The Law and Business of Litigation Finance 9781526515254, 9781526515285, 9781526515278

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The Law and Business of Litigation Finance

The Law and Business of Litigation Finance

General Editor Steven Friel Chief Executive Officer, Woodsford

BLOOMSBURY PROFESSIONAL Bloomsbury Publishing Plc 50 Bedford Square, London, WC1B 3DP, UK BLOOMSBURY and the Diana logo are trademarks of Bloomsbury Publishing Plc First published in Great Britain 2020 Copyright © Bloomsbury Professional, 2020 All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage or retrieval system, without prior permission in writing from the publishers. While every care has been taken to ensure the accuracy of this work, no responsibility for loss or damage occasioned to any person acting or refraining from action as a result of any statement in it can be accepted by the authors, editors or publishers. All UK Government legislation and other public sector information used in the work is Crown Copyright ©. All House of Lords and House of Commons information used in the work is Parliamentary Copyright ©. This information is reused under the terms of the Open Government Licence v3.0 (http://www.nationalarchives.gov. uk/doc/open-government-licence/version/3) except where otherwise stated. All Eur-lex material used in the work is © European Union, http://eur-lex.europa.eu/, 1998-2020. British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library. ISBN:

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Acknowledgements This book is the product of the hard work of many people. Not only the fantastic contributors to whom I  am very grateful, but also the many colleagues at our respective businesses, law firms and universities that have provided invaluable support. I  am grateful for the efforts of my Woodsford colleagues Steven Savage, Helena Eatock and, especially, the Chairman of our business, Yves Bonavero. Thanks also to Andy Hill and his colleagues at Bloomsbury, and to our professional editor Kim Hutchings. This book is also a product of lockdown. Rather than being crafted in our offices and libraries, it was largely crafted at our kitchen tables. Perhaps more so than usual, we should be grateful to our loved ones for their patience and support for our professional endeavours during these strange times. Yet more reason to express my love and gratitude to my husband Scott and our children Jake and Neveah.

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Foreword by Shira Scheindlin

This new book, edited and co-authored by Steven Friel, CEO of Woodsford, is a timely addition to discussions on an increasingly important subject. Litigation finance is no longer in its infancy – it is now an established part of the legal landscape in the United States and the United Kingdom, and indeed throughout the world. And there is a good reason for this, as this well-organized and comprehensive book demonstrates. Litigation increases in times of turmoil, whether political or financial or both. We are living in such times. As a former United States District Judge, and now an arbitrator, I believe deeply in preserving the rule of law and providing access to fair adjudication in the public and private sectors. That access is often costly. Many litigants with meritorious claims simply cannot afford to seek a remedy before a tribunal. There should be mechanisms to help them. The US has long approved of contingency fee arrangements where a lawyer provides services – and sometimes contributes to the other costs of litigation – in anticipation of sharing in a favorable outcome. Such arrangements are common in personal injury cases and, more recently, in employment discrimination cases. However, the cost and complexity of commercial, intellectual property and other similar cases create too great a risk for most lawyers to undertake alone. Whether the litigation involves an individual plaintiff against a large company, a mass or class action against a well-funded multinational, or a financially distressed business against a government or state-owned enterprise, litigation funding is now a well-accepted option. As litigation funding has grown in use and acceptance, and as the variety of parties who have an interest in the practice, including as investors, increases, a body of regulations, case law and legislation has now developed in the US and in other jurisdictions. This book is an invaluable guide to each of those. I  have now been a member of Woodsford’s Investment Advisory Panel for the past three years and in that capacity have worked closely with Steven and several of the other contributors to the book. It has been an invaluable experience. Whatever preconceptions I might have had about litigation funding have been replaced by the insider knowledge I  have gained. I  have played a part in the rigorous process by which cases are evaluated, and I have learned a great deal about the financial, as well as the legal, implications of the funding arrangements. These are candidly discussed throughout this book. vii

Foreword by Shira Scheindlin

Steven Friel, and the other contributors to this book, enjoy the highest reputation for accuracy and professionalism. I congratulate them for creating a book that should be added to law and finance libraries throughout the world. Hon. Shira A Scheindlin United States District Judge (Ret.) Fellow, College of Commercial Arbitrators 29 September 2020

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Foreword by Rupert Jackson

When I  conducted the Review of Civil Litigation Costs in 2009, one of my guiding principles was (a) to abolish methods of funding litigation which drove up costs and (b) to maximise funding options which did not have that deleterious effect. Consistently with that principle, I recommended (amongst much else): (i) Abolishing recoverable success fees under conditional fee agreements; (ii) Abolishing recoverable ATE premiums under ‘after the event’ insurance arrangements; (iii) Outlawing referral fees in personal litigation (these sucked costs out of the system, without generating any benefit for either victim or tortfeasor); (iv) Promoting ‘before the event’ insurance; (v) Permitting contingency fees/damages-based agreements; (vi) Promoting third-party funding, subject to funders maintaining proper standards (capital adequacy, not withdrawing in the absence of good cause etc). In relation to (vi) there was a debate whether to call it third-party funding (TPF) or litigation funding. I have supported both sides of that debate at different times, but now favour TPF, because litigation funding is a much broader concept. As noted in the above summary, my endorsement of TPF formed part of a broader package of reforms, which were intended to rebalance the conduct and funding of civil litigation. Different categories of litigants need different forms of funding. TPF is particularly well suited to (a) large commercial claims and (b) small claims where individuals club together in a group action. TPF has been widely used in Australia for many years. Following my January 2010 report, it became more popular in the UK. It is now expanding in the USA. As the authors of this excellent book note, the reason why the US was not in the vanguard of this development was because most states already had a viable form of litigation funding; namely, contingency fees. The position now is that TPF is an established means of funding litigation in both the UK and the US. This book is therefore timely. Written from a midAtlantic perspective, it provides much useful information for both providers and ix

Foreword by Rupert Jackson

users of TPF. It includes a survey of legislation, the common law rules, taxation, investment in TPF and much else. Readers will also, no doubt, bear in mind that TPF is expanding in other jurisdictions. It is now used for arbitrations in Singapore and Hong Kong, both major dispute resolution centres. I  have also noted its use in Caribbean arbitrations in which I was involved. This work will become a handbook for those providing and using TPF across many jurisdictions, provided of course that it is kept up-to-date in future editions! Sir Rupert Jackson Retired Justice of the Court of Appeal of England & Wales 4 New Square, Lincoln’s Inn, London WC2A 3RJ 29 September 2020

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General editor

Steven Friel, Chief Executive Officer, Woodsford Steven Friel is Chief Executive Officer at Woodsford, one of the most wellestablished litigation funders in the international market. Steven has repeatedly been ranked by independent directories as a leader in the field. Chambers and Partners, 2020: ‘Steven Friel is … praised for his hands-on approach and ability to work constructively on even the biggest and most complicated matters. He is very easy to deal with… He grasps the facts and the law extremely quickly. He is an extremely good resource for Woodsford – a great strategic thinker.’ Chambers and Partners, 2019: ‘He seems to have limitless energy to explore things, and he’s extremely sharp.’ Chambers and Partners, 2018: ‘Steven Friel is very impressive. He has a razor sharp legal mind, is intellectually curious, and has strong business sense.’ Before joining Woodsford, Steven was a partner in the London office of international law firm Brown Rudnick. Prior to joining Brown Rudnick, Steven was a partner in the London office of DAC Beachcroft, and practised from the London and New York offices of Debevoise & Plimpton. Steven is a law graduate of Cambridge University, and graduated top of his class with a Master of Laws degree in International Dispute Resolution from the University of London.

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Contributors

Razzaq Ahmed, Associate, Brown Rudnick LLP, London Razzaq Ahmed is an associate in Brown Rudnick’s Litigation group, focusing on group litigation and claims arising from regulatory investigations. He advises start-ups through to FTSE 100 companies on contentious situations and advises clients in relation to Environment, Social and Governance matters. Razzaq has previously been seconded to one of the largest FTSE 100 insurers and also has experience in the Financial Conduct Authority’s complex cases and enforcement teams on matters such as Payment Protection insurance remediation and the investigation into the Royal Bank of Scotland’s Global Restructuring Group in relation to the treatment of small and medium-sized enterprises. Jonathan Barnes, Chief Operating Officer and General Counsel, Woodsford, London Jonathan Barnes is Chief Operating Officer and General Counsel at Woodsford. Before leaving private practice, Jonathan enjoyed a successful 20-year career in the City of London as a transactional lawyer. In 2006 he joined longstanding client Woodsford Consulting – a business consultancy and Family Office of a wealthy European family – as a director and subsequently CEO. Jonathan cofounded Woodsford Litigation Funding in 2010 and has been central to its successful growth. Woodsford is a founder member of both the International Legal Finance Association and the Association of Litigation Funders of England and Wales and Jonathan serves on the Management Committee of the former and the Board of the latter. Philippa Beasley, Associate, Reed Smith LLP, London Philippa is an Associate within the Global Commercial Disputes Group based in Reed Smith’s London office. Philippa trained and qualified at an international law firm in South Africa, before moving to the UK. Philippa’s core areas of practice are commercial litigation, financial services litigation, regulatory investigations and professional negligence disputes. Philippa has varied experience in large complex cross-border litigation and regulatory matters. Her litigation experience includes the English High Court, predominantly in the Business and Property Court, Commercial Court and Chancery Division. Her regulatory experience includes dealings with the Serious Fraud Office, the Financial Conduct Authority and the Prudential Regulation Authority. xiii

Contributors

David Capper, Queen’s University Belfast Dr David Capper studied Law at Queen’s University Belfast and Cambridge University from 1978 to 1984. He was a practising member of the Bar of Northern Ireland from 1984 until 1989 when he was appointed to a Lectureship in Law at Queen’s. He is now Reader in Law, teaching and writing in the fields of Private Law, Civil Procedure and Remedies. He has held visiting positions at the University of Detroit Mercy and Fordham University. Dr Capper first became interested in access to justice and the funding of civil litigation when serving as member (1995–2001) and vice-chair (1997–2001) of the Lord Chancellor’s Legal Aid Advisory Committee for Northern Ireland. He is the sole author of two books, on Mareva Injunctions and the Enforcement of Judgments in Northern Ireland, respectively, as well as around 50 law review publications. Currently he is sub-editor of the Northern Ireland Legal Quarterly. Robin M. Davis, Esq., Senior Investment Officer, Woodsford, Philadephia Robin M. Davis is a highly skilled attorney with expertise in both litigating and investing in intellectual property cases. A graduate of the Massachusetts Institute of Technology (MIT) and Cornell Law School, she was a partner in a New York City-based patent litigation boutique law firm prior to joining Woodsford Litigation Funding as a Senior Investment Officer. Robin is admitted to the state bars of New York and Pennsylvania and, while in private practice, advised clients on matters pending in various US district courts, the International Trade Commission (ITC) and Patent Trial and Appeal Board (PTAB). In her current position with Woodsford Litigation Funding, Robin leads the diligence and monitoring of investments in intellectual property litigation, with a particular emphasis on US patent infringement matters. Alex Hickson, Woodsford, London Alex is an Investment Officer at Woodsford Litigation Funding. He is an Australian-qualified lawyer with experience in financial services and consumer protection group actions in both Australia and the UK. He worked on a number of high-profile class actions in Australia before making the move to London where he continued to work in Group Litigation. He also has experience in professional negligence, commercial property, defamation and insurance disputes. Prior to joining Woodsford, Alex worked at class action firms Shine Lawyers in Brisbane and Slater & Gordon Lawyers in London. He has litigated in the Supreme, District and Magistrate Courts of Queensland; the Queensland, New South Wales and Tasmanian Courts of Appeal; the Federal and High Courts of Australia; and the High Court of England and Wales. Alex completed undergraduate degrees in Law and Arts at the University of Queensland and was admitted as a solicitor to the Queensland Supreme Court and the High Court of Australia in 2015. xiv

Contributors

Andrew Hill, Partner, Fox Williams Andrew is a Partner at the City law firm, Fox Williams LLP, and leads the firm’s securities litigation and group actions practice. He is dual-qualified in Australia and England and Wales, and has significant experience with the class action regimes in both jurisdictions. He has been at the forefront of developing securities litigation in the UK, and drove the launch of the UK’s first such claim against a public company – the high-profile and ground-breaking case against Tesco plc for a large group of institutional investors, following Tesco’s admission of a profit overstatement in 2014. Zachary Krug, Woodsford, London A  trial litigator by training, with deep experience in both finance and law, Zachary Krug helps lead Woodsford’s US and international investments. Zachary believes strongly that access to justice should not be dictated by financial resources and that litigation finance can play a pivotal role in vindicating legal rights. At Woodsford, Zachary works closely with plaintiffs and lawyers to not only provide much-needed capital, but to craft winning strategies from day one through to enforcement. Zachary has extensive trial litigation experience, having represented both plaintiffs and defendants in a wide variety of commercial disputes in state and federal courts in the United States, as well as in international proceedings. He has particular expertise in intellectual property disputes and technology-related matters, complex business litigation and competitor disputes, government contracts and whistle-blower actions, art-related matters, and international human rights litigation. Prior to joining Woodsford, Zachary was a trial litigator for nearly a decade and half. He most recently was a litigator in the Los Angeles office of the global litigation firm Quinn Emanuel Urquhart & Sullivan. Prior to that, he was an associate in the New York office of Shearman & Sterling, where he focused on international disputes and project finance. Zachary received his JD from Cornell Law School, where he was an Articles Editor on the Cornell Law Review, and his BA from Yale University, where he was a Sulger Scholar. Zachary is fluent in Spanish. Alex Lempiner, Woodsford, Philadelphia Alex Lempiner, EVP and US  General Counsel for Woodsford, leverages his 20+ years of legal and industry experience to oversee all US corporate and legal matters. Alex’s career began in Milbank’s New York office where for six years he represented administrative agents, lenders and borrowers on a wide range of syndicated financings and capital markets transactions. xv

Contributors

Alex departed Milbank for Coventry First, where, as the company’s first inhouse lawyer, he helped make it the leading life settlement company. As SVP and Chief Compliance Officer, Alex managed all operational matters, implemented processes for regulatory compliance and structured credit facilities supporting innovative insurance products. After twelve years at Coventry, Alex joined Rembrandt IP Management to build its litigation finance operations. As Corporate Counsel and Secretary, Alex was responsible for all legal matters and handled all litigation funding transactions. Alex’s JD is from NYU School of Law and his BA from The Pennsylvania State University. Walter Mansfield, Partner, Vault Group LLP Walter Mansfield is a certified public accountant (CPA). His experience covers an array of US tax consulting and compliance issues across a broad range of industries, with particular focus on private equity, venture capital, and real estate funds. Walter’s  20 years of experience cover a wide variety of US domestic and international tax issues spanning many industries, including real estate, financial services, manufacturing, pharmaceuticals, hi-tech, energy and resources, and healthcare. Walter has served these clients in mergers and acquisitions, international structuring, tax return filings, revenue agent reviews, state tax issues, and other matters. Since relocating to London in January 2007, he has been responsible for providing substantial US tax consulting and reporting services for numerous global investment funds, with a primary emphasis on private equity, venture capital, and real estate funds. John Middlemass, Tax Manager, BDO UK LLP John is a UK Chartered Accountant and Chartered Tax Adviser, with seven years’ experience advising clients across a broad range of UK and international corporate tax areas. He works across the BDO London financial services and transactions tax teams and he specialises in dealing with asset managers, investment funds and their investors. John started his career working as an accountant before moving into the world of corporate tax, and so has been able to bring a good background in accounting to his role. John has particular experience advising private equity houses on initial fund structuring, acquisitions of target businesses and tax considerations of exits, including implications for investors in the fund. He is also involved in sell-side transactions, advising founders and management groups through the exit or partial exit from their business. John works closely with David Tran advising a number of UK based corporate litigation funders on tax matters from structuring the investment vehicles, xvi

Contributors

considerations regarding the form of litigation funding, the taxation of returns for the fund and investors, remuneration for managers, and dealing with UK tax returns for the manager and UK funds. Charlie Morris, Chief Investment Officer, Woodsford Charlie is an English-qualified senior lawyer with significant experience of handling high-value class actions and group litigation in numerous jurisdictions, both in his capacity as a lawyer and as a litigation funder. As Chief Investment Officer of Woodsford Litigation Funding, Charlie has overall responsibility for Woodsford’s investments outside of the United States and, in particular, plays a key role in Woodsford’s investments in securities and antitrust class actions in the UK, Australia and continental Europe. Charlie was previously a solicitor at London disputes boutique Enyo Law and international firm Addleshaw Goddard. ‘Charlie … has been praised for his expertise on financial services matters, with sources reporting that he is “extremely knowledgeable in those areas, possibly more so than the lawyers who run the cases. If I had a case like that I would go to him.” Chambers and Partners, 2020.’ Ravi Nayer, Partner, Brown Rudnick LLP, London Ravi Nayer’s practice focuses on group litigation, acting on behalf of the UK’s largest financial services institutions. As well as advising on the merits and conduct of securities class actions and regulatory enforcement actions, Ravi advises on governance policies and procedures relating to bondholder litigation and securities class actions and related fiduciary duties. His experience includes creating joint defence and novel litigation cooperation agreements for peer institutions in some of the UK’s largest class actions, including the recent RBS Rights Issue litigation. Ravi also advises clients on the design and implementation of private-sector compensation schemes, which he had led on in the UK in recent years, arising from alleged mass torts, most recently for Manchester City Football Club and the UK construction industry relating to the alleged blacklisting of workers, as well as the first ICO-approved data compensation scheme. Anisha Patel, Associate, Fox Williams Anisha is an Associate and Solicitor Advocate in Fox Williams’ dispute resolution team. She has significant experience working on high-profile securities litigation and group actions, banking and finance litigation, and international commercial and investment treaty arbitration. She has acted for businesses and investors in the financial services, shipping, technology, fashion and energy sectors. Anisha also has experience advising clients on corporate accountability policy and regulation, and takes a keen interest in developments in investor stewardship and ESG investing. xvii

Contributors

Lucy Pert, Hausfeld, London, UK Lucy, partner at Hausfeld London, has almost 20 years of commercial dispute resolution experience with a focus on financial services, contentious restructuring, insolvency and shareholder disputes, as well as general commercial work. She has extensive experience of managing cross-border litigation and commercial arbitration. Lucy’s client base includes corporates, hedge funds, private equity funds, insolvency practitioners and high net worth individuals. Prior to working at Hausfeld, Lucy was Of Counsel at Quinn Emanuel, having joined from Freshfields. Lucy also has experience working directly in third party litigation finance, having worked for Harbour Litigation Funding. This insight coupled with Hausfeld’s wide ranging experience with flexible fee structures and litigation finance, means she is well-placed to advise clients on litigation funding matters, including strategies for securing funding. Eric Schuller, President, The Alliance for Responsible Consumer Legal Funding Eric is the current President of the industry Trade Association, The Alliance for Responsible Consumer Legal Funding also known as ARC. In his role as President Eric directs and manages all the Government Affairs issues that confront the industry on national bases. He is a Member of the Board of Directors of the State Government Affairs Council (SGAC), an Advisory Board Member of the Dispute Financing Library of the Center on Civil Justice at NYU Law School and an active participant in the Council of State Governments (CSG), National Conference of State Legislators (NCSL) and the Council of Western Attorneys General (CWAG) and National Association of Attorneys General (NAAG). Eric retired from the United States Army and National Guard after 23 years of Service. His background was in Military Intelligence, Counterintelligence and Military Police Operations. He has a Bachelor’s degree from the University of Illinois at Chicago in Business. ]Anthony Sebok, Cardozo School of Law, Yeshiva University, New York Professor Sebok is an expert on mass torts, litigation finance, comparative tort law, and legal philosophy. Before coming to Cardozo in 2007, he was the Centennial Professor of Law and the Associate Dean for Research at Brooklyn Law School where he taught for 15 years. He is the author of Legal Positivism in American Jurisprudence, and numerous articles and essays on legal finance and insurance law. His casebook, Tort Law: Responsibilities and Redress, which he co-authored with John Goldberg and Benjamin Zipursky, is used at several leading law schools. Professor Sebok was the Academic Co-Reporter, with W. Bradley Wendel, of the ABA Commission on Ethics 20/20 Informational Report on Alternative Litigation Finance (2012). xviii

Contributors

Emma Shafton, Associate, Reed Smith LLP, London Formerly at the London Bar, Emma joined Reed Smith’s Global Commercial Disputes and Global Regulatory Enforcement groups in February 2019. Emma’s practice focuses on corporate crime, investigations and civil fraud. She frequently advises clients suspected of fraud, money laundering, bribery and corruption, market abuse, and insider dealing. Emma advises clients on all aspects of the Proceeds of Crime Act 2002 including asset freezes/forfeiture, confiscation and AML compliance. In her commercial litigation practice, Emma has particular experience of conducting complex civil conspiracy claims. In the litigation funding sphere, Emma has recently acted for a funded claimant as part of a crossborder team seeking to monetise a portfolio of non-performing loans valued at over $600 million. Neill Shrimpton, Partner, Brown Rudnick LLP, London Neill Shrimpton is head of Brown Rudnick’s Litigation team in London, and practises in all areas of commercial litigation and arbitration. He has represented clients in disputes in all divisions of the High Court, the Court of Appeal and the Privy Council, and pursuant to the rules of many arbitration institutions. He has extensive offshore experience, in particular in the British Virgin Islands and the Eastern Caribbean Court of Appeal. He has also acted for parties in arbitrations pursuant to the LCIA and ICC Rules. Neill is experienced in representing clients under criminal and/or regulatory investigation, having advised clients in recent years in connection with investigations by the National Crime Agency and the Serious Fraud Office. Neill has been recognised by Legal 500 for a number of years. He is a recommended lawyer in Legal 500 2020 in the fields of Banking Litigation (Investment and Retail), Commercial Litigation, and Civil Fraud. David Siffert, New York University School of Law – Center on Civil Justice David Siffert serves as Director of Research and Projects at the Center on Civil Justice at NYU School of Law, a centre dedicated to the study of the civil justice system in the United States and how it can continue to fulfill its purposes. Prior to joining the Center, Siffert was a civil litigator at Boies, Schiller & Flexner. Siffert clerked for Hon. Robert S. Smith, Associate Judge of the New York Court of Appeals, and Hon. Barbara S. Jones, United States District Judge for the Southern District of New York. Siffert is an alumnus of New York University School of Law (‘09) and the University of Chicago (AB ‘06). Mark Spiteri, Commercial and Finance Director, Woodsford, London Mark Spiteri graduated from the London School of Economics in 1997 where he read Economics & Industrial Relations. He is a Chartered Accountant, qualifying with PriceWaterhouseCoopers, where he held positions in both the Consultancy xix

Contributors

and Corporate Finance divisions before joining Woodsford Consulting, a Family Office, in 2005. Mark subsequently became Managing Director of Woodsford Consulting, where he was responsible for sourcing and implementing investments across the financial services and real estate sectors. Mark was a founder director of Woodsford Litigation Funding (WLF), an international litigation finance business, established in 2010. Mark still serves on the board of WLF as its Finance & Commercial Director, while he also holds a number of non-Executive positions including at Dom Development SA, Poland’s largest listed residential developer and Woodsford TradeBridge, an alternative finance provider. His interests outside of business include the environment, with a particular interest in oceans as well as sports and family life. Ben Summerfield, Partner, Reed Smith LLP, London Ben is a partner in the London office of Reed Smith’s Global Commercial Disputes Group. He represents clients in multi-jurisdictional commercial litigation and international arbitration matters. He is recognised as one of the leading practitioners in the London market, where he acts in major cases for international clients, ranging from major institutions, governments and ultra-high net worth individuals. Ben’s work spans a broad number of sectors including financial services, technology, telecoms, media and energy. Ben is an advocate for alternative funding of disputes and has acted in litigation and arbitration matters where third party funding has been deployed for his clients, as well as defending cases where the claim has been third-party funded. Christian Toms, Partner, Brown Rudnick LLP, London Christian Toms is a member of Brown Rudnick’s International disputes team. He regularly advises in a range of matters, with particular experience in complex financial disputes, contentious financial regulatory matters, and director/ shareholder/joint venture disputes. He has previously acted for and against investment banks, hedge funds and other investor groups. Before joining Brown Rudnick, Chris was an associate barrister with the then Lovells LLP. Prior to that, he was a tenant in London chambers defending and prosecuting criminal cases. His previous experience at the Criminal Bar gives him an invaluable insight when advising on contentious regulatory and White Collar matters. Chris has been recognised by Legal 500 for a number of years and is a highly regarded and noted lawyer in the fields of Banking Litigation: Investment and Retail; Commercial Litigation: Premium; and Fraud: Civil. In 2020 Chris was appointed to judicial office by HM the Queen. He now sits as a Recorder. David Tran, Tax Director, BDO UK LLP David is a UK Chartered Tax Adviser, with 14 years’ experience advising clients across a broad range of UK and international corporate tax areas. He works in the BDO London financial services tax team and his specialism is dealing with asset managers, investment funds (hedge, private equity and debt) and their investors. xx

Contributors

David has particular experience advising mid-sized and fast growing asset managers and funds throughout their life, from initial structuring and implementation, dealing with ongoing tax compliance, advising on acquisitions and post-acquisition reorganisations and tax considerations on exit. David advises a number of UK-based corporate litigation funders on tax matters from structuring the investment vehicles, considerations regarding the form of litigation funding, the taxation of returns for the fund and investors, remuneration for managers, and dealing with UK tax returns for the manager and UK funds. Jared Wade, Partner, Vault Group LLP Jared Wade is a Partner of Vault Group LLP. In addition to focusing on real estate and private equity fund clients, Jared also has extensive experience in advising UK and European-based SMEs on US corporate tax matters. He is a certified public accountant (CPA) in the State of Ohio and has been based in London since 2010. Jared has 11 years of experience providing comprehensive US tax advisory and compliance services to his clients. As an advisor, Jared has led clients through various transactional matters, including pre-acquisition diligence, deal structuring, and post-acquisition structure rationalisation. With respect to compliance, Jared has been responsible for meeting federal, state and local tax reporting requirements for a diverse base of clients operating in a variety of industries. Jared also has significant experience in assisting non-US corporations in navigating US-inbound taxation matters. Simon Walsh, Cadwalader, Wickersham & Taft Simon Walsh is Special Counsel in Cadwalader’s Global Litigation Group, based in London. Simon focuses on high value international commercial arbitration and complex cross-border litigation and has acted for clients in the telecoms, private equity, financial, maritime, offshore, power and aviation sectors. Simon has extensive experience of managing multi-jurisdictional litigation in the offshore courts in Guernsey, Jersey, the Isle of Man, the British Virgin Islands, Bermuda and the Cayman Islands as well as in Europe and Russia. Simon also has detailed knowledge of the enforcement and annulment of international arbitral awards and judgments. Prior to joining Cadwalader, Simon was Senior Investment Officer with Woodsford Litigation Funding in London, where he was responsible for global litigation and arbitration investments. Simon had a particular focus on group and representative litigation in England & Wales. He holds a Master’s Degree in International Trade and Maritime Law from the University of Southampton. xxi

Contributors

Imogen Winfield, Associate, Brown Rudnick LLP, London Imogen is an associate in the International Disputes team in Brown Rudnick’s London office. Imogen has experience in a wide range of commercial disputes, ranging from high-value breach of contract and negligence claims between financial institutions to disputes concerning privacy, harassment and defamation issues. Imogen has acted for senior individuals in connection with regulatory investigations and has a particular interest in disputes arising out of financial contexts.

