Third-party litigation funding: a trainee lawyer’s perspective

Answer

This article was originally published on 18 June 2024. 

What’s third-party litigation funding?

Litigation funding is where a third-party funder (typically an independent financial institution) finances all or part of the legal costs of a claim, in return for a share of any damages awarded. It’s also known as third-party funding (TPF). Although TPF originated in Australia, the UK has become a global leader in its use. We’ve also seen major funders establish themselves across the US, Canada, Switzerland and Hong Kong.

Demand for TPF has grown exponentially. The UK TPF market is estimated to have been worth between £1.5 billion and £4.5 billion last year, and the global TPF industry is set to be worth more than US$24.3 billion by Q4 2028. There are more than 30 active litigation finance providers, including listed funds, private equity houses and hedge funds.

Importance of TPF in commercial disputes

TPF is typically utilised in high-value commercial, arbitration and group litigation claims. This type of funding is often paired with other products, such as after the event (ATE) insurance, conditional fee agreements (CFAs) and damages-based agreements (DBAs). TPF is a risk sharing model: where the claim is successful, the funder will recover their costs and receive a success fee, which is usually between 10% and 50% of the award value. However, where a claim fails, the funder will not recover costs from the client.

Disputes funding is an important part of any disputes lawyers’ tool kit. Many leading law firms, including White & Case, have integrated TPF into their client pitches as it improves the ability to compete for valuable work. Moreover, there’s a professional obligation for solicitors to provide information to clients about costs and funding options. TPF is beneficial to clients as it can allow them to secure some portion of an award granted to them quickly – funding can involve an advance against an arbitration award, for example, with the funder assisting with the later enforcement.

Why might a litigant seek to use TPF?

Access to justice: TPF can bring financial backing to strong claim which may not otherwise be advanced because of a lack of resources.

• To retain cash for business operations: this form of funding is attractive to large multinationals with high-value claims, that can fund the dispute themselves but wish to use TPF as a means of managing financial risk and keeping costs down.
• Validity of settlement: an opponent may consider settlement if they know a funder is on board – this indicates that the claim is strong. Funders will often only support claims with a 60% or more chance of success.
• Flexibility: a commercial and pragmatic approach can be taken; funding can be tailored to the financing needs of any given case.
• Cost management: TPF brings an additional level of scrutiny and monitoring of the legal budget. The claimant can benefit from the strategic input of the lender and control costs.

Are there any ethical issues associated with TPF?

First, solicitors must not act where there’s a conflict of interest – crucially, solicitors have a professional obligation to their client, not the funder. This obligation must not be compromised by the funding agreement or by allowing a funder to gain outsized influence over proceedings. For instance, it’s likely to be in the interest of the funder to discourage settlement, preferring instead to secure a full award at a trial or arbitration tribunal. However, this may not be in the interest of the client and may lead to a breakdown in trust and communication between the funder, counsel and client. A solicitor must be cognisant of any such competing interests and must prioritise pursuing the outcomes valued by their client.

Second, solicitors must keep the affairs of current and former clients confidential, unless disclosure is required or permitted by law or the client consents to disclosure. Solicitors must be careful not to share information with the funder without explaining the risks to their client and obtaining informed consent. Where information is shared without a confidentiality agreement, perhaps due to pressure from a funder, privilege may be considered waived. Where TPF doesn’t proceed, any assertion that there’s a protected ‘common interest’ between prospective funder and litigant will fail, leaving the client significantly exposed.

Third, the core ethical issues associated with TPF can arise due to the funder’s ability to control proceedings by:

• withdrawing funding;
• influencing the acceptance or rejection of settlement offers; and
• directing strategy.

These issues are less prevalent today – it’s in the interest of the funder to act reasonably. Also, when drafting the TPF agreement, the legal team can:

• limit the lender’s power to withdraw funding without notice or just cause;
• create exclusionary walls to limit access to sensitive information; and
• ensure that offers of settlement are openly considered.

What’s the regulatory and judicial framework associated with TPF?

The TPF market is largely unregulated. In England and Wales, the Association of Litigation Funders (ALF) was established in November 2011, with most large funders now members. The ALF sets out capital adequacy requirements – a minimum of £5 million and an ability to cover liabilities for 36 months. ALF’s Code of Conduct sets out standards of best practice and behaviour but is entirely voluntary. At the request of the UK government, the Law Commission considered potential amendments to the Arbitration Act 1996 to ensure that TPF is proportionate and fair. The Law Commission declined to suggest any new statutory regulations for TPF. Therefore, the TPF market continues to self-regulate.

The Supreme Court of the United Kingdom has taken a different approach to TPF. In R (on the application of PACCAR Inc. and others) (Appellants) v Competition Appeal Tribunal and others (Respondents) [2023], the Supreme Court held that litigation funding agreements are DBAs, therefore making funding agreements unenforceable. Uncertainty around litigation funding risks a detrimental impact on the attractiveness of England and Wales as a global hub for commercial litigation and arbitration.

As a result, the UK government has brought forward legislation that will restore the position to that which prevailed before the decision of the Supreme Court by amending the definition of a DBA in the Courts and Legal Service Act 1990. The Litigation Funding Agreements (Enforceability) Bill seeks to ensure enforceability uniformly across TPF provided before and after the PACCAR ruling.

However, as a general election has been called for 4 July 2024, there wasn’t sufficient time for the bill to be passed into law before the dissolution of Parliament on 30 May 2024. Therefore, it’ll become law only if restored by the next government. This is an area to watch.

Closing thoughts

Despite recent judicial scrutiny and residual issues of control, confidentially and conflict, TPF is an ever-growing industry and will continue to shape modern commercial disputes. Clients’ attitudes to risk and novel commercial strategy are changing, with disputes now viewed as potentially lucrative investments or as portfolios of investments. The market to fund them is rapidly developing as a result. This is only the beginning for TPF – funders, law firms and clients continue to adapt and find creative ways to finance litigation claims.

Mahmoud Ismail is a trainee solicitor in the commercial litigation team at White & Case LLP.

Any views expressed in this publication are strictly those of the authors and should not be attributed to White & Case LLP.