Litigation
funding in the Channel Islands
Gordon Dawes
Litigation
funding was once suspected of being a form of champerty and unlawful as such,
but times and public policy change. This article examines the status of
litigation funding in Channel Island law, whether any issues remain and
possible pitfalls.
1 For a long time litigation funding was
looked upon by the legal profession with suspicion that it was somehow wrong. Lawyers
were often conditioned to think this way by the professional obligations of
whatever jurisdiction they happened to be practising in. For example, in
Guernsey the articles of a Guernsey advocate include the obligation: “Qu’ils
ne feront marché avec leurs parties, ou leurs attournes, d’aucune
quantité de la cause, ou d’avoir aucune part ou portion de la
cause contentieuse”.[1] Rule 38
of the Guernsey advocate’s rules of professional conduct provides that—
“An Advocate who is retained or employed to
prosecute any action, or other contentious proceeding shall not enter into any
arrangement to receive a contingency fee in respect of that proceeding.”[2]
2 There was a fear also that litigation
funding amounted either to maintenance or, more likely, champerty. Maintenance
and champerty were criminal offences under English law until abolished by s 13
of the Criminal Law Act 1967. They were also abolished as torts by s 14(1)
but s 14(2) provided that—
“The abolition of criminal and civil
liability under the law of England and Wales for maintenance and champerty
shall not affect any rule of law as to the cases in which a contract is to be
treated as contrary to public policy or otherwise illegal.”
3 Maintenance and champerty were defined
succinctly by Marshall, LB in the Guernsey case of In re Providence Investment Funds PCC Ltd[3] where liquidators
sought the court’s approval to enter into a litigation funding agreement
in order to bring proceedings against the auditors of an insolvent fund—
“‘Maintenance’ is the perceived
vice of a third party funding or lending assistance to the pursuit of a cause
of action in which he himself has no interest. ‘Champerty’ is the
perceived vice of funding or maintaining a cause of action belonging to another
person in return for a share of the proceeds.”[4]
4 The leading Jersey case on the subject
remains In re Valetta Trust.[5] Trustees
had brought a Beddoe application
seeking the court’s approval to enter into a funding agreement with a
litigation funder. The court requested that it be addressed on whether such an
agreement was permissible under Jersey law.
5 The court found that there was no
material difference between the law of Jersey and the law of England as to what
maintenance and champerty were, there being no Jersey case law found.[6] The court
cited English authority[7] and the
approval of the following definitions—
“A person is guilty of maintenance if he
supports litigation in which he has no legitimate concern without just cause or
excuse.
Champerty occurs when the person maintaining
another stipulates for a share of the proceeds of the action or suit.”[8]
6 The court cited earlier English
authority as to the history and nature of the mischief which led to the outlawing
of maintenance and champerty—
“. . . one of the abuses which
afflicted the medieval administration of justice was the practice of the
assigning of doubtful or fraudulent claims to royal officials, nobles or other
persons of wealth and influence who could in those times be expected to receive
a very sympathetic hearing in the courts. The agreement was often that the
assignee would maintain the action at his own expense and share the proceeds of
a favourable outcome with the assignor. It was in those circumstances that the
courts developed the doctrines of maintenance and champerty to prevent such
abuses.”[9]
7 The court held—
“. . . we have no doubt that Jersey
law is to like effect as English law and an agreement which provides for a
share of the proceeds of litigation may be held to be unenforceable on the
ground of champerty if contrary to public policy”,
but went on to hold that the reasons for the “sea
change” in judicial attitude to litigation funding in England (and
Australia) applied also to Jersey.[10]
8 In Providence
it was likewise accepted that maintenance and champerty formed a part of
Guernsey “common law”[11] and were
founded upon public policy considerations referring to—
“. . . the law’s distaste for