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Contents

Forewords vii General editor xi Contributors xiii Table of UK statutes xxix Table of UK statutory instruments xxxi Table of Australian legislation xxxiii Table of US legislation xxxv Table of other international legislation xxxvii Table of UK cases xxxix Table of Australian cases xlv Table of US cases xlvii Table of other international cases li Chapter 1 Introduction 1 Steven Friel, Chief Executive Officer, Woodsford Litigation finance, often known as litigation funding 1 Trans-Atlantic evolution 2 The law 3 Business 6 Multi-contributor 7 Chapter 2 A brief history of third-party litigation funding in the UK, US and elsewhere in the common law 9 David Capper, Queen’s University Belfast; Anthony Sebok, Cardozo School of Law, Yeshiva University, New York Introduction 9 TPLF and assignment 10 The modern history of TPLF in the UK and Ireland 12 The modern history of TPLF in the United States 15 Conclusion 19 Chapter 3 Regulation and legislation 21 A England 23 Jonathan Barnes, Chief Operating Officer and General Counsel, Woodsford, London Introduction 23 xxiii

Contents

Adverse costs Statutory regulation The ALF Code of Conduct Final thoughts on the position in England

24 24 25 36

B The United States 41 David Siffert, New York University School of Law – Center on Civil Justice; Eric Schuller, The Alliance for Responsible Consumer Legal Funding The US position – regulation 41 The US position – legislation 47 C Australia, Hong Kong, Singapore and global Jonathan Barnes, Chief Operating Officer and General Counsel, Woodsford, London The Australian position The Hong Kong position The Singapore position The global position

53

53 59 62 64

Chapter 4 Third-party litigation financing and lawyers’ ethical obligations 65 Lucy Pert, Hausfeld, London; Anthony Sebok, Cardozo Law School, NYC Introduction 65 Choice of law 65 The United States 67 England and Wales 71 Chapter 5 Privilege and confidentiality 81 Simon Walsh, Cadwalader, Wickersham & Taft; Zachary Krug, Woodsford, London Introduction 81 English law 85 Application to third-party litigation funding under English law 96 US law 122 Application to third-party litigation funding under the laws of the United States 126 International arbitration 136 Chapter 6 The litigation funding agreement 143 Alex Lempiner, Woodsford, Philadelphia; Jonathan Barnes, Woodsford, London Introduction 143 Key stakeholders in the litigation funding agreement 145 Key characteristics of the litigation funding agreement 147 Key clauses in the litigtion funding agreement 150 Miscellaneous provisions 158 The closing 158 Expert advice required 159 Conclusion 160 xxiv

Contents

Chapter 7 Adverse costs and security for costs 161 Steven Friel, Chief Executive Officer, Woodsford Introduction 161 Adverse costs in England and Wales 163 English case law from the 1980s and 1990s 164 The ‘purity test’ developed by the English courts in Dymocks and Hamilton v Al Fayed 166 The Australian case of Gore v Justice Corp foreshadows Arkin 168 Arkin 170 Excalibur 174 Davey v Money 177 Litigation funder’s liability for adverse costs in the Australian securities class action regime 182 Security for costs in England and Wales 184 ATE as security for costs 188 Adverse costs in international arbitration: institutional rules 190 Investor v State arbitration 191 Commercial arbitration 200 Conclusions 203 Chapter 8 Other methods of financing litigation A State funding Ravi Nayer, Partner, Brown Rudnick LLP; Razzaq Ahmed, Associate, Brown Rudnick LLP England and Wales United States Contingent litigation funds

205 207

207 212 212

B Pro bono, philanthropic, charitable and ‘revenge’ funding 217 Ravi Nayer, Partner, Brown Rudnick LLP; Razzaq Ahmed, Associate, Brown Rudnick LLP Pro bono 217 Philanthropic and charitable funding 220 ‘Revenge’ funding 223 C Insurance 227 Christian Toms, Partner, Brown Rudnick LLP BTE insurance 228 ATE insurance 231 Other uses of insurance 234 D Contingency and conditional fee agreements 237 Ben Summerfield, Partner, Reed Smith LLP; Emma Shafton, Associate, Reed Smith LLP Introduction 237 Conditional fee agreements in England and Wales 238 xxv

Contents

Damages-based agreements in England and Wales Conditional and contingent fee arrangements in other jurisdictions Conditional and contingent fee agreements and the funding market Chapter 9 Types of litigation and arbitration that attract and are attractive to litigation finance A Patent litigation Robin M. Davis, Esq., Senior Investment Officer, Woodsford, Philadelphia What is patent infringement litigation? Patent litigation is highly amenable to funding Key funding-related issues in US patent cases Patent litigation strategies especially amenable to litigation funding

240 245 248

249 251 251 252 255 265

B Insolvency 267 Christian Toms, Partner, Brown Rudnick LLP Evolution of funding insolvency matters 267 Key considerations for insolvency practitioners 269 Availability of legal expenses insurance 269 Creditor financial support 270 Other forms of external finance 270 Assignment options 270 Other considerations: contingent fees and ATE insurance 272 C Treaty arbitration 277 Neill Shrimpton, Partner, Brown Rudnick LLP; Imogen Winfield, Associate, Brown Rudnick LLP The parties 279 Value 281 Costs 282 Conclusions 283 D Class actions Charlie Morris, Chief Investment Officer, Woodsford; Andrew Hill, Partner, Fox Williams; Anisha Patel, Associate, Fox Williams Opt-out class actions Opt-in class actions Conclusion and the future

287

288 314 317

Chapter 10 The users of litigation finance – who, where, when and why? 319 Philippa Beasley, Associate, Reed Smith LLP; Ben Summerfield, Partner, Reed Smith LLP Introduction 319 The litigation funders 321 Where do funders seek opportunities? 322 When does funding become a prospect for litigants? 332 xxvi

Contents

Why would clients seek litigation funding? 335 Conclusion 336 Chapter 11 The investors in litigation finance Mark Spiteri, Commercial and Finance Director, Woodsford, London Litigation finance as an asset class Investment structures Types of investors in litigation finance

339 339 342 348

Chapter 12 High risk, high return 365 Alex Hickson, Woodsford, London Introduction 365 Key risks 367 Big losses 384 Risk assessment and risk management 386 High rewards 390 Big wins 394 Conclusion 396 Chapter 13 Tax Jared Wade, Partner, Vault Group LLP; Walter Mansfield, Partner, Vault Group LLP; David Tran, Tax Director, BDO UK LLP; John Middlemass, Tax Manager, BDO UK LLP The devil is in the detail UK tax considerations US tax considerations

397

398 398 408

Index 425

xxvii

Table of UK Statutes

Access to Justice Act 1999... 8.73, 8.102; 9.62 s 29...........................................8.97 Arbitration Act 1996......................... 7.167 s 59...........................................7.168 (1)......................................7.175 (c)..................... 4.37; 7.177; 12.113 61...........................................7.167 63(3)......................................4.37 67...........................................3.16 68...........................................3.16 (2)(b)..................................7.175 69...........................................3.16 Companies Act 2006 s 859H......................................6.19 994.........................................5.93 Competition Act 1998 s 47A........................................3.6 47B................................. 3.6; 5.131; 6.43 (8)(b)...............................9.165 58A........................................9.162 Constitutional Reform Act 2005....... 7.8 Consumer Protection Act 1987 s 3.............................................7.105 Consumer Rights Act 2015............... 9.162 Coroners and Justice Act 2009 s 154.........................................8.99 County Courts Act 1984 s 66...........................................12.55 Courts and Legal Services Act 1990...4.37; 8.73; 9.60, 9.62 s 58.................................... 8.91, 8.92, 8.97 (2)(b), (c)...........................8.91 58A........................................8.97 58AA.....................................8.99 Criminal Law Act 1967......... 9.41, 9.42, 9.43 s 13...........................................9.41 14...........................................9.41 (2)......................................9.42 Data Protection Act 2018.................. 9.156 Enterprise Act 2002........................... 5.131 s 18...........................................3.6 Sch 4 para 15B...............................5.131

Financial Services and Markets Act 2000.......................................... 8.10 s 26...........................................3.26 80, 81.....................................9.190 90......................................... 9.189, 9.190 (1)......................................9.190 (4)......................................9.190 90A........................... 9.189, 9.190, 9.191 Pt XVI (ss 225–234B)..............8.10 Sch 10A para 1....................................9.190 2, 3, 5............................9.191 Sch 17.......................................8.10 Insolvency Act 1986 s 213, 214.................................9.59 238, 239, 244.........................9.59 246ZA, 246ZB, 246ZD.........9.59 Legal Aid and Advice Act 1949........ 9.41 Legal Services Act 2007................... 3.65 s 1(3)(d)....................................3.65 176.........................................4.29 Legal Aid, Sentencing and Punishment of Offenders Act 2012.......................... 4.37; 8.3, 8.4, 8.5, 8.7, 8.9; 9.60 Pt 2 (ss 44–62).........................4.38 s 44............................................ 4.37, 4.44; 8.91, 8.97 46.................................... 4.37; 8.74, 8.97 Sch 1.........................................8.6 Misrepresentation Act 1967.............. 9.189 Senior Courts Act 1981..................... 7.8 s 51............................ 7.8, 7.11, 7.15, 7.16, 7.17, 7.77, 7.78, 7.82 (1)......................................7.13 (3)......................................7.66 Small Business Enterprise and Employment Act 2015 s 118.........................................9.59 Supreme Court Act 1981 see Senior Courts Act 1981 Supreme Court of Judicature Act 1890 s 5.............................................7.8

xxix

Table of UK Statutory Instruments

Civil Legal Aid (Financial Resources and Payment for Services) Regulations 2013, SI 2013/480.8.6 reg 8.............................................. 8.6 Civil Procedure (Amendment) Rules 2000, SI 2000/221..................... 9.184 Civil Procedure Rules 1998, SI 1998/3132............................. 5.120 Pt 19 (rr 19.1–19.15)................7.98; 9.101 r 19.6.......................... 9.110, 9.149, 9.150, 9.151, 9.153, 9.155, 9.158, 9.159, 9.160, 9.161, 9.164, 9.186, 9.188 (3)......................................... 9.150 19.7............................................. 9.154 25.13........................................... 7.98 25.14....................................... 5.92; 7.99, 7.105, 7.111 (2)(b)............................ 5.91; 7.101, 7.102 31.3...................................... 5.105, 5.106 31.12........................................... 5.106 44.2............................................. 7.9 PD 51U.......................................... 10.4 Competition Appeal Tribunal Rules 2015, SI 2015/1648............. 6.43; 9.162, 9.164, 9.168 r 78................................ 5.131; 6.43; 9.162 (1)(b)....................................... 9.165

Competition Appeal Tribunal Rules 2015, SI 2015/1648 – contd (2)............................................ 9.165 (d)....................................... 3.6 (3)(c)....................................... 3.6 79.......................................... 6.43; 9.162 (1)............................................ 9.165 (2)............................................ 9.164 93(4)............................................ 9.168 94.......................................... 6.43; 9.168, 9.188 (4)............................................ 9.168 (9)(g)....................................... 9.168 97................................................ 6.43 Conditional Fee Agreements Order 1995, SI 1995/1674...............8.73, 8.92; 9.62 Conditional Fee Agreements Order 2013, SI 2013/689..................... 8.91 art 3............................................... 8.91 Damages-Based Agreements Regulations 2010, SI 2010/1206...8.99 Damages-Based Agreements Regulations 2013, SI 2013/609.....4.37; 8.99, 8.103, 8.104, 8.112 Legal Aid, Sentencing and Punishment of Offenders Act 2012 (Commencement No 12) Order 2016, SI 2016/345 art 2............................................8.74; 9.62

xxxi

Table of Australian legislation

Constitution s 51................................................ 9.136 Corporations Act 2001... 3.121, 3.123, 3.124, 3.127, 3.131 s 601FC......................................... 3.128 925A........................................... 3.122 Corporations Amendment (Litigation Funding) Regulations 2020 (Commonwealth)...................... 3.126 Corporations Regulations 2001......... 3.123 Federal Court of Australia Act 1976...3.133; 9.129, 9.130, 9.131 Pt IVA (ss 33A-33ZJ).................... 9.128 s 23................................................ 9.135 33C...................................... 9.131, 9.132 33H............................................. 9.132 33N............................................. 9.132 33V(2)................................. 9.138; 12.23

Federal Court of Australia Act 1976 – contd 33ZF.................................... 9.135, 9.136 Federal Court Rules 2011 Div 9.3........................................... 9.128 Justice Legislation Miscellaneous Amendments Act 2020 (Victoria) Justice Legislation Miscellaneous Amendments Bill 2019 (Victoria)................................... 12.85 Securities and Investments Commission Act 2001........ 3.124, 3.125 Solicitors’ Conduct Rules r 16A............................................. 8.20 Supreme Court Act 1986................... 8.122 s 33ZDA........................................ 8.122 Supreme Court Rules (Queensland) Order 91 r 1.........................................7.12

xxxiii

Table of US legislation

Class Action Fairness Act 2005....9.104, 9.106 Clayton Antitrust Act 1914 s 4.................................................. 9.105 Constitution art 1 § 8 cl 8.................................. 9.2 Federal Rules of Civil Procedure.9.27, 9.106 r 12(b)(6)....................................... 9.24 (c)............................................ 9.24 23(a)............................................ 9.106 (b)............................................ 9.111 (3)....................................... 9.150 (e)(3)....................................... 9.112 (g)(1)(C)(iii)............................ 9.107 r 26(b)(1)....................................... 5.153 (3)....................................... 5.143 (A).............................. 9.28, 9.29 (ii)............................ 9.28 Legal Services Corporation Act 1974.......................................... 8.13 Litigation Funding Transparency Act 2019.......................................... 3.71 § 471............................................. 3.116 Private Securities Litigation Reform Act 1995.................................... 9.104 Securities Litigation Uniform Standards Act 1998................... 9.104 Smoot-Hawley Tariff Act 1930 s 337.............................................. 9.7 Uniform Commercial Code Art 9.............................................. 3.109 United States Code Title 5 (Government Organization and Employees) § 101, 103, 282......................... 9.3 Title 11 (Bankruptcy Code) Ch 11......................................... 8.53 Title 19 (Customs Duties) § 1337(a)(1).............................. 9.7 (b)(1)............................. 9.7 Title 26 (Internal Revenue Code)..... 13.63, 13.65 § 861......................................... 13.118 865......................................... 13.98 (a)(2)................................ 13.117 871(h)..................................... 13.119 (2)................................ 13.69

United States Code – contd Title 26 (Internal Revenue Code) – contd 881(c)..................................... 13.119 (2)................................ 13.69 1221....................................... 13.91 1234A............ 13.111, 13.112, 13.113, 13.114, 13.117 (2)................................ 13.113 1411................................ 13.66, 13.97 Title 28 (Judiciary and Judicial Procedure) § 1782....................................... 5.189 1920....................................... 7.6 Title 35 (Patents) § 31, 40..................................... 9.2 101............................. 9.23, 9.25, 9.26 102, 103................................. 9.14 261......................................... 9.11 271......................................... 9.2 286......................................... 9.12 299......................................... 9.7 316......................................... 9.15 321......................................... 9.14

ALASKA

Rules of Civil Procedure r 82................................................ 7.5

ARKANSAS

Act 915 (2015).................................. 3.99 § 4-57-105, 109............................. 3.106

CALIFORNIA

California Evidence Code § 954............................................. 5.135 District of California Local Rule 7.1-1.......................................... 5.172

FLORIDA

Senate Bill 794 (2019)...................... 3.113

INDIANA

Act 153 (2016).................................. 3.99 Code 24-4.5-3-202............................ 3.106 House Bill 1447 (2019)..................... 3.99 § 2251........................................... 3.100

xxxv

Table of US legislation House Bill 1447 (2019) – contd 2252........................................... 3.101 2260........................................... 3.101

MAINE

Revised Statutes Title 9-A art 12............................................. 3.98

NEBRASKA

Revised Statute § 25-3301 (2010)........................... 3.99

NEVADA

Senate Bill 432 (2019)...................... 3.99 Rev Stat 604C.310............................ 3.106

NEW YORK

Civil Practice Law and Rules § 4503(a)(1).................................. 5.135 Judiciary Law § 489............................................. 10.22

OHIO

Revised Code Ann Title 13 Ch 1349.................... 3.98

OKLAHOMA

Stat Title 14A § 3-701 (2013)............................... 3.99

TENNESSEE

Code Ann § 47-16-101 (2014)....................... 3.99 47-16-110............................ 3.106, 3.109

UTAH

House Bill 312 (2020)....................... 3.99 § 13-57-201................................... 3.112

House Bill 312 (2020)....................... 3.99

VERMONT

Administrative Procedures Act 3 VSA § 2259........................................... 3.102 2256.................................... ����������3.102, 3.105 2253........................................... 3.103 2254........................................... 3.104 Ch 25............................................. 3.102 Act 128 (2016).................................. 3.99 House Bill 527 (2019).................. 3.99, 3.105 Senate Bill 154 (2019)................. 3.99, 3.105 Stat Ann tit 8 § 2251........................................... 3.100 2252........................................... 3.101 2254........................................... 3.109 2260........................................... 3.101

WEST VIRGINIA

Senate Bill 360 (2019)...................... 3.99 § 46A-6N-1................................... 3.107 46A-6N-2................................... 3.107 46A-6N-3................................... 3.108 46A-6N-4................................... 3.109 46A-6N-4................................... 3.110 46A-6N-7................................... 3.109 46A-6N-8................................... 3.109 46A-6N-9................. ����������3.106, 3.109, 3.111

WISCONSIN

Statute § 235.12 (2017)............................. 3.97 Assembly Bill 73 (2017)................... 3.99

xxxvi

Table of other international legislation

CANADA

Class Proceedings Act 1992 (SO 1992)............................. 8.22; 9.120 Law Society Act 1990 (RSO 1990).. 8.22 Ontario Regulation 195/04 s 7.................................................. 8.123 Contingency Fee Agreements Regulation 195/04..................... 10.29

GERMANY Act

on the Remuneration of Lawyers (Rechtsanwalts­ vergütungsgesetz, 2004)............ 10.33 Code of Civil Procedure (Zivilprozessordnung)............... 10.33

HONG KONG

Arbitration Ordinance Pt 10A Div 3 (ss 98E-98X)........... 3.146 s 98S.............................................. 3.147 Civil Procedure Ordinance s 101I............................................. 3.145

High Court Ordinance s 52A, 52B.................................... 7.8 Rules of the High Court Order 23 r 1.............................................. 7.95 Order 62 r 6A........................................... 7.8

NEW ZEALAND

High Court Rules 2016, LI 2016/225 r 14.1............................................. 7.46 46................................................ 7.12

SINGAPORE

Arbitration Ordinance....................... 10.44 Civil Law Act (Cap 43, 1999).... 3.156; 10.44 s 5B(2).................................... 3.156; 10.44 Civil Law (Third-Party Funding) Regulations 2017 reg 3.............................................. 3.156 4(1)-(3).................................... 3.156

xxxvii

Table of UK cases

A Abraham v Thompson [1997] 4 All ER 362, [1997] 7 WLUK 526, [1997] CLC 1370.1.18 Adris v Royal Bank of Scotland plc [2010] EWHC 941 (QB), [2010] 4 WLUK 518, [2010] 4 Costs LR 598............................................................................................8.75 Aiden Shipping v Interbulk [1986] AC 965, [1986] 2 WLR 1051, [1986] 2 All ER 409............................................................................................................7.11, 7.12, 7.101 Akhmedova v Akhmedov [2020] EWHC 1526 (Fam), [2020] 6 WLUK 175, [2020] Costs LR 901................................................................................................1.8; 2.10; 4.23 Apollo Ventures Co Ltd v Manchanda [2020] EWHC 2206 (Comm), [2020] 8 WLUK 76............................................................................................................................7.119 Arkin v Borchard Lines Ltd (Costs Order) [2005] EWCA Civ 655, [2005] 1 WLR 3055, [2005] 2 Lloyd’s Rep 187........................................................ 1.24; 2.10; 3.3; 7.27, 7.36, 7.45, 7.57, 7.58, 7.72, 7.82, 7.84, 7.85, 7.86, 7.108; 12.70 Arroyo v BP Exploration Co (Colombia) Ltd [2010] EWHC 1643 (QB), [2010] 5 WLUK 99............................................................................................ 5.102, 5.115, 5.119, 5.120, 5.121, 5.124, 5.125, 5.130 B Bailey (Sandra) v Glaxosmithkline UK Ltd [2017] EWHC 3195 (QB), [2018] 4 WLR 7, [2017] 6 Costs LR 1209..............................................................7.105; 8.82; 9.63 Balabel v Air India [1988] Ch 317, [1988] 2 WLR 1036, [1988] 2 All ER 246.........5.21, 5.24, 5.84 Balmoral Group Ltd v Borealis (UK) Ltd (Indemnity Costs) [2006] EWHC 2531 (Comm), [2006] 10 WLUK 447.............................................................................7.60 Bank of Nova Scotia v Hellenic Mutual War Risk Association (Bermuda) Ltd (The Good Luck) [1992] 1 AC 233, [1991] 2 WLR 1279, [1991] 3 All ER 1 ...............5.25 Bank St Petersburg PJSC v Arkhangelsky [2020] EWCA Civ 408, [2020] 4 WLR 55, [2020] 3 WLUK 249...............................................................................................12.36 Barr v Biffa Waste Services Ltd [2009] EWHC 1033 (TCC), [2009] 5 WLUK 386, [2010] 3 Costs LR 291.....................................................................................5.101, 5.123 Bolton v Corpn of Liverpool (1833) 1 My & K 88, 39 ER 614, [1833] 2 WLUK 45....5.17 British Cash & Parcel Conveyors v Lanson Store Service Co Ltd [1908] 1 KB 1006, [1908] 3 WLUK 50.................................................................................................4.46 Brownton Ltd v Edward Moore Inhucom Ltd [1985] 3 All ER 499, [1985] 2 WLUK 25, (1985) 82 LSG 1165.........................................................................................2.7 Burnden Holdings UK v Fielding [2019] EWHC 2995 (Ch), [2019] 11 WLUK 86, [2019] Costs LR 2061.............................................................................................9.50 Buttes Gas & Oil Co v Hammer (No 3) [1981] QB 223, [1980] 3 WLR 668, [1980] 3 All ER 475..............................................................................................................5.39 Byrne v Sefton Health Authority [2001] EWCA Civ 1904, [2002] 1 WLR 775, [2001] 11 WLUK 605.........................................................................................................7.101

xxxix

Table of UK cases C Camdex International Ltd v Bank of Zambia (No 1) [1998] QB 22, [1996] 3 WLR 7759, [1996] 3 All ER 431......................................................................................2.8 Casehub Ltd v Wolf Cola Ltd [2017] EWHC 1169 (Ch), [2017] 5 WLUK 493, [2017] 5 Costs LR 835.......................................................................................................2.8 Catalyst Managerial Services v Libya Africa Investment Portfolio [2017] EWHC 1236 (Comm), [2017] 3 WLUK 438...................................................................8.82; 9.63 Chant v Brown (1852) Hare 790, 68 ER 735, [1852] 5 WLUK 75................................5.119 Chapelgate Credit Opportunity Master Fund Ltd v Money [2020] EWCA Civ 246, [2020] 1 WLR 1751, [2020] 2 WLUK 303...........................................................3.3; 4.53; 7.87; 12.70 City of Gotha v Sotheby’s (No 1) [1998] 1 WLR 114, [1997] 6 WLUK 337, (1997) 94 (30) LSG 28............................................................................................................5.56 D Dadourian Group International Inc v Simms [2008] EWHC 1784 (Ch), [2008] 7 WLUK 787..............................................................................................................5.71 Davey v Money; Stewart-Koster (Joint Administrators of Angel House Developments Ltd); Chapelgate Credit Opportunity Master Fund Ltd v Dunbar Assets plc; Davey v Chapelgate Credit Opportunity Master Fund Ltd [2019] EWHC 997 (Ch), [2019] 1 WLR 6108, [2019] 4 WLUK 314...............................................7.49, 7.70; 12.70, 12.72 De Haes & Gijsels v Belgium (Application 19983/92) [1997] 2 WLUK 415, (1998) 25 EHRR 1...................................................................................................................8.7 Deutsche Bank v Sebastian Holdings Inc [2016] EWCA Civ 23, [2016] 4 WLR 17, [2016] 1 WLUK 376...............................................................................................7.105 Director of the Serious Fraud Office v Eurasian Natural Resources Corpn [2018] EWCA Civ 2006, [2019] 1 WLUK 791, [2019] 1 All ER 1026.............................5.29 Dymocks Franchise Systems (NSW) Pty Ltd v Todd (Costs) [2004] UKPC 39, [2004] 1 WLR 2807, [2005] 4 All ER 195.....................................................3.3; 7.19, 7.45, 7.58, 7.80, 7.86, 7.94 E Edwardian Group Ltd, Re [2017] EWHC 2805 (Ch), [2017] 11 WLUK 244............5.93, 5.99, 5.104, 5.105, 5.106, 5.107 Emerald Supplies Ltd v British Airways plc [2010] EWCA Civ 1284, [2011] Ch 345...... 9.151, 9.155, 9.156, 9.159, 9.164 Essar Oilfields Services Ltd v Norscot Rig Management Pvt Ltd [2016] EWHC 2361 (Comm), [2017] Bus LR 227, [2016] 2 Lloyd’s Rep 481............ 4.37; 8.78; 9.82; 12.102, 12.107, 12.108, 12.113 Euroption Strategic Fund Ltd v Skandinaviska Enskilda Banken AB [2012] EWHC 749 (Comm), [2012] 3 WLUK 988........................................................................7.60 Excalibur Ventures LLC v Texas Keystone Inc [2016] EWCA Civ 1144, [2017] 1 WLR 2221, [2016] 11 WLUK 521.................................................. 1.18; 3.54; 4.23; 5.65, 5.103, 5.105, 5.125, 5.126; 7.49, 7.50, 7.69, 7.78, 7.80; 12.48, 12.73 Excelsior Commercial & Industrial Holdings Ltd v Salisbury Hamer Aspden & Johnson (Costs) [2002] EWCA Civ 879, [2002] 6 WLUK 131, [2002] CP Rep 67...............7.76 F Financial Services Compensation Scheme Ltd v Abbey National Treasury Services plc [2007] EWHC 2868 (Ch), [2007] 12 WLUK 25...........................................5.25, 5.99 Formica Ltd v Export Credits Guarantee Department [1995] 1 Lloyd’s Rep 692, [1994] 7 WLUK 142, [1994] CLC 1078.................................................................5.43

xl

Table of UK cases G Gibson (Dorothy) v Pride Mobility Products Ltd [2017] CAT 9, [2017] 3 WLUK 808, [2017] Comp AR 257............................................................................9.171, 9.173; 12.38 Giles v Thompson [1994] 1 AC 142, [1993] 2 WLR 908, [1993] 3 All ER 321........2.10; 7.17, 7.18 Globe Equities Ltd v Globe Legal Services Ltd [1999] 3 WLUK 106, [2000] CPLR 233, [1999] BLR 232..............................................................................................7.101 Goodwood Recoveries Ltd v Breen [2005] EWCA Civ 414, [2006] 1 WLR 2723, [2006] 2 All ER 533................................................................................................7.80 Greenough v Gaskell (1833) 1 My & K 98, 39 ER 618, [1833] 1 WLUK 442..............5.17 Guinness Peat Properties Ltd v Fitzroy Robinson Partnership [1987] 1 WLR 1027, [1987] 2 All ER 716, [1987] 4 WLUK 145 ........................................................5.70, 5.74 Gutmann (Justin) v First MTR South Western Trains Ltd (Case 1304/7/7/18)..... 5.131, 5.132, 5.133; 9.178; 12.38 Gutmann (Justin) v London & South Eastern Rly Ltd (Case 1305/7/7/19)............5.131, 5.132, 5.133; 9.178 Guy v Churchill (1888) 40 Ch D 481, [1888] 12 WLUK 45..........................................2.9 H Hall v Saunders Law Ltd [2020] EWHC 404 (Comm), [2020] 2 WLUK 384...............12.49 Hamilton v Al Fayed (Costs) [2002] EWCA Civ 665, [2003] QB 1175, [2003] 2 WLR 128 2.10; 7.19, 7.23, 7.25, 7.80 Harcus Sinclair v Buttonwood Legal Capital Ltd [2013] EWHC 1193 (Ch), [2013] 5 WLUK 502..............................................................................................................4.35 Hayward v Giffard & Grove (1838) 4 M & W 194, 150 ER 1399, [1838] 1 WLUK 193..........................................................................................................................7.10 Hellenic Mutual War Risks Association (Bermuda) Ltd v Harrison (The Sagheera) [1997] 1 Lloyd’s Rep 160, [1996] 10 WLUK 293..................................................5.41 Highgrade Traders Ltd, Re [1984] 1 WLR 928, [1984] BCLC 151...............................5.70 Hocking v Marsden [2014] EWHC 763 (Ch), [2014] Bus LR 441, [2014] 3 WLUK 550..........................................................................................................................9.58 Hollins v Russell [2003] EWCA Civ 718, [2003] 1 WLR 2487, [2003] 4 All ER 590..4.29 Hotel Portfolio II UK Ltd (in liquidation) v Ruhan [2020] EWHC 233 (Comm), [2020] 1 WLUK 232, [2020] Costs LR 205...........................................................7.119 Hughes v Kingston upon Hull City Council [1999] QB 1193, [1999] 2 WLR 1229, [1999] 2 All ER 49..................................................................................................4.46 Hutson v Tata Steel UK Ltd (formerly Corus UK Ltd) [2019] EWHC 143 (QB), [2019] 2 WLUK 4...................................................................................................9.185 I IBM Corpn v Phoenix International (Computers) Ltd (Discovery) [1995] 1 All ER 413, [1994] 7 WLUK 343, [1995] FSR 184...........................................................5.119 IS v Director of Legal Aid Casework & the Lord Chancellor see R (on the application of S) v Director of Legal Aid Casework Ingenious Litigation, Re [2020] EWHC 235 (Ch), [2020] 2 WLUK 98, [2020] STI 357..........................................................................................................................3.68 J Jalla v Shell International Trading & Shipping Co Ltd [2020] EWHC 738 (TC), [2020] 3 WLUK 383.......................................................................................5.127; 8.102; 9.159, 9.160 Johnson v Bingley [1995] 2 WLUK 191, [1997] PNLR 392, [1995] NPC 27...............4.29 L LF2 Ltd v Supperstone & Shiners [2018] EWHC 1776 (Ch), [2018] Bus LR 2303, [2018] 7 WLUK 218...............................................................................................9.58 Lampet’s Case (1612) 10 Co Rep 46, 77 ER 994, [1612] 1 WLUK 281.......................2.5

