What is litigation funding?
Litigation funding is where a third party with no prior connection to the litigation agrees to finance all or part of the legal costs of the litigation in return for a fee payable from the proceeds recovered by the funded litigant if successful.
Litigation funding may be used in conjunction with an after the event (ATE) insurance policy, a conditional fee agreement (CFA), a damages based agreement (DBA).
Historically, English law refused to recognise arrangements under which litigation was funded or “maintained” by third parties but the rules have changed subject to considering things like
- The extent to which the funder controls the litigation.
- The level of communication between the funded party and the solicitor.
- The extent to which the funded party is provided with information, and is able to make informed decisions about the litigation.
- The amount of profit that the funder stands to make relative to the total damages.
- Whether there is a risk of inflaming damages.
- Whether there is a risk of distorting evidence.
- Whether the funder is regulated.
If the rules are breached the agreement is void and unenforceable and the funder will be unable to enforce the agreement against the funded party.
Importantly, in these circumstances, a successful funded party would be unable to recover costs from its opponent. There may also be grounds justifying a costs order (under section 51 of the Senior Courts Act 1981) against the litigation funder, possibly for the entire costs of the litigation.
Under the SRA Solicitors’ Code of Conduct, solicitors must not act where there is a conflict (or a significant risk of a conflict) between them and their clients. Further, solicitors must not act where their duty to act in the best interest of two or more clients conflicts, except in very limited circumstances and where certain conditions are met. Caution and transparency is therefore required.
Similarly, the SRA Solicitors’ Code of Conduct deals with confidentiality and disclosure. A solicitor must keep the affairs of current and former clients confidential unless disclosure is required or permitted by law or the client consents. This may lead to a dilemma because the prospective funder will want to see documentary evidence in order to assess the strength of the claim. Solicitors therefore need to give careful thought to which documents need to be disclosed to the litigation funder and should not disclose information to the funder without explaining to the client the risks of doing so and obtaining the client’s informed consent.
There is a Code of conduct for litigation funders.
Funders prefer cases that have been investigated to establish that a claim is not purely speculative. For example, it is helpful if there is pre-action correspondence that gives an indication of the defendant’s possible approach to the dispute. Funding may also be available as a claim progresses.
If the claim is unsuccessful the funder will lose the capital that it has invested in the case and may be ordered to pay the successful party’s costs and interest on costs.