CHALLENGING AND UPHOLDING LITIGATION FUNDING ARRAGEMENTS, AND THE LIABILITIES OF FUNDERS
JEREMY COUSINS QC
Until very recently a person supporting litigation in which he had no legitimate concern without just cause or excuse was guilty of the criminal misdemeanour of maintenance, of which, per Lord Denning MR in Trendtex Trading Corporation & another v Credit Suisse [1980] 1 QB 629, a “particularly obnoxious form” was champerty where the maintainer sought to make a profit for himself by sharing in the proceeds of litigation.
In response to the perceived public policy of affording access to justice, largely driven by the need to accommodate widespread withdrawal of legal aid, the courts have gradually relaxed the common law rules of maintenance and champerty (which by express statutory provision survived decriminalisation with the Criminal Law Act 1967) as to invalidating contractual provisions. This relaxation, over the last three decades or so, has been for the purpose of ensuring access to justice, not so as to afford a new vehicle for making profit to those sitting on available funds. Therefore, where any arrangement, or the conduct of it, might threaten the integrity of our system of justice, the threat to the validity of funding arrangements remains very real and current. The scope for undermining and challenging a funding arrangement, or on the other hand supporting it, will therefore turn on the issues of access to justice and the compatibility of the arrangement with the integrity of the justice system.
The task of someone advising as to whether a funding arrangement is vulnerable to attack, or is securely based, is not helped by the width of the source material in which the guidance is contained. Usually the public policy issues are considered after a trial on an application under s51 of the Senior Courts Act 1981 for a costs order to be made against a third party. The scene was well described (at para 8 of his judgment) by HH Judge Mackie QC, sitting as a High Court judge, in Merchantbridge & Co v Safron General Partner 1 Ltd [2011] EWHC 1524, unusually a case concerned with funding a defence rather than a claim:
“It is clear from the authorities cited that the Court of Appeal sees these applications as requiring a summary procedure not over complicated by reference to or by over-analysis of case law. The process is not however straightforward for at least two reasons. First the cases to which I have been taken make it clear that it is for the appellate courts to establish guidelines and parameters for the exercise of the discretion by first instance judges. That guidance is to be found in at least nine of the appellate cases (one Privy Council and eight Court of Appeal) to which I have been taken. These are:—
(i) Hamilton Al Fayed (No 2) [2003] QB 1175 (May 2002) ;
(ii) Gulf Azov Shipping v Idisi [2004] EWCA Civ 292 (March 2004) ;
(iii) Dymocks Franchise Systems v Todd [2004] 1 WLR 2807 (July 2004);
(iv) Goodwood Recoveries Ltd v Breen [2006] 1 WLR 2723 (April 2005) ;
(v) Arkin v Borchard Lines Ltd (Nos 2 and 3) [2005] 1 WLR 3055 (May 2005) ;
(vi) Petromec Inc v Petroleo Brasileiro [2007] 2 Costs LR 212 (July 2006) ;
(vii) Sims v Hawkins [2007] EWCA Civ 1175 (November 2007) ;
(viii) Dolphin Quays Developments Ltd v Mills [2008] 1 WLR 1829 (April 2008) ; and
(ix) Oriakhel v Vickers [2008] EWCA Civ 748 (July 2008).
Secondly, the appellate guidance is contained in cases where the facts are often unusual and the relevant considerations diverse. Some observations relied upon by Counsel in this case are very specific to those facts and circumstances. A further factor is that in some respects “the law has moved a considerable distance” – see Petromec at paragraph 11 and the earlier cases are not always still as authoritative as they were. It seems to me that the aspects of the principles most relevant to this application are as follows.”
The task is, in one sense, even more complicated today than it was at the time of the decision in Merchantbridge because of the growth in the case law in the intervening period, and the continuing tendency of the law to move on. On the other hand, the endorsement of third party litigation funding by Sir Rupert Jackson in his Review of Civil Litigation Costs Final Report is likely to influence the development of policy for some time to come.
POLICY, VULNERABILITIES AND PROTECTIONS
- The sanctions
Funders have very good reasons for not wishing to overstep the mark of what is permissible. First, if a claim fails, they are in any event liable for costs under s51, but, at least on the current state of the law, those costs are capped by the extent to which the funder has contributed to the costs of the litigant whom he has funded; see the decision of the Court of Appeal in Arkin v Borchard Lines [2005] 1 WLR 3055); the benefit of that cap will be lost where an arrangement is found to be champertous for reasons explained by the court in Arkin at para 40 (see below). For a practical example of the loss of the cap, see Merchantbridge, especially the reasoning at para 46.
Secondly, however, a champertous agreement will be unlawful and unenforceable, so that if a funded claim succeeds and a substantial recovery is made, the funder’s entitlement to share in any proceeds (and to recover costs) would be jeopardised. This would defeat the whole object of participation in funding.
