Litigation Funding: Status and Issues

Centre for Socio‐Legal Studies, Oxford Lincoln Law School LITIGATION FUNDING: STATUS AND ISSUES RESEARCH REPORT Christopher Hodges, John Peysner and Angus Nurse January 2012 sponsored by 1 Summary Litigation funding is new and topical. It has the capacity to significantly alter the litigation scene. It gives rise to particular issues that need understanding and attention. It is relevant only in certain situations, and while it is not a possible solution to all types of claims it has the potential to significantly increase opportunities to pursue certain claims. The basic model of litigation funding is an investment business based on securing an appropriate return on investment. It is not a banking loan as no interest is charged, and not insurance as no premium is charged. Investment is made in any case that has a sufficient prospect of success on its merits, and has a strong legal team with a convincing case strategy. In some types of offering, however, the model of litigation funding can appear to be more like the provision of legal services. This is where a funder, sometimes from a legal services background, conducts a detailed assessment of the legal merits of a case (including obtaining or providing specialist legal advice on the case) prior to agreeing to funding. Funders determine the risk, and ultimately the extent of the investment, based on an assessment of the merits of the case, the solvency of the defendant (or, in the case of a funded defendant, the resources of the claimant) and the size of the claim and likely return. However, during this research the contrary view that litigation funding is part of the legal services market has been raised. Arguably the nature of the funding being offered and background of the funder (i.e. whether legal services or insurance/financial sector) can be factor. This research examines the current structure of the litigation funding market and the types of product on offer. Litigation funding can apply advanced banking techniques to a legal claim, treating it like any other valuable asset and applying the same risk assessment techniques in determining the level of finance offered. The initial phase of 3rd party litigation funding is an exploratory affair where both the funder and the client are seeking partners in spreading risk and distributing reward. The funder cannot make such a decision without detailed assessment of the legal and factual matrix of the case and its prospects of success (and would perhaps be foolish to proceed without such an exercise) and although the funder might share such insights with the prospective client, they are essentially the funder's work product. The development of the litigation funding market has thus merely recognised an expanded use for a new asset class (claims or defences) and opened up a new market for associated finance. Litigation funding is currently a bespoke product tailored to the needs of the specific market and legal jurisdiction. There are thus, difference conceptions of litigation funding in the UK, mainland Europe, Australia, Canada, the US and South Africa. Within the UK there are examples of co-funding or risk spreading so that some funders may jointly fund a large case, and some arrangements may involve various companies providing different packets of finance or insurance. The principal constraint on the development of litigation funding is traditional public policy against funding others’ litigation or intermeddling in the conduct of litigation (the concepts of maintenance and champerty discussed later in this report). However, such rules are being reformed in some jurisdictions, although no consistency has 2 emerged over what the emerging policy and principles should be, and different jurisdictions are making different reforms at different speeds (or not doing so). This research examines the status of litigation third party funding, the different funding models currently in use and assesses the historical development of third party funding and the legislative and policy considerations that inform the current market. In doing so, it draws conclusions on the potential of litigation funding to increase access to justice in light of current policy changes in the provision of legal services. 3 Contents Preliminaries Summary 2 Abbreviations 5 Description of the Research Project 6 Project Research Team 8 Project Methodology 9 1. What is Litigation Funding? 