The Landscape of Litigation Funding in England & Wales

This is the sixth article in Clyde & Co’s latest international arbitration series covering the topic of litigation funding across various international jurisdictions. In this piece, senior associate Steven Bird and associate Robin Bandar from our London office provide the legal perspective from England & Wales.

Introduction

At its core, litigation funding occurs when a party to litigation has its legal fees paid by someone else.  Typically, the funder will agree to pay a claimant’s fees in return for either a percentage of the damages received, or a multiple of the capital they have invested, should the claim be successful. Should the claim be unsuccessful, there is normally no obligation to repay the funder the capital they have invested (this is because the majority of litigation funding is provided on a ‘non-recourse’ basis).  

Litigants seeking funding typically fall into one of three camps.  The first is that they have a good claim, but they do not have the financial means to pursue it.  The second is that they have the resources to pursue the claim, but they have reasons to not fund the litigation themselves (e.g., they would prefer to use the capital to grow their business). And the third is the emerging industry of class or representative actions where a claim is brought on behalf of a group of people. These actions typically involve many claimants seeking relatively modest individual damages. Because of this, they typically need funding to “get off the ground".¹

The funding industry is large and growing in England & Wales, with various reports claiming that the assets on funders’ balance sheets now exceed £2 billion, a sizeable increase from its £198 million valuation in 2011/12.

1. Is litigation funding permitted in your jurisdiction?

Yes, and the UK is considered a major centre for the industry.  

Historically, however, litigation funding was barred by the torts of maintenance and champerty.² While the Criminal Law Act 1967 abolished the crimes and torts of champerty and maintenance, champerty nevertheless survived as a rule of public policy that had the capacity to render a litigation funding agreement (“LFA”) unenforceable. It was not until 2002 that the Court of Appeal observed that only LFAs that would ‘undermine the ends of justice’³ should be held to contravene this rule of public policy. 

It may have been a somewhat slow and uncertain beginning, but the Court of Appeal’s decision paved the way for the inception and evolution of the industry to the current point where ‘the role played by professional funders is now seen by the courts as “highly desirable” in order to facilitate access to justice’.⁴

Despite this mainstream acceptance, funders are still prohibited from exercising undue control over proceedings. In Akhmedova, Knowles J observed that a ‘funder of litigation is not forbidden from having rights of control but is forbidden from having a degree of control which would be likely to undermine or corrupt the process of justice’.⁵   

2. Does this position on litigation funding apply in the same way to arbitration?

Litigation funding is regularly adopted by parties in arbitration proceedings. Appeals to the English Court’s on questions arising from such funding arrangements have conclusively determined them to be valid and a Tribunal’s powers to award costs include the power to award costs to third-party funders.⁶ Nevertheless, careful consideration should be taken, however, in respect of the applicable rules adopted for the arbitration, including those of certain forums.

In 2018, the International Council for Commercial Arbitration and Queen Mary, University of London Task Force on third-party funding released an all encompassing report particularising the various issues that arise from third-party funding in arbitration. The points raised are useful for practitioners but, principally, the report predicates its research on the ‘upsurge in the number of third-party funders, the number of funded cases, the number of law firms working with third-party funders, and the number of reported cases involving issues relating to funding.’ 

The International Bar Association (the “IBA”) Guidelines, which are regularly adopted into arbitrations, have been updated to include rules in regard to the identity of a party where another has a direct economic interest and as a result has brought about issues concerning conflicts and disclosure. Whilst these are non-binding guidelines, they are reflections of good international practice. Also of note are the IBA Guidelines on Conflicts of Interest where third-party funders and insurers are effectively considered to be equivalent to a party to the arbitration, at least for the purposes of assessing arbitrator conflicts of interest.

Of further note is the Association of Litigation Funders (the “ALF”) Code, which seeks to regulate funding of litigation and arbitration, among other dispute resolution procedures, by setting out standards of practice and behaviour to be observed by funders. The ALF is the body tasked by the Government to deliver self-regulation of the funding market in England & Wales. The Code it has produced is widely adopted, including in arbitration disputes.

Further, within Investment Arbitration, funding has been addressed in the context of the Energy Charter Treaty and new international investment agreements are increasingly making provision for it.

Evidently, parties are generally treated favourably for arranging third-party funding to pursue their claims in an international arbitration context.

3. Have there been any key decisions or awards?

Since the advent of litigation funding in the UK, there have been many key decisions in fundamental areas of litigation. These include: 

Liability for costs: In Arkin v Bochard Lines⁷ it was held that a funder who finances part of a litigant’s costs should be liable for the costs of the opposing party to the extent of the funding provided (this became known as the Arkin cap).

However, recent case law has undermined the apparent certainty provided by the Arkin cap. In Davey v Money⁸, the court chose not to apply the Arkin cap and awarded indemnity costs against the funder. In reaching this decision, Snowden J observed that the litigation funding industry had evolved since Arkin, and it was not an automatic rule in any event. This decision was upheld by the Court of Appeal⁹. 

Security for costs: The court has ordered a litigation funder to provide security for costs.¹⁰ This differs from the position in arbitration.  As a funder normally will not be a party to the arbitration agreement, the arbitral tribunal is unlikely to have sufficient jurisdiction to make it pay security for costs.

Disclosure: Generally, there is no requirement to disclose a LFA in High Court litigation. This principle was illustrated in Akhmedova where Knowles J observed that a litigant does not have ‘control’ of a funding agreement between solicitors and a funder, and as a result they are not able to disclose it.  

