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THIRD PARTY LITIGATION FUNDING

We have a lot of experience in advising Claimants and Funders.

A Conditional Fee Agreement (“CFA”) with a lawyer will only cover you for his time and some of the smaller expenses such as court fees. Experts are expensive and since they cannot act on CFAs their fees must be paid before they go to court.

If a Claimant cannot pay for an expert and cannot obtain a loan he/she may turn to a funder. As a last resort in strong cases Third Party Funders are now prepared to pay such fees in exchange for a share of any damages won (“the funder’s success fee”). These agreements differ from CFAs where the Claimant can recover from his opponent any success fee paid to his lawyer.

We consider that the courts should permit a Claimant to also recover from a Defendant as part of his legal costs the amount of any “funder’s success fee”, i.e., the sum which the Claimant agrees to pay to his funder. If this is not permitted then the Claimant will have been put at an unfair advantage due to his financial circumstances, a position which could have been avoided had the Defendant settled the Claim before any funder was needed.

Third Party Funding is a growth area in the UK. Funding agreements are governed by principles of public policy designed to discourage “claims farming”. The common law doctrines of champerty and maintenance apply here. The courts can order funders to put up security for an opponent’s costs. Future changes to the CPR may allow the courts to exercise more control over funded cases so as to better protect all parties involved. These changes might also deal with the recovery of the “funder’s success fee” by the Claimant from the Defendant.

Claimants need to understand how to present their cases to funders. Funders only invest in cases with the best prospects. A lot of skill and attention is required to put funding arrangements in place where both sides can work together towards a common objective. The relationship is akin to that of insurer and insured. The basic rule is that at all times the conduct and control of the case must rest with the Claimant and his lawyers and not with the funder.

Arkin v Borchard & Others* is the landmark case in the UK concerning third party funding. Cormac Cawley acted for the third party funder in that case. The funder agreed to advance up to £1.3m to enable Mr Arkin to retain experts for his case. The case was lost. Mr Arkin could not pay the Defendants’ costs of c. £6m. The court refused to make the funder pay any of the £6m. The Court of Appeal later ordered the funder to pay costs of £1.3m. The court decided that a balance needed to be struck between the interests of (a) the Claimant obtaining access to justice and (b) the Defendants not recovering their costs if the case was lost. It was decided that in normal cases the funder’s exposure in costs should be capped at the level of any funding which he had provided. At an earlier stage in the matter Mr Justice Colman delivered one of the first Judgments on an application for security for costs against a funder pursuant to CPR 25.14 (1) & (2) (b)*.

Funding arrangements usually proceed on the basis of the following example. The claim is worth £1m. The funder puts up a maximum fund of £100,000. If the case is won with costs, the funder will be repaid his £100,000 plus a success fee of 25%, i.e. a total of £350,000. Assuming that 70% of all costs are recovered the Claimant will have sacrificed £280,000 from his damages to procure the funding, i.e., at a cost of 280%. Because of its high cost funding should only be used as a last resort and a Claimant will have to show a court that he has exhausted all other avenues, such as seeking a bank loan or borrowing from friends and family.

Such funding is expensive because the funders are taking serious risks. They have to be ready to put up security in every case. The courts will expect them to be sufficiently capitalised to cover their outlays and potential losses since not all cases end in success. Funders usually require the Claimant’s lawyers to be acting on a CFA so that the risk is spread with officers of the court who are highly regulated in relation to CFAs. The involvement of a CFA helps to bolster the requirement of control of the case resting with the Claimant and not the funder.

The law in this area is evolving and complex. We have attempted to summarise some of the most important points here. If you are a funder or a Claimant seeking funding we would be happy to discuss your requirements.

1. "Champerty” has been defined as “an aggravated form of maintenance” and occurs when the person maintaining another stipulates for a share of the proceeds of the action or suit’ (See Giles v Thompson, [1993] 3 A.E.R 321, and Trendtex Trading Corporation v Credit Suisse [1980] 1 QB 629, 663).

2. ‘A person is guilty of maintenance if he supports litigation in which he has no legitimate concern without just cause or excuse’ (See Hill v Archbold [1968] 1 QB 686 and Trendtex Trading Corporation v Credit Suisse [1980] 1 QB 629, 663).

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** This links to an external internet site controlled by The Ministry of Justice. Cormac T. Cawley & Co is not responsible for the content of any external internet sites.