EXTRACT FROM COOK ON COSTS (2011 edition)

Transcription

1 EXTRACT FROM COOK ON COSTS (2011 edition) Chapter 41 Third Party Funding Definitions Third party funding (TPF) [41.1] TPF is a relatively recent development in the funding of litigation in the English courts (having developed in Australia and Germany before finding its way over here in the past ten years), albeit it that it has been permitted in matters arising out of insolvencies since Seear v Lawson (1880) 15 Ch D 426. TPF is the funding of litigation, throughout its life, by individuals or companies who have no previous connection with the litigation with a view to making a profit out of it. TPF involves a direct arrangement between a party to litigation and a funder whereby the funder receives a share of the proceeds of the litigation if it succeeds in return for funding the case as it proceeds, taking full liability for all of the costs it has agreed to cover (which can include opponent's costs) of the action if it fails. Section 2.03 of the Solicitor s Code of Conduct 2007, further requires solicitors to discuss with their clients how they will pay for the costs of their claim, including whether there are funding or insurance options available to them to cover such costs However, it is the combination of a policy steer by the Civil Justice Council, the Court of Appeal judgment of Arkin in 2005 (see para [41.9]) and crucially the impact of the Jackson Report, which for the first time in a report produced at that level, devoted an entire chapter to TPF (see para [41.2]). The effect of this is to recognise the role of TPF as a permanent part of the costs funding landscape and a matter of which all practitioners should make sure they are aware to avoid falling foul of the Solicitors Code of Conduct It is important to remember that TPF is not just for the impecunious client and practitioners are reminded to ensure they discuss funding options with all clients. The Jackson Report impact on funding [41.2] Jackson s conclusions were generally positive about the presence of TPF as an option for funding litigation costs. He said I remain of the view that, in principle, third party funding is beneficial and should be supported. He compared TPF favourably with CFAs and ATE because TPF does not involve recovering an additional liability from the losing party which he is seeking to have abolished. He also considered that TPF filters out unmeritorious claims and provides Access to Justice. The recommendations he made were: (1) not to abolish champerty and maintenance; (2) that it is too soon in the development of this nascent industry to introduce formal regulation into TPF; (3) that he supported a Voluntary Code of Conduct ( the Code ) and suggested the existing draft be re-visited to address: Capital Adequacy requirements for funders, given that it is critical that a funder is adequately funded to fund all the cases it is funding to completion. The basis on which a funding agreement might be terminated should be re-considered and if possible, expanded, in the Code. A group of funders have therefore re-worked the Code in the light of these observations,

2 and the new draft was the subject of a consultation process managed by the Civil Justice Council, which ended on 3rd December 2010 ( TPF_consultation_paper_ ( ).pdf). At present the bulk of funding occurs in commercial litigation. If there are new entrants who operate solely consumer based litigation, there may well need to be a separate code to deal with the issues arising there. In the meantime of course, the consumer has the protection of the Consumer Credit Act. In addition, an Association of Litigation Funders has been formed as a forum for funders and non-funders alike to discuss matters relating to funding and provide a contact point for those using funding. This body will also be responsible for future developments of the Code. The developments in funding generally, the arrival of new entrants and the endorsement of TPF by Jackson help see funding enter its teenage years of development. Its wholesale acceptance and understanding by the profession is still to be seen. The Funding Agreement [41.3] A Third Party Funder covers all the costs (or such costs as the funded party seeks to have covered by the funder) of the litigation in return for a share of the proceeds of the action, including its own legal costs, expert s and court fees and any adverse costs orders. There is no need for a conditional fee agreement (though funders will no doubt look more favourably on cases where the solicitor is prepared to act on at least a partial conditional fee agreement as a demonstration of their belief in the merits of the case in question) or after-the-event insurance. The price is typically 20% 50% of the amount recovered, depending on how long this takes. This form of funding is not champertous provided the funder does not (and is not entitled to) control the conduct of the action by the client. Agreements must be structured so that the client retains full control over the way in which they conduct their action. This includes the funder not being permitted to set minimum settlement levels