xli

Table of UK cases Laurent v Sale & Co [1963] 1 WLR 829, [1963] 2 All ER 63, [1963] 1 Lloyd’s Rep 157..........................................................................................................................2.8 Lloyd v Google LLC [2019] EWCA Civ 1599, [2020] QB 747, [2020] 2 WLR 484....9.95, 9.101, 9.156, 9.158, 9.159, 9.160, 9.161 Lungowe v Vedanta Resources plc [2020] EWHC 749 (TCC), [2020] 3 WLUK 463...9.185 Lyell v Kennedy (No 3) (1884) 27 Ch D 1, [1884] 4 WLUK 22............................5.100, 5.102, 5.104, 5.119 M McFarlane v EE Caledonia Ltd (No 2) [1995] 1 WLR 366, [1995] 1 Lloyd’s Rep 535, [1994] 11 WLUK 159.............................................................................................7.14 Marren (Inspector of Taxes) v Ingles [1980] 1 WLR 983, [1980] 3 All ER 95, 54 TC 76............................................................................................................................13.17 Marson (Inspector of Taxes) v Morton [1986] 1 WLR 1343, [1986] STC 463, 59 TC 381..........................................................................................................................13.28 Martell v Consett Iron Co Ltd [1955] Ch 363, [1955] 2 WLR 463, [1955] 1 All ER 481..........................................................................................................................9.41 Massai Aviation Services v A-G [2007] UKPC 12, [2007] 2 WLUK 619.....................2.9 Merricks v Mastercard Inc [2018] EWCA Civ 2527, [2019] Bus LR 1287, [2018] 11 WLUK 148.........................................................................................................9.95, 9.101 Merricks v Mastercard [2017] CAT 16, [2017] 7 WLUK 516, [2018] Comp AR 1; revs’d [2019] EWCA Civ 674, [2019] Bus LR 3025, [2019] 4 WLUK 253............... 9.174, 9.177, 9.178 Michael O’Higgins FX Class Representative Ltd v Barclays Bank plc (1329/7/7/19)..12.38 Millharbour Management Ltd v Weston Homes [2011] EWHC 661 (TCC), [2011] 3 All ER 1027, [2011] 3 WLUK 668.........................................................................9.159 Murphy v Young & Co’s Brewery plc [1997] 1 WLR 1591, [1997] 1 All ER 518, [1997] 1 Lloyd’s Rep 236....................................................................................7.15, 7.25 P PM Law Ltd v Motorplus Ltd [2016] EWHC 193 (QB), [2016] 2 WLUK 161, [2016] 1 Costs LR 143....................................................................................................8.64, 8.72 Plummers Ltd v Debenhams plc [1986] BCLC 447.......................................................5.70 Premier Motorauctions Ltd (in liquidation) v PricewaterhouseCoopers LLP [2017] EWCA Civ 1872, [2018] 1 WLR 2955, [2018] Bus LR 882............................3.68; 7.116; 8.82; 9.63 Property Alliance Group Ltd v Royal Bank of Scotland plc [2015] EWHC 3187 (Ch), [2016] 1 WLR 992, [2015] 11 WLUK 108.............................................................5.24 R R v Derby Magistrates’ Court, ex p B [1996] AC 487, [1995] 3 WLR 681, [1995] 4 All ER 526................................................................................................................5.14, 5.36 RBS (Rights Issue Litigation), Re [2016] EWHC 3161 (Ch), [2017] 1 WLR 1991, [2016] 12 WLUK 201............................................................................5.29, 5.105, 5.106, 5.125; 7.2, 7.100; 9.185 RBS (Rights Issue Litigation), Re [2017] EWHC 1217 (Ch), [2017] 1 WLR 4635, [2017] 5 WLUK 524...............................................................................................7.105 R (on the application of Factortame Ltd) v Secretary of State for Transport, Local Government & the Regions (No 8) [2002] EWCA Civ 932, [2003] QB 381, [2002] 3 WLR 1104.............................................................................................2.10; 9.42 R (on the application of Gudanaviciene) v Director of Legal Aid Casework [2014] EWCA Civ 1622, [2015] 1 WLR 2247, [2015] 3 All ER 827................................8.7, 8.8 R (on the application of Jet2.com Ltd) v Civil Aviation Authority [2020] EWCA Civ 35, [2020] 2 WLR 1215, [2020] 1 WLUK 208.......................................................5.27 R (on the application of Morgan Grenfell & Co Ltd) v Special Comr of Income Tax [2002] UKHL 21, [2003] 1 AC 563, [2002] 2 WLR 1299.....................................5.16

xlii

Table of UK cases R (on the application of Prudential plc) v Special Comr of Income Tax [2013] UKSC 1, [2013] 2 AC 185, [2013] 2 WLR 325.....................................................................5.14 R (on the application of S) v Director of Legal Aid Casework [2015] EWHC 1965 (Admin), [2015] 1 WLR 5283, [2015] 7 WLUK 481.............................................8.8 Raiffesisen Zentralbank Osterreich Ag v Crossseas Shipping Ltd [2003] EWHC 1381 (Comm), [2003] 6 WLUK 341...............................................................................5.91 Recovery Partners GB v Rukhadze [2018] EWHC 95 (Comm), [2018] 1 WLR 1640, [2018] 1 WLUK 350.................................................................................7.117; 8.82; 9.63 Reeves v Sprecher [2007] EWHC 3226 (Ch), [2007] 11 WLUK 454, [2009] 1 Costs LR 1........................................................................................................................5.91 Road Haulage Assciation Ltd v Man SE (1289/7/7/18)..................................................12.38 Rowe v Ingenious Media; Re Ingenious Litigation [2020] EWHC 235 (Ch), [2020] 2 WLUK 98, [2020] STI 357..................................................................7.112, 7.118; 8.82 Ruttle Plant Hire Ltd v Secretary of State for Environment, Food & Rural Affairs [2008] EWHC 238 (TCC), [2009] 1 All ER 448, [2008] 4 WLUK 771................9.59 S SL Claimants v Tesco plc [2019] EWHC 2858 (Ch), [2020] Bus LR 250, [2019] 10 WLUK 405....................................................................................................9.95, 9.190 Saunderson v Sonae Industria (UK) Ltd [2015] EWHC 2264 (QB), [2015] 7 WLUK 980..........................................................................................................................9.184 Seear v Lawson (No 1) (1880) 15 Ch D 426, [1880] 7 WLUK 59................................2.9; 9.39 Shah v Karanjia [1993] 4 All ER 792, [1993] 7 WLUK 175, (1993) 143 NLJ 1261.....7.10 Sharpe v Blank [2020] EWHC 1870 (Ch), [2020] 7 WLUK 186, [2020] Costs LR 835..........................................................................................................................7.88 Sharpe v Blank [2019] EWHC 3096 (Ch), [2019] 11 WLUK 243.................................9.187 Simpson v Norfolk & Norwich University Hospital NHS Trust [2011] EWCA Civ 1149, [2012] QB 640, [2012] 2 WLR 873..............................................................2.8 Southwark & Vauxhall Water Co v Quick (1878) 3 QBD 315, [1878] 2 WLUK 71......5.64 Stevensdrake Ltd (t/a Stevensdrake Solicitors) v Hunt [2017] EWCA Civ 1173, [2017] 7 WLUK 778, [2017] BCC 611..............................................................................9.61 Svenska Handelsbanken v Sun Alliance & London Insurance plc (No 1) [1995] 2 Lloyd’s Rep 84, [1995] 1 WLUK 358.................................................................5.40 Symphony v Hodgson [1994] QB 179, [1993] 3 WLR 830, [1993] 4 All ER 143........7.101 T TGA Chapman Ltd v Christopher [1998] 1 WLR 12, [1998] 2 All ER 873, [1997] 7 WLUK 166...........................................................................................................7.18 Tew v BoS (Shared Appreciation Mortgages) No 1 plc [2010] EWHC 203 (Ch), [2010] 1 WLUK 443...............................................................................................9.184 Tharros Shipping Co Ltd v Bias Shipping Ltd (The Griparion) (No 3) [1997] 1 Lloyd’s Rep 246, [1996] 11 WLUK 295, [1997] CLC 546.................................................7.18 Therium (UK) Holdings Ltd v Brooke [2016] EWHC 2477 (Comm), [2016] 10 WLUK 117......................................................................................................................6.7; 12.45 Three Rivers District Council v Bank of England (No 6) [2004] UKHL 48, [2005] 1 AC 610, [2004] 3 WLR 1274...........................................................................5.22, 5.61, 5.85, 5.99 Three Rivers District Council v Governor & Co of the Bank of England (No 5) [2003] EWCA Civ 474, [2003] QB 1556, [2003] 3 WLR 667......................................5.25, 5.28, 5.29, 5.99 Three Rivers District Council v Governor & Co of the Bank of England [2004] UKHL 48............................................................................................................5.13, 5.18 Three Rivers District Council v Governor & Co of the Bank of England [2006] 5 Costs LR 714....................................................................................................................7.60 Threlfall v ECD Insight Ltd (Costs) [2013] EWCA Civ 1444, [2013] 10 WLUK 934, [2014] 2 Costs LO 129............................................................................................7.66

xliii

Table of UK cases Trendtex Trading Corpn v Credit Suisse [1982] AC 679, [1981] 3 WLR 766, [1981] 3 All ER 520............................................................................................................2.8 Trepca Mines Ltd (No 2), Re [1963] Ch 199, [1962] 3 WLR 955, [1962] 3 All ER 351....................................................................................................................2.8 U UK Trucks Claim Ltd v Fiat Chrysler Automobiles NV; DAT Trucks NV & Road Haulage Association Ltd v MAN SE & Daimler AG [2019] CAT 26, [2019] 10 WLUK 722................................................................................................ 3.25, 3.68; 4.23, 4.57; 9.178; 12.38 USP Strategies plc v London General Holdings (No 1) [2002] EWHC 2557 (Ch), [2002] 11 WLUK 221, (2003) 26 (1) IPD 26002...................................................5.57 United States v Philip Morris Inc (No 1) [2004] EWCA Civ 330, [2004] 3 WLUK 609, [2004] 1 CLC 811...........................................................................................5.32 V Various Claimants v Wm Morrison Supermarkets plc [2018] EWHC 1123 (QB), [2018] 5 WLUK 302, [2018] 3 Costs LR 531........................................................9.185 Ventouris v Mountain (The Italia Express) (No 1) [1991] 1 WLR 607, [1991] 3 All ER 472, [1991] 1 Lloyd’s Rep 441........................................................................5.100, 5.104 W Wall v Royal Bank of Scotland plc [2016] EWHC 2460 (Comm), [2017] 4 WLR 2, [2016] 10 WLUK 127.............................................................................................5.92 Waugh v British Railways Board [1980] AC 521, [1979] 3 WLR 150, [1979] 2 All ER 1169................................................................................................ 5.26, 5.34, 5.64, 5.120 Winterthur Swiss Insurance Co v AG (Manchester) Ltd (in liquidation) [2006] EWHC 839 (Comm), [2006] 4 WLUK 329..................................................5.18, 5.33, 5.44, 5.68, 5.70, 5.76, 5.122 Woolwich Equitable Building Society v IRC [1993] AC 70, [1992] 3 WLR 366, [1992] 3 All ER 737................................................................................................12.19

xliv

Table of Australian cases

A ASIC v Richards [2013] FCAFC 89...............................................................................12.22 AWB v Terence Cole [2006] FCA 571...........................................................................5.104 B BMW Australia Ltd v Brewster; Westpac Banking Corpn v Lenthall [2019] HCA 45.....9.136, 9.141; 12.20 Blairgowrie Trading Ltd v Allco Finance Group Ltd (2017) 343 ALR 476...................12.23 Botsman v Bolitho [2018] VSCA 278............................................................................12.106 Brookfield Multiplex Funds Management Pty Ltd v International Litigation Funding Partners Pty Ltd (2009) 180 FCR 11, [2009] FCAFC 147...................3.120, 3.121, 3.123 C Campbells Cash & Carry Pty Ltd v Fostif Pty Ltd (2006) 229 CLR 386, [2006] HCA 41............................................................................................................3.119; 10.19 Cantor v Audi Australia Pty Ltd (No 5) [2020] FCA 637...............................................9.139 Capic v Ford Motor Co of Australia Ltd.........................................................................7.121 Clarke v Sandhurst Trustees Ltd (No 2) [2018] FCA 511..............................................12.106 D DIF III Global Co-Investment Fund LP (formerly Babcock & Brown DIF III Global Co-Investment Fund LP) v BBLP LLC (formerly Babcock & Brown LP) [2016] BSC 401 (DIF.........................................................................................................7.120 Dorajay Pty Ltd v Aristocrat Leisure Ltd [2005] FCA 1483..........................................12.107 E Earglow Pty Ltd v Newcrest Mining Ltd [2016] FCA 1433..........................................12.24 Equuscorp Pty Ltd v Haxton [2012] HCA 7...................................................................2.8 F FPM Constructions Pty Ltd v Council of the City of the Blue Mountains [2005] NSWCA 340...........................................................................................................7.93 G Goldberg v Ng [1994] 33 NSWLR 639..........................................................................5.56 Gore v Justice Corpn....................................................................................................7.27, 7.28 H Hodges v Waters (No 7) [2015] FCA 264......................................................................12.35 I Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 744.............................7.96 International Litigation Partners Pte Ltd v Chameleon Mining NL (Receivers & Managers) Appointed) (2012) 246 CLR 4555, [2012] HCA 45.................... 3.120, 3.122, 3.123

xlv

Table of Australian cases K Kebaro Pty Ltd v Saunders [2003] FCA 5......................................................................7.19 Knight v FP Special Assets Ltd (1992) 107 ALR 585........................................7.12, 7.27, 7.28 L Latoudis v Casey (1990) 170 CLR 534..........................................................................7.93 Liverpool City Council v McGraw-Hill Financial Inc (now known as S & P Global Inc) [2018] FCA 1289.............................................................................................12.106 M McKay Super Solutions Pty Ltd (Trustee) v Bellamy’s Australia Ltd (No 3) [2020] FCA 461..................................................................................................................9.139 Minister for Immigration & Ethnic Affairs, ex p Lai Qin (1997) 186 CLR 622............7.93 Money Max Int Pty Ltd (Trustee) v QBE Insurance Group Ltd [2018] FCA 1030....9.135, 9.141; 12.20, 12.106 P PM Works Pty Ltd v Management Services Australia Pty Ltd [2018] NSWCA 168.....7.93 Paciocco v Australia & New Zealand Banking Group Ltd [2016] HCA 28...................12.76 Pearson v State of Queensland (No 2) [2020] FCA 619.................................................9.139 Perera v Getswift Ltd [2018] FCA 732......................................................................7.96; 12.58 Petersen Superannuation Fund Pty Ltd v Bank of Queensland Ltd [2017] FCA 699....7.122 R Richards v Macquarie Bank Ltd (No 4) [2013] FCA 438..............................................12.22 Ryan Carter & Esplanade Holdings Pty Ltd v Caason Investments Pty Ltd [2016] VSCA 236...............................................................................................................7.66 U Uren v RMBL Investments Ltd [2020] FCA 647...........................................................9.139 W Wigmans v AMP Ltd (No 3) [2019] NSWSC 162....................................................7.89; 12.58

xlvi

Table of US cases

A AVM Techs LLC v Intel Corpn 2017 WL 1787562 (D Del, 2017)................................5.160 Acceleration Bay LLC v Acitivision Blizzard Inc 2018 WL 798731 (D Del, 2018).........5.163, 5.169 Accrued Fin Servs v Prime Retail Inc 298 F 3d 291 (4th Cir 2002)..............................2.15 Adkin Plumbing & Heating Supply Co v Harwell 606 A 2d 802 (NH, 1992)...............2.18 Alice Corpn v CLS Bank International 573 US 508 (2014)........................................9.23, 9.24 Applications in Internet Time LLC v RPX Corpn 897 F 3d 1336 (Fed Cir, 2018)........9.14 Aspex Eyeweat Inc v Miracle Optics Inc 34 F 3d 1336 (Fed Cir, 2006)........................9.12 B BSC Associates v Leidos Inc 91 F Supp 3d 319 (NDNY, 2017)....................................2.15 Baker v General Motors Corpn 209 F 3d 1051 (8th Cir, 2000)......................................5.146 Bank of America NA v Terra Nova Insurance Co 211 F Supp 2d 493 (SDNY, 2002).... 5.142 Benitez v Lopez 2019 WL 1578167 (EDNY, 2019).......................................................5.161 Berkheimer v HP Inc 881 F 3d 1360 (Fed Cir, 2018).....................................................9.23 Boettcher v Criscione 299 P 2d 806 (Kan, 1956)...........................................................2.18 Bollea v Gawker Media LLC 913 F Sup 2d 1325 (MD Fla 2012).....................8.53, 8.55, 8.56 Brown v Bigne 28 P 11 (Or, 1891).................................................................................2.18 Brown v Dyrnes 109 So 2d 788 (Fla Dist Ct App, 1959)...............................................2.18 Burnet v Logan 283 US 404 (1931)................................................................................13.107 C CXT Sys Inc v Academy Ltd No 2:18-cv-00171-RWS-RSP (2020)..............................5.160 Calloway v Comr 135 TC 26..........................................................................................13.78 Carlyle Inv Mgmt LLC v Moonmouth Co SA 2015 WL 778846 (Del Ch, 2015).... 5.145, 5.162, 5.164; 9.114 Carnegie Mellon University v Marvell Tech Group Ltd 807 F 3d 1283 (2015).............9.21 Cavallaro v United States 284 F 3d 236 (1st Cir, 2002).................................................5.140 Charge Injection Techs Inc v EI DuPont De Nemours & Co 2015 WL 1540520 (Del Super Ct, 2015).......................................................................................5.166; 8.57; 9.114 Chevron Corpn, Re 633 F 3d 153 (3d Cir, 2011)............................................................5.147 Clifford v Wilcox 27 P 2d 722 (Wash, 1933)..................................................................2.18 Cohen v Cohen 2015 WL 745712 (SDNY, 2015)...................................................5.168, 5.169 Comcast Corps v Behrend 133 Ct 1426 (2013)..............................................................9.111 Conlon v Rossa 2004 WL 1627337 (Mass Land Ct, 2004)............................................9.116 Conrad Bros v John Deere Ins Co 640 NW 2d 231 (Iowa, 2001)..................................2.7 Content Extraction & Transmission LLC v Wells Fargo Bank Nat Ass’n 776 F 3d 1343 (Fed Cir, 2014)...............................................................................................9.23 Continental Circuits LLC v Intel Corpn 435 F Supp 3d 1014 (D Arizona, 2020)... 5.159, 5.162, 5.166 Council Fin Services LLC v Leibowitz (No 13-12-00103-CV) (Texas, 2013)..............4.20 Currence v Ralphsnyder 151 SE 700 (W Va, 1929)........................................................2.18 D Dealer Management Sys Antitrust Litig, Re 2020 WL 3050280 (ND Ill, 2020)............5.169

xlvii

Table of US cases Devon IT Inc v IBM Corpn 2012 WL 4748160 (ED Pa, 2012)...............................5.162, 5.170 Doe v Society of Missionaries of Sacred Heart 2014 WL 1715376...............................5.162 Duplan Corpn v Deering Milliken Inc 397 F Supp 1146 (DSC, 1974)..........................5.142 E Echeverria v Estate of Lindner 2005 WL 1083704 (Sup Ct, 2005)................................10.24 Eidos Display LLC v Chi Mei Innolux Corpn 2017 WL 2773944 (ED Tex, 2017).......5.160 Enzo APA & Son Inc v Geapag AG 134 F 3d 1090 (Fed Cir, 1998)..............................9.12 Exmark v Briggs & Stratton Power Prods Grp LLC 879 F 3d 1332 (Fed Cir, 2018).....9.21 F Fastenau v Engel 240 P 2d 1173 (Colo, 1952)...............................................................2.18 Fast Track Inv Co LLC v Sax 2018 WL 2183237 (ND Cal, 2018)................................4.20 Finjan v Blue Coat Systems 879 F 3d 1299 (Fed Cir, 2018)..........................................9.21 Francis v Mirman, Markovitis & Landau PC (NY Sup Ct, 2013)..................................4.9 Fulton v Foley 2019 W 6609298 (ND Ill, 2019)..........................................5.158, 5.162, 5.165 G Georgia-Pacific Corpn v US Plywood Corpn 318 F Supp 1116 (SDNY, 1970).............9.21 Giambattista v Nat’l Bank of Commerce of Seattle 586 P 2d 1180 (Wash Ct App, 1978).......................................................................................................................2.18 Gideon v Wainwright 372 US 335 (1963)......................................................................8.13 Gladden v Comr 112 TC 209 (1999)..............................................................................13.93 Grand Jury Investigation, Re 974 F 2d 1068 (9th Cir, 1992)..........................................5.135 Grand Jury Proceedings October 12 1985, Re 78 F 3d 251 (6th Cir, 1996)...................5.137 Green Grand Jury Proceedings, Re 492 F 3d 976 (8th Cir, 2007)..................................5.146 Grodt & McKay Realty Inc v Comr 77 TC (1981)..................................................13.77, 13.78 H Hamilton Capital VII LLC I v Khorrami LLP 48 Misc 3d (NY Supp Ct, 2015)....8.120; 9.105 Hickman v Taylor 329 US 495 (1947).....................................................................5.143, 5.144 Higgins v Comr 312 US 212 (1941)...............................................................................13.87 Hoist Fitness Sys v TuffStuff Fitness Int’l 2018 WL 8193374 (CD Cal, 2018).............5.162 Huber v Johnson 70 NW 806 (Minn, 1897)...................................................................2.18 I Illinois Brick Co v Illinois 431 US 720 (1977)...............................................................9.108 International Oil Trading, Re 548 BR 825 (Bankr SD Fla, 2016)..........................5.164, 5.165, 5.168, 5.170 Internet Patents Corpn v Active Network Inc 790 F 3d 1343 (Fed Cir, 2015)...............9.23 J Justinian Capital SPC v WestLB AG, NY Branch 28 NY 3d 160 (2016........................10.24 K Kaplan v SAC Capital Advisors 2015 WL 5730101 (SDNY, 2015)..............................5.174 Kelly, Grossman & Flanagan LLP v Quick Cash Inc 35 Misc 3d 1205(A), 950 NYS 2d 723 (Sup Ct, 2012).............................................................................................4.20 Kiobel v Royal Dutch Petroleum Co 133 S Ct 1659 (2013)...........................................9.104 Kraft v Mason 668 So 2d 679 (Fla, 1996)......................................................................2.18 L Lambeth Magnetic Structures LLC v Seagate Tech (US) Holidngs 2018 WL 466045 (WD Pa, 2018)...............................................................................5.162, 5.166; 9.28, 9.29 Lawsuit Funding LLC v Lessoff (No 650757/2012) 2013 WL 640971 (NY Sup Ct, 2013).......................................................................................................................4.20 Leader Techs Inc v Facebook Inc 719 F Supp 2d 373 (D Del, 2010).............................5.169

xlviii

Table of US cases M MLC Intellectual Property LLC v Micron Tech 2019 WL 118595 (ND Cal, 2019).........5.158, 5.173; 9.30 Martin v Bally’s Park Place Hotel & Casino 983 F 2d 1252 (3d Cir, 1993)..................9.28 Maslowski v Prospect Funding Partners LLC 944 NW 2d 235 (Minn, 2020)..........2.18; 5.175 Merricks (Walter Hugh) CBE v Mastercard Incorporated [2017] CAT 16.............11.88; 12.38, 12.108 Metropolitan Life Insurance Co v Fuller 61 Conn 252 (1891).......................................2.15 Miami National Bank v Comr 67 TC 793 (1977)...........................................................13.105 Miller UK Ltd v Caterpillar Inc 17 F Supp 3d 711 (ND Ill 2014).................2.17; 5.152, 5.153, 5.154, 5.157, 5.168, 5.169 Minco Inc v Combustion Engineering Inc 95 F 3d 1109 (Fed Cir, 1996)......................9.11 Mitchell v Amerada Hess Corpn 638 P 2d 441 (Okla, 1981).........................................2.18 Moller v United States 721 F 2d 810 (Fed Cir, 1983)....................................................13.87 Mondis Tech Ltd v LG Electronics Inc 2011 WL 1714304 (ED Tex, 2011)..................5.162 Morley v Square Inc 2015 WL 7273318 (ED Mo, 2015)...............................................5.165 Morrison v National Australia Bank Ltd 561 US 247 (2010).........................................9.104 Morrow v Microsoft Corpn 499 F 3d 1332 (Fed Cir, 2007)...........................................9.12 MyMail Ltd v ooVoo LLC 943 F 3d 1371 (Fed Cir, 2019)............................................9.25 N NAACP v Button 371 US 415 (1963).............................................................................2.17 National Prescription Opiate Litigation, Re 2018 WL 2127807 (ND Ohio, 2018)........5.174 Novolesky v Comr (TC Memo 2020-68)........................................................................13.72 O Odell v Legal Bucks LLC 665 SE 2d 767 (NC Ct App, 2008).......................................2.18 Odyssey Wireless Inc v Samsung Electronics Co 2016 WL 7665898 (SD Cal, 2016)..5.162 Oil States Energy Services LLC v Greene’s Energy Group LLC 138 S Ct 1365 (2018)......................................................................................................................9.16 Oppenheimer Fund Inc v Sanders 437 US 340 (1978)...................................................5.153 Ortho Pharma Corpn v Genetics Inst Inc 52 F 3d 1026 (Fed Cir, 1995)........................9.12 Osprey Inc v Cabana Ltd P’ship 532 SE 2d 269 (SC 2000)...........................................2.16 P PNC Bank v Berg (No 94 C-09-208-WTQ) 1997 WL 527978 (Del Super Ct, 1997)....4.20 Pall Corpn v Hemasure Inc 181 F 3d 1305 (Fed Cir, 1999)...........................................9.3 Peters v Active Manufacturing Co 129 US 530 (1889)..................................................9.3 Pilgrim’s Pride Corpn v Comr 141 TC 533 (2013); vacated 779 F 3d 311 (5th Cir, 2015).............................................................................................. 13.112, 13.113, 13.114 Poe v Davis 29 Ala 676 (1857).......................................................................................2.15 Powers v Chicago Transit Authority 890 F 2d 1344 (7th Cir, 1989)..............................5.137 Primus, Re 436 US 412 (1978).......................................................................................2.16 Prospect Funding Holdings LLC v Saulter 102 NE 3d 741 (Ill App, 2018)...................4.11 Prospect Funding Partners LLC v Williams (Minn Dist, 2014)......................................4.11 R Rancman v Interim Settlement Funding Corpn 789 NE 2d 217 (Ohio, 2003)...............2.18 Record v Ins Co of N Am 438 SW 2d 743 (Tenn, 1969)................................................2.18 Rembrandt Techs LP v Harris Corpn 2009 WL 4002332 (Del Super Ct, 2009)............5.170 Reynolds v Beneficial National Bank 288 F 3d 277 (7th Cir, 2002)..............................5.174 Rice v Stone 83 Mass 566 (1861)...................................................................................2.7 Richardson v Comr 121 F 2d 1 (2f Cir); cert denied 314 US 684 (1941)......................13.106 Robertson v Town of Stonington 750 A 2d 460 (Conn, 2000).......................................2.18 Ronald J Palagi PC LLC v Prospect Funding Holdings (NY) LLC 302 Neb 769 (2019)......................................................................................................................4.17

xlix

Table of US cases S SAS v Iancu 138 S Ct 1348 (2018).................................................................................9.16 Saladini v Righellis 687 NE 2d 1224 (Mass, 1997)........................................................2.18 Son v Margolius, Mallios , Davis, Rider & Tomar 709 A 2d 112 (Md, 1998)...............2.18 Space Data Corpn v Google LLC 2018 WL 3054797 (ND Cal, 2018)..........................5.159 Spokeo Inc v Robins 136 S Ct 1540 (2016)...................................................................9.108 Sprint Commc’ns Co LP v APCC Servs Inc 554 US 269, 128 S Ct 2531, 171 L Ed 2d 424 (2008)...............................................................................................................2.14 T Toste Farm Corpn v Hadbury Inc 798 A 2d 901 (RI, 2002)...........................................4.11 U United Access Techs LLC v AT & T Corpn 2020 WL 3128269 (D Del, 2020).............5.158 United States v Adlman 134 F 3d 1194 (2d Cir, 1998)............................................5.145, 5.156 United States v Bergonozi 216 FRD 487 (ND Cal, 2003)..............................................5.141 United States v Davis 370 US 65 (1962)........................................................................13.108 United States v Deloitte LLP 610 F 3d 129 (DC Cir, 2010)...........................................5.147 United States v El Paso Co 682 F 2d 530 (5th Cir, 1982)..............................................5.145 United States v Homeward Residential Inc 2016 WL 1031154 (ED Tax, 2016)...........5.162 United States v International Broth of Teamsters, Chauffeurs, Warehousemen & Helpers of Am 119 F 3d 210 (2d Cir, 1997)...........................................................5.135 United States v Kovel 296 F 2d 918 (2d Cir, 1961).................................................5.138, 5.168 United States v Nixon 418 US 683 (1974).....................................................................5.168 United States v Ocwen Loan Servicing LLC 2016 WL 1031157 (ED Tax, 2016).........5.166 United States v Schwimmer 892 F 2d 237 (2d Cir, 1989)..............................................5.134 United States v United Shoe Mach Corpn 89 F Supp 357 (D Mass, 1950)....................5.137 United States v Univis Lens Co 316 US 241 (1942)......................................................9.2 Upjohn Co v United States 449 US 383 (1981).......................................................5.134, 5.146 V V5 Techs v Switch 2019 WL 7489108 (D Nev, 2019)...................................................5.158 VHT Inc v Zillow 2016 WL 7077235 (WD Wash, 2016)...............................................5.158 Valsartan N-Nitrosodimethylamine (NDMA) Contamination Production Liability Litigation, Re 405 F Supp 3d 612 (DNJ, 2019)...............................................5.158, 5.161 Vaupel Textilmaschinen KG v Mecanica Euro Italia SpA 944 F 2d 870 (Fed Cir, 1991).......................................................................................................................9.12 Viamedia Inc v Comcast Corpn 2017 WL 2834635 (ND Ill, 2017)...............................5.162 Virnetx Inc v Cisco Systems Inc 767 F 3d 1308 (Fed Cir, 2014)...................................9.21 W WAG Acquisition LLC v Multi Media LLC (DNJ Civil Action No 2-14-cv-02340).....9.13 WFIC LLC v LaBarre 148 A 3d 812 (Pa Super Ct, 2016).............................................10.22 Walker Digital LLC v Google Inc 2013 WL 9600775 (D Del, 2013)............................5.170 Wal-Mart Stores Inc v Duke 131 S Ct 2541 (2011)........................................................9.110 Welch v Comr 204 F 3d 1228 (9th Cir, 2000)................................................................13.72 Welch v Mandeville 1 Wheat 233 (1816).......................................................................2.14 Wright v Meek 3 Greene 472 (Iowa, 1852)....................................................................2.18 Y Yousefi v Delta Elec Motors Inc 2015 WL 11217257 (WD Wash, 2015)......................5.161

l

Table of other international cases

BERMUDA

P Phoenix Global Fund Ltd v Citigroup Fund Services (Bermuda) Ltd & The Bank of Bermuda Ltd [2007] Bda LR 61.............................................................................7.96