- Two limbs of policy
There are, of course, many potential bases upon which an arrangement can be attacked. For example, if a funder is backing a claim for an ulterior purpose, as was the case in Simpson (assignee of Catchpole) v Norfolk & Norwich University Hospital NHS Trust [2012] QB 640, where Mrs Simpson, for reasons of a personal campaign in relation to MRSA risks in hospitals, took an assignment of rights from Mr Catchpole who had a potential claim against a hospital; the Court of Appeal held that the assignment was of a bare right to litigate unsupported by a personal interest of a kind sufficient to justify proceedings. Assigning a claim simply with a view to enabling another to litigate and to profit would savour of champerty. Note that in this case, from the constitution of the claim, it was possible for the champerty point to be taken and pursued before any trial. This will often not be the case.
Today, however, I wish to focus upon two limbs of policy identified in the decided cases which may render a funding arrangement vulnerable to attack. They emerge from the decision of the Court of Appeal in Arkin (as well as other cases) at para 40:
“40. The approach that we are about to commend will not be appropriate in the case of a funding agreement that falls foul of the policy considerations that render an agreement champertous. A funder who enters into such an agreement will be likely to render himself liable for the opposing party’s costs without limit should the claim fail. The present case has not been shown to fall into that category. Our approach is designed to cater for the commercial funder who is financing part of the costs of the litigation in a manner which facilitates access to justice and which is not otherwise objectionable. Such funding will leave the claimant as the party primarily interested in the result of the litigation and the party in control of the conduct of the litigation.” (Emphasis added)
First, then, if the claimant is not the party primarily interested in the result of the litigation, the action may well be held to be champertous. Quite clearly where the claimant is in reality little more than a nominee for a funder, so that the funder stands to take all of the “winnings”, it must be likely that the funding arrangement will be held to be champertous. Similarly, absent some very good reason, where the funder stands to take more than half of the proceeds, there must be a significant risk that a court would hold that “the real party” is the funder. A useful test was posed by Lord Brown in the Privy Council case of Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2004] 1 WLR 2807, at para 25, namely whether the non-party “is not so much facilitating access to justice by the party funded as himself gaining access to justice for his own purposes.” These questions will be very dependent on particular facts and impression. Where a funder may have to incur great cost relative to a modest subject matter, which might never be capable of being litigated without great resource, it might be possible to justify a high percentage share in favour of a funder. Where the costs are low in relation to the prospective reward, especially where the profit might be very large, a risk of a finding of champerty must be greater, even where the percentage “share” taken by the funder is well under fifty per cent.
The relationship between the investment, work and effort made by the funder to the share that the funder might take from proceeds was specifically considered by the Court of Appeal in R (on the application of Factortame) v Secretary of State for Transport, Local Government and the Regions (No 2) [2003] QB 381. In that case Grant Thornton were prepared to provide services (but by way of back up not expert witnesses) in establishing quantum in exchange for an 8 per cent share of the final settlement received; it was in this sense that they provided funding. The Court of Appeal considered the propriety of this percentage and its justification, including by reference to the danger that it might incentivise “inflaming” a claim:
“85 The greater the share of the spoils that the provider of legal services will receive, the greater the temptation to stray from the path of rectitude. The 8% that was agreed between Grant Thornton and the claimants was not extravagant. Grant Thornton had not wished to contract on this basis, but had agreed to do so under pressure from the claimants. They, understandably, viewed a reasonable percentage of their recoveries as more satisfactory than an open-ended commitment to pay for the services provided on an hourly basis. Grant Thornton had originally been persuaded to agree 8% as a cap, but by the time the agreements were drawn up this had crystallised into a firm figure. Mr Swabey said that he was very relieved when he heard that the percentage agreed was 8% as he considered that this was very reasonable on the basis of the potential damages as he saw them at the time. As he pointed out, the formula agreed had the added advantage of apportioning the fees between the claimants in a manner that appeared equitable.
86 Our view of the 8% agreement was that it should have appeared attractive not merely to the claimants but to the Government, who would ultimately be liable to pay the costs if the claims succeeded. The Government would, in any event, only be liable to pay reasonable costs, which would be likely to be assessed on an hourly rate basis. Thus, for the Government the 8% would be likely to operate as a cap.
87 The prospect of receiving 8% of recoveries would have provided a motive for Grant Thornton to inflame the damages, though not to the extent that a larger proportion would have done. As to the likelihood of their yielding to this temptation, we consider that Mr Hancock was justified in emphasising the fact that Grant Thornton are reputable members of a respectable profession whose members are subject to regulation. We do not believe than any reasonable onlooker, or indeed the minister, would seriously have suspected that the fact that they were to receive 8% of the recoveries would tempt Grant Thornton to deviate from performing their duties in an honest manner. Had this not been the case, we do not consider that there would have been much scope for Grant Thornton to influence the outcome of the assessment of damages.
