By Regulation
Overview
Is third-party litigation funding permitted? Is it commonly used?
Third-party litigation funding is permitted and endorsed by the judiciary and policymakers as a tool of access to justice. Consistent with modern public policy, English courts have a generally positive attitude to third-party funding.
In March 2018, Sir Rupert Jackson, while reviewing the reforms made as a result of his 2009 report into the civil litigation costs regime, noted that his proposals to:
[p]romote [third-party funding] and introduce a code for funders have been successful. These reforms enable parties to pursue claims (and sometimes defences) when they could not otherwise afford to do so. Funders are highly experienced litigators and they exercise effective control over costs. They often insist upon having court-approved budgets. Self-evidently, these reforms promote access to justice and tend to control costs.
In R (on the application of PACCAR Inc and others) v Competition Appeal Tribunal and others [2023] UKSC 28, the Supreme Court recognised that ‘funding of litigation by third parties is now a substantial industry which, although driven by commercial motives, is widely acknowledged to play a valuable role in furthering access to justice’. It also noted that ‘the effectiveness of group litigation may depend on the use of third party funding, since such litigation often involves high numbers of claimants who have individually suffered only a small amount of loss, where the pursuit of claims on any other basis would be uncommercial’.
In the Competition Appeal Tribunal (CAT), third-party litigation funding has been described as ‘a well-recognised feature of modern litigation’ that ‘facilitates access to justice for those who otherwise may be unable to afford it’ (UK Trucks Claim Limited v Fiat Chrysler Automobiles NV and Others and Road Haulage Association Limited v Man SE and Others [2019] CAT 26).
In Mark McLaren v MOL and Others [2022] CAT 10, a case funded by Woodsford, the CAT noted that ‘third-party funding is often a necessary feature of collective proceedings, and collective proceedings also play a role in ensuring that wrongdoers modify their behaviour’.
The CAT’s recognition that litigation funding is often necessary to hold large corporate defendants accountable for misconduct that causes loss to consumers and others was reflected in the Court of Appeal decision in another Woodsford-funded case, Gutman v London & South Eastern Railway and Others [2022] EWCA Civ 1077. Lord Justice Green stated that ‘to enable mass consumer actions to be viable at all will invariably necessitate the assistance of third-party funders’ and that ‘litigation funding is a business and funders will, legitimately, seek a return upon their investment’.
Litigation funding has also been endorsed in family law proceedings. In Akhmedova v Akhmedov [2020] EWHC 1526 (Fam)), Mrs Justice Knowles found that ‘first-instance decisions in the Family Division have concluded that [litigation funding] is “a necessary and invaluable service in the right case” (per Mr Justice Francis at paragraph 53 in Weisz v Weisz [2019] EWHC 3101 (Fam)) and that nothing should be said “that makes it even more difficult for litigants to obtain litigation funding in the future, particularly given that there is no legal aid available in this area anymore” (per Mr Justice Moor at paragraph 9 of Young v Young [2013] EWHC 3637 (Fam))’.
The third-party funding industry, which is arguably centred in London, has grown significantly in terms of the number of market participants, the capital available to them, the types of disputes that are funded and the size of investments made. Formed in 2011, the Association of Litigation Funders (ALF) now has 15 funder members and an analysis by RPC in 2022 found that the top 15 UK litigation funders’ total assets amounted to £2.2 billion, up 11 per cent on the previous year.
Restrictions on funding fees
Are there limits on the fees and interest funders can charge?
The Supreme Court confirmed in R (on the application of PACCAR Inc and others) v Competition Appeal Tribunal and others [2023] UKSC 28 that, where litigation funding agreements provide for a funder’s fee if the claimant receives proceeds which is determined by reference to the amount of the proceeds (such as a percentage of the proceeds), litigation funding agreements are damages-based agreements within the meaning of the Courts and Legal Services Act 1990 and are subject to the requirements of the Damages-Based Agreements Regulations 2013.
As a consequence, such litigation funding agreements must satisfy the requirements for damages-based agreements, including that the agreement must not provide for a payment above an amount which, including VAT, is equal to 50 per cent of the sums ultimately recovered by the client.
Specific rules for litigation funding
Are there any specific legislative or regulatory provisions applicable to third-party litigation funding?
