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Funding Litigation Someone who, without just cause, supports litigation in which he has no legitimate interest commits what is called maintenance. When someone "maintains" another person's litigation in return for a share of the proceeds of the litigation he commits champerty, "an aggravated form of maintenance". Until the 1990s, maintenance and champerty were seen as preventing a third party from funding litigation under English law. However, changes in government policy involving the restriction of public funding and placing greater emphasis on access to justice have led to a change in the way in which these principles are applied by the courts. Funding litigation through insurance is now commonplace, and funding is even available through private equity houses, banks and hedge funds that are prepared to consider funding litigation as an investment opportunity. Maintenance and champerty still exist, but the courts will now only find third party funding of litigation objectionable where there is some element of impropriety, such as "wanton or officious" meddling, disproportionate control or profit, or where there is a clear tendency to corrupt justice. Conditional Fee Agreements A major change in litigation funding took place in 1995 with the introduction of conditional fee agreements (CFAs) which allowed lawyers to work for clients under "no win no fee" arrangements. The Courts and Legal Services Act 1990, as amended by the Access to Justice Act 1999, provides the legislative framework for CFAs and they are now a major form of funding, particularly for claimants in personal injury claims. What is a CFA? "an agreement with a person providing advocacy or litigation services which provides for his fees and expenses, or any part of them, to be payable only in specified circumstances". CFAs are allowed in all civil cases except divorce proceedings, and can be used in all commercial claims. Under most CFAs, a client will only have to pay his lawyer any fees if he wins the case. In some more complex cases, the lawyer may require the client to pay some fees at a reduced rate if the client loses so that the risk of losing is shared between the lawyer and the client. Contingency fee arrangements, where the lawyer receives a percentage of the damages awarded are still not allowed in proceedings in the English Courts. In the US, that sort of arrangement is commonplace. A CFA which fails to comply with section 58 of the Courts and Legal Services Act 1990 is champertous and illegal (Awwad & Anor v Geraghty & Co [1999] EWCA Civ 3002), and Rule 2.04 of the Solicitors' Code of Conduct specifically prohibits solicitors from entering into a CFA "for work done in prosecuting or defending any contentious proceedings before a court of England and Wales, a British court martial or an arbitrator where the seat of the arbitration is in England and Wales, except as permitted by statute or the common law". Success Fees Under most CFAs, if the case is successful, the lawyer may charge at his normal rate (the base costs) and may charge a success fee in return for taking the risk of receiving reduced fees, or no fees, if the case is lost. Any success fee agreed between the lawyer and client must be set out in a written CFA. The success fee must be calculated by the lawyer after a proper risk analysis of the case, and it must reflect the merits and value of the claim, an estimate of the costs that will be incurred and the risk of losing. In most cases, there is no usual rate of uplift, but the Courts and Legal Services Act sets the upper limit for a success fee at 100% of the base costs. The Civil Procedure Rules provide for fixed uplifts in road traffic accidents and in employer's liability cases involving personal injury and disease. Under those Rules, a party entering into a CFA with a success fee must notify the court and the other parties of the CFA. Recovery of costs from the other party to the litigation Where there is a CFA, the winning party is may claim from the losing party, the success fee that he has agreed to pay his lawyer. However, the party paying the costs is entitled to have the costs assessed by the court. As part of that assessment, the success fee may be reduced if it is not reasonable on a risk analysis of the case. The court may also allow different success fees for different parts of the case or different stages of the proceedings. The regulation of CFAs The Solicitors' Code of Conduct requires solicitors to give their clients the best information possible about the likely cost of the matter and risks of losing the litigation. Where a solicitor is acting under a CFA, 2.03(2) of the Code also requires him to explain: The Law Society has produced model CFAs that set out the terms that should be included in a CFA to comply with the Solicitors' Code of Conduct. Insurance A CFA will protect a claimant from liability for his own legal costs should he lose his case. However, if he does lose, the court is likely to order that he pays the other party's costs and a CFA cannot protect him from that liability. The other party's costs may be covered by legal expenses insurance, (for instance household or car insurance policies) which provide cover for legal expenses in particular types of claim. Rule 2.03(1) (g) of the Solicitors' Code of Conduct 2007 requires solicitors to discuss with clients "whether their liability for another party's costs may be covered by existing insurance or whether specially purchased insurance may be obtained". A solicitor is required to check whether the client already has before the event insurance to cover this liability (although, in the case of commercial claims, this is highly unlikely). If a client does not have before the event insurance, he may consider taking out after the event (ATE) insurance to protect against the risk of paying another party's costs. Many