A complex beast - but does litigation funding need taming?

The basis on which they had worked together for many years was now in question. This was not a challenge to the principles behind funding but a very precise examination of a hotchpotch of legislation. As the dust settled, however, the import of the decision became clear; litigation funders provided “claims management services” and therefore some funding agreements were unenforceable. Now the decision is to be reversed by statute to restore the status quo ante. PACCAR, along with other events, has, however, brought political attention to litigation funding and its role and further legislation may follow.

Litigation funding has grown as an investment asset class alongside the growth in contingency work for lawyers. Contingency work has its modern roots in the legislative and common law changes of the late 90s. The Woolf reforms and the consequent Access to Justice Act 1998 bedded in lawyers working on a ‘no win, no fee’ basis. At the time, the change was directed towards personal injury claims to replace legal aid which had been removed from the great bulk of such claims. The changes were hot rodded by the revolution that allowed the recovery of the lawyers’ success fee and the premiums for adverse costs insurance cover (ATE). Although these changes applied widely initially, it was only in civil claims arising out of insolvency that we saw widespread use of contingency and, in due course, funding.

Both were challenged by defendants, but the Courts endorsed the changes by reining back the common law principles of champerty and maintenance to ensure the new arrangements could work to ensure clients and lawyers were able to use the new arrangements to the full.

As lawyers started to meet the potential of the reforms and increase access to justice, they looked to ways in which the risk they took could be shared with funders, providing the vital capital to run larger and more complex cases against defendants only too willing to use their deep pockets to protract and exhaust claimants in lengthy litigation, as the Post Office did against the sub-postmasters.

Three major events then boosted the developing contingency funding market: the Global Financial Crisis in 2008/09, which gave rise to massive international claims requiring financing; the reforms of Lord Justice Jackson in 2013, which removed the recoverability of ATE premiums and the lawyers’ success fee; and the reforms to group Competition claims, introducing an opt-out process for mass claims. All three highlighted the necessity for the litigation funding industry to provide essential capital to run cases that claimants (and lawyers) simply did not have the capital to run.

The changes in contingency arrangements and the legal market’s response to it, both lawyers and funders, developed in a fairly haphazard way, which was the root cause of the problems that arose in PACCAR, deriving from a convoluted statutory picture, the consequence of which was a statutory interpretation by the Supreme Court had not been in the contemplation of the drafters. The picture now painted by the Supreme Court, in short, made funding agreements that provided for a percentage return of the damages for the funders, unlawful. The litigation funding industry and claimant lawyers reacted quickly, amending agreements so that they are paid on a multiple of the funding provided, thus taking them outside the DBA Regulations. Despite the Courts now approving these amendments, a swathe of satellite litigation over past agreements has resulted.