CANADA

B British Columbia (Minister of Forests) v Okanagan Indian Bank (2003) 114 CCR 2d 108..........................................................................................................................7.2 C Cash Converters International Ltd v Gray (2014) 223 FCR 139....................................9.131 D David v Loblaw (2018) ONSC 198................................................................................9.127 Dorajay Pty Ltd v Aristocrat Leisure Ltd (2005) 147 FCR 394.....................................9.128 Dugal v Manulife Financial Corpn (2011) ONSC 3147.................................................10.26 E Edwards v Law Society of Upper Canada (1994) 36 CPC (3d) 116..............................8.23 F Fresco v CIBC (2012) ONCA 444..................................................................................8.24 H Hollick v Toronto (City) 2001 SCC 68...........................................................................9.116 Houle v St Jude Medical Inc (2017) ONSC 5129...........................................................10.26 I IC Ltd v Fischer [2013] 3 SCR 949................................................................................9.116 M Multiplex Funds Management Ltd v P Dawson Nominees Pty Ltd (2007) 164 FCR 275...........................................................................................................9.128, 9.133 Murphy Operator v Gladstone Ports Corpn (No 4) [2019] QSC 228.............................3.119 P Pitney Bowes of Canada Ltd v The Queen (2003) 225 DLR (4th) 747..........................5.76 Q Quebec Inc v Callidus Capital Corpn 2020 SCC 10.......................................................9.117 S Schenk v Valeant Pharmaceuticals (2015) ONSC 3215.................................................10.28 Seed v Ontario (2012) ONSC 2681................................................................................8.23 Smith v Inco (2012) ONSC 5094....................................................................................8.23

li

Table of other international cases W Western Canadian Shopping Centres Inc v Dutton 2001 SCC 46, [2001] 2 SCR 534......9.116, 9.118, 9.121

IRELAND

F Fraser v Buckle [1996] 2 ILRM 34.................................................................................2.12 P Persona Digital Telphony Ltd v Minister for Public Enterprise [2017] IESC 27...........2.12 S SPV Osus Ltd v HSBC Institutional Trust Services (Ireland) Ltd [2018] IESC 44.......2.12

NEW ZEALAND

A Arklow Investments Ltd v MacLean (unreported, 19 May 2000)..................................7.58 C Carborundum Abrasives Ltd v Bank of New Zealand (No 2) [1992] 3 NZLR 757.......7.12 H Highfate on Broadway Ltd v Devine [2013] NZHC 2288, [2013] NZAR 1017............7.96 W Waterhouse v Contractors Bonding Ltd [2013] NZSC 89, [2014] 1 NZLR 91..............7.46

SINGAPORE

V Vanguard Energy, Re [2015] SGHC 156................................................................ 3.159; 10.36

INTERNATIONAL

A Adel A Hamadi Al Tamimi v Sultanate of Oman (ICSID Case No ARB/11/33)...........9.74 Aven (David) v Republic of Costa Rica (Case No UNCT/15/3)....................................9.81 B Burimi SRL & Eagle Games SHA v Republic of Albania (ICSID Case No ARB/11/18).............................................................................................................7.151 C Casado (Victor Pey), Fundación Presidente Allende v Republic of Chile (ICSID Case No ARB/98/12).....................................................................................7.140, 7.143, 7.151 Commerce Group Corpn & San Sebastian Gold Mines Inc v Republic of El Salvador (Decision 20 September 2012)................................................................................7.140 Commerce Group Corpn & San Sebastian Gold Mines Inc v Republic of El Salvador (ICSID Case No ARB/09/17)..................................................................................7.151 Crystallex v Venezuela....................................................................................................9.77 E EuroGas Inc & Belmont Resources Inc v Slovak Republic (ICSID Case No ARB/14/14)...........................................................................................5.187; 7.148, 7.162 G Gustav FW Hamester GmbH & Co KG v Ghana (ICSID Case No ARB/07/24)...........7.162 Grynberg v Grenada see RSM v Granada (ICSID Case No ARB/10/6)

lii

Table of other international cases H Hulley Enterprises Ltd (Cyprus) v The Russian Federation (18 July 2014)...................7.145 K Kardassopoulos & Fuchs v Republic of Georgia (ICSID Case Nos ARB/05/18 & ARB/07/15)..................................................................................................... 7.132, 7.162 L Libananco Holdings Co Ltd v Republic of Turkey (ICSID Case No ARB/06/8)....7.140, 7.143 M Maffezini (Emilio Agustin) v Kingdom of Spain (ICSID Case No ARB/97/7)..............7.140 Muhammet Cap & Sehil Insaat Endustri ve Ticaret Ltd Sti v Turkmenistan (ICSID Case No ARB/12/6)................................................................................................5.187 O Occidental Petroleum Corpn & Occidental Exploration & Production Co v Republic of Ecuador (ICSID Case No ARB/06/11)...............................................................7.151 Oxus Gold plc v Republic of Uzbekistan (UNICTRAL)................................................5.187 P Peterson v Argentine Republic (No 16-3303) (2d Cir, 2018).......................11.37, 11.72, 11.78 Philip Morris Brands Sarl, Philip Morris Products SA & Abal Hermanos SA v Oriental Republic of Uruguay (ICSID Case No ARB/10/7).................................................9.90 Phoenix Action Ltd v Czech Republic (ICSID Case No ARB/06/5)..............................7.151 Plama Consortium Ltd v Republic of Bulgaria (ICSID Case No ARB/03/24)...............7.151 R RSM v Grenada (ICSID Case No ARB/10/6)..........................................................7.151, 7.162 RSM v Saint Lucia (ICSID Case No ARB/12/10).......................................5.187; 7.138, 7.151, 7.152, 7.155, 7.161, 7.162 Rusoro Mining Ltd v Bolivarian Republic of Venezuela (ICSID Case No ARB(AF)/12/5)....11.35 S S & T Oil Equipment & Machinery Ltd v Romania (ICSID Case No ARB/07/13).......5.187 Saipem SpA v People’s Republic of Bangladesh (ICSID Case No ARB/05/7)..............7.151 South American Silver Ltd v Bolivia (PCA Case No 2013-15)......................................7.154 T Teinver SA Transportes de Cercanias SA & Autobuses Urbanos de Sur SA v Argentine Republic (ICSID Case No ARB/09/1)....................................................9.80; 11.72, 11.78 Tenaris SA & Talta (Trading e Marketing Sociedade Unepessoal Lda) v Bolivarian Republic of Venezuela (ICSID Case No ARB/11/26).............................................9.74 V Veolia Environnement & Vilnius Energija v Vilnius City Municpal Administration (SCC Case No 2016/183) ....................................................................................9.89, 9.92

liii

CHAPTER 1

Introduction Steven Friel Chief Executive Officer, Woodsford

Litigation finance, often known as litigation funding 1.2 Trans-Atlantic evolution 1.3 The law 1.8 Business 1.23 Multi-contributor 1.26

1.1 This book is unique. It is the first multi-contributor treatise on the law and business of litigation finance from an international, primarily trans-Atlantic, perspective.

LITIGATION FINANCE, OFTEN KNOWN AS LITIGATION FUNDING 1.2 Many readers of this book will be lawyers. We lawyers like to start with definitions. The Association of Litigation Funders of England and Wales (ALF)1 provides a useful starting point. Litigation funding is where a third party provides the financial resources to enable costly litigation or arbitration cases to proceed. The litigant obtains all or part of the financing to cover its legal costs from a private commercial litigation funder, who has no direct interest in the proceedings. In return, if the case is won, the funder receives an agreed share of the proceeds of the claim. If the case is unsuccessful, the funder loses its money and nothing is owed by the litigant. Because the litigation funder’s return is tied to the success of the case, funders look to fund cases with good prospects of success. The funders’ share of the proceeds of a successful case is negotiated with the litigant at the outset. This financial reward typically consists of either a percentage of the damages recovered, or a multiple of the amount advanced by the funder, or a combination of the two.

1

Discussed in more detail in chapter 3.

1

1.3  Introduction

This financing tool provides a valuable means of access to justice for claimants who may not have funds available, or may not wish to tie up funds, for costly yet meritorious claims… Some members of the Association of Litigation Funders also provide financing to law firms wishing to manage their exposure to conditional fee arrangements in litigation work, and can offer financing against other litigation-related risks, such as a portfolio of litigation claims.2

TRANS-ATLANTIC EVOLUTION 1.3 It is notable that ALF, the world’s first representative body for litigation finance companies was launched in London, charged by the UK’s Ministry of Justice, as far back as November 2011, with administering self-regulation of the industry. While the modern law and business of litigation finance have roots in a number of jurisdictions, particularly Australia,3 in the aftermath of the 2008 global financial crisis, London quickly became the centre of gravity for the practice. English legal concepts,4 English capital5 and English litigation finance businesses continue to have a dominant influence. 1.4 Some query why the United States, with its much bigger economy and more litigious society, does not dominate the world of litigation finance. The answer lies, first and foremost, in the long and successful history of contingent fee arrangements in the United States,6 a form of litigation funding extended by law firms to their clients. A second important factor is the fact that the United States, as a general rule, does not follow the ‘loser pays’ principle of litigation that is prevalent elsewhere in the English-speaking world.7 As a result, they have never had a vibrant market of after-the-event insurance,8 a close ally of litigation funding. Further, one of the key risks that causes economically weaker parties to shy away from litigation in England and other similar ‘loser pays’ jurisdictions unless they have litigation funding is not present in the United States. 1.5 Nonetheless, the United States has become an increasingly important place for litigation finance. One of the reasons for this is the volume of high value intellectual property litigation that takes place there.9 US law firms also handle a significant amount of international arbitration, including pursuant to investor–State disputes, another key area for litigation finance.10 Many of the bigger English litigation funders now have a presence in the United States, and 2 www.associationoflitigationfunders.com/litigation-finance/ 3 See chapter 9, Part D, for a discussion of the influence of Australia on the law and practice of class action litigation funding in particular. 4 See the discussion of champerty and maintenance in chapter 2. 5 See chapter 11 for a discussion of the different sources of capital tapped by litigation funders. 6 Chapter 8, Part D. 7 Chapter 7. 8 Chapter 7 and chapter 8, Part D. 9 Chapter 9, Part A. 10 Chapter 9, Part C.

2

The law 1.10

there are a number of wholly domestic US litigation funders, deploying hundreds of millions of dollars into the major US litigation markets, particularly New York, California and Texas. The centre of gravity of the litigation finance industry now hovers mid-Atlantic, making it all the more important for this book to explain the position on both sides of the pond. 1.6 As a reflection of this shift to the mid-Atlantic, a new globally constituted trade association was launched in September 2020. Seeking to use global advocacy and data-based information to guide the global industry, the International Legal Finance Association (ILFA) is made up largely of Londonheadquartered funders, but is itself incorporated in Washington, DC.11 1.7 It is interesting to note the evolution of the Anglo-centric definition of litigation funding set out above to the more trans-Atlantic definition advanced by the ILFA: Commercial legal finance helps those who are: unable to take the financial risk of seeking redress against more powerful opponents who have done them wrong, or unwilling to take the material financial risks inherent in obtaining such redress, or seeking rational capital solutions to their litigation issues. Imbalance in the litigation system has permitted well-financed repeat defendants to achieve an inappropriate advantage. Once possessed of such an advantage, holders have a strong desire to retain it. Commercial legal finance levels the playing field and threatens that advantage.12

THE LAW 1.8 This book aims to serve as an authoritative resource on the law of litigation finance. Many of the legal principles discussed in this book were covered in a June 2020 judgment of Mrs Justice Knowles in the English High court in the Akhmedova Divorce.13 It is useful to consider that judgment in some detail, as it forms something of a signpost for many of the legal, and access to justice, issues discussed in the book. 1.9 The case is about English divorce litigation between Farkhad Akhmedov (Husband), a Russian ally of President Putin, and his wife, Tatiana Akhmedova (Wife), in which their son Temur Akhmedova (Temur) became embroiled. 1.10 In December 2016 the Husband was ordered to pay the Wife £453,576,152. The Husband did not voluntarily pay anything, and enforcement prior to the date of the judgment realised only about £5 million.

11 Chapter 3, para 3.16. 12 www.ilfa.com 13 [2020] EWHC 1526 (Fam); www.bailii.org/ew/cases/EWHC/Fam/2020/1526.pdf

3

1.11  Introduction

1.11 The Husband’s main assets identified by the Wife’s legal team were: (i) a superyacht known as the M/Y Luna, (ii) modern art valued in January 2016 at US $145.2 million, and (iii) cash and securities worth around US $650 million which were previously held by Cotor at UBS. Collectively, these are the ‘Identified Assets’. 1.12 The Wife contended that Temur played a key role – essentially as his father’s lieutenant – in the Husband’s strategy of evasion. In his defence, Temur admitted that the English court had jurisdiction to determine the Wife’s claims and that he had received over US $106 million from the Husband (and his companies) in addition to (unparticularised) ‘generalised financial provision’. Although he did not admit the provenance of these funds, Temur contended that, in late 2013, the Husband told him that he would make funds available so that Temur could invest in the financial markets for his sole financial benefit. 1.13 The Wife invited the court to infer that at least one objective of gifting well over US $100 million to Temur was to put those assets beyond her reach. 1.14 The litigation by the Wife to enforce her financial remedies order was funded by a well-known third-party funder (the Funder), one of the founding members of the ALF. The Wife entered into a Deed of Assignment14 (otherwise known as the Security Assignment) with the Funder, pursuant to which the Wife retained sole control over the litigation unless and until she defaulted in paying the Funder. The Wife’s solicitor confirmed that the Wife rather than the Funder decided what steps to take and gave instructions to the lawyers acting for her. The Funder was consulted, but the Wife’s right to privilege15 was not waived, and the Funder did not control16 the proceedings. 1.15 Temur brought a counter-claim by which he sought an injunction restraining the Wife from instructing any solicitors to be paid by the Funder, and disclosure17 of the litigation funding agreement. He argued that the funding arrangements that the Wife had entered into were champertous.18 He also argued that third-party litigation funding should not be permitted in family proceedings.19 1.16 The Wife argued that Temur’s applications were nakedly tactical manoeuvres intended to gain an advantage over the Wife by discovering how much funding she had and the terms on which it was provided, and ultimately to leave her unable to pursue her claim against him and the Husband. 14 Chapter  6 examines the funding agreement and the ancillary contracts pursuant to which litigation funding is normally provided. 15 Confidentiality and privileged are discussed in chapter 5. 16 Control by the litigation funder is discussed in chapter  2 (paras 2.10 and 2.18), chapter  4 (para 4.46) and chapter 6 (paras 6.13 and 6.51). 17 Disclosure is dealt with in detail in chapter 5. 18 The historic principles of champerty and maintenance are discussed in chapter 2. 19 Most of this book is about high value, commercial disputes, and litigation finance of the type discussed in this book would not be suitable for most divorce cases. The Akhmedova Divorce case is exceptional for a number of reasons, including the huge sums of money involved.

4

The law 1.22

1.17 Mrs Justice Knowles was clearly sympathetic to the notion that the law of champerty should be curtailed rather than expanded by the courts in a context where access to justice is difficult to achieve for the great majority of citizens, given the ever-reducing availability of state funding for litigation (legal aid),20 and where legislative policy21 has shifted to permit a wider variety of more flexible funding arrangements. 1.18 She also cautioned against undesirable satellite litigation to investigate funding arrangements in circumstances where the claim is bona fide and the inquiry into funding arrangements would afford no defence to the claim22. The Judge echoed the words of Lord Justice Jackson that ‘in principle, third party litigation funding is beneficial and should be supported’ for a number of reasons, including that it promotes access to justice and, for some parties, may be the only means of funding litigation.23 Mrs Justice Knowles was of the view that the judicial attitude to litigation funding was summarised by the Court of Appeal at para  31 of its judgment in Excalibur Ventures LLC  v Texas Keystone Inc:24 ‘litigation funding is an accepted and judicially sanctioned activity perceived to be in the public interest’.25 1.19 The Judge also noted that no agreement with a professional litigation funder had been found by any English court to be contrary to public policy in the 15 years up to 2020. 1.20 In arguing that the Wife’s litigation funding arrangements were champertous, Temur relied on the ‘significant control’ ceded by the Wife to the Funder pursuant to the Deed of Assignment. However, Mrs Justice Knowles found that a litigation funder 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. She said that, even if the Wife was required to obtain the Funder’s consent before settling her enforcement action, that would appear to be a perfectly proper protection for the Funder and would not tend to corrupt justice. 1.21 In response to another argument from Temur, Mrs Justice Knowles said that it was obvious that the Funder will stand to profit from any settlement, but this does not render the agreement unlawfully champertous. 1.22 In England, conditional fee agreements26 between lawyers and their clients, which are lawful and common in commercial cases, are prohibited 20 Other methods of funding litigation, including state funding (legal aid) are discussed in chapter 8. 21 Legislation and regulation are discussed in chapter 3. 22 See Abraham v Thompson [1997] CLC 1370. 23 Chapter 11 of his Final Report from the Review of Civil Litigation Costs (2009). 24 [2016] EWCA Civ 1144. 25 The Excalibur case is discussed in detail in chapter 7, in the context of a litigation funder’s liability for costs. 26 Conditional and contingent fee agreements are discussed in chapter 8, Part D.

5

1.23  Introduction

in family proceedings. However, the Judge said that ‘clear concerns’ about a person’s lawyer having a financial interest in the outcome of proceedings which might improperly influence both the advice and the representation given do not arise in third-party funding arrangements where the lawyers conducting the proceedings have no financial interest in the outcome. In this context, she was also mindful of the inappropriateness of extending the prohibition on third-party litigation funding to family proceedings as if settlement were any more difficult/ desirable in those proceedings or because a portion of the monies at stake in the litigation were used to pay a funder. She said: Litigation funding practised by a funder adhering to the Code of Conduct27 has been endorsed by the senior courts in robust terms. Funding is being provided post-judgment to enable the Wife to secure the recovery of sums already awarded to her in the face of the Husband’s contumelious conduct (assisted by others) in evading and frustrating the enforcement of the judgment debt. Without such funding, the Wife would lose access to justice.

BUSINESS 1.23 This is not the first book on litigation finance.28 However, it is the first to take an in-depth look at the trans-Atlantic practice of the law and business of litigation finance. Litigation finance is as much about business and finance as it is about litigation, and is as much of interest to investors and the business world as it is to lawyers and litigants.29 This is also the first book to examine the tax implications of litigation finance.30 1.24 The modern business of litigation finance, certainly in the northern hemisphere, might be said to have started sometime between the 2005 English Court of Appeal decision in Arkin31 and the aftermath of the 2008 global financial crisis. In those early days, a small number of largely London-based litigation funders raised tens of millions of dollars from a select group of investors with an

27 The Code of Conduct of the Association of Litigation Funders is discussed in chapter 8, paras 3.8 to 3.54. 28 Other notable contributions to the study of litigation finance include: Pirozzolo, Rocco. Litigation Funding Handbook. London, 2014; Nicholas Rowles-Davies and Jeremy Cousins. Third Party Litigation Funding. Oxford, 2014; Lisa Bench Nieuwveld and Victoria Shannon Sahani. Third-party Funding in International Arbitration. Second ed. Alphen Aan Den Rijn, The Netherlands, 2017; Gian Marco Solas. Third Party Funding: Law, Economics and Policy. Cambridge, 2019; WH  Van Boom. Litigation, Costs, Funding and Behaviour: Implications for the Law. 2016. Web.; Jonas Von Goeler. Third-party Funding in International Arbitration and Its Impact on Procedure. Alphen Aan Den Rijn, The Netherlands, 2016; Steven Friel and Jonathan Barnes. Litigation Funding. Getting the Deal Through. UK, 2020. 29 Chapter 11. 30 Chapter 13. 31 Arkin v Borchard Lines (No  2) [2005] 1  WLR  3055. See chapter  7, in particular para  7.36 et seq.

6

Multi-contributor 1.26

appetite for high risks and potentially high returns.32 Very few litigation lawyers knew anything about litigation finance; even fewer had availed themselves of it. 1.25 Fast forward to 2020, and much has changed. Billions of dollars now flow through litigation finance, enabling access to justice for thousands, while generating large financial returns for litigants, law firms, litigation funders and their investors. Almost all sophisticated litigation lawyers now know about litigation finance; indeed in some jurisdictions lawyers arguably have an obligation to advise clients on litigation finance options,33 and most of the world’s top 250 litigation law firms avail themselves of it. The early investors, niche investment businesses, have been joined by more traditional investment businesses, including pension funds, university endowments funds and sovereign wealth funds in enjoying the high returns that successful litigation funding businesses offer. Indeed, with a number of litigation finance business listed on the London Stock Exchange,34 the Australian Stock Exchange,35 and otherwise accessing the public markets, even ‘mom and pop’ have now become invested in litigation finance.

MULTI-CONTRIBUTOR 1.26 Finally, a few words about the contributors to this book. Each of them is a recognised leader in their field. Drawn from academia, legal practice, the investment world and litigation funding, they bring a blend of experiences to the book. And they straddle the Atlantic, providing a comparative English and American context to most of the issues discussed in the book. I am grateful to all of them.

32 Chapter 12. 33 Chapter 4 para 4.24. 34 LON: BUR; LON: LIT; LON: MANO. 35 ASX: OBL.

7

CHAPTER 2

A brief history of third-party litigation funding in the UK, US and elsewhere in the common law David Capper Queen’s University Belfast

Anthony Sebok Cardozo School of Law, Yeshiva University, New York

Introduction 2.1 TPLF and assignment 2.3 The modern history of TPLF in the UK and Ireland 2.8 The modern history of TPLF in the United States 2.13 Conclusion 2.20

INTRODUCTION 2.1 This chapter provides a brief overview of the history of third-party litigation funding (TPLF), with a particular emphasis on case law.1 A number of important concepts are packed into this phrase, which we shall unpack presently, since, while it is important not to be imprisoned by terminology, there are some terms that are a useful shorthand which we want to define and use. There are three terms whose definition we shall stipulate. (1) ‘Litigation’, by which we mean any form of dispute resolution through law. Thus, we include dispute resolution not before a tribunal, such as arbitration, but exclude legal representation unconnected to dispute resolution, such as a transaction. (2) ‘Funding’, by which we mean traditional financial support (also called ‘litigation finance’) as well as non-monetary support such as in-kind resources, legal advice, and information relevant to the adverse proceeding. Mere moral support or encouragement is excluded. 1

Regulation and legislation are dealt with in chapter 3.

9

2.2  A brief history of third-party litigation funding in the UK, US and elsewhere in the common law

(3) ‘Third party’, by which we mean any private entity other than the partyin-interest. This would include an entity with a prior beneficial interest or a contractual obligation to support the party-in-interest (such as a liability insurer2), although, as will be seen below, the third parties most often associated with TPLF are often complete strangers to the party-in-interest until after they make the decision to support litigation. 2.2 The history of TPLF in the common law that we want to tell is defined mostly by legal developments, although a parallel history could be told of informal political and economic trends and forces. In brief, the history of TPLF in the common law is a story of liberalisation of certain legal doctrines, and we are not in a position to say whether, in the main, the tendency towards liberalisation was the product of external social forces or the product of the law ‘working itself pure’ through doctrinal refinement and legislative reflection. As will be seen by the end of this chapter, the charge may still be made that the current state of the law throughout the common law is still not logical, consistent, or clear – and therefore reflects the mixed feelings of the societies in which TPLF has been allowed to develop.

TPLF AND ASSIGNMENT 2.3 From an analytical perspective, TPLF can be distinguished from assignment, even though historically the two have often been treated under the same broad brush.3 The former assumes that the party who has standing before the court remains the same, while the latter assumes that the party who has standing changes as a result of a private, voluntary transaction.4 As the latter is sometimes used for access to justice purposes akin to TPLF it is included in this chapter for the sake of completeness. 2.4 The early history of the English common law reflected earlier prejudices against strangers intermeddling in legal disputes that ebbed and flowed as legal systems in Europe evolved from ancient Greece, to the Romans, to Medieval and early Modern Europe, until Blackstone’s time.5 In ancient Greece, clubs were formed to provide mutual aid in support of a fellow club member’s litigation, but outside of this structure, more active intermeddling by sykophantes (paid strangers) was illegal.6 Roman law developed more formal protections against strangers intermeddling in another’s legal concerns. In addition to prohibiting

2 See chapter 8, Part C. 3 See Anthony Sebok (2011) The Inauthentic Claim 64 Vand. L. Rev. 61, 72. 4 See Edmond H  Bodkin (1935) The Law of Maintenance and Champerty 6–7 (‘Inseparably bound up with the historical development of the law of maintenance, although totally distinct from that law in origin, is the doctrine of the non-assignability of choses in action.’) 5 See, eg, Walter Wheeler Cook (1916) The Alienability of Choses in Action 29 Harv. L. Rev. 816 and Max Radin (1936) Maintenance by Champerty 24 Cal. L. Rev. 48, and for a modern account, Gian Marco Solas Third Party Funding (2019) 17–30. 6 See George Miller Calhoun (1913) Athenian Clubs In Politics And Litigation.

10

TPLF and assignment 2.7

a figure similar to the sykophantes (the calumniator), Roman law dealt with the rise of wealthy citizens buying claims from poorer citizens by prohibiting such transfers to a stranger of higher rank.7 2.5 Finally, in medieval England, the rejection of intermeddling by a stranger in legal disputes reached its fullest development. The common law distinguished between three separate offences: barratry, maintenance, and champerty. All of these are forms of what today might be called TPLF: barratry was a stranger stirring up litigation; maintenance was a stranger supporting litigation; and champerty was a stranger taking a share of litigation’s proceeds.8 Scholars attributed these prohibitions to the weakness of the State; as Holdsworth said, ‘[i]n England in the Middle Ages the disorderly state of the country … and the ease with which jurors, sheriffs, and other ministers of justice could be corrupted or intimidated, made maintenance and kindred offences so crying an evil that it was necessary to prohibit sternly … ’9 This reasoning was seamlessly extended to the prohibition of the assignment of choses in action, for fear that ‘rich and powerful barons, unless restrained, would buy up claims, and … would overawe the courts, and thus secure unjust and unmerited judgments, and oppressing those against whom their anger was directed.’10 This view was summarised in 1612 in Lampet’s Case, which held that ‘no possibility, right, title, nor thing in action, shall be granted or assigned to strangers.’11 2.6 To modern ears, the medieval assumptions that led to sweeping prohibitions on both TPLF and assignment are quaint, and can be questioned. Certainly, they were already being debated by the eighteenth century. While Blackstone could famously say in 1769 that strangers intermeddling in litigation were ‘pests of civil society, [who] are perpetually endeavoring to disturb the repose of their neighbors, and officiously interfering in other men’s quarrels,’ Bentham could respond that it was ‘absurd’ for the courts to ‘beckon’ litigants to the court ‘with one hand’ while ‘pushing them away’ from being able to sue with the other, just because of the groundless fear that ‘a man would buy a weak claim, in hopes that power might convert it into a strong one.’12 2.7 The hostility to strangers intermeddling in litigation followed two distinct paths as the common law entered the modern era. On the one hand, the prohibition on assignment began a steady retreat, to the point where a court could say with confidence in 2001 that ‘the law now generally favors the assignability

7

See Michael Velchik and Jeffery Zhang (2019) Islands of Litigation Finance 24 Stan. J.L. Bus. & Fin. 11. 8 Ibid at 11–13 (citing Blackstone and Williston). 9 WS Holdsworth (1920) The History of the Treatment of Choses in Action by the Common Law 33 Harv. L. Rev. 997, 1007). 10 WW Thornton (1884) Champertous Agreements, 19 Cent. L.J. 402, 402. 11 10 Co. Rep. 46b, 48a, 77 Eng. Rep. 994, 997 (K.B.1612). 12 3 William Blackstone, Commentaries *133 and Jeremy Bentham (1787) Maintenance And Champerty, reprinted in 3 The Works of Jeremy Bentham (John Bowring ed., Edinburgh, William Tait 1843).

11

2.8  A brief history of third-party litigation funding in the UK, US and elsewhere in the common law

of choses in action.’13 Holdsworth and others have documented how, starting in the eighteenth century, the prohibition was abandoned.14 The pressures of commerce, plus the sheer illogic of the doctrine, has led it to be narrowed to the point where very few lawsuits cannot be assigned in their entirety to strangers. But the same cannot be said for TPLF. Despite the common historical ground for the prohibition on champerty and maintenance, the prohibition on TPLF was not abandoned until much later than the prohibition on assignment, and it still resists reform in many common law jurisdictions.15

THE MODERN HISTORY OF TPLF IN THE UK AND IRELAND 2.8 In the common law jurisdictions of the UK (England & Wales and Northern Ireland) choses in action are generally assignable. But this has never applied to the assignment of a bare right to litigate unconnected to the enforcement of a property right. Debts are treated as property rights and presumptively assignable but claims in contract and tort are not.16 To make such an assignment valid the assignee must have a legitimate interest in the claim. In Trendtex Trading Corporation v Credit Suisse17 a lending bank was presumptively permitted to take an assignment from its borrower of the latter’s claim for payment under a letter of credit because if the borrower did not obtain payment for the goods sold it would probably be unable to repay the lending bank. The assignment was ultimately invalidated because it allowed for further onward assignment to parties with no interest in the underlying obligation. Historically, the legitimate interest had to pre-exist the assignment although more recent pronouncements from English and Australian courts have exhibited acceptance of assignments in favour of class action litigation managers to pay their remuneration for managing claims.18 Distinguishing between debts and claims in contract and tort has not always been crystal clear,19 but the continuing prevalence of the rule against assigning bare rights to litigate was clearly revealed by the decision of the Court 13 Conrad Bros. v John Deere Ins. Co., 640 N.W.2d 231, 236 (Iowa 2001). 14 See Holdsworth (1920) The History of the Treatment of Choses in Action 33 Harv. L. Rev at 1021, and see Rice v Stone, 83 Mass. 566, 568 (1861) (‘[a] thing in action, cause of suit or title for condition broken, could not be granted or assigned over at common law … But this ancient doctrine has been greatly relaxed.’). 15 The ancients were not illogical in their approach, even if to the modern eye the premises for their concerns were specious. The motivation behind assignment and TPLF is more or less identical. The motivation in both is the interest of the buyer to promote a legal claim against the defendant in order to bring about a result – a judicial finding of liability against the defendant – who is a stranger to the buyer. Modern courts have not failed to notice this. See, eg, Brownton Ltd v Edward Moore Inbucom Ltd [1985] 3 All ER 499 (CA) (‘There is no difference between the interest required to justify maintenance of an action, and the interest required to justify the taking of a share in the proceeds, or the interest required to support an out and out assignment.). 16 Trendtex Trading Corporation v Credit Suisse [1982] AC 679 (HL). 17 [1982] AC 679 (HL). 18 Casehub Ltd v Wolf Cola Ltd [2017] 5 Costs LR 835 (Stuart Isaacs QC, sitting as a deputy High Court judge); Equuscorp Pty Ltd v Haxton [2012] HCA 7. 19 Laurent v Sale [1963] 1 WLR 829 (QBD); In re Trepca Mines Ltd (No 2) [1963] Ch 199 (CA); Camdex International Ltd v Bank of Zambia [1998] QB 22 (CA).