when signing up a case, or interfering in the day to day conduct of the matter. Withdrawal of funding if the claim s merits plummet does not amount to interference. Once the case is signed up, the client is then left to run his litigation in the usual way. The funding agreement sets out the responsibilities and liabilities of the parties. If at any stage the claim s merits suffer a material adverse decline (which will include the ability of any successful judgment to be enforced against the defendant, the position on liability or claim value, or the conduct of the claimant, amongst others), the funder has the right to terminate the funding, while retaining the liability for all own side and adverse costs up to that date. The fact that investors in litigation are only interested in funding good claims also sends the powerful message to the opponent that a dispassionate and commercially focused third party also thinks the claim is good. The role of funders in accelerating settlement discussions has inevitably been a welcome development for third party funded claimants. The Litigation Funder s criteria [41.4] TPF is not for everyone. There are at the time of writing four major funders (not to be confused with litigation funding brokers who seek to introduce the litigants to the funders) and their minimum sizes of claim they will fund ranges from 350,000 to 3,000,000. Additional eligibility criteria for considering funding a claim are: a defendant who can pay the amount claimed; good legal merits (60%-70% prospect of success), with a demonstrable minimum

3 claim value; where the costs of pursuing the matter are proportionate to the size of the claim; and the lawyer who it is proposed will run the claim is demonstrably experienced in the area to which the claim relates. TPF or CFA and ATE? [41.5] In my view this is a no-brainer. IF the client can find lawyers willing to act under a conditional fee agreement and insurers willing to provide after-the-event insurance he should grab them before they change their minds if only because on these terms under the law as it stands if he wins he will recover his claim free of all costs and recover the insurance premium, while under a TPF agreement he will have to share the spoils of victory with his funder. But you will note it is a big IF. Not all lawyers are prepared to underwrite the costs of substantial litigation, and while specialist insurers may offer ATE, the premium may be prohibitive. In addition, ATE is not always deemed adequate security for costs. Funders can provide a payment into court or purchase the extra deed of indemnity which can accompany ATE to help defeat such security for costs applications. If you cannot afford to litigate, 50% under a TPF agreement is a lot better than nothing. Critically ATE does not provide funding for payment of bills throughout the life of the case, it only pays out if the case is lost. What is clear therefore is that TPF is typically more suited to larger more complex claims where such cash flow requirements need to be covered. Where an expert witness is required, they cannot be paid on a conditional fee basis and their fees must be paid in full. The good news is that funders are happy to fund all or any of the costs of a case, so a pick and mix approach is possible, to achieve the most cost effective outcome for the client. This means an opponent can be confronted with an opponent with the formidable combination of a third party funder, and the prospect of paying a 100% success fee and a huge ATE premium if he has the temerity to oppose the claim and loses. What is certain is that in all substantial litigation, whatever the financial position of the client, the solicitor now has a duty to advise on this new method of finance. Evolution [41.6] The evolution of TPF into a respectable and acceptable method of funding civil litigation has been impeded since the middle ages by the doctrines of maintenance and champerty. Here is the story. Maintenance [41.7] Maintenance is the procurement, by direct or indirect financial assistance, of another person to institute, or carry on or defend civil proceedings without lawful justification (The Law Commission 1966). Or, if you prefer the classic definition: Maintenance is the wanton and officious intermeddling with the disputes of others in which the maintainer has no interest whatever, and where the assistance he renders to the one or other party is without justification or excuse (British Cash and Parcel Conveyors Ltd v Lamson Store Service Co Ltd [1908] 1 KB 1006, 77 LJKB 649, CA). Or, going back even further, there was Lord Loughborough LC in Wallis v Duke of Portland in 1798: maintenance is not malum prohibitum, but malum in se: that parties shall not by their countenance aid the prosecution of suits of any kind: which every person must bring upon his own bottom and