10 2. The Development of Litigation Funding in England and Wales 15 3. Litigation Funding in Other Jurisdictions 37 4. The Current Litigation Funding Market in England and Wales 62 5. Funding Models 84 6. Privilege and Third Party Funding 89 7. Economic Operational Requirements for Litigation Funding 100 8. Findings on the State of Litigation Funding 102 9. Issues on General Funding Policy 107 10. Issues with the Control of Litigation by Non-Parties 119 11. Future Development of Litigation Funding and Issues of Regulation 141 12. Conclusions and Recommendations 153 Appendix 1: Interviewees 155 Appendix 2: The Association of Litigation Funders of England and Wales: Code of Conduct for Litigation Funders (Civil Justice Council, November 2011 156 4 Abbreviations ABA American Bar Association ADR Alternative dispute resolution ATE After-the-event legal costs insurance BTE Before-the-event legal costs insurance CFA Conditional fee arrangement CLAF Contingency Legal Aid Fund DCA Department for Constitutional Affairs, predecessor to the MoJ LEI Legal expenses insurance MoJ Ministry of Justice of the United Kingdom SLAS Supplementary Legal Aid Scheme TAG The Accident Group TPF or 3PF Third Party Funding U.K. The United Kingdom U.S.A. The United States of America 5 Description of this Research Project The aim of this research is to examine the status of ‘third party’ litigation funding as a tool to increase access to justice and overcome some of the obstacles faced by some plaintiffs due to the high costs of litigation. The research is empirical in nature and examines the practical, ethical and regulatory issues relating to third party litigation funding. The geographical focus is primarily on the jurisdiction of England and Wales, but the analysis is illustrated by reviewing law and practice in other jurisdictions where litigation funding has emerged.1 Litigation funding introduces into legal proceedings an independent third party who has no other connection with or interest in the litigation. However, the extent to which the funder becomes involves prior to confirming and making their investment varies considerably, and is discussed later in this Report. The third party funder can be an insurer, specialist funding company, hedge fund, lawyer or individual, and may provide a variable amount of funding from providing the full legal costs of the proceedings, part funding, or fund only disbursements outlayed. From the outset we should say that the flexible nature of third party funding makes it difficult to define, as the product is continually developing to meet the needs of the market and there is no standard third party funding product. While we are primarily concerned with specialist litigation funding provided by companies established primarily for the purpose of investing in litigation for a return of the proceeds, this research considers a broad definition of third party litigation funding which encompasses any situation where an individual who is not one of the parties involved (i.e. neither claimant nor defendant) provides funding in respect of the litigation. The key research questions that arise are: 1. What is litigation funding? 2. What is the extent of third party litigation funding in England and Wales? 3. How does litigation funding work? How is third party litigation funding constituted and, in particular; what contractual terms and ‘cover’ are used, what is the range and median of the deduction, and what is the relationship between third party funding and After the Event (ATE) insurance? 4. What are the pros and cons of litigation funding ? What issues does it raise? 5. What is the current regulatory environment for third party litigation funding in the EU and are there different regulatory mechanisms in different jurisdictions? 6. What is the relationship between the relevant parties―client(s), funder, lawyer and opponent(s)? Who chooses the funder and/or lawyer? Who controls the decisions that are necessary during the litigation, especially in relation to settlement? 7. How should litigation funding be controlled? 1 We are grateful to the Law Society of Scotland for clarifying that speculative actions have been allowed in Scotland for several decades and while ATE insurance is not widely available in Scotland some firms doing significant personal injury work do have policies available. Until 1992 the Court controlled all fees for civil litigation whether payable by the solicitor's own client or by the unsuccessful party to the successful one. In that year solicitor/client fees were freed from this control and an Act of Sederunt (regulation) was passed, allowing an uplift (success fee) payable by the solicitor's own client, not the other party. As a result litigation funding is not a significant issue in Scotland and is thus outside the geographical scope of this study. 6 8. Should it be encouraged or discouraged, and in what circumstances? In addition to considering the emergence and use of third party funding in the commercial sector, the research will consider the potential for this model of funding in other areas such as group actions, international arbitration cases, and European cross border litigation, and its limited potential for use in smaller consumer cases. While the research is primarily focused on the emergence of and potential for third party litigation funding in England and Wales, litigation funding exists in other jurisdictions, so useful comparisons can be made, and consideration be given to whether there are any global aspects. The research will be informed by an understanding of how litigation funding operates in other jurisdictions; specifically Australia, the USA, Canada, Ireland, Germany, Austria and the Netherlands.

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