Withdrawal symptoms: when funders pull out

Fewer clients clients are either able or willing to fund dispute processes in the post-Jackson world.

Many want to share the risk of their disputes and as the funding market has opened up, there are numerous ways in which clients can defray the risk of litigation.

In Harcus Sinclair (a firm) v Buttonwood Legal Capital Limited (BLC), Rylatt Chubb (a firm) Alternative Real Estate Fund Limited (AREF) and Roskill Advisors Cayman Limited [2013] EWCH 1193 (Ch) the court had to consider the commercial funding arrangements between the parties, in respect of which BLC was a third party funder.

Across England and Wales corporate teams provide legal advice to clients on secured and unsecured funding arrangements, including their obligations and terms. Third-party litigation funding is most easily explained as a form of unsecured lending, and should be treated in the same way. Should we therefore be surprised that the court held the parties to the strict terms of a commercial arrangement between a third party funder, a law firm and ?their client?

Agreement terminated

AREF had a commercial dispute related to the financing of potential development projects in the UK. AREF alleged that the defendant in those proceedings was in repudiatory breach of the funding arrangements and as a consequence AREF had a claim for £25m. A preliminary advice on merits was provided by leading counsel for the purposes of obtaining funding in September 2010. It was short, just eight paragraphs, but it was anticipated that more formal advice would be obtained at a later date. Rylatt Chubb, the solicitors for AREF, obtained funding for the litigation from BLC based on that preliminary advice. Proceedings were issued in December 2011. No further substantive advice was provided.

The agreement with BLC included the right to terminate the agreement if, in the reasonable opinion of BLC, AREF's 'prospects of success in the proceedings are 60 per cent or less'. BLC became concerned at difficulties in obtaining an updated opinion and eventually procured an opinion for itself, which put the prospects of success at less than 50 per cent. BLC terminated the funding agreement on 8 January 2013.

The termination was challenged '“ the grounds of the main challenge were quite narrow. It was not suggested that the opinion and the decision to terminate were unreasonable as such, but that the opinion had not taken into account relevant material including potential witness statements and that AREF should have been allowed to make representations on ?the merits.

The judge commented on the reluctance on the part of Rylatt Chubb to co-operate and concluded that even if the material had been provided to BLC, having reviewed it, it would not have affected counsel's critical assessment of the case. On the question of representations the judge concluded that if the opinion ?was reasonable, the process by which it was reached did not make it unreasonable.

Common term

The documents necessary to enter into a third-party funding arrangement are complex and include obligations for all parties which if not adhered to can result in those agreements being terminable. Default provision for termination, if there is an adverse change in the prospects of success, is a common term in funding agreements. This is the case even where the funder is a member of the Association of Litigation Funders of England and Wales (ALF) who have a voluntary code of practice limiting the circumstances in which the funder can terminate. SJ