4 at his own expense. Champerty [41.8] Champerty is an aggravated form of maintenance. The distinguishing feature of champerty is the support of litigation by a stranger in return for a share of the proceeds (Steyn LJ in Giles v Thompson [1994] 1 AC 142, [1993] 3 All ER 321, HL). In other words, those of Lord Mustill also in Giles v Thompson, Champerty is maintenance with the addition of a division of the spoils of the litigation. These doctrines developed because, according to Professor Winfield one of the abuses which afflicted mediaeval administration of justice was the practice of assigning doubtful or fraudulent claims to royal officials, nobles or other persons of wealth and influence, who could in those times be expected to receive a very sympathetic hearing in the court proceedings. The agreement often was that the assignee would maintain the action at his own expense, and share the proceeds of a favourable outcome with the assignor. Gradually the conditions which led to the emergence of maintenance and champerty disappeared. Jeremy Bentham wrote in 1843: A mischief, in those times it seems but too common, though a mischief not to be cured by such laws, was, that a man would buy a weak claim, in hopes that power might convert it into a strong one, and that the sword of a baron, stalking into court with a rabble of retainers at his heels, might strike terror into the eyes of a judge upon the bench. At present, what cares an English judge for the swords of a hundred barons? Neither fearing nor hoping, hating nor loving, the judge of our days is ready with equal phlegm to administer, upon all occasions, that system, whatever it be, of justice or injustice, which the law has put into his hands. By 1908 an English judge, Fletcher Moulton LJ in British Cash (above) was able to say: The truth of the matter is that the common law doctrine of maintenance took its origin several centuries ago and was formulated by text-writers and defined by legal decisions in such a way as to indicate plainly the views entertained on the subject by the courts of those days. But these decisions were based on the notions then existing as to public policy and the proper mode of conducting legal proceedings. Those notions have long since passed away, and it is indisputable that the old common law of maintenance is to a large extent obsolete. Nevertheless in 1963 Lord Denning MR in Re Trepca Mines (No 2) [1963] Ch 199 explained that the reason the common law still condemned champerty was because of the abuses to which it may give rise. The common law fears that the champertous maintainer might be tempted, for his own personal gain, to inflame the damages, to suppress evidence, or even to suborn witnesses. These fears may be exaggerated; but, be that so or not, the law for centuries has declared champerty to be unlawful, and we cannot do otherwise than enforce the law. Public Policy [41.9] Both maintenance and champerty were criminal offences and torts until the Criminal Law Act 1967 abolished them as such (together with the crimes of eavesdropping, scolding and challenging an enemy to a fight!) but section 14(2) preserved any rule of that law as to the cases in which a contract is to be treated as contrary to public policy or otherwise illegal. The common law restrictions on maintenance and champerty therefore remain, and the courts still have to decide on the facts of each litigation funding agreement whether the contract is unenforceable on the grounds of public policy. Public policy was considered in Arkin v Borchard Lines Ltd, Zim Israel Navigation Co Ltd and Managers and Processors of Claims (Part 20 defendants) [2003] EWHC 2844 (Comm), [2004] 1 Lloyd's Rep 88, both in the High Court and the Court of Appeal. The second defendants (MPC), a professional funding company, entered into a funding agreement with the claimant, whereby it funded the employment of expert witnesses, the

5 preparation of their evidence and the organisation of the enormous quantities of documents which it became necessary to investigate before the trial. In applying for a costs order against MPC the defendants laid stress on the very substantial proportion of any recoverable damages or settlement payments (25% of the first 5 million and 23% of any excess) which MPC was to receive under its funding agreement. The amount of the claim, including exemplary damages, eventually reached $160 million, which would have resulted in a benefit of some $40 million to the funders. The defendants also drew attention to the absence of any undertaking by MPC to pay the defendants' recoverable costs or to take out after-the-event (ATE) insurance cover in respect of such costs. They submitted that, in principle, professional funders, as distinct from pure funders, who are maintaining litigation for their profit, should be liable for the costs of the defendants if their claim fails, which in this case it did. In resisting this application MPC submitted that funding agreements with professional funders which have the purpose of enabling impecunious claimants to pursue claims of real substance which, but for such funding, they could not have done, should not be visited with costs orders against the funders if the claim fails. The court held that in these circumstances the public policy objectives of the deterrence of weak claims and of the protection of the due administration of justice from interference by those who fund litigation must yield