incentivising litigation as a source of profit rather than confining it to its
proper purpose of the redress of wrongs. Agreements involving maintenance or
champerty are unlawful and void at common law. However, in the modern world,
these doctrines have been scrutinised, narrowed and subjected to exceptions in
pursuit of another tenet of public policy, namely that of improving or
facilitating access to justice.”[12]
9 A key moment in the history of
litigation funding was the Review of Civil Litigation Costs or Jackson Review,
led by Lord Justice Rupert Jackson. This concluded with the Review of Civil Litigation Costs: Final
Report, December 2009.[13] The
report referred to litigation funding as “third party funding”[14] and
defined it as follows—
“The funding of litigation by a party who has
no pre-existing interest in the litigation, usually on the basis that (i) the
funder will be paid out of the proceeds
of any amounts recovered as a consequence of the litigation, often as a
percentage of the recovery sum; and (ii) the funder is not entitled to payment
should the claim fail.”[15]
10 The Final Report came out strongly in favour of litigation funding, identifying,
inter alia, the following benefits[16]—
ii(i) It
provided an additional means of funding litigation, and for some, the only
means of funding litigation. Litigation funding promoted access to justice;
i(ii) While
a successful claimant with litigation funding would forego a percentage of his
damages, it was better to recover a substantial part of his damages than to
recover nothing at all;
(iii) The use of
litigation funding imposed no additional financial burden upon opposing
parties;
(iv) Litigation funding
tended to filter out unmeritorious cases, because funders would not take on the
risk of such cases. This benefited opposing parties.
11 The court in Valetta relied heavily on both the preliminary and final Jackson
reports along with English and Australian case law in reaching its conclusion
authorising trustees to become party to the litigation funding agreement under
consideration. That agreement was fairly typical, at least in the lines that it
took, even if the precise figures vary from funder to funder and case to case. The
funder agreed to provide the plaintiffs’ legal costs. It agreed to meet
any adverse costs orders made against the plaintiff. In return any damages
recovered would be applied first to reimburse the funder for all the costs incurred.
Beyond that, the proceeds would be split between the funder and the plaintiffs
with the greater of 25% of the proceeds or twice the plaintiffs’ legal
costs going to the funder. The percentage or multiple increased according to
the time the proceedings took, up to a maximum of 50% of the proceeds or three
times the plaintiffs’ legal cost, whichever the greater.[17]
12 The decision in Valetta was confirmed in the later case of Barclays Wealth Trustees (Jersey) Ltd v Equity Trust (Jersey) Ltd.[18] The
current trustee and manager of unit trusts had brought proceedings against the
former trustee and manager. After bringing proceedings the plaintiffs had
entered into a litigation funding agreement with the same funder as in Valetta and, it is implicit, upon similar
terms. The defendants raised the objection that the agreement was contrary to a
1635 Jersey Ordinance forbidding buying or contracting for any debt or other “thinge
in Action”, itself re-enacted/confirmed by the Code of 1771[19] which
provided that nobody could contract for “choses ou matières en litige”. The court distinguished
between “a prohibition on contracting for a matter in litigation”
and a “contract which deals with the funding of that litigation by a
third party”.[20] And
while the court had power to declare unenforceable agreements which were
contrary to public policy on the grounds of champerty or maintenance, the
funding agreement before the court was not contrary to public policy. There was—
“. . . nothing in the funding
agreement in this case which would harm the purity of justice and that, on the
contrary, it facilitates the important objective of access to justice.”
13 Accordingly the court held that it
would not be an abuse of process for the litigation to continue on the basis of
the agreement.
14 The Guernsey Royal Court likewise
approved of the litigation funding agreement before it in the Providence case. But the scope of that
blessing was very narrow as opposed to being any kind of more general
endorsement of litigation funding.