This position is to be contrasted with the approach in the Competition Appeal Tribunal (“CAT”). In the CAT, before certifying a representative to act on behalf of a class, the Tribunal will usually review the LFA.

Award of costs: In Essar Oilfields Services Ltd v. Norscot Rig Management PVT Ltd¹¹, the sole arbitrator adjudicating the dispute under the ICC Rules and the UK Arbitration Act 1996 held that Norscot, who prevailed in the arbitration, was entitled to recover the funder’s success fee from Essar as ‘other costs’. 

Essar brought proceedings in the High Court to challenge that award, arguing that ‘other costs’ should not include litigation funding costs (such as a success fee). The Court decided that the relevant test was whether: (i) the costs related to the arbitration and are for the purposes of it; and (ii) whether the costs are reasonable. 

In the court’s view, both conditions were met. They therefore concluded that arbitrators have the power to award funding costs in appropriate circumstances - an advantage over English litigation where such a possibility does not exist.

Paccar¹²:  

On 26 July 2023, the UK Supreme Court held that LFAs which entitle funders to receive a proportion of the damages recovered are Damages Based Agreements (“DBAs”).  

This decision is consequential for the funding industry for two main reasons. First, pursuant to Competition Act 1998¹³ DBAs cannot be used to fund opt-out collective proceedings in the CAT. This is significant because the majority of high value opt-out collective claims in the CAT are brought using third party funding. And second, for DBA’s, to be lawful and enforceable they need to comply with the 2013 DBA regulations.  

As it happens, most funding agreements do not comply with the DBA regulations as prior to Paccar, LFAs were widely considered to not be DBAs.¹⁴ This lack of compliance as a result of the decision of the Supreme Court, has rendered many LFAs unlawful/unenforceable overnight.

(Detailed analysis of Paccar and its implications is outside of the scope of this article.  For further discussion, please see the articles here and here).

4. Are there any upcoming or proposed rules or regulations in respect of litigation funding that may alter how your jurisdiction approaches litigation funding?

Given the significant uncertainty caused by Paccar, the government has amended the Digital Markets, Competition and Consumers Bill to reverse the decision in respect of opt-out claims in the CAT. The implications of this legislative intervention are discussed in more depth here.

In addition, while there are no formal proposals in this regard, there is a broad consensus that the 2013 DBA regulations are not fit for purpose, and some quarters have even called for the industry itself to be regulated. 

The most positive development in favour of litigation funding has been as a byproduct of the Post Office scandal involving the Horizon software which led to hundreds of sub-postmasters being wrongfully convicted. Many of those individuals received access to litigation funding to pursue the Post Office, for example, in High Court proceedings to expose the defects with the software. The Justice Secretary has recently announced, as a result, that the damaging effects of the Paccar decision will be reversed at the first legislative opportunity to continue to permit such funding.

5. What is the current landscape of litigation funding in your jurisdiction – is there a notable market and are there any litigation funders well established in your jurisdiction?

England & Wales has one of the world’s most developed third-party funding markets. There are a number of funders based in the jurisdiction, and members of the ALF, which include: Augusta Ventures, Asertis, Balance Legal Capital, Burford Capital, Harbour, Innsworth, Omni Bridgeway, Orchard Global Asset Management, Redress Solutions, Therium, Fortress Investment Group and Woodsford Litigation Funding. Additionally, there are other well-known names outside the ALF.

Key aspects of the ALF Code require funder members to always maintain adequate financial resources to meet their liabilities, have procedures in place to identify and manage conflicts of interests and requires compliance with certain behavioural requirements, including withdrawing from funding in certain circumstances. It is important to note, however, that the Code is a form of self-regulation which only applies to subscribing members. It is unlikely that further regulations will be introduced to regulate funders’ activities in the short term.  Nevertheless, users of funders’ services should pay close attention to the terms of any funding agreement to ascertain the full scope of the funders’ duties and obligations, as these may depart from the Code.

It is also worthy to note that the Paccar decision has created short term issues for the funding industry particularly in relation to UK litigation. That, combined with higher interest rates, appears anecdotally to have reduced the immediate flow of new cases being funded. However, subject to further developments arising out of Paccar, which stakeholders will need to watch, it seems likely that funding will continue to grow, although perhaps not at the significant pace of previous years.

¹As no one claimant is incentivised to fund the litigation.

²“Maintenance” refers to the situation where someone who is not party to a proceeding provides funding for a case. “Champerty” is maintenance, but for profit.

³Factortame (No.8) [2002] EWCA Civ 932 at [36].

⁴Akhmedova v Akhmedov [2020] EWHC 1526 (Fam) at [40] and Arkin v Borchard Lines Ltd [2005] EWCA Civ 655 at [16].

⁵Akhmedova v Akhmedov at [60].

⁶See, for example, the more recent decision in Tenke Fungurume Mining S.A. v Katanga Contracting Services S.A.S. [2021] EWHC 3301 (Comm).

⁷[2005] EWCA Civ 655.

⁸[2019] EWHC 9997 (Ch).

⁹Chapelgate Credit Opportunity Master Fund Ltd v Money and Others [2020] EWCA Civ 246.

¹⁰Rowe v Ingenious Media Holdings Plc [2020] EWHC 235 (Ch).

¹¹[2016] EWHC 2361 (Comm).

¹²R (on the application of PACCAR Inc and Ors) v Competition Appeal Tribunal and Ors [2023] UKSC 28.

¹³Section 47C(8).

¹⁴Also, the DBA Regulations were drafted with solicitors in mind – not third party funders.