to the objective of making access to the courts available to impecunious claimants with claims of sufficient substance. An order for costs against MPC would, no doubt, operate as a strong deterrent to professional funders to provide support for impecunious claimants with large and complex claims. [41.10] On appeal the Court of Appeal held that a professional funder, who finances part of a claimant's costs of litigation, should be potentially liable for the costs of the opposing party to the extent of the funding provided. In its judgment the court said: The effect of this will, of course, be that, if the funding is provided on a contingency basis of recovery, the funder will require, as the price of the funding, a greater share of the recovery should the claim succeed. In the individual case, the net recovery of a successful claimant will be diminished. While this is unfortunate, it seems to us that it is a cost that the impecunious claimant can reasonably be expected to bear. Overall justice will be better served than leaving defendants in a position where they have no right to recover any costs from a professional funder whose intervention has permitted the continuation of a claim which has ultimately proved to be without merit. The decision may not have pleased purists like me (because the issue of causation should be the key: if a funder, or indeed a solicitor running a case on a full CFA, causes an opponent to incur costs and subsequently loses the case, then they should be liable to pay all costs recoverable by their opponent, since but for that funding, the opponent would not have incurred the costs in question) but it was a step in the right direction of a commercial funder of litigation being liable for all of the costs awarded against the fundee if the claim fails. Over recent years the courts have indicated that the overriding need for claimants to have access to justice makes third party funding acceptable, subject to certain safeguards and protections. The present attitude of the judiciary to third party funding was exemplified by Lord Phillips in Gulf Azov Shipping Co Ltd v Idisi [2004] EWCA Civ 292 when he said: Public policy now recognises that it is desirable, in order to facilitate access to justice, that third parties should provide assistance designed to ensure that those who are involved in litigation have the benefit of legal representation. In June 2007, the Civil Justice Council, as part of its wider consideration of Access to Justice, considered a range of funding options and, endorsed the decision in Arkin in stating TPF was a legitimate mechanism for paying for litigation costs. See future_funding_litigation_paper_v117_final.pdf. Landmarks

6 [41.11] Here is a chronological summary of some landmark decisions in the TPF journey. [41.12] Stocznia Gdanska v Latreefers [2001] 2 SCLC 116 (CA). Funders agreed to finance commercial litigation in exchange for 55% of the proceeds. They agreed to pay the between-the-parties costs if the litigation failed. They also had a prior commercial interest in the litigation because they were already owed money under an agreement which successful litigation would enable them to recover. The defendants sought a stay of the proceedings on the ground of champerty relying on the disproportion between the value of the funders prior interest (about $7m) and the value of their 55% share if the case were successful (about $40m). Although the Court of Appeal did not have to decide whether or not the agreement was champertous, it was strongly of the view that it was not, because the alleged disproportion was more theoretical than real, the funders were undertaking a very substantial potential costs liability, they had a pre-existing interest in the subject-matter of the claim and they would not be able to influence the conduct of the litigation because that, including any negotiations, was in the hands of experienced solicitors. [41.13] The Eurasian Dream (No 2) [2002] 2 LIoyd's Rep 692 (Commercial Court). Marine claims assessors had carried out work for the claimants on the basis of a no-win, no-fee agreement providing for 5% of recoveries. The judge rejected an argument that the agreement was champertous, saying it was necessary to consider the role played by the consultants to see whether the nature of their interest in the outcome carried with it any tendency to sully the purity of justice. The opportunity for the consultants to influence the outcome was limited, as solicitors and counsel were instructed. It was relevant that it was the practice in this market to be remunerated on a similar basis. [41.14] R (on the application of Factortame) v Secretary of State for Transport, Environments and the Regions (No 2) [2002] EWCA Civ 932, [2003] QB 381. Impecunious Spanish trawler owners had obtained judgment against the British Government for damages for breaches of their fishing rights but they could not afford to proceed with the assessment of damages. Accountants agreed to provide litigation support in the form of handling documents and programming services, as well as undertaking to pay the fees of expert witnesses, in exchange for 8% of