12

The modern history of TPLF in the UK and Ireland 2.10

of Appeal in Simpson v Norfolk and Norwich University Hospital NHS Trust.20 Mrs Simpson took an assignment of a medical negligence claim from a patient who had been treated in the same hospital as her late husband. She had settled a medical negligence claim she brought for the benefit of his estate and wanted another chance to expose deficiencies in patient care at the hospital. It was held that she did not have a legitimate interest in taking the assignment. 2.9 Returning to the historical account, the first major inroad into the obstacles presented by maintenance and champerty to all kinds of TPLF occurred in the late nineteenth century when English courts recognised the right of bankruptcy trustees to assign litigation claims belonging to bankrupts in order to raise money to pay creditors.21 In the twentieth century, particularly before the advent of legal aid now much diminished in any event, the vast majority of workplace accident claims were brought with the assistance of trade union funding, and the vast majority of road traffic accident claims were funded by insurers.22 As this funding was not for profit it did not engage the prohibition against champerty, litigation support for a share of the spoils of victory, and consequently was treated as an unobjectionable provision of access to justice. 2.10 Acceptance of litigation funding for profit came with a series of decisions by the superior courts in England in the late twentieth and early twenty-first centuries: Giles v Thompson,23 R (on the application of Factortame Ltd) v Secretary of State for Transport, Local Government and the Regions (No 8),24 Hamilton v Al Fayed (No 2),25 and Arkin v Borchard Lines Ltd.26 These decisions make it possible to state the following propositions. First, so long as the funder does not in effect take over the litigation, there is no objection to providing financial and litigation management support in return for a share in any damages recovered. Indeed, recent case law suggests that the funder can contract for a degree of control as long as that control does not ‘undermine or corrupt the process of justice’.27 For the judge in Akhmedova, ‘even if the [claimant] was required to obtain [the funder]’s consent before settling her enforcement action, that would appear to be a perfectly proper protection for [the] funder and would not tend to corrupt justice.’28 The cost of modern litigation and the risks posed by the ‘loser pays costs’ rule mean that only the very wealthiest can contemplate litigation without significant financial support. Conditional fee agreements, a variant of the American contingency fee, provide a measure of access to justice for personal injury claims but these funding arrangements have 20 [2011]  EWCA  Civ 1149, [2012]  QB  640; A  Tettenborn (2012) Personal Injury Claims and Assignment: Interesting Times? P.N. 61. 21 Seear v Lawson (1880) 15 Ch D 426 (CA); Guy v Churchill (1888) 40 Ch D 481 (Chitty J). 22 Acknowledged by Lady Hale in Massai Aviation Services v Attorney General [2007] UKPC 12 at [14]. 23 [1994] 1 AC 142 (HL). 24 [2002] EWCA Civ 932, [2003] QB 381 (CA). 25 [2002] EWCA Civ 665, [2003] QB 1175 (CA). 26 [2005] EWCA Civ 655, [2005] 2 Lloyd’s Rep 187 (CA). 27 Akhmedova v Akhmedov [2020] EWHC 1526 (Fam), dated 12 June 2020 at [60]. 28  Ibid.

13

2.11  A brief history of third-party litigation funding in the UK, US and elsewhere in the common law

no meaningful presence in commercial litigation. Secondly, if the litigation fails, the funder is likely to have a third-party costs order made against it under section 51 of the Senior Courts Act 1981. To date, this liability is limited to the extent of the funder’s contribution to the plaintiff’s litigation support (the Arkin cap) but there has been considerable clamour for the funder’s liability to be extended to all of the successful defendant’s reasonable costs.29 2.11 It is suggested that future developments in relation to the assignment of rights to litigate should align with developments relating to TPLF. The assignment of a claim is a perfectly legitimate access to justice tool. Why should a litigant not be allowed to choose the bird in the hand guaranteed recovery obtained by selling their claim for a portion of its potential value instead of sharing the proceeds of a victory that may not be achieved? If the assignment is a genuine endeavour to obtain a legal remedy for the invasion of a litigant’s legal rights, as opposed to something like Mrs Simpson’s public crusade against deficient health care, it should be allowed to proceed.30 2.12 If maintenance and champerty are much on the wane in the common law jurisdictions of the UK, the same cannot be said for Ireland. At the same time as England was liberalising its TPLF regime as described above, the Irish Supreme Court handed down its decision in Fraser v Buckle.31 An agreement between an heir hunter and the beneficiaries of an intestate estate under which the heir hunter would use his best endeavours to place the beneficiaries in possession of their inheritance, in return for a 40 per cent share of anything recovered and nothing if his efforts proved fruitless, was struck down as savouring of maintenance and champerty. This was despite the absence of any meaningful litigation that would have to be undertaken to prove the beneficiaries’ entitlement in New Jersey where the beneficiaries’ relative had died. It was also despite the potential availability of other legal tools, such as misrepresentation and unconscionability, on which these agreements can be challenged. In the context of TPLF and the assignment of rights to litigate, this decision has had an almost terminal effect. In Persona Digital Telephony Ltd v Minister for Public Enterprise32 the Supreme Court said a very firm ‘no’ to TPLF although it did recognise the access to justice implications that this position presented.33 Following on from this decision, there was the unsurprising rejection of assigning litigation rights for monetary consideration in SPV Osus Ltd v HSBC Institutional Trust Services (Ireland) Ltd.34 The reason for the stark difference between the approach of the courts in Ireland as compared 29 Jackson (2010) Review of Civil Litigation Costs: Final Report, Ch. 11, paras 4.3–4.7; R Mulheron (2014) England’s Unique Approach to the Self-Regulation of Third Party Funding: A Critical Analysis of Recent Developments, 73 Cambridge Law Journal 570, 587–588. 30 D Capper (2019) Three Aspects of Litigation Funding 70 Northern Ireland Legal Quarterly 357. 31 [1996] 2  ILRM  34. D  Capper (1997) The Heir-Locator’s Lost Inheritance 60 Modern Law Review 286. 32 [2017] IESC 27. D Capper (2018) Third Party Litigation Funding in Ireland: Time for Change? 37 Civil Justice Quarterly 193. 33 D  Capper (2018) Supreme Court Rejects Litigation Funding 41 Dublin University Law Journal 197. 34 [2018] IESC 44.

14

The modern history of TPLF in the United States 2.15

to those in the UK is mainly a question of who should bear the responsibility of reforming the law so as to address the openly acknowledged access to justice problem. Irish courts are hesitant to assume responsibility for introducing reform because of the perceived need for regulation of the litigation funding industry, a task the courts believe requires legislation. English courts have embraced change but have had to place much faith in voluntary self-regulation of the litigation funding profession, not yet a universal phenomenon. The Irish Supreme Court served notice in the two major decisions above that if the legislature failed to introduce a scheme the courts might be forced to take the matter forward.

THE MODERN HISTORY OF TPLF IN THE UNITED STATES 2.13 After the declaration of independence from Great Britain, state law in the United States followed two tracks: (1) a rapid acceptance to assignment of choses of action universally across all the states, and (2) a much more halting acceptance of TPLF across most, but not all, of the states. We will deal with each track separately, with emphasis on the second. 2.14 (1) As the United States Supreme Court noted, American ‘courts have long found ways to allow assignees to bring suit; that where assignment is at issue, courts—both before and after the founding—have always permitted the party with legal title alone to bring suit.’35 The Court in Sprint Commc’ns Co. reviewed the history of assignment in connection with debt collection.36 The Court noted that the blanket prohibition on the assignment of choses of action, which may have purportedly been the common law in 1776, was never received in the United States.37 2.15 However, the acceptance of assignment to strangers in the United States was never total. Where the same policy concerns that motivated the early common law’s rejection of champerty could be found in a modern case of the assignment of a chose in action, limitations were preserved.38 Two nineteenth century cases illustrate this point: Poe v Davis (1857)39 and Metropolitan Life Insurance Co. v Fuller (1891).40 Both involved the assignment of a ‘mere’ or ‘naked’ right to litigate unconnected to property or debt transferred to the assignee. In Poe the 35 Sprint Commc’ns Co., LP  v APCC  Servs., Inc., 554  U.S. 269, 285, 128  S. Ct. 2531, 2541, 171 L. Ed. 2d 424 (2008). 36 The assignee was a company that was assigned small claims against national telephone companies from payphone operators for no consideration in exchange for the promise to return a portion of the proceeds resulting from the claims, which it would aggregate and pursue. 37 ‘Justice Story, writing for a unanimous Court, summarized the practice in American courts as follows: “Courts of law … now take notice of assignments of choses in action, and exert themselves to afford them every support and protection … [and] now consider an assignment of a chose in action as substantially valid.”’ Ibid. at 2538, quoting Welch v Mandeville 1 Wheat. 233, 236–37 (1816). 38 Bodkin (1935) The Law of Maintenance and Champerty at 6–7. 39 29 Ala. 676 (1857). 40 61 Conn. 252 (1891).

15

2.16  A brief history of third-party litigation funding in the UK, US and elsewhere in the common law

assignee agreed to prosecute a disputed inheritance right and to return most of the proceeds to the assignor, while in Metropolitan Life the assignee agreed to prosecute a fraud claim and return most of the proceeds to the assignor. Despite the former being by far the more ‘property-like’ interest, the Alabama Supreme Court held the assignment void, while the Connecticut Supreme Court upheld the assignment. The difference between the courts’ reasoning in these cases was the degree to which they thought that the concerns of champerty should limit the law on assignment: the former thought the evil of strangers speculating on litigation so great as to trump the claimholder’s freedom to assign a chose of action, while the latter could not see how the assignee’s speculative motive diminished the likelihood that the assignment would ‘generally promote justice.’41 The hostility to the assignment of ‘bare’ rights of action remains, to various degrees, in various American states, always justified at some level with a concern for champerty, or, to put it more simply, an anxiety over strangers speculating on litigation.42 2.16 (2) Modern US TPLF breaks down into two categories: maintenance and champerty. The chief difference between them is that the maintainer is not rewarded for his or her support of the litigant.43 One of us has argued that the American law of maintenance and champerty can be mapped onto a spectrum.44 One end of the spectrum represents maintenance arising from motives that arguably enjoy universal approval (for example, support of a stranger’s lawsuit based on purely charitable motives), while on the other end of the spectrum are acts of maintenance that often receive universal condemnation (for example, support of a stranger’s lawsuit motivated by pure spite towards the stranger’s opponent). In the middle is champerty – support of a stranger’s lawsuit for profitseeking motives. In the patchwork of federal and state law that controls this field, the only generalisation that can safely be made is that the degree of freedom by a stranger to support litigation decreases as one moves across the spectrum from selfless motives to malicious ones. 2.17 Selfless maintenance – support given to family members and friends, or to members of one’s church or school, without any quid pro quo expected nor any independent gain by the maintainer – can be prohibited by the state, in theory, but there is little evidence that it has been in modern times. The one state that comes 41 Metro. Life Ins. Co., 61 Conn. at 260. 42 See Accrued Fin. Servs. v Prime Retail, Inc. 298 F.3d 291 (4th Cir. 2002) (applying Maryland common law) and BSC Associates v Leidos, Inc., 91 F. Supp. 3d 319 (N.D.N.Y. Feb. 17, 2015) (applying New York statutory law (N.Y. Jud. Law § 489)). Obviously, the most significant example of strangers ‘speculating’ on litigation is the contingent fee charged by an attorney. See Radin (1936) Maintenance by Champerty 24 Cal. L. Rev. at 73 (‘Contingent fees of lawyers, supported by a lien on the proceeds of a suit, can scarcely be differentiated from the assignment of a cause of action, or rather part of one.’). The history of the rapid approval of the contingent fee through the courts in the early twentieth century in the United States involved, among other things, distinguishing it from champerty by laypersons, and is not, therefore, relevant to this chapter. See Charles W Wolfram (1986) Modern Legal Ethics § 8.13, at 489–90. 43 ‘[P]ut simply, maintenance is helping another prosecute a suit; champerty is maintaining a suit in return for a financial interest in the outcome.’ Osprey, Inc. v Cabana Ltd. P’ship 532 S.E.2d 269, 273 (S.C. 2000) (quoting In re Primus, 436 U.S. 412, 424 n.15 (1978)). 44 See Sebok (2011) The Inauthentic Claim 64 Vand. L. Rev. at 100.

16

The modern history of TPLF in the United States 2.18

closest to asserting the power to prohibit selfless maintenance is Mississippi.45 Interestingly, the only time states have tried to prohibit selfless maintenance in any coordinated fashion was during the Civil Rights era, when various states attempted to criminalise gratuitous support for civil rights litigation.46 In NAACP v Button the Supreme Court held that Virginia could not restrict lawyers or non-lawyers from providing support (such as legal advice, non-legal advice and encouragement) by invoking the state’s power to exercise its police powers to limit maintenance and champerty.47 It can be taken as a given that, whatever a state might want to do with its maintenance law, it cannot, under the First Amendment, limit the power of laypersons to engage in selfless maintenance designed to protect constitutionally protected rights through litigation. 2.18 While it is difficult to estimate the number of states that currently allow maintenance in some form, 16 explicitly permit champerty.48 Many of the remaining states probably permit champerty – it is just that they do not explicitly cite the investment by contract into a stranger’s suit as a permissible form of maintenance. Champerty law may be mapped along multiple dimensions. For example, a state might restrict what may be supported by a stranger interested in maintaining for profit. Tennessee, for instance, permits champerty in anything but 45 It shall be unlawful for any person … either before or after proceedings commenced: (a) to promise, give, or offer, or to conspire or agree to promise, give, or offer, (b) to receive or accept, or to agree or conspire to receive or accept, (c) to solicit, request, or donate, any money … or any other thing of value, or any other assistance as an inducement to any person to commence or to prosecute further, or for the purpose of assisting such person to commence or prosecute further, any proceeding in any court or before any administrative board or other agency. Miss. Code Ann. § 97–9–11 (2009). Illinois’ law sweeps slightly less broadly: If a person officiously intermeddles in an action that in no way belongs to or concerns that person, by maintaining or assisting either party, with money or otherwise, to prosecute or defend the action, with a view to promote litigation, he or she is guilty of maintenance and upon conviction shall be fined and punished as in cases of common barratry. It is not maintenance for a person to maintain the action of his or her relative or servant, or a poor person out of charity. 720 Ill. Comp. Stat 5/32–12 (2009). Illinois allows selfless maintenance when the recipient of the support is either one’s family or a person who is poor. It has also been interpreted narrowly by the courts. See Miller UK Ltd. v Caterpillar, Inc., 17 F. Supp. 3d 711 (N.D. Ill. 2014). 46 See Note, The South’s Amended Barratry Laws: An Attempt to End Group Pressure through the Courts (1963) 72 Yale L.J. 1613. 47 NAACP  v Button 371  U.S. 415, 439 (1963) (‘However valid may be Virginia’s interest in regulating the traditionally illegal practices of barratry, maintenance and champerty, that interest does not justify the prohibition of the NAACP activities disclosed by this record.’) 48 See Fastenau v Engel, 240 P.2d 1173 (Colo. 1952); Robertson v Town of Stonington 750 A.2d 460 (Conn. 2000); Kraft v Mason 668 So. 2d 679 (Fla. 1996); Wright v Meek 3 Greene 472 (Iowa 1852); Boettcher v Criscione 299 P.2d 806 (Kan. 1956); Me. Rev. Stat. Ann. tit. 9A, §§ 12–101 to –107 (2009) (partially amending Me. Rev. Stat. Ann. tit. 17A, § 516(1) (2009)), Son v Margolius, Mallios, Davis, Rider & Tomar 709 A.2d 112 (Md. 1998); Saladini v Righellis 687  N.E.2d 1224 (Mass. 1997); Maslowski v Prospect Funding Partners LLC  2020 Minn. LEXIS  322; Adkin Plumbing & Heating Supply Co. v Harwell 606  A.2d 802 (N.H. 1992); Odell v Legal Bucks, LLC  665  S.E.2d 767 (N.C. Ct. App. 2008); Ohio Rev. Code Ann. § 1349.55 (West 2009) (superseding Rancman v Interim Settlement Funding Corp. 789 N.E.2d 217 (Ohio 2003)); Mitchell v Amerada Hess Corp. 638 P.2d 441 (Okla. 1981); Brown v Bigne 28 P. 11 (Or. 1891); Giambattista v Nat’l Bank of Commerce of Seattle 586 P.2d 1180 (Wash. Ct. App. 1978); and Currence v Ralphsnyder 151 S.E. 700 (W. Va. 1929).

17

2.19  A brief history of third-party litigation funding in the UK, US and elsewhere in the common law

transactions concerning land.49 Texas, which has one of the most liberal bodies of law concerning both assignment and maintenance, does not permit champerty in certain areas of litigation, such as legal malpractice.50 Limiting champerty on the basis of what kind of suit is supported would seem to be an obvious means of regulation for a state that wanted to support champerty as a matter of general principle while recognising that, as a matter of public policy, there might be some types of litigation which are ill-suited to third-party investment. It is odd, therefore, that states rarely limit champerty on this basis. More common are limitations based on how the support is offered. The most common way states control the how question in champerty is by limiting how much control the investor has over the conduct of the litigation into which they have put their money. We can say, therefore, that states sometimes limit intermeddling champerty: where a contract allows the third party to take too much control over the conduct of what otherwise would be a meritorious suit by another, the maintenance will be prohibited. In Florida, for example, intermeddling means ‘offering unnecessary and unwanted advice or services; meddlesome, esp[ecially] in a highhanded or overbearing way.’51 Other states have held that a champerty contract which gives the power to settle to the funder crosses the line into intermeddling. The Minnesota Supreme Court voided a maintenance contract in part because it required the plaintiff to pay the funder a set amount if the plaintiff settled the case without the funder’s permission.52 Some states have pointed to the absence of control over settlement as prima facie evidence that a champerty contract did not permit the funder to intermeddle.53 2.19 Finally, it may be difficult sometimes to distinguish between selfless maintenance and malicious maintenance when the maintainer is motivated by political or social antipathy towards the defendant whose suit is supported. For example, in recent years there have been a variety of non-economically motivated campaigns by third-party funders to burden or bankrupt media defendants who have offended wealthy political actors.54 As one recent commentator has noted, ‘not-for-profit funders, may be concerned with (their version of) the public 49 Record v Ins. Co. of N. Am., 438 S.W.2d 743, 747 (Tenn. 1969). 50 See Christy B Bushnell (2007) Note, Champerty Is Still No Excuse in Texas: Why Texas Courts (And the Legislature) Should Uphold Litigation Funding Agreements 7 Hous. Bus. & Tax L.J. 358, 376–77. 51 Kraft v Mason 668 So. 2d 679, 682 (Fla. Dist. Ct. App. 1996) (citation omitted). 52 ‘But there is a still more objectionable provision in this contract, one upon which we mainly rest our decision. It is the one which binds the defendant not to settle the claim without the written consent of the plaintiff, and provides that, if he does settle without plaintiff’s consent, he shall pay the plaintiff a fixed and arbitrary sum, without any regard to the amount or value of the services which the latter may have performed.’ Huber v Johnson 70 N.W. 806, 808 (Minn. 1897); see also Brown v Dyrnes 109 So. 2d 788, 789 (Fla. Dist. Ct. App. 1959) (noting that the funder had demanded a fixed sum if the litigant settled without his consent). 53 See Kraft v Mason 668 So. 2d 679, 683 (Fla. Dist. Ct. App. 1996) (‘[The funder did not] concern herself with the antitrust litigation or impose her views upon the attorneys or the litigants once she provided the loan.’); Clifford v Wilcox 27 P.2d 722, 725 (Wash. 1933) (noting that the funder did not control settlement). 54 See Lili Levi (2017) The Weaponized Lawsuit Against the Media: Litigation Funding as a New Threat to Journalism 66 Am. U. L. Rev. 761.

18

Conclusion 2.20

interest but, of course, what constitutes and furthers the “public’s interest” is often a contested matter.’55

CONCLUSION 2.20 As other chapters in this volume demonstrate, TPLF is an accepted part of modern commercial and financial life on both sides of the Atlantic. However, this chapter serves as warning against a number of assumptions. First, and most obviously, it reminds the modern lawyer that attitudes towards some of the most basic features of the law were very different even when the common law contained all the familiar private law categories that we still use today. Second, and perhaps less obvious, the path of change in the law is hard to predict, and, as the Legal Realists insisted, as much in response to perceived social (or economic) necessity as the operation of logic. Even today, despite the appearance of a liberal and frictionless market in connection to litigation, different common law systems limit or permit TPLF to varying degrees. In the UK, assignments of choses in furtherance of an assignee’s pre-existing commercial interest are accepted. Assignments for pure profit where this provides access to justice benefits show signs of gaining acceptance, although it is difficult to explain, as a matter of doctrine or logic, the reason for historic judicial hesitancy. But, in England, it may be that the leading edge of change is TPLF, which has gained widespread acceptance so long as successful defendants are protected against costs. Perhaps English courts, once they grow comfortable with TPLF, and especially if there is a successful period of regulation, will treat assignment with the same liberal spirit. Ireland is a different story – there the reluctance of courts to take on the regulatory role has held back both TPLF and assignment. In the United States, as in England, the common law courts (in tandem, on occasion, with the legislature) have allowed strangers to trade in choses of action within limits that are neither logical nor especially responsive to social necessity. The same can be said for TPLF as well in the United States, although in this latter case, where there have been islands of resistance, they are falling rapidly, as the startling and sudden reversal in favour of a liberal champerty regime by the Minnesota Supreme Court in 2020 illustrates.

55 Maya Steinitz (2019) Follow the Money? A Proposed Approach for Disclosure of Litigation Finance Agreements, 53 U.C. Davis L. Rev. 1073, 1085.

19

CHAPTER 3

Regulation and legislation A England B The United States C Australia, Hong Kong, Singapore and global

21

PART A

England Jonathan Barnes Chief Operating Officer and General Counsel, Woodsford, London

Introduction 3.1 Adverse costs 3.3 Statutory regulation 3.4 The ALF Code of Conduct 3.8 Final thoughts on the position in England 3.55

INTRODUCTION 3.1 According to the eighteenth-century jurist, philosopher, and legal and social reformer Jeremy Bentham: … so long as the expense of seeking relief at law stands on its present footing [which is to say it is expensive], the purpose of seeking that relief [ie, funding] will of itself, independently of every other, afford a sufficient ground for allowing any man, or every man, to borrow money on any terms on which he can obtain it.1

Well yes, but the 2007–2008 global financial crisis suggests that markets can’t be left to regulate themselves: Those of us who have looked to the self-interest of lending institutions to protect shareholder’s equity – myself especially – are in a state of shocked disbelief…

(Former chairman of the Federal Reserve, Alan Greenspan.2)

So how best to regulate third-party litigation funding? 3.2 The question was one of the discrete issues considered by Lord Justice Jackson in his comprehensive 2009 review of civil litigation costs3. His three recommendations4 were:

1 J Bentham A Defence of Usury, Letter XII, Maintenance and Champerty. 2 Evidence to the US  House of Representatives Committee on Oversight and Government Reform, 23 October 2008. 3 The Review of Civil Litigation Costs, or ‘Jackson Review’. 4 Chapter 15 of the Preliminary Report and chapter 11 of the Final Report.

23

3.3  Regulation and legislation

•

‘A  satisfactory voluntary code, to which all litigation funders subscribe, should be drawn up…

•

‘The question whether there should be statutory regulation of third-party funders by the [Financial Conduct Authority (FCA)] ought to be re-visited if and when the third-party funding market expands.

•

‘Third-party funders should potentially be liable for the full amount of adverse costs, subject to the discretion of the judge.’

ADVERSE COSTS 3.3 Lord Justice Jackson’s third recommendation (we’ll come to the other two) is a reference to the ‘Arkin cap’, referred to in more detail in chapter 7. In Arkin5 the Court of Appeal took the view that a commercial funder, financing in a manner that facilitates access to justice (and which is not otherwise objectionable) and that leaves the claimant as the party primarily interested in the result of the litigation and in control of its conduct, should be potentially liable for adverse costs ‘to the extent of the funding provided’. This was taken to mean that a funder’s potential adverse costs liability was capped at the amount of its commitment, which might be rather less than a successful defendant’s actual spend. In theory, the judgment supported the growth of the then emerging sector as funders could put a figure on, and so better price, their adverse cost risk. In practice, prudent funders never completely relied on Arkin, which has been steadily eroded by subsequent judgments such that Lord Justice Jackson’s wish has effectively been granted. More recently, in Chapelgate,6 the Court of Appeal dismissed an appeal by a commercial funder against an order holding it liable for all the respondents’ costs (from the date of the funding agreement). The court confirmed that the Arkin cap does not automatically apply in cases involving professional funders. Instead, the court retains a broad discretion to make such order as is just in all the circumstances. (The jurisdiction to award costs against a non-party is found in section 51(1) and (3) of the Senior Courts Act 1981 and is the subject of the Privy Council’s decision in Dymocks,7 which sought to summarise the many cases.)

STATUTORY REGULATION 3.4 Lord Justice Jackson’s second wish, that the efficacy of statutory regulation be revisited if the market expands, has yet to be granted. His recommendation was informed by the fact that third-party funding was still nascent in England and Wales (in 2009) and that the parties who used it were generally commercial or similar enterprises with access to full legal advice. In short, it was too small to concern the Financial Services Authority (as it then was) 5 6 7

Arkin v Borchard Lines Ltd & Ors [2005] EWCA Civ 655 (26 May 2005). Chapelgate Credit Opportunity Master Fund Ltd v Money and others [2020] EWCA Civ 246. Dymocks Franchise Systems (NSW) Pty Ltd v Todd and others [2004] UKPC 39.

24

The ALF Code of Conduct 3.9

and lacking a business-to-consumer imbalance that would demand a regulator’s intervention. 3.5 The market has certainly expanded. According to international law firm Pinsent Masons,8 the assets under management of the 16 main third-party funders operating in the UK topped £1.5 billion in 2018; a figure that has grown by 743 per cent from £180 million in 2009.9 However, in the UK at least, the parties who use funding generally remain commercial or similar enterprises with access to full legal advice. There isn’t an obvious case that funded claimants either don’t understand the funding terms agreed or aren’t able to negotiate terms in a competitive environment. In this sense Lord Justice Jackson’s conclusion that full regulation is not presently required holds true. 3.6 Since the Jackson Review, individuals (consumers and businesses) have acquired rights to bring claims for damages caused by breaches of competition law and authorised class representatives may bring collective actions on their behalf in the Competition Appeal Tribunal (CAT).10 In deciding whether it is just and reasonable to approve a person as a class representative, the factors that the CAT must take into account include whether the person will be able to pay the defendants’ recoverable costs11 and whether it has a plan for its own costs.12 In this sense, the court is, in effect, regulating litigation funding by reviewing the funding arrangements at an early stage and not allowing collective actions to continue if they are not satisfactory. Again, we need not disturb Lord Justice Jackson’s conclusion. 3.7 An aspect that Lord Justice Jackson didn’t consider, but that should be part of this equation is the barrier to entry that statutory regulation might create for new entrants to the market. The cost, in time and money, of compliance can be significant and it’s not always safe to assume that well-resourced, existing market participants are completely averse to its introduction.

THE ALF CODE OF CONDUCT 3.8 Which leaves Lord Justice Jackson’s first recommendation – a satisfactory voluntary code to which all litigation funders subscribe. 3.9 Following consultation on a draft code and draft articles for the Litigation Funders Association conducted by the Civil Justice Council,13 a company limited 8 Regulation of third party litigation funding in England and Wales, Out-Law Analysis, 19 Jul 2018. 9 For further views on the growth of the market, see chapter 11. 10 On 1  October 2015 section 18 of the Enterprise Act 2002 introduced ss  47A and 47B into the Competition Act 1998. For further discussion of litigation funding for class actions, see chapter 9, part D. 11 The Competition Appeal Tribunal Rules 2015, SI 2015 No.1648, rule 78(2)(d). 12 Ibid rule 78(3)(c). 13 Civil Justice Council, Consultation Paper, A Self Regulatory Code for Third Party Funding.

25

3.10  Regulation and legislation

by guarantee – The Association of Litigation Funders of England & Wales (ALF) – was incorporated and its members’ code of conduct was published in November 2011. The Code has since been revised (in January 201814). 3.10 It is appropriate to note at this point that Woodsford Litigation Funding was a founder member of the ALF and that the writer currently serves on its Board of Directors. (Associate membership of the ALF is open to brokers, insurers, law firms, barristers, overseas funders and academics, but the following commentary is confined to the Code as it relates to funder members.) 3.11 The first part of the Code sets out its scope. In short, it applies to funders who are members of the ALF who must have their own capital (ie not intermediaries) and fund litigation in England on a non-recourse basis. It goes on to set out standards to be observed by funder members.