15 The Guernsey context was that of
insolvency and the approval likewise restricted. The Lieutenant Bailiff held
that—
“. . . I conclude that, in
principle, the law of Guernsey will permit the assignment of a cause of action
for value by a liquidator, and will also permit the entering into of a
litigation funding agreement by a liquidator on appropriate terms,
notwithstanding that the doctrines of maintenance and champerty are part of
Guernsey law. The well-established
justification for this is the limited one that it is to be interpreted as
authorised as part of the statutory powers of a liquidator to sell the
company’s assets, and any right of action vested in the company is such
an asset.” [Emphasis added]
16 The court went on to extend the same
reasoning to administration. While the scope of the statement is narrow, it is
suggested that Guernsey law would follow Jersey case law in the context of a
trustee bringing proceedings. The court cited Valetta and the circumstances of that case (i.e. proceedings to be brought by a trustee) and clearly approved
its reasoning. It is suggested that the reasoning in both cases can be extended
more generally and that, prima facie, commercial litigation funding is
permissible in both jurisdictions.[21]
17 There are caveats though. It is
likely that Jersey and Guernsey courts would attach significance to issues of
the kind identified by Jackson, LJ. As matters stand, litigation funders in
England and Wales continue to be self-regulated. The relevant body is the
Association of Litigation Funders[22] which
was set up under the auspices of the Civil Justice Council in 2011. The
Association has adopted a code of conduct. Its key elements provide for the
capital adequacy of funders, limiting the circumstances in which a funder may
withdraw from a funding agreement and limiting the control funders may exercise
over either litigation or settlement negotiations.[23]
18 The issue of control was a key factor
for both the Jersey and Guernsey courts and the express disavowal of control
contributed significantly to the respective courts’ findings that the
agreements under consideration were not contrary to public policy.
19 This is not to say though that a
funder cannot have considerable influence on the course of litigation, even to
the point of providing for agreement as to the firm of advocates to be
appointed.[24]
20 The question of the proper limits of
the role of a litigation funder was considered by the English Court of Appeal
in Excalibur Ventures llc v Texas
Keystone Inc (No 2).[25] Excalibur
claimed an interest in a number of oil fields in Kurdistan. There were four
groups of funders, but none were members of the Association of Litigation
Funders. Between November 2010 and March 2013 the funders advanced
£31.75m to Excalibur to enable the claim to be pursued to the conclusion
of the trial. This broke down as to £14.25m to cover Excalibur’s
own lawyers’ fees and disbursements and £17.5m to allow Excalibur
to comply with orders to pay security for costs. The trial judge (the future
Christopher Clarke, LJ) held that the case failed on every claim, describing
the litigation as having met with “a resounding, indeed catastrophic,
defeat”.[26] It was
found to have been “speculative and opportunistic”[27] and
Excalibur was ordered to pay the defendants’ costs on the indemnity basis.
The costs judgment was excoriating to the point of evisceration. The
consequence of ordering indemnity costs was that the sum paid into court by way
of security for costs was inadequate. The issue arose as to whether the funders
should be ordered to pay the excess of indemnity costs over the secured costs
with the funders being joined to the case by the defendant seeking third party
costs orders against them.
21 The Association of Litigation Funders
was given leave to intervene and took the point that—
“to avoid being fixed with the conduct of the
funded party, the funder would have to exercise greater control over the
conduct of the litigation throughout and that this runs the risk that the
funding agreement would be champertous.”
The court dismissed this concern, holding
that—
“champerty involves behaviour likely to
interfere with the due administration of justice. Litigation funding is an
accepted and judicially sanctioned activity perceived to be in the public
interest. What the judge characterised as ‘rigorous analysis of law,
facts and witnesses, consideration of proportionality and review at appropriate
intervals’ is what is to be expected of a responsible funder . . .
and cannot of itself be champertous . . . rather than interfering
with the due administration of justice, if anything such activities promote the
due administration of justice . . .”[28]
22 The case can be seen both as an
endorsement of membership of the Association of Litigation Funders and a more
hands on approach by funders, falling short of control.
