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Investing in dispute

17 May 10

Reasons for considering third party funding as an option in funding litigation, and its potential in Scotland

by Ross Murdoch

Litigation is expensive and uncertain. It is therefore no surprise that the current trend has been to rebrand litigation practices as “dispute resolution”. Hand in hand with this has been an underlying movement to use modern commercial alternatives, such as mediation, to manage more effectively the risks inherent in the resolution of any dispute. Lord Jackson’s recently published Review of Civil Litigation Costs highlighted that this desire to manage risk and control costs has led to the growth of third party funding of litigation in England. The Civil Justice Council for Scotland, proposed by Lord Gill’s Civil Justice Review to consider litigation costs, may also wish to consider its potential in Scotland.

Necessary option

Third party funding of litigation applies where outside investors finance a court action in return for a percentage of any award. This may be used where a party does not possess the funds – or perhaps the appetite – to risk litigation. Lord Jackson concluded that third party funding should be supported for five reasons:

“(i) Third party funding provides an additional means of funding litigation and, for some parties, the only means of funding litigation. Thus third party funding promotes access to justice.

(ii) Although a successful claimant with third party funding foregoes a percentage of his damages, it is better for him to recover a substantial part of his damages than to recover nothing at all.

(iii) The use of third party funding (unlike the use of conditional fee arrangements (“CFAs”)) does not impose additional financial burdens upon opposing parties.

(iv) Third party funding will become even more important as a means of financing litigation if success fees under CFAs become irrecoverable.

(v) Third party funding tends to filter out unmeritorious cases, because funders will not take on the risk of such cases.

This benefits opposing parties” (p 117).

Tackling the funding gap

Financing of this kind has grown remarkably in recent years in England. An increasing number of funders and brokers have entered the market, largely insurance-backed institutions although hedge fund interest in backing commercial litigation has also expanded.

These funders usually require that after-the-event (ATE) insurance is taken out to cover their potential liability for costs. However, this is not always so, as a recent professional negligence action in the House of Lords highlights (Stone & Rolls Ltd (in liquidation) v Moore Stephens [2009] UKHL 39). It was reported that in this case the funder stood to receive 40% of any award and at that time managed a portfolio of cases with a success rate of 80%. This case was ultimately dismissed, but serves to highlight that funders will pick only high value and low risk cases in order to maximise their return and minimise liability for costs.

According to Lord Jackson’s preliminary report, the value of claims must reach at least £150,000 to obtain funding (as at 22 January 2009). Lord Gill’s Review states that approximately half of all commercial actions in the Court of Session were awarded over this amount in 2008. It is the clients that do not have the funds to continue, or perhaps even raise an action, though, that would truly benefit from third party funding.

Application in Scotland

Third party funding remains relatively unexplored and should be another option considered in the long-term funding of litigation in Scotland. There is clearly a demand, as it has been reported in the business press recently that in a “Scottish first”, a Scottish company is seeking to raise an action with the benefit of third party funding in England. However, neither statute nor common law prohibits third party funding in Scotland (Quantum Claims Compensation Specialists Ltd v Powell 1998 SC 316). Third party finance should, therefore, be encouraged in Scotland, particularly if, as Lord Jackson recommends, success fees and ATE insurance premiums become irrecoverable in England.

Time to explore

In recent years, third party funding has rapidly grown in jurisdictions across the world, such as the Netherlands, Australia and the USA. Even though it represents only a small percentage of the total number of claims raised, it may be worthwhile exploring this in our own jurisdiction alongside the ethical and regulatory considerations such funding would raise.

Lord Gill’s Review consulted with the providers of ATE insurance to establish whether there was commercial interest in developing this source of funding. A similar exercise by the proposed Civil Justice Council, or a similar body, may be the most cohesive way to explore the viability of third party funding and whether it would be available for claims below the current thresholds applied by funders in England. In the future, dispute resolution will need to adopt new methods such as mediation, legal expenses insurance, and third party funding to manage clients’ needs more effectively and split the risks they face when confronted with raising an action.

  • Ross Murdoch is a trainee solicitor with Maclay Murray & Spens LLP

Have your say


Your comment

Priya Kumar

Wednesday December 15, 2010, 10:18

In some cases, but not all, this new phenomenon of third-party funding could lead to cases being decided or settled on the basis of merit. In other cases, it conceivably could have the opposite effect, giving artificial "legs" to bogus claims that would otherwise fall flat. But I wonder whether sophisticated investors would bet on bogus claims, when they can fund meritorious ones instead. In any event, another effect of this trend probably will be a further acceleration of the shift to offshore legal outsourcing. Corporate legal departments, already under cost pressure, will see that pressure increase, with the rise of well-funded plaintiffs' suits. And litigation investors, eager to get the best possible return, and treating litigation as a business, naturally will want to increase efficiencies through legal process outsourcing. So one of the big winners in the lawsuit funding area is likely to be the LPO industry.

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