insurance companies now offer insurance that will cover the insured's own expenses and his opponent's costs and disbursements if the legal action is abandoned, discontinued or lost at trial. ATE insurance is also available to cover the costs of both sides if a party does not have a CFA with his lawyer. As with any other form of insurance, an insurance company will consider the risks to be insured and may decide not to offer cover under an ATE insurance policy. The premium payable for the ATE policy will depend on the risks involved in the case, the likely level of the costs and whether the premium is paid up front. In some cases, the premium may be staged so that it will increase as the case progresses and so that the earlier the case settles, the lower the premium will be. As well as the initial premium, some insurance companies charge a 'renewal' premium on the anniversary of the insurance. This means that if the case takes a long time, you will have to pay a percentage of the original premium on each anniversary of the insurance until the case has been concluded. Provided the premium is a reasonable percentage of the amount of the damages recovered, the cost of the insurance premium may be recovered from the other party if the claimant obtains a costs order against the other party. You will not be able to recover the premium if you have not informed the other party that you have obtained insurance. Professional Third Party Funders In summer 2007, the Civil Justice Council published its recommendations to the Lord Chancellor on the future funding of litigation. It recommended that: "properly regulated third-party funding should be recognised as an acceptable option for mainstream litigation". The number of professional litigation funders (who lend money so that litigation can be pursued, and make their profit from sharing in the damages when the claim succeeds) has increased in the last 18 months. Businesses such as funders IM Litigation Funding, Allianz, hedge fund MKM Longboat and Juridica Investments - which publicly listed for £78.4m in 2007 - and a number of brokers such as Calunius Capital and The Judge have recently entered the market. The courts may still have concerns if the control of the litigation is such that it appears that the funder is abusing the litigation process for commercial gain. These concerns will increase if the percentage share of damages payable to the funder appears to be disproportionate to the funding that it is provided. The courts may impose cost liabilities on professional funders if they lose the litigation they have funded. In Arkin v Borchard Lines Ltd & Ors [2005] EWCA Civ 655, the Court of Appeal decided that third party funding was acceptable and concluded that the funder was liable for costs up to the amount of its own contribution, as the funder had not exercised any control over the litigation process. However, the court noted that, had the funding agreement been champertous, the third party funder's liability could be unlimited. Assignments of an action to an unconnected party usually fall foul of the rules of champerty. Although in Massai Aviation Services & Anor v The Attorney General & Anor (The Bahamas) [2007] UKPC 12, the Privy Council upheld an assignment of a cause of action to a party who was a shareholder, but not a creditor of the assignor company because the assignee had a genuine commercial interest in the assignment, the court cautioned that, in other circumstances (for example, a minority shareholder buying a substantial claim for a nominal sum in the hope of making a substantial profit), the assignment might fall foul of the rule of champerty. To date professional third party funding has been geared towards high-value commercial disputes where there is a very good chance of success. This model of funding works where costs are in proportion to the damages at stake in the claim. At the time of writing, the largest independently-funded case in the UK is the £69.5 million negligence claim against accountancy firm Moore Stephens pursued by creditors of a collapsed UK company, Stone & Rolls, in 2007 through specialist litigation funds provider IM Litigation Funding. Conclusion The way in which litigation is funded in the UK has changed substantially in the last 10 years. Public funding for litigation has been withdrawn in many areas and replaced by insurance companies and lawyers (by means of CFAs) covering the risk. There is a conflict between providing access to justice for all, regardless of their means, and ensuring that the civil justice system is not abused for commercial gain. In the last few years, professional litigation funders and brokers have developed an alternative method of funding, but it remains to be seen how that market will develop. The Civil Justice Council met in February 2008 to discuss whether regulation is required to protect litigants from abuse of the system by funders. The Council recommended that third party funders should be required to disclose the funding arrangement to the court and the other party and should be required to provide security for costs. Contact Details If you would like further advice about any of the issues considered above please contact Paul Northwood on 01869 331753, or email him at paul.northwood@northwoodreid.com . Terms of Use This article is not intended to be, and should not be taken as being, legal advice. The law often changes and it varies from jurisdiction to jurisdiction; the information in this article is generic in nature and specific legal advice should be taken before acting on any of it. © Northwood Reid 2008. The use, copying and dissemination of this article are subject to our Terms of Use.
A CFA is:
In cases before an English court, the court will usually make a costs order in favour of the successful party. This means that if you win your claim you will be able to recover your costs from the other party.