23 The central issue in Excalibur was
whether the so-called “Arkin
cap” should extend to funded sums provided by way of security for costs. The
cap takes its name from the case Arkin v
Borchard Lines Ltd (No 2)[29] where
the issue arose as to the liability of a funder of a failed case to pay the
opposing party’s costs. In Excalibur
Tomlinson, LJ summarised the effect of Arkin
in this way—
“. . . the rationale for imposing a
costs liability upon a non-party funder is that he has funded proceedings
substantially for his own financial benefit and has thereby become ‘a
real party’ to the litigation. It is ordinarily just that he should be
liable for costs if the claim fails. The pragmatic solution reached in Arkin’s
case, and accepted by the funding community, is that the funder who finances
part of a claimant’s costs of litigation should be potentially liable for
the costs of the opponent party to the extent of the funding provided, ie
invest one in the pursuit of the common enterprise, and bear the risk of
liability in that same amount in the event of failure . . .”
24 Turning to the question of monies put
up as security for costs Tomlinson, LJ saw—
“. . . no basis upon which a funder
who advances money to enable security for costs to be provided by a litigant
should be treated any differently from a funder who advances money to enable
that litigant to meet the fees of its own lawyers or expert witnesses.”[30]
25 There is no Channel Island case law
on such issues, or indeed many other of the finer points which arise in
litigation funding, and it remains to be seen whether, in each case, a Channel
Island court will follow the English lead. They are, of course, not bound by
English case law.
26 Take the example of the Arkin cap itself. Jackson, LJ was
strongly against it, finding that the criticisms of Arkin were sound—
“In my view, it is wrong in principle that a
litigation funder, which stands to recover a share of damages in the event of
success, should be able to escape part of the liability for costs in the event
of defeat. This is unjust not only to the opposing party (who may be left with
unrecovered costs) but also to the client (who may be exposed to costs
liabilities which it cannot meet).”[31]
27 It would be open to Channel Island courts
to adopt Jackson, LJ’s viewpoint and make full third party costs orders
against a funder. Indeed the power to do so was expressly referred to by the
Bailiff in Barclays Wealth Trustees—
“. . . one can readily envisage the
Court using its power to order a third party to pay the costs of the successful
defendant where that party has acted as third party funder to the plaintiffs on
a commercial basis . . .”[32]
28 It is important to note also that the
existence of litigation funding in no way affects the professional obligations
of the lawyers with conduct of the funded case, nor indeed the professional
obligations of the lawyers working within the litigation funder itself. All
continue to be obliged to respect their respective professional and ethical
rules, which would include, in the case of an English solicitor working for a
litigation funder, the obligation to advise litigants on all reasonable funding
options.[33]
29 Issues which remain to be decided in
Channel Island law include whether a litigation funder could be ordered
directly to provide security for costs, in England the answer would appear to
be yes.[34] Another
possible issue is whether, and to what extent, an unsuccessful party can be
ordered to pay the cost to the successful party of litigation funding. In the
case of Essar Oilfields Services Ltd v
Norscot Rig Management Pvt Ltd the English High Court
held that litigation funding costs fell within the definition of “other
costs” for the purposes of s.59 of the Arbitration Act 1996 and dismissed
a challenge to the award. The arbitrator had taken a particularly dim view of Essar's conduct.
30 While there is no obligation for a
party to disclose voluntarily that it is funded, it may choose to do so on the
basis that the opposing party is more likely to settle if it realises that it
now faces an opponent with the resources to take the matter to its final
conclusion combined with the fact that a litigation funder has, self-evidently,
taken a positive view of the merits of that case. It seems likely though that a
Channel Island court would follow English courts in ordering, when appropriate,
the disclosure of whether a case is funded and the identity of the funder in
order to permit the opposing party to join and make applications against that
funder.[36]
31 Concerns are raised periodically as
to the effect of litigation funding on privilege given the need to exchange
information with a prospective funder in order to persuade the funder of the
merits (and economics) of the case. In practice a combination of
confidentiality agreements and common interest privilege appear to be
sufficient to protect the position of the litigant seeking funding, the
precondition being that the material being disclosed itself attracts legal
advice or litigation privilege.
