Written by Introduction
Litigation funding has become an essential aspect of the legal landscape in England and Wales, providing crucial support for individuals and businesses seeking access to justice. The Legal Services Board (LSB) commissioned an in-depth report by Professor Rachael Mulheron from Queen Mary University of London to explore the nature, benefits, and challenges of litigation funding. This article summarises the key findings and discussions presented in this comprehensive report, focusing on the regulatory framework, types of cases funded, and the broader implications for the legal system and consumers.
Background and Objectives
The LSB’s regulatory objectives, as outlined in the Legal Services Act 2007, underpin the analysis presented in the report. These objectives include protecting and promoting the public interest, improving access to justice, protecting consumer interests, promoting competition in the provision of legal services, and ensuring the integrity and independence of the legal profession. The report aims to provide a detailed understanding of how litigation funding aligns with these objectives, particularly in the context of consumer protection and access to justice.
Methodology
The research methodology comprised empirical studies, including detailed questionnaires sent to various stakeholders such as ALF-funder members, non-ALF funders, law firms, ATE insurers, and litigation brokers. Additionally, the report includes a thorough review of case law databases and a literature review of both standard and grey sources. This robust methodology ensures a comprehensive and nuanced understanding of the litigation funding landscape.
Definition and Scope of Litigation Funding
Litigation funding involves a third party financing legal disputes in exchange for a share of the proceeds recovered from the resolution of the disputes. The key characteristics of litigation funding include the absence of a pre-existing interest in the subject matter, the funder’s business model of investing in litigation for profit, and the provision of non-recourse funding, meaning the funder does not require repayment if the funded action fails.
Litigation funding is distinct from other forms of third-party funding such as ATE and BTE insurance, conscience funders, litigation loans, crowd-funding, and funding by trade associations or unions. Each of these forms of funding differs in terms of risk, return, and the relationship between the funder and the funded party.
Historical Context
The concept of litigation funding emerged significantly in the 1990s and gained substantial credibility in the 2000s through various developments. Notable endorsements by the House of Lords and the increasing involvement of hedge funds and other financial entities bolstered the industry. The Civil Justice Council (CJC) and other legal bodies also played crucial roles in advocating for litigation funding as a means to promote access to justice.
Types of Cases Funded
Collective Actions
Litigation funding has been pivotal in supporting collective actions, which aggregate individual claims into a class action. This mechanism is particularly important for consumer and SME grievances against large corporations. The report highlights that litigation funding is indispensable in the collective proceedings regime under the Competition Appeal Tribunal (CAT) and the group litigation order regime.
The types of defendants in these collective actions typically include tech giants like Apple and Facebook, banks, financial institutions, utilities, and major car and truck manufacturers. The consumer classes involved often comprise a broad cross-section of the public, reflecting the widespread impact of the issues at hand.
Non-Consumer Cases
Beyond consumer collective actions, litigation funding also supports non-consumer claims, including those by individuals and corporations in arbitration settings. This diversification underscores the broader applicability and necessity of litigation funding across various legal contexts.
Regulation of Litigation Funding
Self-Regulation
The litigation funding industry in England and Wales is primarily self-regulated through the Association of Litigation Funders (ALF) and its Code of Conduct. Membership in ALF requires adherence to stringent guidelines designed to ensure transparency, fairness, and ethical conduct in funding agreements. Judicial supervision complements this self-regulation, particularly in preventing champerty – the improper involvement in litigation for a share of the proceeds.
Capital Adequacy and Complaints
The report discusses the capital adequacy requirements imposed by the ALF’s Code of Conduct, which mandate minimum financial thresholds to ensure funders can meet their obligations. Additionally, a structured complaints procedure is in place to address grievances and maintain accountability within the industry.
Funding Structure and Sources
The corporate structure of litigation funders often involves associated entities and subsidiaries, which are delineated in the ALF’s Code of Conduct. The sources of finance for litigation funders are diverse, ranging from investment funds and pension funds to high-net-worth individuals and international hedge funds. This variety ensures a steady flow of capital to support litigation funding activities.
Managing and Paying for Costs
Litigation funders cover various costs associated with legal proceedings, including the funded client’s own-side costs and potential liabilities to defendants. The report emphasises the importance of managing adverse costs, as funders must either contractually assume these liabilities or face direct costs orders against themselves.
Success Fees
Success fees are a critical component of litigation funding agreements, typically calculated as a percentage of the recovery or a multiple of the costs invested. The UK Supreme Court’s decision in Paccar, which categorised certain success fees as damages-based agreements (DBAs), has significant implications for the enforceability of these agreements. The report discusses the legislative efforts to reverse this decision and the potential impact on the litigation funding landscape.
Safeguards for Funded Parties
To protect funded parties, the ALF’s Code of Conduct mandates independent advice for clients entering funding agreements. Additionally, funders must not take over control of the litigation, ensuring that the integrity of the legal process is maintained. These safeguards are crucial in preventing conflicts of interest and maintaining the ethical standards of litigation funding.
Conclusion
The report concludes that litigation funding aligns well with the LSB’s regulatory objectives, particularly in promoting access to justice and protecting consumer interests. Despite the challenges and risks, litigation funding provides a viable and often indispensable route for individuals and businesses to pursue legal claims that would otherwise be unaffordable. The ongoing regulatory discussions and legislative developments will shape the future of litigation funding, ensuring it continues to serve the public interest and enhance the legal profession’s effectiveness and integrity.
Implications and Future Directions
The comprehensive analysis presented in Professor Mulheron’s report underscores the critical role of litigation funding in the contemporary legal landscape. As the industry evolves, continuous monitoring and adaptive regulation will be essential to balance the benefits of funding with the need for ethical conduct and financial stability. The insights gained from this report will inform ongoing discussions among regulators, legal professionals, and policymakers, ultimately shaping the future of litigation funding in England and Wales.
References
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