Access to capital 3.12 Specifically, to be a member of the ALF a ‘litigation funder’ must have access to funds ‘immediately within its control’ or be the exclusive investment adviser to an entity (or entities) having access to such funds. A funder member isn’t a broker or other intermediary and can be a corporate, funding from its own balance sheet, or an investment manager investing on behalf of third-party capital. 3.13 This requirement addressed one of the sector’s early bugbears – bogus entities representing themselves as funders who, having stumbled across a potential investment, then had to approach genuine funders with the financial means to help claimants with good claims. This necessarily opaque and timeconsuming process was a source of considerable frustration for claimants, their lawyers and genuine funders alike. The inherent delays, renegotiations and confusion probably saw many otherwise fundable claims fall by the wayside. 3.14 The requirement also reflects the way in which litigation funders were, and still are, set up. Many (eg  Harbour and Therium) adopt a private equity fund structure while others are private or public companies (eg Woodsford and Burford, respectively).

Only litigation in England 3.15 The Code only applies to ALF members funding the resolution of ‘relevant disputes’, essentially litigation in England. In this sense the Code’s scope is narrow. The majority of the ALF’s funder members have international reach and fund litigation in numerous jurisdictions. Australia was an early adopter

14 Available online: https://associationoflitigationfunders.com/wp-content/uploads/2018/03/ Code-Of-Conduct-for-Litigation-Funders-at-Jan-2018-FINAL.pdf

26

The ALF Code of Conduct 3.19

and a market in which many international and local players are active. The United States is the largest market and a number of ALF members fund alongside US-based and focused providers. The German market is long established. The market in Canada and other common law jurisdictions continues to grow. The UK market has very significant attractions for claimants and defendants alike, not least the quality and integrity of its judiciary. But it’s also a very expensive place to litigate, which means that only very high value claims are economically viable from a funder and claimant perspective and which renders a small market smaller still. Most ALF members also fund big ticket arbitration, both commercial arbitration under the auspices of the various arbitral bodies (the London Court of International Arbitration (LCIA), the International Court of Arbitration (ICC), etc.) and bi-lateral investment treaty arbitration administered by the International Centre for Settlement of Investment Disputes. Again, none of this is covered by the Code. 3.16 That said, the Code does have some application in relation to arbitration. First, it will apply to the enforcement of an arbitral award in the English courts. Second, while it’s common for arbitration agreements and rules of arbitration to provide that the award will be final and binding on the parties and this finality can be one of arbitration’s main advantages, the courts can be invoked to: (1) challenge the tribunal’s substantive jurisdiction15; (2) challenge on the ground of serious irregularity affecting the tribunal, the proceedings or the award16; and (3) appeal on a point of law.17

LFAs and how litigation funding is different 3.17 ALF members must invest pursuant to a litigation funding agreement (LFA) to enable a party to a dispute to meet the costs (including pre-action costs) of the resolution of litigation (in England). In return the funder receives a share of the proceeds if the claim is successful. It may not seek any other payment unless the funded party is in material breach of the LFA. 3.18 In practice, an LFA invariably means a written agreement. They typically cover not only the Code’s requirements but also a broader range of issues and, as with any other commercial contract, aim to clearly describe the parties’ contractual rights and obligations to avoid misunderstandings and future disputes. Chapter 6 deals with LFAs in detail. 3.19 Crucially, the Code reflects the non-recourse nature of the funding provided. Most lending, secured or unsecured, involves the advance of a principal 15 Arbitration Act 1996 s 67. 16 Ibid s 68. 17 Ibid s 69.

27

3.20  Regulation and legislation

sum on which interest is payable and an unconditional obligation to repay both. A meritorious claim against a solvent defendant is an asset, but it doesn’t produce income and can’t service an interest-bearing loan. Nor do traditional lenders have the skills needed to value a claim. Litigation funders don’t, therefore, charge interest and are better able to manage the risk that they only become entitled to the repayment of their capital/investment and only make a return thereon (a success fee) if the funded claim is a) won and b) generates proceeds (a settlement or a judgment is worthless if the defendant can’t meet it). It’s this non-recourse element that sets litigation funders apart from other sources of finance provided by banks, etc.

Capital adequacy 3.20 Having established the ‘who’, the ‘where’ and the ‘what’ (the Code applies to) let’s return to Lord Justice Jackson and what, in particular, he wanted the Code to achieve: This code should contain effective capital adequacy requirements and should place appropriate restrictions upon funders’ ability to withdraw support for ongoing litigation.18

3.21 The Code provides that ALF members must maintain access to ‘adequate financial resources’ to meet their funding obligations and, in particular, will: 1.

ensure that the they maintain the capacity: 1.1. to pay all debts when they become due and payable (a standard solvency test); and 1.2. to cover aggregate funding liabilities under all their LFAs for at least three years;

2.

maintain access to a minimum of £5 million of capital or such other amount as stipulated by the ALF (it was increased from £2 million in 2016);

3.

accept a continuous disclosure obligation in respect of its capital adequacy, including a specific obligation to notify the ALF and the funded party if the funder reasonably believes that its representations in respect of capital adequacy under the Code are no longer valid because of changed circumstances;

4.

be audited annually by a recognised national or international audit firm and provide the ALF with: 4.1. a copy of the audit opinion on the funder’s most recent annual financial statements (but not the underlying financial statements) or, in the case of funders who are investment advisers to a fund, the audit opinion

18 Chapter 15 of the Preliminary [Jackson] Report and chapter 11 of the Final [Jackson] Report.

28

The ALF Code of Conduct 3.23

in respect of the fund (but not the underlying financial statements), within one month of receipt and in any case within six months of each fiscal year end. If the audit opinion provided is qualified (except as to the uncertainty of valuing relevant litigation funding investments) or expresses any question as to the ability of the firm to continue as a going concern, the ALF is entitled to enquire further into the qualification and take any further action it deems appropriate; and 4.2 reasonable evidence from a qualified third party (preferably from an auditor, but alternatively from a third-party administrator or bank) that the funder or the fund it manages satisfies the minimum capital requirement prevailing at the time of annual subscription. 3.22 In this context the Code is augmented by the ALF’s Rules (as revised in July 201619). They provide that a funder, whether applying for membership or on (annual) renewal and at all material times accepts the following factors in assessing whether it has adequate financial resources: (1) the need for members to be both conservative in assessing what is counted as capital and pessimistic about the timing and level of any expected returns under existing LFAs; (2) the quality, source and certainty of a member’s capital, as well as the timing and extent of the aggregate financial commitments made by a member under LFAs and other commitments (actual or contingent); and (3) the uncertain nature of litigation – in particular with respect to the merits, realistic claim value, budgeted costs (including overruns), enforcement and collection risks and timing of a case, and the professional experience of the litigation team and the member. 3.23 It’s important that funders are adequately capitalised. Meritorious claims should be conducted as well as they can be and not stutter or run aground completely because the funder is financially overstretched or insolvent. Nor, in English litigation, should a defendant have to run the risk that its costs won’t be met if the court holds that the funder should be liable for them.20 A claimant can and should do its due diligence on the funder’s finances. However, even if they check out on the day the claimant signs the LFA, there’s nothing to stop the funder signing several more LFAs the following day and completely changing the picture. A defendant has even less visibility, although can of course apply to the court for security for costs if, for example, the claimant is a corporate. The bottom line is that the parties likely to suffer from an undercapitalised funder are not always well placed to mitigate their risk and regulation could help to address the issue.

19 Available online: https://associationoflitigationfunders.com/wp-content/uploads/2016/09/ ALF-Rules-finalJuly2016PDF.pdf 20 See para 3.3, above.

29

3.24  Regulation and legislation

3.24 As already noted, the Code and the requirement that funders must have at least £5 million in capital has ensured that ALF members are not intermediaries masquerading as funders. Beyond that, the limitations of self-regulation come into view. 3.25 Most obviously, the sanction for failure to produce the annual external verifications by the relevant deadline and in a form reasonably satisfactory to ALF’s Board is, at the discretion of the Board, suspension of membership and, if the default has not been cured within three months, automatic expulsion.21 The defaulting funder would lose the ‘kite mark’ afforded by ALF membership, which it would no doubt be loath to do. As noted by the CAT22 in the Trucks proceedings23: Of course, this is a voluntary code and not a binding legal obligation, but we think that it is wholly unrealistic to suppose that a leading litigation funder that is commercially active in this field would not honour these commitments to the Association … and thus place at risk the whole regime of self-regulation.

3.26 Expulsion from the ALF would be a warning signal to the market, but contrast the position with statutory regulation in the UK. If a business carries on ‘regulated activity’ without authorisation from the FCA its contracts will be unenforceable24 and the FCA has a wide range of enforcement powers – criminal, civil and regulatory. It can fine firms and individuals who breach its rules. 3.27 Commentators tend to focus on the minimum capital requirement of £5 million and ask if it’s enough. The answer will be different for each funder. Each will recognise the difference between their funding commitments and their cash position. Their funding commitments are their day one headline commitment to a claimant or claim set out in the relevant LFA. Let’s assume a £1 million commitment to litigation with a realistic claim value of £10 million and that it’s expected to result in a win in three years’ time and cash proceeds, after an enforcement process, a year later. The commitment is £10 million but cash will go out much more slowly. On an (admittedly unrealistic) straight-line basis, cash would be paid out by the funder at just under £21,000 a month (£1m ÷ 48 months), whereas its funding obligation under the LFA for the first three years would be £750,000. This illustrates that the potential trap is to focus on the slow cash burn and overcommit to cases, and why the Code obliges ALF members to think about aggregate liabilities beyond the short term. 3.28 The other side of the coin is the funder’s ‘adequate financial resources’ and this will mean different things to different funders. For a corporate funder 21 Rule 3.15.4, Rules of the Association, July 2016. 22 The Hon Mr Justice Roth (President), Dr William Bishop and Professor Stephen Wilks. 23 UK Trucks Claim Ltd v Fiat Chrysler Automobiles NV and others and DAT Trucks NV and others and Road Haulage Association Ltd v MAN SE and others and Daimler AG  [2019]  CAT  26 (28 October 2019) at para 54. 24 Financial Services and Markets Act 2000 s 26.

30

The ALF Code of Conduct 3.31

it will be equity capital provided by its shareholders (possibly through a public market listing) and profits from prior successful investments in claims. It might also include shareholder loans and capital raised in the bond market. For a funder with a fund structure, the Fund will normally have contractual commitments from a range of third-party investors with cash being drawn down over time only as and when required. Not all of a funder’s investments will come good, but nor are they all bound to fail and it’s reasonable, therefore, that its financial resources should include conservative estimates of success fees in the relevant period. So pertinent questions, as reflected in ALF’s Rules, might include the following. 3.29 Some funders fund in a series of tranches, ie they only commit to fund to a specific point in the proceedings and give themselves the option to fund another tranche to the next milestone, and so on. In the above example is the funding liability the commitment to the first tranche (and subsequent tranches only if incepted) or £750,000? Again, in the above example, is the spend profile realistic or should the figure for the three years following the LFA be higher/the figure to enforce any judgment lower? How concrete are the funder’s financial resources? What are the terms of any shareholder loans? Are they term loans or repayable on demand? How many investors does the fund have? How financially strong is each one? What are the terms on which each has invested – can their commitments be withdrawn in given circumstances? How conservative, or otherwise, are the funder’s assumptions relating to its success rate and the level of its returns? Do they accord with its track record? 3.30 In short, a proper assessment of a funder’s capital adequacy involves a thorough investigation and understanding of its structure and its individual business. 3.31 There is a difference between State-funded, independent statutory regulation and self-regulation by self-financed market participants. However, if the limitations of self-regulation are clear and self-regulation doesn’t claim to be anything it’s not, it can be appropriate and useful. Lord Justice Jackson summed it up as follows: This [provision relating to capital adequacy] is a very substantial improvement upon the original provision. Obviously there are cases which will run for more than three years, although such cases are becoming rarer and I hope that other pending reforms will further reduce their number. Nevertheless, as a provision in a code to which funders are expected to sign up voluntarily, in my view this clause strikes a reasonable balance between practicality and client protection.25

25 Sixth lecture by Lord Justice Jackson in the Civil Litigation Costs Review Implementation Programme, delivered at the Royal Courts of Justice on 23 November 2011.

31

3.32  Regulation and legislation

Termination 3.32 Lord Justice Jackson also wanted the Code to include ‘appropriate restrictions upon funders’ ability to withdraw support for ongoing litigation’. 3.33 It’s argued by some that funding on a portfolio basis will cure weak underwriting on the basis that if risk is spread widely enough the returns from winning claims will more than make up for the duds. On that view funders may not need the ability to call time on an investment. Time will tell. In the meantime, most funders invest on a case-by-case basis and aim to avoid losing cases. And while a funded claimant is entitled to be confident that a funder can stay the course, litigation is often a multiyear process and claims change significantly over time, not always for the better. Nor is it in the interests of the administration of justice for funders to be kept in claims that have gone bad. The Code tries to strike the right balance – an ALF member may only terminate an LFA if it reasonably: (1) ceases to be satisfied about the merits of the dispute; (2) believes that the dispute is no longer commercially viable; or (3) believes that there has been a material breach of the LFA by the funded party. 3.34 If the LFA does give the funder any of the above rights, it will also provide that: (1) if the funder terminates the LFA, the funder shall remain liable for all funding obligations accrued to the date of termination unless the termination is due to the funded party’s material breach; and (2) if there is a dispute between the funder and the funded party about settlement or about termination of the LFA, a binding opinion shall be obtained from a QC26 instructed jointly or nominated by the Chairman of the Bar Council. 3.35 In practice, where the parties’ interests are more or less aligned there is usually a consensus on whether the claim remains viable. However, a claimant will have a significant financial interest in the outcome of the action but may not retain any of the attendant risk, for example, because a combination of its lawyers and a funder is responsible for its legal fees and third-party costs and an insurer is covering the adverse costs risk. In these circumstances the claimant may have a higher risk tolerance than its backers and may be less willing, for example, to accept the certainty of a settlement and more willing to press ahead and tolerate the uncertainty inherent in a trial. Hence the inclusion of the quick and simple dispute resolution provision by a QC. 26 The award of Queen’s Counsel is for excellence in advocacy. It is made to advocates who have rights of audience in the higher courts of England and Wales and have demonstrated the competencies in the Competency Framework to a standard of excellence.

32

The ALF Code of Conduct 3.41

3.36 An ALF member shall be deemed to have adopted the Code in respect of funding the resolution of relevant disputes. However, that doesn’t vary the actual contract between funder and claimant and claimants (and their advisers) should check that the termination provisions in the LFA reflect the Code.

What else? 3.37 The following provisions are largely in the order they appear in the Code, which is to say not necessarily in order of importance. The Code doesn’t include the headings below. The funder’s identity 3.38 A claimant and its advisers should know who they are dealing with. The Code requires ALF members to inform a funded party, as soon as possible and prior to execution of an LFA, if it is acting for and/or on behalf of a subsidiary or a fund managed by the funder and whether the LFA will be entered into by the funder, a subsidiary or a fund managed by the funder. Marketing 3.39 An ALF member’s promotional literature must be clear and not misleading. Confidentiality 3.40 The Code provides that ALF members will observe the confidentiality of all information and documentation relating to the dispute to the extent that the law permits, and subject to the terms of any confidentiality or non-disclosure agreement (NDA) agreed between the funder and the funded party. The free flow of information between claimant and funder is very important from a funder’s perspective as it’s difficult to make good underwriting decisions without all the facts. Claimants should always enter into an NDA with each funder they deal with before sharing any confidential information.27 Independent advice 3.41 An ALF member will take reasonable steps to ensure that the funded party has independent advice on the terms of the LFA before it’s signed. For the purposes of the Code, this obligation is satisfied if the funded party confirms in writing that it has taken advice from the solicitor or barrister instructed in the dispute. 27 See also chapter 5.

33

3.42  Regulation and legislation

3.42 To the extent that it’s harder for a funded party to argue that it didn’t agree or didn’t understand any part of the LFA (for example, the calculation of the funder’s success fee) it’s in the funder’s interest for the funded party to be separately advised. On the other hand, such advice comes at a cost that the claimant may struggle to meet. It can also significantly impact timing at a point when the parties will have already been through a negotiation of commercial terms and have a significant due diligence process to go through. Sometimes the funder will agree that the cost can be added to the funding if the LFA is ultimately concluded and the cost fixed or capped so that it remains proportionate. 3.43 Separately, the claimant’s lawyers should ask themselves if they should advise on the LFA and act in the dispute. Whether proposing to charge on a time basis or an alternative fee arrangement the solicitor has an interest in the claim proceeding and, therefore, the LFA being agreed. A  conflict of interest could arise if the solicitor should, in the client’s best interest, advise the claimant not to continue with an egregious LFA. The claimant’s legal team 3.44 An ALF member must not take any steps that cause, or are likely to cause, the funded party’s solicitor or barrister to act in breach of their professional duties. 3.45 While the funder is probably paying all or at least part of the lawyer’s fees, the lawyer’s client is always and only the claimant and a lawyer’s ability to act in the best interests of their client should be unfettered. As the claimant’s lawyer is not usually a party to the LFA they are unlikely to have any duties to the funder unless a separate contractual relationship is created between the two. This will generally augment the funded party’s obligations to the funder; for example, to inform the funder of any negative developments. 3.46 An ALF member must not seek to influence the funded party’s solicitor or barrister to cede control or conduct of the dispute to the funder. Controlling or conducting the litigation might be champertous (see chapter 2) and render the LFA unenforceable by the funder. Other liabilities 3.47 The LFA shall state whether (and if so, to what extent) the funder is liable to the funded party to: (1) meet any liability for adverse costs that results from a settlement or from an order of the Court; (2) pay any premium (including insurance premium tax) to obtain adverse costs insurance; (3) provide security for costs; and (4) meet any other financial liability. 34

The ALF Code of Conduct 3.54

3.48 It makes sense to ensure that the contractual position is clear. Of course, even if the LFA provides that the funder has no contractual obligation to meet the funded party’s liability for adverse costs, the court may exercise its discretion to make such order as is just in all the circumstances and award costs against a non-party/the funder.28 Settlement 3.49 The LFA shall state whether (and if so how) the funder may provide input to the funded party’s decisions in relation to settlements. 3.50 Ultimately, the decision rests with the claimant and if it’s not motivated by external factors unrelated to the claim itself the funder is unlikely to push back. A committed claimant is normally an essential component of a winnable claim. As noted above, if the LFA gives the funder termination rights, it shall provide that in the event of a dispute about settlement, a binding opinion shall be obtained from a QC.29 Subsidiaries and fund vehicles 3.51 Breach, by an ALF member’s subsidiary or a fund managed by an ALF member, of the provisions of the Code constitutes a breach of the Code by the ALF member. Complaints 3.52 The ALF maintains a complaints procedure.30 Complaints may be made by a funded party only (and not other parties to a funded claim). Monitoring investments 3.53 Nothing in the Code prohibits an ALF member from conducting appropriate due diligence, both before offering funding and during the course of the litigation being funded, including but not limited to analysis of the law, facts, witnesses and costs relating to a claim, and including regularly reviewing the progress of the litigation. 3.54 This final provision is a nod to the Court of Appeal’s decision in Excalibur.31 The case involved funders who were not ALF members and who unsuccessfully appealed the first instance decision that they were liable to pay the 28 See para 3.3 above. 29 See paras 3.32 et seq. above. 30 Available online: https://associationoflitigationfunders.com/wp-content/uploads/2018/03/ ALF-Complaints-Procedure-October-2017.pdf 31 Excalibur Ventures LLC v Texas Keystone Inc and others [2016] EWCA Civ 1144.

35

3.55  Regulation and legislation

defendants’ costs on the indemnity basis, ie in full and not on the lower ‘standard basis’. In short, they had to follow the fortunes of their funded claimant, who had aggressively pursued a meritless claim to the bitter end. The ALF intervened in the case and expressed the concern that funders would have to exercise greater control over the conduct of the litigation to avoid being fixed with the conduct of the funded party, and this ran the risk that the funding agreement would be champertous. In response, the Court of Appeal confirmed that ‘rigorous analysis of law, facts and witnesses, consideration of proportionality and review at appropriate intervals’ was to be expected of a responsible funder and could not of itself be champertous. This reflects many funders’ business models. Given that most litigation is lengthy and the matrix that constitutes a good claim changes regularly a ‘fire and forget’ model is cavalier.

FINAL THOUGHTS ON THE POSITION IN ENGLAND 3.55 Litigation funding involves the efficient allocation of capital. Before the emergence of businesses specialising in litigation funding, it was largely funded (or underfunded) by claimants through force of circumstance and who had no real experience of the process. Often, value was lost by claimants and accrued to defendants as a result of a financial inequality of arms. Litigation funders are expert underwriters of litigation claims and a litigation funding market can help claimants realise the full value of their litigation assets. 3.56 Regulation is often introduced to tackle market failure, ie when a market left to itself does not allocate resources efficiently. Examples include:

•

The abuse of market power, which can occur whenever a single buyer or seller can exert significant influence over prices or output (a monopoly32 or monopsony33).

•

Externalities – when the market doesn’t take into account the impact of an economic activity on outsiders. For example, the market may ignore the costs imposed on outsiders by a firm polluting the environment.

•

Public goods, such as national defence. How much defence would there be if it were left to the market?

•

Where there is incomplete or asymmetric information or uncertainty.

3.57 Can we find examples of market failure in relation to litigation funding that would warrant changes to the current position? The dramatis personae are

32 When the production of a good or service with no close substitutes is carried out by a single firm with the market power to decide the price of its output. 33 A market dominated by a single buyer. A monopsonist has the market power to set the price of whatever it is buying (from raw materials to labour).

36

Final thoughts on the position in England 3.61

investors in litigation funders,34 litigation funders themselves, funded parties,35 their lawyers,36 and defendants. Let’s take them in turn.

Investors 3.58 Investors in funders structured as funds or who invest in listed funders are already covered by existing financial services legislation and the FCA. A fund can only be marketed and managed by a funder regulated by the FCA. Financial promotions (of the fund) must be clear, fair and not misleading.37 Likewise, when either an offer of securities is made to the public or securities are admitted to trading on a regulated market the prospectus must contain ‘the necessary information which is material to an investor’ for making an informed assessment; including the assets and liabilities, profits and losses, financial position and prospects of an issuer and any guarantor and the rights attaching to the securities, together with the reasons for the issue and its impact on the issuer.38 Thereafter, listed companies have ongoing disclosure obligations and must publish audited annual accounts in accordance with the relevant accounting standards. 3.59 Most investors in litigation funding funds are institutional investors with the necessary sophistication and resources to make an informed decision on whether to invest. Typically, litigation funding exposure is only a small part of their overall AUM (assets under management). They appreciate that, given the nature of the underlying asset (litigation/arbitration claims), it’s necessarily an illiquid/long-term investment and that the higher the target return, the higher the risk to their capital. They shouldn’t need a regulator to spell any of this out. It’s harder for retail investors to invest directly in the sector, but insofar as they can there’s no shortage of statutory regulation that aims to highlight the risks.

Funded parties 3.60 The issues for funded parties include the funder taking over their claims, the funder driving an unconscionable bargain and the funder failing to uphold its side of the bargain by not delivering the promised funding. 3.61 The common law rule prohibiting champerty (see chapter  2) should ensure that the claimant stays in the driving seat and remains the party primarily interested in the result of the litigation.

34 35 36 37 38

See further at chapter 11. See further at chapter 10. See further at chapter 4. Principle 7, Principles for Businesses, FCA Handbook PRIN 2.1. Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017, Art. 6. OJ L 168, 30.6.2017, p. 12–82.

37

3.62  Regulation and legislation

3.62 A  claimant can fund litigation in many ways – from annual profits, cash reserves, working capital borrowed from a bank, through an alternative fee arrangement with its lawyers, agreeing a deferred/contingent premium with an ATE (after the event) insurance company, using a litigation funder proper or an ad hoc investor in litigation, such as an alternative asset hedge fund, a family office or a high net worth individual. There are brokers and lawyers who can help claimants navigate these options. In short, funding is not in short supply and litigation funders compete not just with other specialist funders but with lawyers acting on a ‘no win no fee’ basis and other sources of funding hungry to deploy capital in a low-yield world. So, no market failure here and no excuse for a claimant not matching the cost of its funding with the risk passed to the funder. As for funders not delivering the promised funding, see paras 3.13 and 3.21.

The claimant’s lawyers 3.63 English Solicitors are regulated by the Solicitors Regulation Authority (SRA).39 All the people and law firms the SRA regulates must act:

•

in a way that upholds the constitutional principle of the rule of law, and the proper administration of justice;

•

in a way that upholds public trust and confidence in the solicitors’ profession and in legal services provided by authorised persons;

• • • • •

with independence; with honesty; with integrity; in a way that encourages equality, diversity and inclusion; and in the best interests of each client.

3.64 Litigation funding simply enables the client to pay its legal bills and shouldn’t affect a solicitor’s relationship with their client. Litigation funding doesn’t, therefore, detract from any of the above. 3.65 Solicitors can also have duties as ‘officers of the court’. By virtue of the Legal Services Act 2007 ‘persons who exercise before any court a right of audience, or conduct litigation in relation to proceedings in any court, by virtue of being authorised persons should comply with their duty to the court to act with independence in the interests of justice’.40 If a solicitor’s duties to their client conflict with these duties, it’s the public interest – especially the public interest

39 See further at chapter 4. 40 Section 1(3)(d).

38

Final thoughts on the position in England 3.68

in the proper administration of justice – that should prevail.41 Again, litigation funding doesn’t detract from these duties.

Defendants 3.66 The risk to defendants has been touched on above and in plain terms is that an impecunious claimant, facilitated by a lax funder, brings a poor claim (one that otherwise wouldn’t have got off the ground) and runs out of funds, leaving the defendant with a legal bill that it can’t pass to the claimant or the funder. Several negative stars must align, so it is not a likely scenario but not beyond the realms of possibility either. 3.67 The defendant might not suffer the loss if the claimant has effected ATE insurance. Even if the funder ultimately gets into financial trouble it may have had the wherewithal to pay a premium at an earlier point or the premium may be payable on a deferred and contingent basis (ie  only if the claim succeeds/ from the proceeds of the claim). The policy will cover the litigation risk but not solvency risks so that, in the above scenario, the policy would not respond in relation to adverse costs incurred from the date on which the claim is no longer funded. In practice it would most likely be discontinued and the defendant’s costs to that point paid or an alternative basis agreed by the parties. 3.68 As already noted, a defendant can apply to the court for security for costs on several grounds, including when the claimant is a corporate, which most will be. In a recent case42 the High Court explored how the liability for security for costs might be met in a funded claim. It was not persuaded that the funder would step up, not least because no financial information about the funder had been forthcoming. The judge took a different view to Mr Justice Roth in the Trucks43 proceedings and commented, ‘Nor am I confident that its membership of the ALF, and the obvious pressure which that puts on it to comply with the ALF rules, is sufficient to give one enough confidence that if it were facing a large liability for costs at the end of the day, that the money would be forthcoming’. Although several of the claimants were wealthy individuals, that did not remove the defendant’s risk of not being paid. The ATE insurance cover was not sufficient to cover the full amount of the potential liability, but the more fundamental difficulty was that the policies were not designed as security for costs.44 In the normal way, the insurers reserved the right to avoid and to terminate their policies, eg in the case of fraud or deliberate non-disclosure, and there was a real risk that the policies would not respond in full. Ultimately, Mr Justice Nugee allowed part of the value of the policies, provided certain conditions were met, and ordered the funder to provide security for the balance. The judge clearly 41 42 43 44

Solicitors Regulation Authority Balancing duties in litigation November 2018. Re Ingenious Litigation [2020] EWHC 235 (Ch). See paras 3.20–3.31 above. See also the Court of Appeal decision in Premier Motorauctions Ltd (in liquidation) and another v Pricewaterhousecoopers LLP [2017] EWCA Civ 1872.

39

3.69  Regulation and legislation

understood the commercial realities and the limitations of the ALF’s Code of Conduct and a normal insurance contract. In exercising its discretion, the court successfully balanced the parties’ different interests and the case illustrates the effectiveness of the courts’ ‘regulation’ in this context. 3.69 The parties involved in funded litigation in the UK are regulated by the FCA (funders in their dealings with investors), the ALF (funders in their dealings with funded parties), the SRA (solicitors in their dealings with funded parties/ their clients) and the courts (claimants, defendants and their solicitors in their conduct of the litigation). While there’s always room for improvement in any given situation there are no glaring market failures or regulatory omissions that require attention in this part of the litigation funding world.

40

PART B

The United States David Siffert New York University School of Law – Center on Civil Justice

Eric Schuller The Alliance for Responsible Consumer Legal Funding

The US position – regulation The US position – legislation

3.70 3.97

THE US POSITION – REGULATION 3.70 Litigation funders are not subject to statutory or self-regulation in the United States. There is, however, no lack of debate on the subject. 3.71 In the dual-sovereign system of American federalism, states are the highest authority and the federal government only has limited overriding authority as enumerated in the Constitution. Because litigation funding-related issues typically involve state law matters (state bar rules, contract law, status of champerty provisions, etc.) or procedural matters governed by local practice, there is little purely federal law on funding. That said, the US  Congress has reintroduced the Litigation Funding Transparency Act of 2019. If enacted, this legislation would require disclosure of funding (and a copy of the funding agreement) in any federal class action or federal multidistrict litigation and (as described below) much of the US debate has centred around disclosure. The proposed law was put forward without success in 2018 and reintroduced in early 2019. It is under consideration by the Senate Judiciary Committee, so it remains to be seen whether the law will eventually be amended or enacted. 3.72 In January 2020 the Institute for Legal Reform (ILR) repeated its call for the regulation of litigation funding45 and the disclosure of funding arrangements. The ILR is an affiliate of the United States Chamber of Commerce, the country’s largest lobbying group (2018 spend was US $72.8  million) and, on behalf US business, it advocates for civil justice reform, commonly referred to as tort reform.