Damages-based Agreements Regulations
As set out above, the Supreme Court recently confirmed in R (on the application of PACCAR Inc and others) v Competition Appeal Tribunal and others [2023] UKSC 28 that the Damages-Based Agreements Regulations 2013 apply to certain litigation funding agreements.
In addition to limiting any funder’s return (as described above), these regulations impose strict requirements on the form of such agreements, including that the terms and conditions must specify:
- the claim or proceedings or parts of them to which the agreement relates;
- the circumstances in which payment, expenses and costs, or part of them, are payable; and
- the reason for setting the amount of the payment at the level agreed.
The Supreme Court’s decision is particularly significant for opt-out litigation in the CAT, as section 47C(8) of the Competition Act 1998 provides that a damages-based agreement is unenforceable if it relates to opt-out collective proceedings.
Following this judgment, it is possible that legislation will be introduced to clarify that litigation funding agreements are not damages-based agreements. Indeed, on 31 August 2023, the Department for Business and Trade in the UK government released a statement that ‘The Department is aware of the Supreme Court decision in Paccar and is looking at all available options to bring clarity to all interested parties’.
ALF Code of Conduct
Most of the long-standing professional funders in the London market have voluntarily joined the ALF and committed to compliance with the ALF Code of Conduct, which sets out the standards of practice and behaviour required of ALF members in relation to litigation in England and Wales. The voluntary ALF Code of Conduct was facilitated by the Civil Justice Council, a government agency that is part of the Ministry of Justice of England and Wales (Ministry of Justice), and published on 23 November 2011. In Akhmedova, Mrs Justice Knowles highlighted that litigation funding ‘practised by a funder adhering to the Code of Conduct has been endorsed by the senior courts in robust terms’.
The ALF Code of Conduct includes provisions as to the capital adequacy of funders, the limited circumstances in which funders may be permitted to withdraw from a case, and the roles of funders, litigants and their lawyers.
In UK Trucks Claim Limited v Fiat Chrysler Automobiles NV and Others and Road Haulage Association Limited v Man SE and Others [2019] CAT 26, the CAT described the ALF Code of Conduct as ‘a voluntary code’, but that in their view it was ‘wholly unrealistic to suppose that a leading litigation funder that is commercially active in this field would not honour these commitments to the Association of which it is a founder member, and thus place at risk the whole regime of self-regulation’.
In addition to ALF membership, several funders in England and Wales are now also members of the International Legal Finance Association (ILFA), co-founded in September 2020 by Woodsford. ILFA members must agree to uphold the association’s Best Practices, which include avoiding conflicts of interest and a commitment to maintaining appropriate capital adequacy.
Legal advice
Do specific professional or ethical rules apply to lawyers advising clients in relation to third-party litigation funding?
The Solicitors Regulation Authority (SRA) Codes of Conduct contain a number of provisions relevant to solicitors and firms advising on funding. These include sections relating to ‘Maintaining trust and acting fairly’, ‘Service and competence’, ‘Conflict, confidentiality and disclosure’ and ‘Referrals, introductions and separate businesses’. To ensure compliance with these rules, solicitors should advise litigants on all reasonable funding options, including insurance and third-party funding. A failure to do so could result in sanction by the SRA, and, potentially, liability for professional negligence.
Regulators
Do any public bodies have any particular interest in or oversight over third-party litigation funding?
The judiciary provides a layer of oversight of the funding arrangements in litigation. By way of example, in collective proceedings in the CAT, funding arrangements are likely to be reviewed and scrutinised by the tribunal as part of the certification process. This was the case in Mark McLaren v MOL and Others [2022] CAT 10, where Woodsford’s litigation funding agreement was fully approved by the CAT.
The litigation funding industry is also subject to oversight by the ALF, the independent body charged by the Ministry of Justice with delivering self-regulation of disputes whose resolution is to be achieved principally through litigation in England and Wales. The ALF administers self-regulation of the voluntary code of conduct for litigation funders that are ALF members and maintains the procedure governing complaints against ALF members by funded litigants.
Most professional funders in London are staffed by solicitors and other professionals (eg, chartered accountants) who will ordinarily be regulated by their professional bodies.