32 Liquidators and trustees[37] are
amongst those most likely to consider litigation funding. Both are likely
(liquidators more so) to find themselves in the position of having potentially
valuable claims without the funds to bring litigation, very often because of
the events underlying the claim. Both liquidators and trustees will wish to
seek the approval of the court to enter into funding arrangements, the trustee
as part of a Beddoe application. The court
will expect to see that the liquidator/trustee has tested the market to ensure
that it is obtaining funding on reasonable terms (few funders these days demand
exclusivity when considering a claim). The court will also be concerned to
ensure that the funder is of good standing.[38]
33 Litigation funding is of interest to
banks and other businesses who may not wish the cost of litigation to appear on
their balance sheets or where they have taken a view that they do not wish to
risk their own funds. There is also such a thing as portfolio litigation
funding where groups or categories of cases are taken on with the proceeds of
earlier cases funding later cases. Funding particularly lends itself to use in
class actions by parties who could not otherwise afford access to justice. For
example, the claims which the United Kingdom Supreme Court recently permitted
1,826 Zambian citizens, described as very poor members of rural farming
communities, to bring against a UK domiciled parent company in relation to
alleged discharges of toxins from a copper mine into watercourses. Indeed the
availability of litigation funding was a factor in the reasoning of the court,
see Vedanta Resources plc v Lungowe.[39] Other possible uses would extend to
funding clinical negligence and product liability claims.
34 From a fundee’s perspective, a
priority concern is to ensure the capital adequacy of a funder. It is essential
that the funder is good for the money at all stages of the future litigation. It
is another powerful reason only to use a professional funder of substance and a
proven track record. The Association’s Code of Conduct requires funders
to maintain at all times access to adequate financial resources to meet the
funder’s obligations with a requirement for annual audit.[40]
35 From the funder’s perspective
the concerns are fourfold: how will it get paid? what is the value of the
claim? what is the budget? what are the merits? In other words the funder
wishes to be satisfied that the (prospective) defendant is itself good for the
money and/or that there are assets to be recovered. In principle it is possible
for a defendant to obtain litigation funding based upon the value of what is
preserved, but in reality litigation funding of defendants is restricted to
defendants with counterclaims. As to value, litigation funders very often (but
not always) have a minimum value of claim which they will fund, typically
measured in millions of pounds. They are concerned to know the likely sum they
will be required to put up in terms of lawyers’ fees, expert witness
costs, other disbursements and security for costs. The question of merit speaks
for itself. A funder will form its own view about the merits of a claim and
typically has experienced litigation lawyers working in-house and an investment
committee (to consider funding proposals) which will itself include very
experienced and even eminent lawyers. Litigation funders will often seek
specialist advice from counsel.
36 The additional oversight of the claim
by the funder is often a benefit to both the legal team running the litigation
and the client, particularly when it comes to settlement; although there is a
different dynamic in settlement because of the effect of the funding agreement.
The value to the client of additional sums of money is reduced by the extent to
which those sums will go to the funder. The funder might take a different view
of the level at which a claim should settle and might be more eager to settle
than the client. The Code of Conduct requires the funding agreement to state
whether, and if so, how, the funder may provide input into the funded party’s
decisions in relation to settlements.[41]
Ultimately however, the funder must not have control of the litigation in order
to avoid the charge of champerty.
37 Litigation funding is big business
and set to take an ever increasing role in higher value litigation. For
example, one litigation funder announced in December 2018 that it had secured
funding for $1.6 bn in new litigation investments, which included backing from
a sovereign wealth fund.[42] From the
perspective of litigation lawyers and their claimant clients, this is all good
news, obviously. It is less so for those on the other end of a funded claim. Funders
may bring cases to firms or, more often, firms bring cases to funders. Lawyers
may also be retained for opinion work by funders as to the merits of a claim
brought to them, particularly from Channel Island jurisdictions, given the
specificity of Guernsey and Jersey law and the knowledge required to advise.
38 Like it or not, litigation funding is
an increasingly prominent feature of the Channel Island litigation landscape.
Gordon Dawes is an Advocate and Partner at Mourant
Ozannes.