45 Selling More Lawsuits, Buying More Trouble. Third Party Litigation Funding A Decade Later. January 2020.

41

3.73  Regulation and legislation

The disclosure debate 3.73 The following aims to reflect many of the arguments made for and against the disclosure of third-party litigation funding arrangements in US litigation. The definition problem 3.74 Opponents of disclosure argue that even accurately defining what constitutes litigation funding is problematic and, absent a complete answer, disclosure will unfairly discriminate against certain types of funding. Funding can take many forms: by lawyers through contingency fees and other alternative fee arrangements; single-case investment by specialist funders, hedge funds, family offices and high net worth individuals; claimant and law firm portfolio funding; traditional bank lending and credit lines to claimant businesses and law firms; family and friends investment; and insurance. Traditional bank lending, recourse lending and family and friends investment, have existed for years without any push for disclosure and, if they were carved out from disclosure requirements, the distinction would distort the market by discriminating against other types of funding. Further, on a practical level, litigation funding arrangements can be complex and include a combination of the above examples, which would be impossible to meaningfully unpick for the purposes of disclosure. 3.75 Proponents of disclosure counter that a requirement to disclose ‘agreements under which any person, other than a lawyer permitted to charge a contingency fee representing a party, has a right to receive compensation that is contingent on, and sourced from, any proceeds of the civil action…’ carefully limits the disclosure requirement to arrangements in which an investor buys an interest in the outcome of a lawsuit. 3.76 The manifold real-world nuances of litigation funding throw up legitimate questions in relation to this threshold definition issue. They highlight the real risk that a disclosure requirement would spawn satellite litigation on the requirement itself and numerous other aspects (touched on below). The only certainty is that it would add expense and delay to litigation, as well as increasing the burden on judicial resources. The bias and conflicts of interest problem 3.77 It is conceivable that judges, jurors, and/or witnesses have connections with litigation funders (for example, an investment in the funder or a relationship with a law firm that has an ongoing relationship with the funder) and so would be inclined to side with the funded party. Further, the identity of the funder might in any event be revealed at some point in the litigation, which could result in recusal or substantial delay. 3.78 This takes us straight back to the definition problem. To the extent that litigation funding would give rise to a conflict of interest because of a financial 42

The US position – regulation 3.85

interest in the outcome, a special disclosure rule for litigation funding would be incomplete – disclosure should logically be expanded to creditors, lenders, affiliates and other stakeholders, despite their more attenuated relationship to the specific litigation matter. This would be a significant shift in the existing law. 3.79 It doesn’t appear to be a problem in practice. Litigation funders are typically bound by confidentiality and don’t normally disclose details of the matters they fund even to their investors. Absent disclosure, no judge, juror or witness would have any basis to know the litigation funder that may stand to gain. Further, public investment in litigation funders is extremely limited, and judges should not invest in litigation funders. The control/party in interest problem 3.80 It’s argued by the defence bar that, if litigation funders exercise control over the matters they fund, their identity should be revealed as the real party bringing the claim. 3.81 Against that, a defendant’s liability for a legal claim exists and must be resolved or adjudged regardless of whether the named claimant, or another party, is arguably the true ‘party in interest’. A party’s receipt of litigation funding has no relevance to the legal merits of any party’s claims or defences and claimants hold that a defendant’s voyeuristic desires do not render litigation funding discoverable. 3.82 Defendants may also want to test whether a funding arrangement constitutes champerty, maintenance, usury,46 fee-splitting or is otherwise prohibited by law or public policy. Even if a funder says it won’t exercise control, it might do so in practice and control mechanisms may be subtle or indirect. 3.83 But do these purported concerns mischaracterise the way litigation funding actually operates? 3.84 Funding agreements typically give funders the right to monitor and provide input on the litigation. This need not be sinister. Because specialist litigation funders are repeat players in the litigation space and their underwriters and case managers are typically experienced former litigators, many funded clients expect and appreciate input from their funder about litigation strategy. In fact, this expertise is part of the reason that funded parties choose to work with litigation funders – it’s part of the value that funders add. 3.85 A funding agreement might also include a term permitting the funder to approve the lawyers selected by the claimant. But that provision doesn’t allow the funder to select the litigant’s counsel; it merely ensures that the counsel selected is a reputable law firm with expertise and experience that matches the nature, size 46 Lending money at unlawful interest rates.

43

3.86  Regulation and legislation

and complexity of the claim in question and has the necessary resources to do the claim justice. Again, as specialist litigation funders are repeat buyers of litigation services, over time they acquire valuable market intelligence on good, bad and indifferent litigators. Sharing that knowledge with their funded claimants through an approval mechanism is not controlling the litigation, it’s just common sense. 3.86 If a funder does exercise unlawful control and the funding arrangement is rendered champertous, the law already provides an effective remedy – the contract will be unenforceable by the funder. This is a funder’s disaster scenario. It will have risked its capital, usually over an extended period, the claimant will have succeeded and received proceeds from the claim, but the funder will be left with less than nothing – the loss of its capital and the agreed success fee. This is a considerable and effective disincentive intended to modify behaviour. Why should a defendant, faced with a legitimate claim, have the right to interfere in other parties’ contractual arrangements? From the defendant’s perspective, what purpose would it serve other than to starve the principal claim of funding as a tactic in its defence? The fee-sharing problem 3.87 Funders sometimes enter into arrangements directly with a law firm rather than directly with a claimant; for example, when a funder provides a law firm with capital that is repayable from a portfolio of contingency fee claims being handled by the law firm for different clients. The worry here is that such arrangements threaten the professional independent judgement of attorneys (a ‘low’ settlement offer might suit a cash-strapped lawyer but not be in the best interests of the client) and may breach the specific rules governing if, when and how attorneys may share fees with non-lawyers. Rule 5.4 of the American Bar Association Model Rules of Professional Conduct ‘Professional Independence of a Lawyer’ provides that, ‘[a] lawyer or law firm shall not share legal fees with a nonlawyer, except [in specified circumstances]’. 3.88 Those in favour of disclosure contend that if funding agreements are disclosed as a matter of course/at an early stage, the parties and the court can determine whether any ethical lines have been crossed. 3.89 The obligation on a lawyer to maintain independent professional judgement is of course the sine qua non of the rule. Given that funders may not conduct or control any of the claims (through the lawyer) for fear of offending the law of champerty and assuming several claims of broadly similar fee-earning potential (ie no single claim that might cloud the lawyer’s professional advice) there seems no reason why the law firm’s ability to repay the funder shouldn’t be underpinned by the value the funder can see in the firm’s litigation practice or part of it. In effect, the funder is providing working capital secured on the outcome of several claims and banks routinely do the same thing but secured against the law firm’s fee income based on time charged and often the partners’ personal assets. The arrangements are so similar that, logically, one can’t be permitted and the other not allowed. 44

The US position – regulation 3.93

3.90 Nor are the disclosure requirements of the Federal Rules the proper place to police violations of attorney ethics rules. By analogy, the rules of professional conduct in each state prohibit lawyers from representing two clients where they have a conflict of interest, and the Federal Rules have not been amended to require disclosure of such conflicts. The enforcement of those rules is a matter for the state bar authorities. 3.91 The issue has been thoroughly examined by the New York Bar, which in large part has come full circle. New York’s Rules of Professional Conduct are modelled on the American Bar Association Model Rules and the [New York] City Bar’s  2018 Opinion reflects its formal view: ‘we conclude that [portfolio funding] violates Rule 5.4’s prohibition on fee-sharing with nonlawyers.’47 However, that stance generated a significant amount of attention and commentary and in October of the same year, the City Bar’s President formed a working group comprising a range of interested professionals including private practitioners, ethics professors and specialists, litigation funding executives, a former federal judge, in-house counsel, alternative dispute resolution specialists, and representatives from several of the City Bar’s standing committees. As part of its mandate, the group considered whether Rule 5.4, as currently interpreted, serves the professional community and the public well, or whether it should be revised to reflect contemporary commercial and professional needs and realities. After a comprehensive study and review of the issues and practices surrounding litigation funding and analysing the issues from diverse perspectives, the working group concluded that ‘… the New York Rules of Professional Conduct should be modified to accommodate the reality of litigation funding’.48 The working group proposed guidelines so that lawyers will be more informed and better prepared when utilising third-party litigation funding, protecting their clients’ interests and ensuring compliance with their professional obligations.

The insurance analogy 3.92 Parties in Federal Court are required to produce ‘for inspection and copying …, any insurance agreement under which an insurance business may be liable to satisfy all or part of a possible judgment in the action or to indemnify or reimburse for payments made to satisfy the judgment’49 to ‘enable counsel on both sides to make the same realistic appraisal of the case.’50 3.93 Should the same reasoning apply to litigation funding? The presence of litigation funding will have an impact on the case, including with respect

47 NY City Bar Assoc. Comm. on Prof’l Ethics, Formal Op. 2018-5 (2018). 48 Report to the President by the New York City Bar Association Working Group on Litigation Funding, February 28, 2020. 49 Fed. R. CIV. P. 26(a)(1)(A)(iv). 50 Fed. R. Civ. P. 26(a)(1)(A)(iv) cmnts. on 1970 Amendments.

45

3.94  Regulation and legislation

to the likelihood of settlement and the terms and form of any settlement. For example, if a funder is due a certain recovery before the client recovers anything, the client will likely not agree to a settlement that does not satisfy that hurdle amount. The disclosure of such information to the defendant would be relevant and useful in permitting the parties to successfully negotiate any settlement, including in those instances in which the funder is being asked by the client to renegotiate its entitlement to part of the proceeds from any recovery. 3.94 The danger is of course that any aid to settlement that might be gained through disclosure could easily be eclipsed by the prejudice associated with such disclosure. To meaningfully aid settlement, sensitive details of the funding arrangement would probably have to be disclosed, such as the funder’s investment commitment, investment to date and other conditions that could result in prejudice (such as the staged release of funding against milestones in the claim or triggers for the termination of funding). An adverse party could then employ tactics designed to exhaust that budget and leverage an uneven playing field through litigation and settlement strategy. Absent such details, the mere fact of funding and identity of funding would provide very little to no aid to assisting settlement. This risk of prejudice is much more attenuated for defendants in the case of insurance agreements as the policy limits often exceed the cost of litigating the case. By contrast, the close nexus between the funding agreement and the cost of litigating the case creates greater possibilities for abuse if disclosure of funding terms is mandated. 3.95 Nor would disclosure of litigation funding as a way to discover party resources achieve its objective. While defendants are required to disclose insurance policies, they are not required to disclose all resources that may be available to satisfy a judgment. Likewise, disclosure of litigation funding may provide an incomplete picture of a claimant’s settlement incentives to the extent the claimant may well have other creditors. Similarly, the disclosure of policy limits, which typically exceed the cost of litigation, do not provide information on how much the insurer is prepared to spend in fees to litigate the case. 3.96

Opponents of disclosure also note that:

•

the requirement to disclose insurance coverage has roots in an insurer’s right to control litigation, which is not allowed in commercial litigation funding arrangements;

•

insurance coverage is relevant to a defendant’s ability to satisfy a judgment, which is not relevant to claimants; and

•

there is a well-established legal privilege between insurers and the insured that is less developed in the litigation funding context, which may lead to abuse. Disclosure could open the door to unnecessary, lengthy, and costly motion practice concerning the details of litigation funding arrangements and communication between funded parties and funding sources. 46

The US position – legislation 3.100

THE US POSITION – LEGISLATION 3.97 Twelve different US states have passed bills on the subject of litigation funding.51 In 2019 and 2020, 11 other states, plus the federal government, had bills that were introduced but not yet passed. Legislation has run the gamut from clarifying how the litigation finance industry should operate to effectively eliminating the consumer financing industry entirely. Only one piece of legislation that has passed impacts the commercial financing industry in any way.52 A brief summary of that legislation follows. 3.98 The first US jurisdiction to pass a litigation finance statute was Maine, in 2007.53 Some of the key provisions include: (1) required disclosures in discovery; (2) caps on contract duration and frequency of interest compounding but no caps on interest rates; (3) a $5,000 registration fee for funders, with bi-annual $200 renewals; (4) annual reporting requirements; (5) a bar on funder involvement in the litigation; and (6) a ban on mandatory arbitration. 3.99 Since 2007, 11 other states have passed legislation on the subject.54 Two of these states passed ‘clean-up legislation’ to resolve lingering issues.55 This chapter highlights two of the most significant bills: Vermont’s  2016 bill that regulated and clarified the consumer funding industry, allowing it to expand in the state, and West Virginia’s 2019 bill which effectively eliminated the consumer funding industry.

Vermont 3.100 Vermont’s 2016 bill, H.84, is extremely detailed and can therefore serve as a model for many other pieces of state legislation. It covers only ‘natural person[s]’56 seeking or receiving non-recourse consumer funding.57

51 In states without enacted legislation, regulation has largely been left to the courts. Courts across the United States have produced a degree of clarity in a number of jurisdictions while the legislative process is pending, though they have come down very differently on different issues. For more information on the state of several key issues, see Center on Civil Justice, Fifty State Surveys, available at www.disputefinancinglibrary.org. 52 Wis. Stat. § 235.12 (2017) creates disclosure requirements for all third-party litigation funding contracts, including commercial ones. 53 Maine Revised Statute Title 9-A, Article 12: Legal Funding Practices. 54 See Ohio Rev. Code Ann. Title 13, Ch. 1349; Neb. Rev. Stat. § 25-3301 (2010); Okla. Stat. tit. 14A, § 3-701 (2013); Tenn. Code Ann. § 47-16-101, et seq. (2014); 2015 Ark. Acts 915; 2016 Ind. Acts 153; 2016 Vt. Acts & Resolves 128; 2017 Wis. AB 73; 2019 W. Va. SB 360; 2019 Nev. SB 432; 2020 Utah HB 312. 55 See 2019 Vt. HB 527 and SB 154; 2019 Ind. HB 1447. 56 Note that most statutes limit application to ‘natural persons’ in order to target consumer funding without affecting commercial funding. However, though this has not been tested, it seems, based on the wording, that consumer funding could ignore most statutory provisions by requiring funded parties to set up an LLC to receive the funding. 57 Vt. Stat. Ann. tit. 8, § 2251.

47

3.101  Regulation and legislation

3.101 The bill sets up a registration and regulatory regime for any company engaged in consumer funding in Vermont.58 Registration requires a $600 fee and must be renewed every three years. Funders must also file proof of financial stability, including a surety bond or letter of credit of the greater of $50,000 or double their largest funded amount.59 Registered funders must submit annual reports every 1 April, detailing the number of contracts, value of the contracts, value of charges under those contracts, the number of contracts and dollar amounts where the funder received contracted sums, and the number of contracts and dollar amounts where the funder received less than the contracted sums.60 The Commissioner will then submit an annual report to the General Assembly summarising the relevant information and making necessary recommendations.61 3.102 Violations of the statute are heard in accordance with the Vermont Administrative Procedures Act, 3 VSA chapter 25. They are punishable by the revocation or suspension of the licence, an order to cease and desist funding, penalties of up to $1,000 per violation ($10,000 per wilful violation), and restitution to consumers, in addition to other, existent penalties.62 The Commissioner of the Department of Financial Regulation may conduct examinations of registered funders, at the funders’ expense.63 3.103 The bill also creates requirements of the contract itself, including clarity and certain specifics about how the contract must be laid out to ensure that an individual seeking funding understands the terms.64 There are also substantive requirements, including a right of rescission (allowing an individual to cancel the contract and return the money within five days), that disputes over the contract be litigated in Vermont, and that the individual discuss the contract with their attorney prior to signing (and represent as much in the contract).65 Note that the bill does not create a maximum interest rate for funding contracts. 3.104 The bill bans the funder from paying or receiving any commissions for the contract to or from attorneys or healthcare facilities or providers, including paying court costs or fees or even making referrals to law firms or health care providers.66 Similarly, an attorney working with a client receiving funding cannot have a financial interest in the funder or receive a referral fee or other consideration from the funder.67 The bill also prevents the funder from making any legal decisions with respect to the underlying claim and its settlement or resolution, or even from providing legal advice with respect to the funding or the claim. However, communication between the attorney and the funder does 58 Ibid. § 2252. 59 Ibid. 60 Ibid. § 2260. 61 Ibid. 62 Ibid. § 2259. 63 Ibid. § 2256. 64 Ibid. § 2253. 65 Ibid. 66 Ibid § 2254. 67 Ibid.

48

The US position – legislation 3.109

not waive attorney–client privilege.68 The assignment or securitisation of the underlying claim or a requirement for binding arbitration are also prohibited.69 3.105 In 2019, Vermont passed a ‘clean-up’ bill, HB 527 and SB 154 (2019), which modified some of the requirements, including changing the fee to a combined $500 licensing and investigation fee, plus a $200 annual renewal fee.70 It repealed the specific penalties, allowing the Commissioner to seek more flexible penalties.71 Investigations are no longer at the funder’s expense.72 3.106 While Vermont’s statute has allowed consumer funding to expand, two states – West Virginia and Arkansas – have created legislation that has effectively ended consumer legal funding, primarily through setting rate caps below the cost of capital.73 Three other states have set rate caps, though at higher rates (Tennessee,74 Indiana75 and Nevada76).

West Virginia 3.107 It is useful to discuss West Virginia’s 2019 bill in more detail because it is considered the most antithetical to litigation funding. As an initial matter the statute only applies to consumer funding, defining a consumer as a ‘natural person’.77 The statute requires detailed registration, secured by a $50,000 bond.78 3.108 It also lays out specific requirements for the contract, including a right of rescission and various acknowledgements by the consumer and their lawyer.79 It requires various disclosures, including the material terms, and it requires certain specific contractual language and stylistic layout of the terms. 3.109 The statute also prohibits certain conduct by the funder.80 It bars payment or acceptance of commissions and referral fees, referral to specific law firms or sources of testimony, seeking mandatory arbitration, provision of legal advice with respect to either the financing or the underlying dispute, assignment or securitisation of the funding contract81 (excepting subsidiaries, affiliates, and 68 Ibid. 69 Ibid. 70 2019 Vt. H. 527, § 2108-2019. 71 2019 Vt. S. 154, §2259. 72 Ibid § 2256. 73 2019 W. Va. SB 360, § 46A-6N-9; 2015 Ark. Acts 915, §§ 4-57-104, 109. 74 Tenn. Code Ann. § 47-16-110. 75 Indiana Code 24-4.5-3-202. 76 Nev. Rev. Stat. 604C.310. 77 2019 W. Va. SB 360, § 46A-6N-1. 78 Ibid. § 46A-6N-2. 79 Ibid. § 46A-6N-3. 80 Ibid. § 46A-6N-4. 81 The language seems to bar even use of the contract as a basis for borrowing operating funds. Tenn. Code Ann. 47-51-105 effectively uses the same language. Vermont’s statute bars ‘granting a security interest under Article 9 of the Uniform Commercial Code or as otherwise permitted by law.’ Vt. Stat. Ann. tit. 8, § 2254.

49

3.110  Regulation and legislation

successors-in-interest, and permitting the consumer to assign their interest82), reporting shortfalls in funds from proceeds to credit reporting agencies, or making decisions with respect to the consumer’s claim or resolution thereof.83 A  funder also cannot offer to provide a second round of funding on a claim without the consent of the original funder.84 It also bars law firms retained by consumers from having financial interests in funders or from receiving referral fees.85 Violation of any of these terms voids the funding agreement.86 3.110 All funding contracts must be disclosed prior to discovery.87 3.111 Fees are capped at 18 per cent, charged up to once per year for up to 42 months, compounded semi-annually.88 Since this is below the cost of capital, consumer legal funding no longer exists in West Virginia.89 3.112 In contrast to West Virginia, Utah passed a bill in 2020 with many similarities to Vermont’s bill, but with a simple registration requirement instead of a more stringent licensing requirement.90 Significantly, Utah’s bill passed nearly unanimously, where Vermont’s faced a closer vote.91 The Utah and West Virginia legislation show changing attitudes with respect to litigation financing, with opinions becoming substantially more divergent. Legislatures influenced directly by their Chambers of Commerce are likely to carry and even pass legislation that will effectively ban the industry, whereas those in which the industry has more influence are becoming less and less sceptical of it.

New York 3.113 In 2019 and 2020, 12 states, plus the federal government, had litigation finance bills that have not yet passed.92 Most of these bills were

82 2019 W. Va. SB 360, § 46A-6N-8. 83 Ibid. § 46A-6N-4. 84 Ibid. § 46A-6N-9. 85 Ibid. § 46A-6N-4. 86 Ibid. § 46A-6N-7. 87 Ibid. § 46A-6N-6. 88 2019 W. Va. SB 360, § 46A-6N-9. 89 Business Organization Search, W. Va. Sec’y State, http://apps.sos.wv.gov/business/ corporations/searchadvanced.aspx (last visited 20 June 2020) (A search under ‘Organization Type’ for registered ‘Litigation Financier[s]’ returns no results.) 90 2020 Utah HB 312, § 13-57-201. 91 Votes: UT HB0312 | 2020 | General Session, Ut. Legiscan, https://legiscan.com/UT/votes/ HB0312/2020 (last visited 20June 2020); H.84 (Act 128): An act relating to consumer protection, Vermont General Assembly, http://legislature.vt.gov/bill/status/2016/H.84 (last visited June 20, 2020) (note that Vermont does not report vote totals on its bills). 92 See 2019 Fla. SB 794 and HB 1059; FLORIDA 2020 CITE; GEORGIA CITE; KANSAS CITE; 2019 Mo. HB 519, HB550, SB 484, and SB 504; MISSOURI 2020 CITE; 2019 N.J. AB 2715; NEW JERSEY 2020 CITE; 2019 N.Y. AB 3228, AB 6764, AB 6866, SB 675, SB 3651, SB 4478, and SB 4555; NEVADA CITE; OHIO CITE; 2019 R.I. HB 5477; 2019 Tex. HB 2096 and SB 1567; S. 471, 116th Cong. (2019); UTAH 2019 CITE; UTAH 2020 CITE; WISCONSIN 2020 CITE.

50

The US position – legislation 3.116

deemed ‘negative’ towards the industry; requiring disclosure, imposing rate caps, or both. The only two 2019 bills that required neither were in Missouri and New York,93 states which also had ‘negative’ bills pending. This summary focuses on the various bills in New York State and the bill in front of the United States Senate, as they provide a good overview of the existing legislative controversies. 3.114 In 2020, New York legislators discussed four different litigation finance bills. All these bills are loosely based on Vermont’s regulatory framework. However, the bills can be broken down into three sets of bills: one without rate caps (explicitly holding consumer funding is not a loan), see A3228/S3651 (2019); two imposing rate caps at the Military Lending Act rate, see S675 (2019) and A6764/S4555 (2019); and one imposing a 25 per cent rate cap, see A6866/ S4478 (2019). Furthermore, the latter two sets of bills share the same sponsors. S675 has been dropped, and A6866/S4478 is similar to but less developed than the other bills and unlikely to proceed, so the following discussion focuses on A3228/S3651 and A6764/S4555. 3.115 There are several important other terms in A3228/S3651 and A6764/ S4555. Both apply only to consumer legal funding, by which they mean funding for a ‘natural person’, and S4555 applies only to contracts under $500,000 in value. S3651 gives a five-day cancellation right, and S4555 gives a ten-day right of rescission. Both require explicit terms in the contract from the funder, including a maximum total amount owed. Both require the attorney to sign the contract, disclosing that they are hired on a contingency fee. Both ban referral fees and funders paying court costs and fees. Both bar the funder from making decisions for the consumer but maintain an attorney–client privilege for information disclosed to the funder. Both bar the attorney from having a financial interest in the funder. Both give the funder a lien on the litigation proceeds secondary only to the attorney’s lien. Both impose a $500 registration fee on funders, with a $200 renewal fee, and a bond requirement of up to $50,000. Both require funders to file contracts in advance, and both entail significant reporting requirements by registered funders.

Litigation Funding Transparency Act 3.116 In 2019, the US  Senate also introduced the Litigation Funding Transparency Act, S. 471. The act is relatively simple, and it requires ‘disclos[ure] in writing to the court and all other parties the identity of any commercial enterprise, other than the named parties or counsel, that has a right to receive payment that is contingent on the receipt of monetary relief in the civil action by settlement, judgment, or otherwise’ specifically in class actions and multidistrict litigation. It also requires production of such funding agreements, ‘except as otherwise stipulated or ordered by the court.’ Unlike 93 See 2019 Mo. HB 550 and SB 504; 2019 N.Y. AB 3228 and SB 3651.

51

3.116  Regulation and legislation

existing state legislation, which largely applies only to consumer funding, the Congressional bill applies exclusively to funding in class actions and multidistrict litigation, which will usually be commercial funding. Further, unlike many state statutes, which impose comprehensive regulations on the funding, the Congressional bill requires only disclosure to the court in a given federal multidistrict litigation case.

52

PART C

Australia, Hong Kong, Singapore and global Jonathan Barnes Chief Operating Officer and General Counsel, Woodsford, London

The Australian position The Hong Kong position The Singapore position The global position

3.117 3.149 3.158 3.167

THE AUSTRALIAN POSITION 3.117 The regulation of litigation funding in Australia, and particularly regulation relating to the funding of class actions, seems to be constantly changing. Most recently, the Federal Government has introduced regulations that classify arrangements between litigation funders and group members in class actions as ‘managed investment schemes’ and ‘financial services licensing schemes’. As a result, funders of class actions must hold an Australian Financial Services Licence (AFSL) and must register and operate each funded claim as a managed investment scheme. 3.118 Future changes are likely to increase the level of court oversight and allow Australian lawyers to act on a contingency fee basis; not a regulatory issue, but a change that could significantly change the funding landscape. In the meantime, the Association of Litigation Funders of Australia was established April 2018 and has published Best Practice Guidelines for Litigation Funders & Managers.

A little history 3.119 In 2006 the High Court (the highest court in the Australian court hierarchy and the final court of appeal) held in Fostif94 that third-party litigation funding 94 Campbells Cash and Carry Pty Ltd v. Fostif Pty Limited (2006) 229 CLR 386; [2006] HCA 41 (and, in relation to the Australian jurisdictions where the torts of maintenance and champerty have not been abolished, the Supreme Court of Queensland’s decision in Murphy Operator & Ors v Gladstone Ports Corporation & Anor (No 4) [2019] QSC 228).

53

3.120  Regulation and legislation

(of a class action) was not an abuse of process or contrary to public policy. It unlocked an addressable market recently estimated at AUS $2.08 billion.95 3.120 However, the regulation of litigation funding has been in a state of flux since two further landmark judgements: Multiplex96 and Chameleon.97 So much so that, for short periods, both decisions caused the country’s funded class action market to grind to a halt. 3.121 In 2009, Multiplex found that litigation funding arrangements (including the funding agreement and lawyer’s retainer) in respect of a funded class action constituted a ‘managed investment scheme’ within the Corporations Act 200198 (the Corporations Act). Such schemes are required to be registered99 and managed by an entity holding an AFSL and failure to comply is an offence under the Corporations Act.100 3.122 Then in Chameleon the litigant successfully sought to rescind a funding agreement (under the Corporations Act s  925A) and avoid payment of the funder’s success fee. The funded client argued that the funding agreement was a financial product and that the funder did not hold the required AFSL. On this occasion the High Court concluded that the funding agreement was a ‘credit facility’ rather than a financial product and, while it did not need an AFSL, the funder did require an Australian credit licence.

Conflicts of interest 3.123 The Multiplex and Chameleon cases led to the introduction of a conflict management regime. In 2012, regulations,101 that effectively reverse both decisions and exempt litigation funders from the managed investment scheme and credit licence provisions of the Corporations Act, imposed conflict management requirements on litigation funders. The regulations were followed by a regulatory guide.102 Litigation funders providing both single-party funding (‘litigation funding arrangements’) and multiparty funding (‘litigation funding schemes’) are required to conduct reviews and maintain written procedures identifying and managing conflicts of interest. They must design their own

95 IMF Bentham Limited Annual Report 2019 page 22. 96 Brookfield Multiplex Funds Management Pty Ltd v. International Litigation Funding Partners Pty Ltd (2009) 180 FCR 11; [2009] FCAFC 147. 97 International Litigation Partners Pte Ltd v Chameleon Mining NL (Receivers and Managers Appointed) (2012) 246 CLR 455; [2012] HCA 45. 98 Section 9, Division 1-General, Part 1.2-Interpretation, Chapter 1-Introductory, the Corporations Act 2001. 99 Corporations Act 2001 Part 5C.1, 100 Corporations Act 2001 Part 9.4. 101 Corporations Regulations 2001 [as amended]. 102 RG 248 Litigation schemes and proof of debt schemes: Managing conflicts of interest, Issued 27 March 2013.

54

The Australian position 3.127

bespoke conflict management policy suited to the nature, scale and complexity of their individual funding operations.

Today 3.124 As providers of financial services and credit facilities, litigation funders are subject to the consumer provisions of the Australian Securities and Investments Commission Act 2001 (the ASIC  Act). The ASIC  Act contains protections against unfair contract terms, unconscionable conduct and misleading and deceptive conduct, together with redress against unfair or false and misleading terms or omissions in funding agreements. These are just the sort of protections one would expect given that litigation funding in Australia has evolved largely through the funding of class actions brought on behalf of consumers.103 3.125 Further, for class actions commenced in the Federal Court and certain state courts, claimants are required to disclose the LFA, subject to redactions to conceal information that might reasonably be expected to confer a tactical advantage on another party. Settlements in funded class actions (including the funder’s fee) are subject to approval by the court. 3.126 In May 2020, the Government announced that it would remove exemptions previously afforded to funders by enacting the Corporations Amendment (Litigation Funding) Regulations 2020 (Cth) (the Amendment Regulations). The existing exemptions for insolvency litigation funding schemes and single-plaintiff litigation funding will continue and the new arrangements only apply to schemes where the possible entitlement of each of the scheme’s general members to remedies arises out of:

•

the same, similar or related transactions or circumstances that give rise to a common issue of law or fact (a class action); or

• different transactions or circumstances, but the claims of the general members can be appropriately dealt with together.

3.127 Assuming the regulations survive a disallowance motion tabled in the Senate, the effect is that any third-party litigation funding of such claims, entered into on or after 22  August 2020, will be regulated as a managed investment scheme and subject to the requirements of Chapters  5C and 7 of the Act. In particular, the scheme must be:

103 From September 2013 to September 2016, approximately 49% of all class actions filed in the Federal Court were funded by litigation funders. From 2013 to 2018, that percentage grew to 63.9%, with funded class action proceedings filed in the final year of that period constituting 77.7% of all filed class actions.