any amount recovered. The Court of Appeal held that the agreement was not champertous, saying: Where the law expressly restricts the circumstances in which agreements in support of litigation are lawful, this provides a powerful indication of the limits of public policy in analogous situations. Where this is not the case, then we believe one must today look at the facts of the particular case and consider whether those facts suggest that the agreement in question might tempt the allegedly champertous maintainer for his personal gain to inflame the damages, to suppress evidence, to suborn witnesses or otherwise to undermine the ends of justice. [36].it is necessary to look at the agreement under attack in order to see whether it tends to conflict with existing public policy that is directed to protecting the due administration of justice with particular regard to the interests of the defendant. [44] 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. [85] Although the prospect of receiving 8% of recoveries would have provided a motive to inflame the damages, the court was entitled to take into account that the accountants were members of a respectable and regulated profession. No

7 reasonable onlooker would seriously have suspected that they would be tempted by the percentage to deviate from the honest performance of their duties. [87] Although the accountants played an important role in the preparation of the computer model on which the damages claims were based, this was subject to checking by the other side and was transparent. No lack of objectivity on the part of the accountants could be expected to impact on the assessment of damages. [88 89] The claimants were represented by highly experienced solicitors and counsel, and the solicitors had very properly insisted on remaining in control of the conduct of the litigation. It was unrealistic to suggest that the accountants might have attempted to procure a settlement on terms which were at odds with their appreciation of the merits. [90] I am grateful to Jeremy Morgan QC for this summary. [41.15] Campbells Cash and Carry Ltd v Fostif Pty [2006] HCA 41. This is a much quoted seminal Australian case (known as Fostif ). I am grateful to the Civil Justice Council for the following summary. Fostif involved the attempted recovery of payments of state based licence fees for tobacco that had been found to be unconstitutional. Firmstones, a firm of accountants, wrote to tobacco retailers seeking their authority to act on their behalf to recover fees paid. They offered to fund the litigation, and protect the retailers from adverse costs in the event that they lost the claim, in return they would take one third of any recovery, plus any recovered costs. Firmstones instructed solicitors to front the action, on terms of instruction that severely limited access to their clients, who to all intents and purposes were represented by Firmstones. The claim was set down as a representative proceeding (there are no group litigation or class action proceedings in New South Wales), with only one single identified claimant, but with an opt-in provision intended to permit other parties, once identified and willing to participate, to join the proceedings. At first instance the defendant (Campbells) applied to have the proceedings dismissed or stayed on the grounds that (i) the proceedings were not properly constituted; due to lack of common interest the action was not sufficiently representative, and (ii) that the third party funding arrangements amounted to an abuse of process because of intermeddling, and the degree of control exercised over the proceedings by the funders (Firmstones). The first instance judge, Einstein J, decided that the funding arrangements were contrary to public policy and that the proceedings as constituted did not meet the requirements of a representative action. He entered a stay. The decision was successfully appealed to the Court of Appeal of New South Wales which rejected both grounds of the stay. On further appeal, the High Court (Australia's final appeal process) decided by a majority of 5:2 that the case did not meet the procedural requirements to become a representative proceeding, and stayed the case, allowing that limb of the appeal. However, the Court also removed the stay on the basis of the second limb of the appeal by a majority of 5:2 (a differently constituted majority decision) that the third party funding arrangements did not constitute an abuse of process, and that the arrangements were not contrary to public policy. The appeal therefore succeeded on this ground, giving strengthened legitimacy to third party funding in Australia. [41.16] London & Regional (St George's Court) Ltd v Ministry of Defence [2008] EWHC 526 (TCC). Coulson J summarised the present state of the authorities as: the mere fact that litigation services have been provided in return for a promise in the share of the proceeds is not by itself sufficient to justify that promise being held to be unenforceable; in considering whether an agreement is unlawful on grounds of maintenance or champerty, the question is whether the agreement has a tendency to corrupt