88 Grant Thornton had an important input into the preparation of the computer model—indeed on the claimants’ side they provided almost all the input. But this was a task which was being carried out in conjunction with the Ministry of Agriculture Fisheries and Food experts—indeed we were told that the latter claimed to have had the major responsibility for this work. The skeleton argument submitted for the minister described the position as follows:
“The importance of the model should not be underestimated. It was a large, complicated and sophisticated spreadsheet. The evidence before the costs judge reveals a dispute, irrelevant for present purposes, as to which party had the most significant involvement in its development … However, one of the Secretary of State’s experts was a statistician, Mr Hall. He produced the model which was used at the trial, gave a ‘neutral’ explanation and demonstration of its workings to the judge during the openings, participated in expert meetings at which it was discussed (and to a substantial extent agreed) and gave evidence about it. The claimants … did not call an expert statistician. Their fisheries experts, and in particular Mr Banks for the [Thomas Cooper] claimants, discussed and to a substantial extent agreed principles with the Secretary of State’s fisheries expert. It was [Grant Thornton] on behalf of the [Thomas Cooper] claimants who were responsible for considering whether those principles were properly and adequately reflected in the model and for explaining its working.”
89 The task of producing a suitable model was plainly being carried out as a joint operation involving both sides, and in a manner that was transparent. It does not seem to us that this was an area where any lack of objectivity on the part of Grant Thornton could be expected to impact on the assessment of damages.”
In the circumstances of the case, taking into account the reputability of Grant Thornton, the efforts which they would make, and the nature of the task, there was nothing extravagant about the remuneration to be heard. There was no danger, in this case, that Grant Thornton was becoming the real claimant. Note, however, the court’s anxiety to test the remuneration and its incentive to “talk up” an award, against a range of other considerations. What is very clear is that a percentage based scheme, involving input on the preparation of the material to be put before the court, could be objectionable if the percentage were to be unduly high, or the trustworthiness of the participating funder might not be clear cut. This, in a case where claims management company with a poor reputation was similarly incentivised, the danger to the integrity of the justice system might produce a different result. This is a clear area of risk for some funding models.
Secondly, a funder must be careful not to become the party in control of the litigation. This is well recognised in the case of the Association of Litigation Funders of England & Wales’ Code of Conduct for Litigation Funders (January 2014), which provides at para 9 that a funder will not “seek to influence the Funded Party’s solicitor or barrister to cede control or conduct of the dispute to the Funder.” (The Association is not a statutory body, and a funder does not need to be a member.) This guidance serves as a timely reminder to all funders. Taking control of litigation is likely to render an arrangement champertous, and therefore funders must ensure that in substance as well as in form they do not do so. Merchantbridge is a good example of where persons who effectively controlled litigation were held liable for costs.
It is unlikely that a funder will cross the line as to what is permissible simply by taking an active interest in the funded litigation; for example, by attending conferences, making suggestions as to which experts should be considered, questioning advices from counsel, or suggesting that additional statements from witnesses might be needed. Participation of this kind did not put the funder in Gulf Azov Shipping Co v Idisi [2004] EWCA Civ 292 on the wrong side of the line. There is, however, a fine line that divides what may be permissible from what is not. A funder may not like a choice of counsel or expert, but it is not for the funder to make final decisions on these points, otherwise he will be taking control of the litigation. To express views in a forceful manner may be acceptable, but to make a veiled threat as to termination of funding if those views are not heeded could be seen as tantamount to taking control. The funding agreement itself might purport to confer powers that demonstrate that the funder is in control.
Those wishing to challenge funding arrangements may, in future, and especially in large commercial cases where much money is at stake, seek to become more active in investigating, both before, as well as after, trial what the funding arrangements are. As Simpson demonstrates, a case where the funding arrangements infringe the rules of champerty can be struck out. As funding becomes more important and well-publicised, there must be good prospects that defendants and their insurers will be innovative in searching for opportunities to deal a decisive blow to claims at ever earlier stages.
- Disclosure
The opportunity to obtain disclosure of funding arrangements can arise upon the making of an application for costs following the making of an order for costs against a party; see Flatman v Germany [2013] 1 WLR 2676, CA. In that case the Court of Appeal expressly approved the judgment of Blake J in Thomson v Berkhamsted Collegiate School and others [2009] 6 Costs LR 859, where issues of funding also arose upon a third party costs claim against funders. The approach adopted by Blake J (see para 17 of his judgment) was that what he termed ancillary orders (disclosure, cross-examination etc) should not be ordered if a third party costs order was not likely to be made, nor should they be ordered if the case was so strong that they were not needed. Having considered the strength of the case for a third party costs order, he concluded that it stood a reasonable prospect of success, and that its best prospects depended upon the extent to which control and decision taking could be demonstrated. He continued at para 33:
“The defendant submits that it can only demonstrate the element of control, interference, and assumption of responsibility in the litigation if it knows what communications the interested parties have had with the solicitors, counsel or expert witnesses in the case. In my judgment, such material, if it exists, is likely to be relevant, and depending on volume, timing, and substance, may well be highly probative of the central disputed issue in the application. It has never been suggested that there was no such correspondence, although the interested parties state that they have no records of written or electronic communications in their possession.”
Blake J recognised that potentially issues of privilege could arise, but he held, at para 36, that these would not be a barrier so far as third party funders were concerned:“Having regard to the general principles as to when legal advice or litigation privilege arises, in my judgment, it would not normally exist in communications between a solicitor and a third party to the claim that were not immediately connected with the witness statement of that third party or the giving of legal advice to the claimant.”
Having considered issues of proportionality as well, he concluded that disclosure should be given, and gave directions with a view to identifying relevant non-privileged documents.
The opportunity to obtain a disclosure order as to funding arrangements even before a costs order has been made is another matter. It will be more difficult for challenges to funding arrangements to be deployed pre-emptively, but in some cases it may become apparent from the circumstances that there is likely to be some objectionable feature that may be champertous. To justify disclosure, this would need to be raised on the pleadings, and there would need to be a proper evidential basis to justify any order for disclosure; a fishing expedition in support of a weak case will not be permitted. The analysis in Flatman fully supports that view; on the facts of that case the Court held that material suggesting that solicitors had pressed on without ATE cover contrary to a client’s instructions indicated that the solicitors had tried to control the course of the litigation, so that disclosure was justified.
- Coda
- The extent to which the rules of maintenance and champerty will continue to affect the development of legal policy in relation to the issues under consideration is unclear. There is as yet no indication that the English courts are ready to adopt the root and branch attitude to reform displayed by the High Court of Australia in Campbell’s Cash & Carry Pty Ltd v Fostif Pty Ltd [2006] HCA 41. Following that decision a funder in Australia is now allowed a far greater degree of control and decision-making than would be permissible in England, and the view has been expressed by Hodges, Peysner and Nurse in their January 2012 Litigation Funding: Status and Issues, that the only relevance of the old rules today is in a dispute between a plaintiff and a funder as to enforceability. Since English law on these matters has been developed judicially, a continuing evolution is to be expected, but it must be doubtful whether the courts here would embrace Fostif with any enthusiasm.
FUNDER’S LIABILITIES
The decided cases provide some fairly clear guidance as to a funder’s potential liabilities:
- A “pure funder” who does not take control of proceedings, or stand to share in any “winnings” is very unlikely to have a liability for another party’s costs; Hamilton v Al-Fayed (no 2) [2003] QB 1175. Exceptions could be cases of malice or ulterior purpose.
- A solicitor who provides an indemnity to his client in respect of costs liabilities will not, without more, be guilty of champerty; Sibthorpe and Morris v Southwark LBC [2011] 1 WLR 2111. The Court held that to decide otherwise would extend the law of champerty, which would be inappropriate in the 21st century. The position would be different if the solicitor were to be sharing in proceeds of a claim.
- A litigation funder’s liability will be capped by reference to his contribution made to costs; see Arkin above. Note, however, that Sir Rupert Jackson favoured the removal of this cap. In Tinseltime Ltd v Eryl Roberts & others [2013] PNLR 4, HH Judge Stephen Davies declined to depart from Arkin on the basis that at first instance it was not open to him to do so; the risk remains that an appellate court would now revisit the issue.
- A lawyer who does not step outside his role as such will not be liable for costs because he “funds” litigation by operating under a conditional fee arrangement, or meets disbursements; Hodgson v Imperial Tobacco [1998] 1 WLR 1056, and Tinseltime.
- It remains unclear whether the Hodgson type immunity would be extended by the courts to a lawyer acting under a Damages Based Agreement. The doubt, which is a real one, arises because the lawyer would be sharing in the proceeds of the litigation. The Civil Justice Council’s report in August 2015, The Damages-Based Agreements Reform Project, for this reason, by Recommendation 28.1, urged that the law should be clarified and expressly extend the immunity to such arrangements.
JEREMY COUSINS QC
Radcliffe Chambers,
23rd September 2015
Jeremy Cousins QC is a practising barrister, and also sits as a deputy High Court judge in the Chancery Division. He is the consultant editor of Third Party Litigation Funding by Nick Rowles-Davies (OUP, 2014).
Nothing in these notes or the related seminar constitutes legal advice, and it is not anticipated that it will be relied upon as such.