8 public justice, and such a question requires the closest attention to the nature and surrounding circumstance of a particular agreement; the modern authorities demonstrate a flexible approach where courts have generally declined to hold that an agreement under which a party provided assistance with litigation in return for a share of the proceeds was unenforceable; the rules against champerty, so far as they have survived, are primarily concerned with the protection of the integrity of the litigation process by the limitation of control of the conduct of the action by a third party. Personal injury cases [41.17] Jeremy Morgan QC has drawn attention to a particular difficulty in third party funding of personal injury claims. He says: Solicitors need to be aware of it and the Law Society needs to eradicate it if modern third party funding is to play any role in providing access to justice in personal injury litigation. Given that Legal Aid is now very hard to get for group actions the current situation precludes the use of modern third party funding in important areas such as pharmaceutical litigation. The problem arises as follows. In its recent wholesale revision of the rules governing the practice of solicitors, the Council of the Law Society decided to retain the old Practice Rule 9. It now appears as Rule 9.01(4) of the Solicitors Code of Conduct 2007 which reads: You must not, in respect of any claim arising as a result of death or personal injury, either: (a) enter into an arrangement for the referral of clients with; or (b) act in association with any person whose business, or any part of whose business, is to make, support or prosecute (whether by action or otherwise, and whether by a solicitor or agent or otherwise) claims arising as a result of death or personal injury and who, in the course of such business, solicits or receives contingency fees in respect of such claims. Clearly the Rule affects any solicitor who works with a third party funder in a personal injury case where the funder has stipulated for a contingency fee. Rules made under the Solicitors Act 1974, such as this one, have the force of law (Awwad v Geraghty[2001] QB 570). The prohibition in the Rule is not one which bites on the agreement between the funder and the funded party, but only on the association with the solicitor. Accordingly it should not render the agreement itself unlawful, particularly as there is nothing in the provisions brought into force under the Compensation Act 2006 to preclude claims management companies from entering into such agreements. It is only the Law Society that has a problem with them. Nevertheless it is a trap for solicitors, who face disciplinary action if they breach the rule, and several prosecutions for the breach of the predecessor of this rule are being brought by the Solicitors Regulation Authority. [41.18] There have been a number of rule 9 prosecutions resulting in at least two convictions by the Solicitors Disciplinary Tribunal, mainly arising from the Miners' Respiratory Disease Litigation where it may be that unions receive a percentage of the damages in return for funding cases. There are other cases going through the system The draft Solicitors' Code of Conduct 2007 had not originally included an equivalent of the previous practice rule 9 concerning claims assessors. That practice rule (broadly) prohibited solicitors from accepting referrals from introducers who solicited or received contingency fees in claims arising out of personal injury or death. A decision was made to omit the provision because the government had announced its intention to regulate claims managers, and it was thought that would in effect legitimise and regulate claims assessors.

9 [41.19] Solicitors are able, by virtue of conditional fee agreements, to charge clients on a contingency fee basis (to a maximum of 200% of their hourly rate) because these arrangements are sanctioned through legislation, and clients' interests are protected by various safeguards. There are no equivalent protections for clients who enter contingency fee arrangements with claims assessors indeed such agreements may be contrary to the common law. Clients suffered as a result of entering into agreements with some unscrupulous claims assessors, which resulted in the clients paying over a significant proportion of their damages. In all the circumstances, it was considered that unless and until there was clarity about the regulation of the activities of claims assessors in this area, the new Code of Conduct should maintain the previous status quo and contain a similar prohibition. Rule 9 needs urgent revision now that claims management companies are regulated. Word of warning [41.20] The largest claim that is known to have been commercially funded, a 69.5 million professional negligence claim in Stone & Rolls Ltd (in liquidation) v Moore Stephens (A Firm) [2009] UKHL 39, [2009] 3 WLR 455, [2009] NLJR 1218 gives insight into the inherent risks and high stakes of litigation funding. It failed in the Court of Appeal and failed again in the House of Lords by a 3 2 majority. TPF is not for the faint-hearted.