55

3.128  Regulation and legislation

•

registered, provided it has more than 20 members or is promoted by a person who is in the business of promoting managed investment schemes; and

•

operated by a ‘responsible entity’, being an Australian public company that holds an AFSL authorising the entity to operate the scheme.

3.128 The responsible entity must,104 among other things:

• •

act honestly and in the best interests of members;

•

report breaches of the Act to ASIC.

exercise the degree of care and diligence that a reasonable person would exercise if they were in the responsible entity’s position; and

3.129 The responsible entity will also be subject to the obligations that apply to all AFSL holders, including to:

•

do all things necessary to ensure that the financial services are provided efficiently, honestly and fairly;

•

take reasonable steps to ensure that its representatives comply with financial services laws; and

•

have adequate risk management systems in place.

3.130 However, ASIC has acknowledged that it may be difficult for litigation funders to comply with certain obligations under the Act and issued the ASIC  Corporations (Litigation Funding Schemes) Instrument 2020/787. This includes relief from:

• the obligation to provide a product disclosure statement to ‘passive’

members of the litigation funding scheme (being members who have not entered into a funding agreement with the funder or a costs agreement with the law firm, or otherwise notified the funder or firm that they agree to participate in the scheme), if the funder has made the product disclosure statement publicly available on its website;

• •

the obligation to regularly value scheme property;

•

the requirement to include in the product disclosure statement certain detailed fees and costs information and information about labour standards or the impact of environmental, social or ethical considerations on investment decisions.

the statutory withdrawal procedures for members who opt out of a class action under court rules; and

104 Corporations Act 2001 s 601FC.

56

The Australian position 3.135

3.131 ASIC has also issued a ‘no action’ position, stating that it will not take regulatory action if a funder of an open class action fails to comply with the obligation105 to set up and maintain a register of members of the scheme.

Future reform 3.132 Sadly, at least for neoliberals, that may not be the end of the story. In 2018 the Australian Law Reform Commission reviewed the regulation of litigation funding, at the federal level, and its report106 (the ALRC Report) was tabled in the federal Parliament in January 2019. 3.133 A suite of legislative changes is suggested, including: (1) that class action funding agreements are only enforceable with court approval; (2) expressly empowering the court to award costs against funders (and insurers) who fail to comply with the overarching purposes of the Federal Court of Australia Act 1976 (viz. to facilitate the just resolution of disputed claims according to law and as quickly, inexpensively, and efficiently as possible); and (3) a presumption that litigation funders of class actions will provide security for costs that is enforceable in Australia. 3.134 The ALRC Report also recommends that solicitors be allowed to charge contingency fees in class actions with some limitations, namely that: (1) the contingency fee is the only form of funding; (2) the solicitors may not also charge fees on a time-cost basis; and (3) the solicitors are responsible for disbursements within the contingency fee. 3.135 In the United States, lawyers have been acting on contingency fees since at least the late nineteenth century and are often litigation funders’ most challenging competitors. As the first port of call for most claimants they can cherry-pick the best cases. In this sense, this proposed change could have a significant impact on funders in the Australian market. On the other hand, the very limited uptake of similar arrangements in the UK indicates that lawyers can be slow to move from an existing business model that consistently generates good returns with little risk. This wouldn’t then produce the benefits of increased competition that the ALRC Report envisages.

105 Corporations Act 2001 Chapter 2C. 106 Integrity, Fairness and Efficiency – An Inquiry into Class Action Proceedings and Third-Party Litigation Funders.

57

3.136  Regulation and legislation

Self-regulation 3.136 The Association of Litigation Funders of Australia (ALFA) was established in April 2018 and aims to actively engage with Government, legislators, regulators and other policy makers to shape the Australian regulatory environment. 3.137 ALFA’s Best Practice Guidelines for Litigation Funders and Managers (January 2019) set out standards of practice and behaviour to be observed by its members in respect of funding and/or managing the resolution of disputes, including litigation in Australia and arbitration with an Australian seat (relevant disputes). ALFA’s self-regulation, therefore, relates to a much wider range of funded claims than ASIC’s statutory regulation of funded class actions. Generally, the Guidelines are similar to ALF’s Code of Conduct. Members include funders and managers. 3.138 A ‘funder’ must have access to funds, immediately within its control, to fund the resolution of relevant disputes pursuant to LFAs to enable a party to the dispute to meet the costs (including pre-action costs and adverse cost orders) of the resolution of relevant disputes. In return, the funder receives a share of the proceeds if the claim is successful (as defined in the LFA) and does not seek any payment from the funded party in excess of the amount of the proceeds, unless the funded party is in material breach of the LFA. 3.139 A  ‘manager’ manages litigation financed by a funder and in return receives a share of the proceeds if the claim is successful (as defined in the LFA). 3.140 The Guidelines are not mandatory. Capital adequacy 3.141 Funders ‘… should maintain at all times access to adequate financial resources to meet the obligations of the Funder to fund all the Relevant Disputes that they have agreed to fund and in particular, should ensure that they maintain the capacity to pay all debts as and when they become due and payable’. 3.142 The Guidelines don’t require members to have a minimum amount of capital. Nor do they replicate ALF’s continuous disclosure obligation or include an obligation to notify ALFA and the funded party if the funder reasonably believes that its representations in respect of capital adequacy under the Guidelines are no longer valid because of changed circumstances. 3.143 There is no requirement to be audited and provide ALFA with copies of audit opinions. 3.144 Unlike ALF’s Code of Conduct, the Guidelines are not augmented rules by which members accept relevant factors in assessing whether they have ‘adequate financial resources’. 58

The Hong Kong position 3.150

Termination 3.145 The LFA should state whether (and if so, how) the member will terminate the LFA if the member: (1) reasonably ceases to be satisfied about the merits of the dispute; (2) reasonably believes that the dispute is no longer commercially viable; or (3) reasonably believes that there has been a material breach of the LFA by the funded party. The LFA should not establish a discretionary right for a member to terminate an LFA in other circumstances. 3.146 If the LFA does give the member any of the above rights, the LFA should provide that if the funder terminates, it will remain liable for all funding obligations accrued to the date of termination unless the termination is due to a material breach by the funded party. 3.147 The Guidelines are, therefore, identical to ALF’s Code of Conduct on this point, except that they are silent in relation to how disputes about termination are resolved and don’t mandate expert determination by Senior Counsel. Conflicts 3.148 Reflecting the Australian focus on conflicts of interest, members should publish or, alternatively, provide a copy of their privacy and conflicts policies conforming with the relevant regulations to each funded party in their precontract disclosure documents or as an attachment to the LFA, and they should comply with those policies.

THE HONG KONG POSITION 3.149 With limited exceptions, third-party funding of litigation is not permitted. Champerty and maintenance are both torts107 under Hong Kong law and indictable offences, punishable by imprisonment and a fine.108 3.150 Since February 2019, third-party funding has been allowed for arbitration and related court and mediation proceedings.109 This is significant because 308 arbitrations and 12 mediations were submitted to the Hong Kong International Arbitration Centre in the same year. The total amount in dispute in all arbitration 107 The branch of law that imposes civil liability for breach of obligations imposed by law, eg negligence. 108 Section 101I of the Criminal Procedure Ordinance. 109 Division 3 Part 10A of the Arbitration Ordinance.

59

3.151  Regulation and legislation

cases was HK$36.4 billion (approximately US$4.7 billion) and the total amount in dispute in all administered cases was HK$26.7 billion (approximately US$3.4 billion).110 3.151 The Secretary for Justice has issued the ‘Code of Practice for Third-Party Funding of Arbitration’,111 which applies to any funding agreement commenced or entered into on or after 7 December 2018. Failure to comply with the Code of Practice does not, of itself, give rise to civil or criminal liability. However, the Code of Practice is admissible in evidence before a court or arbitral tribunal, which may take into account any failure to comply with it, if such failure is relevant to a question that the court or tribunal is deciding.112 3.152 How does the Code of Practice address the two aspects that Lord Justice Jackson thought most important – capital adequacy and termination?

Capital adequacy 3.153 The Code of Practice is similar to the ALF’s Code but necessarily amended and weakened to reflect the fact that there is no ALF equivalent and therefore no obligations beyond contractual obligations to the funded party. An ‘advisory body’, made up of three senior, Hong Kong-based lawyers, must be provided with copies of audit opinions or reasonable evidence that funders satisfy the minimum capital requirement, but the body is merely responsible for monitoring and reviewing the operation of the enabling legislation and the Code. 3.154 Specifically, ‘A third party funder must: (1) ensure that it maintains the capacity to: (a) pay all debts when they become due and payable; and (b) cover all of its aggregate funding liabilities under all of its funding agreements for a minimum period of 36 months; (2) maintain access to a minimum of HK$20 million of capital; (3) provide the advisory body with either: (a) a copy of the audit opinion on the third party funder’s most recent annual financial statements (but not the underlying financial statements) within 1 month of receipt of the opinion and in any case within 6 months of the end of each fiscal year; or (b) reasonable evidence from a qualified third party (preferably from an auditor, but alternatively from a third-party administrator or bank) that

110 https://www.hkiac.org/about-us/statistics 111 https://gia.info.gov.hk/general/201812/07/P2018120700601_299064_1_1544169372716.pdf 112 Section 98S of the Arbitration Ordinance.

60

The Hong Kong position 3.157

the third party funder satisfies the minimum capital requirement set out in subparagraph (2); and (4) accept a continuous disclosure obligation under each funding agreement in respect of its capital adequacy, including: (a) a specific obligation to give timely notice to the funded party if the third party funder believes that its representations to the funded party in respect of capital adequacy as required by the Code are no longer valid because of changed circumstances; and (b) a specific undertaking that if an audit opinion provided for any audit period is qualified (except as to any emphasis of matters relating to the uncertainty of valuing relevant dispute resolution funding investments) or expresses any question as to the ability of the third party funder, to continue as a going concern: (i) it will promptly inform the funded party; and (ii) the funded party will be entitled to enquire further into the qualification or question expressed and take any further action it deems appropriate.’

Termination 3.155 The Code of Practice requires funding agreements to state ‘whether (and if so, how) the third-party funder may terminate the funding agreement’ if the funder: (1) reasonably ceases to be satisfied about the merits of the arbitration; (2) reasonably believes there has been a material adverse change to the funded party’s prospects of success, or recovery on success; or (3) reasonably believes that the funded party has committed a material breach of the funding agreement.113 3.156 Funding agreements ‘may not establish a discretionary right for a third-party funder to terminate the funding agreement in the absence of the circumstances described [above]’.114 3.157 The wording is essentially the same as that in the ALF’s Code of Conduct except for the second ground for termination. The ALF Code provides that a funder may terminate if it ‘reasonably believes that the dispute is no longer commercially viable’. This more overtly goes to the economics of the deal in the round (the reference is to the ‘dispute’ rather than just the funding) and probably gives the funder more latitude, whereas the Code of Practice looks at recovery

113 Paragraph 2.13 of the Code of Practice for Third Party Funding of Arbitration, 7 December 2018. 114 Ibid. Paragraph 2.14.

61

3.158  Regulation and legislation

and only from the claimant’s standpoint. For example, a dispute may cease to give the funder a return commensurate with the risk involved if it becomes clear that the claimant has overstated the recoverable damages. The ALF Code would give the funder the right to terminate. The Code of Practice would only do so if this was a material adverse change to the funded party’s prospects of recovery on success. In short, under the ALF Code a funder can terminate if its situation worsens, whereas under the Code of Practice a funder can only terminate if the claimant’s situation worsens.

THE SINGAPORE POSITION 3.158 Like Hong Kong, Singapore has in the last few years become more receptive to third-party litigation funding and, in particular, arbitration-related funding. There is no statutory regulator or ALF equivalent. 3.159 The common law only allows third-party funding of litigation claims handled by liquidators.115 3.160 By virtue of the Civil Law Act, a ‘qualifying Third‑Party Funder’ may fund prescribed dispute resolution proceedings.116 To qualify, a funder’s principal business must be third-party litigation funding and it must have a paid‑up share capital of not less than S$5 million (or the equivalent amount in foreign currency) or not less than S$5 million (or the equivalent amount in foreign currency) in managed assets.117 ‘Managed assets’ are widely defined to include moneys and assets committed by investors to, or drawn down by, a fund managed by a litigation funder.118 ‘Prescribed dispute resolution proceedings’ are international arbitration proceedings and related court and mediation proceedings, including proceedings in connection with the enforcement of arbitration awards.119 3.161 In 2019, the Singapore International Arbitration Centre (SIAC) received 479 new cases of which it administered 95 per cent. The total sum in dispute for new SIAC-administered cases amounted to S$9.02 billion (approximately US$6.69 billion).120 3.162 The Singapore Institute of Arbitrators has issued non-binding guidelines (the SIARB Guidelines) for third-party funders.121

115 Re Vanguard Energy [2015] SGHC 156. 116 Civil Law Act s 5B(2). 117 Civil Law (Third-Party Funding) Regulations 2017 reg 4(1). 118 Ibid. reg 4(2) and 4(3). 119 Ibid. reg 3. 120 Singapore International Arbitration Centre Annual Report 2019. 121 https://www.siarb.org.sg/images/SIArb-TPF-Guidelines-2017_final18-May-2017.pdf

62

The Singapore position 3.166

Capital adequacy 3.163 On the one hand, Singapore’s minimum capital requirement of S$5 million, or the equivalent, is enshrined in its legislation rather than a voluntary code. A breach more explicitly exposes a funder to an argument that its funding arrangements are champertous and unenforceable. On the other hand, the definition of the ‘managed assets’ that can constitute capital is widely drawn so the S$5 million won’t represent a high bar for most funds. 3.164 The, non-binding, SIARB Guidelines have echoes of the ALF Code of Conduct: 4.1 Until the conclusion of the prescribed dispute resolution proceedings or the lawful termination of the funding, a Funder shall take all reasonable steps to ensure that it will continue to meet the qualifications and other requirements of a qualifying Third-Party Funder; and a Funder shall notify the Funded Party and its legal practitioner expeditiously if the Funder reasonably foresees or believes that it will no longer be able to meet the qualifications and other requirements…; 4.2

A Funder shall undertake to be audited regularly by a reputable audit firm.

4.3

At all times, a Funder shall maintain access to adequate financial resources to meet the obligations of the Funder, its subsidiaries and associated entities to fund all disputes that they have agreed to fund, and shall ensure that [they] maintain the capacity: (a)

to pay all debts when they become due and payable; and

(b) to cover aggregate funding liabilities under all of their Funding Contracts.

3.165 Paragraph  4.1 largely repeats the requirements of the relevant regulations. Paragraph 4.2 makes no mention of what happens if the funder is not audited regularly by a reputable firm. In practice this guideline may be no more than a signpost for claimants and their advisers to avoid funders/funds that shy away from external professional scrutiny. Paragraph  4.3(b) is not limited in time (unlike the ALF’s 36 months) but, again, in the absence of a regulatory body charged with oversight of third-party funding and with no ALF equivalent, there’s no sanction for non-compliance.

Termination 3.166 The, non-binding, SIARB Guidelines merely provide that the funding agreement shall be clear on the extent to which the funder may: 7.1.2 terminate the Funding Contract in the event of clearly prescribed conditions; and 7.1.3 remain liable for accrued obligations notwithstanding termination…

63

3.167  Regulation and legislation

THE GLOBAL POSITION 3.167 In September 2020, its founder members (Burford Capital, Harbour Litigation Funding, Longford Capital Management, Omni Bridgeway, Therium Capital Management and Woodsford Litigation Funding) created the International Legal Finance Association (ILFA). It aims to be the ‘global voice’ of the commercial legal finance industry, representing its interests before governmental bodies, international organisations and professional associations and serving as a clearing house of relevant information, research and data about the uses and applications of commercial legal finance. 3.168 ILFA is a not-for-profit corporation incorporated in Washington DC with a significant presence in London. Membership is open to any professional commercial litigation finance firm that satisfies the Association’s criteria. Innsworth Advisors Limited, Law Finance Group, Nivalion AG, Parabellum Capital LLC, The D. E. Shaw Group, Fortress Investment Group LLC and Validity Finance LLC had joined the founder members by the launch date. 3.169 ILFA is a trade body and not a regulator of any sort. It will, however, establish general principles of conduct for the legal finance industry and promote best practices in the field. Its view is that the form of regulation, whether selfregulation, as in the UK, or through some other form of regulation, is a matter for governments and will necessarily vary from country to country. The national chapters of ILFA will work with institutions in their respective jurisdictions to inform policy on legal finance, ensure that policy safeguards the benefits that legal finance can bring and to oppose regulatory initiatives designed to stifle legal finance and access to justice.

64

CHAPTER 4

Third-party litigation financing and lawyers’ ethical obligations Lucy Pert Hausfeld, London, UK

Anthony Sebok Cardozo Law School, NYC, USA Introduction 4.1 Choice of law 4.2 The United States 4.8 England and Wales 4.22 Conclusion 4.59

INTRODUCTION 4.1 This chapter analyses the professional responsibilities of lawyers in the context of third-party litigation funding (TPLF). The basis of those responsibilities is the principal–agent relationship between the client (the principal) and the lawyer (the agent). As in fiduciary law, the professional responsibility of a lawyer whose client is seeking or has received TPLF is one of utmost loyalty to the client. This chapter will review and apply concepts familiar to most professional advisers, particularly lawyers, drawn from the general duties owed to clients, to the specific context of TPLF. Because TPLF transactions by clients may not be familiar to many lawyers, it is easy for lawyers to confuse the novelty of the object of the transaction (litigation finance) with the analysis of the lawyer’s ethical obligations (conflict of interest, confidentiality,1 etc.). This chapter will separate the novel from the familiar and explain how and why the ethical obligations of lawyers whose clients seek TPLF can be determined with familiar principles of legal ethics from the United States, and England and Wales.

CHOICE OF LAW 4.2 As this chapter will detail, a lawyer’s ethical obligations with regard to TPLF vary significantly by jurisdiction. What is permissible in England may not 1

See chapter 5.

65

4.3  Third-party litigation financing and lawyers’ ethical obligations

be permissible in New York, and what is permissible in New York and England may not be permissible in Wisconsin or Ireland, and so on. For that reason, this chapter can only give general guidance about the approach generally taken by major jurisdictions in the United Kingdom and the United States. It also must, as an initial matter, describe the conflict of law rules which determine which body of ethics rules will apply to a lawyer’s conduct as it relates to TPLF when the lawyer’s conduct is connected to more than one jurisdiction. 4.3 In the United States, the rules of professional responsibility are not enforced by the legislative or executive branches of the states, but rather by either the courts or bar associations to whom the courts have delegated their authority.2 The rules of professional responsibility include their own rules on choice of forum and choice of law. Rule 8.5 of the Model Rules of Professional Conduct (MRPC) is the default rule recommended by the American Bar Association and it has been adopted, sometimes with modifications, by all 51 US states and the District of Columbia. 4.4 The architecture of Rule 8.5 is simple. A  lawyer may always be disciplined by the disciplinary authority of the jurisdiction in which they are admitted to practice law, regardless of where their conduct occurred. A lawyer not admitted to practice law in a jurisdiction may be disciplined by that jurisdiction if they provide legal services in it. Assuming that two jurisdictions have these rules in common, it follows that a lawyer may be simultaneously disciplined by the disciplinary authority of the bar to which they are admitted as well as the disciplinary authority of a bar to which they have not been admitted.3 4.5 The rules under which the lawyer’s conduct is judged are, on the surface, easy to determine. Conduct ‘in connection with a matter before a tribunal’ is judged by the rules of the jurisdiction in which the tribunal sits, regardless of which jurisdiction is judging the conduct. Other conduct is judged by the rules of the jurisdiction in which the conduct occurs, unless the ‘predominant effect’ is in a different jurisdiction, in which case the rules of the affected jurisdiction shall apply.4 4.6 The application of the choice of law rules is a little tricky in the context of TPLF. While it may seem obvious, on the face of it, that Lawyer L’s conduct in connection with funding for a case that is already being litigated by L before a court in State A should be judged by A’s rules of professional responsibility, 2

States with mandatory bars – also called ‘unified’ or ‘integrated’ bars – require that, in order to practice law in that state, a lawyer must be a member of the bar. In other states, membership in the state bar association is purely voluntary, and lawyer discipline is typically handled by an agency of the jurisdiction’s highest court. 3 The practical value of a jurisdiction exercising disciplinary authority over a lawyer who is not a member of that bar may be slight – but there may be both symbolic and material effects for a foreign bar to sanction a lawyer even if it cannot disbar the lawyer. 4 New York has a slightly different approach. If a lawyer is only admitted in New York, all conduct not in connection with a matter before a tribunal is judged under New York rules by New York, regardless of where it occurred. See New York Rules Prof. Conduct 8.5(b)(2).

66

The United States 4.10

there are variations on this standard case where the answer may not be so easy to identify. For example: If L is asked to advise Client C on a potential lawsuit that might be filed in States A or M, is the conduct ‘in connection with a matter before a tribunal’? It is not obvious that it is. Or, if L is engaged in so-called ‘portfolio funding’ in which an advance from a funder is secured on a non-recourse basis by five ongoing cases, one in each of five states (two in A and three in M), should State A apply its own rules on professional responsibility to L’s conduct (which may have, for the most part, involved L’s conduct while in an office in A) or M’s rules, assuming that there was an outcome determinative difference between A and M? 4.7 An illustration of the subtleties of choice of law under Rule 8.5 is found in the New York State Bar Association Ethics Opinion 889. It held that a New York lawyer who was also admitted in DC could be a partner in a DC firm that had non-lawyer partners, even if some of the lawyer’s practice consisted of matters before NY tribunals. The committee reasoned that as long as the ‘predominant effect’ of the lawyer’s practice was in DC, the applicable rules under which the NY lawyer’s conduct would be assessed were DC’s, even if some of the conduct (and the fees) were connected to a NY tribunal.

THE UNITED STATES Competency 4.8 A fundamental obligation of a lawyer in the United States is to provide competent representation. This is defined in MRPC  Rule 1.1 as well as the common law duties of reasonable care in malpractice. The chief components of competency for the present purposes are legal knowledge and skill. 4.9 A  lawyer must provide competent service within the scope of representation agreed between the parties. Does the scope of representation of a party seeking to initiate, or in the midst of, litigation, automatically include a duty to advise a client about the desirability of TPLF? Does it include more, such as a duty to advise about the substantive terms of a TPLF agreement, including price, or is that something which the client must separately add to the representation, and for which the lawyer may separately charge the client? At least one court has taken the latter view in connection with legal malpractice and breach of fiduciary duty.5 4.10 Of course, if the baseline is that a lawyer has no obligation to advise a client on TPLF unless the scope of representation is extended to include it, a lawyer may still find themselves under an obligation to provide competent advice

5 See Francis v Mirman, Markovits & Landau PC, N.Y. Sup. Ct. Kings County, No. 29993/10, Jan. 3, 2013.

67

4.11  Third-party litigation financing and lawyers’ ethical obligations

about the underlying matter to the extent that the client’s unilateral actions in connection with funding add to or complicate the matter. So, for example, if a client unilaterally chooses to separately negotiate a contract with a funder, the lawyer will still be under an obligation to advise the client about the consequences of providing the funder with communications between the client and the lawyer or materials containing attorney work product. A client cannot be presumed to appreciate the legal effect of such actions, and even if a lawyer is not directed by the client to take the actions which would effect a waiver, the lawyer has a positive duty to speak up and alert the client of the risks to the litigation arising from inadvertent (or unwise) waiver. 4.11 The same analysis applies with regard to the violation of state law by the client seeking funding. A significant number of US states are hostile to TPLF.6 In some cases, state law treats the contract between the client and funder as voidable as against public policy,7 while in a much smaller set of jurisdictions, champerty and maintenance give standing to adverse parties to attack the underlying case in chief.8 A client’s objectives in retaining a lawyer clearly include avoiding a setback resulting from the latter, and a lawyer clearly must advise the client of that risk. Whether the lawyer is obliged to advise the client of the fact that the contract with the funder may be void because it is against public policy is not clear, unless the client asked the lawyer to help prepare the contract.9

Confidentiality 4.12 A  fundamental principle of legal ethics in the United States is that a lawyer should not reveal information relating to a client’s matter unless explicitly or implicitly directed to do so by the client. Typically, in the latter case, disclosures reasonably necessary to achieve the client’s objectives are permitted, but where there is any doubt, the lawyer should obtain from the client explicit, informed consent. This is the import of MRPC Rule 1.6.10 4.13 Whether or not a lawyer is authorised to reveal client information to a funder depends on whether the client has explicitly or implicitly directed the lawyer to do so. This is not difficult to determine where the client has come to the lawyer after consulting with a funder and instructs the lawyer to reply to 6 See Anthony J Sebok (2011) The Inauthentic Claim 64 Vand. L. Rev. 61. 7 See Prospect Funding Partners, LLC v Williams, 2014 Minn. Dist. LEXIS 2 (Dist. Ct. Hennepin County, Minn., May 5, 2014). 8 See Toste Farm Corp. v Hadbury, Inc., 798 A.2d 901 (R.I. 2002). 9 Given that the client benefits from a finding that the contract is illegal, it is not clear how the client is harmed, although, in theory, a lawyer could still be disciplined for assisting a transaction which the court could not enforce. See Prospect Funding Holdings, LLC v Saulter, 102 N.E.3d 741 (Ill. App. 2018). 10 New York, as well as a few other states, is slightly less protective of clients. NYRPC 1.6 defines ‘confidential information’ more narrowly, so that the rule does not apply to information that is not subject to a litigation privilege, not likely to be embarrassing to the client if disclosed, or not something which the client specifically requested to be treated as confidential.

68

The United States 4.16

the funder’s inquires. The more pertinent question is whether the lawyer has fulfilled their obligation in competency to inform the client of the consequences of allowing the disclosures.

Truthfulness in statements to others 4.14 Related to the previous section is the question of the lawyer’s ethical duty to the funder to be truthful in communications made on behalf of the client. Regardless of whether a lawyer is viewed as a fiduciary of the client for the purposes of liability to third parties, such as funders, there is a separate obligation under the Model Rules to be truthful in communications with third parties (MRPC 4.1). 4.15 A lawyer may not make a false statement of ‘material fact’ to a third party in connection with their client’s matter. In addition, they must disclose a material fact to a third party to avoid assisting their client’s fraud against a third party in connection with their client’s matter. The import for the lawyer in their dealings with funders is clear. They may not lie to prospective funders about any material fact relating to the client’s case, including, for example, the client’s expected recovery. Then, after the funding is in place, the lawyer is under an ongoing duty to correct any material misrepresentation made by the client if the lawyer’s silence could be held to be assistance to the client in perpetuating a fraud against the funder. This latter obligation – to disclose – aligns with the duty of confidentiality under Rule 1.6, which allows disclosure of confidential information ‘to the extent the lawyer reasonably believes necessary’ to prevent the client from using the lawyer’s services to commit a fraud.11

Other obligations to funders 4.16 In the United States, funders in the consumer legal finance sector often ask lawyers to promise to perform certain acts for the benefit of the funder. It is unethical for a lawyer to make a promise to, or a legally binding contract with, a funder without the client’s knowledge and, by extension, implicit (informed) consent. Such a promise or contract is a material conflict of interest under MRPC  Rule 1.7(a)(2). But in the consumer legal finance sector, where funders are dealing with a high volume of contracts with counterparties who are unsophisticated, the client’s lawyer is often the funder’s main point of contact, and also often the only party with a long-term interest in making sure that the funder is kept informed of developments in the client’s case, and that the funder is paid once the client receives proceeds from the case.12

11 See Rule 1.6(b)(2). 12 See Ronen Avraham and Anthony J Sebok (2019) An Empirical Investigation of Third-party Consumer Litigation Funding 104 Cornell L. Rev. 1133.

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4.17  Third-party litigation financing and lawyers’ ethical obligations

4.17 Side promises between the lawyer and a third party guaranteeing a client’s payment to the third party are not unusual in the United States. The phenomenon of the ‘client protection letter’, by which a lawyer commits to a medical provider that the client will satisfy a medical debt out of litigation proceeds, are quite common and are ethical.13 These letters create a private right of action that parallels the lawyer’s pre-existing obligation under MRPC Rule 1.15(d) to deliver property owned by third parties held by the lawyer as a result of the resolution of a client’s matter. Where a lawyer has executed such a letter, with the client’s informed consent, the lawyer is liable to the funder for failure to deliver the share of the proceeds due to it under the funding agreement with the client.14 These letters may also require the lawyer to notify the funder of developments in the case, such as a settlement and receipt of proceeds. Normally, a lawyer would be in violation of the duty of confidentiality (as well as loyalty) were they to fulfil this obligation in contradiction of the client’s wishes but it is not clear whether, assuming that the client gave irrevocable instructions to the lawyer upon receiving the funds, the lawyer can ignore the obligations in the letter even if the client changes their mind.

Concerns about fee-splitting 4.18 In the United States, the history of the development of the rules of professional responsibility has been marked by efforts to protect professional values from other pressures, especially commercial pressures.15 This had been achieved through two intertwined prohibitions. The Model Code of Professional Responsibility, which preceded the Model Rules, prohibited: (1) lawyers aiding in the unauthorised practice of law; and (2) lawyers aiding in the corporate practice of law. When the Model Rules replaced the Code, these functions were combined into the current Rule 5.4, which is intended to protect the ‘Professional Independence of the Lawyer’. 4.19 Rule 5.4(a) permits a lawyer to ‘share fees with a non-lawyer’ under four very limited circumstances, and all US states, except for the District of Columbia and Arizona, have adopted this prohibition in identical form.16 A number of TPLF contracts have been directed towards lawyers, in exchange for a non-recourse interest in earnings drawn from specified matters. ‘Lawyer-directed’ TPLF is identical to ‘client-directed’ TPLF except that the counterparty is a lawyer, not a party in a lawsuit.

13 See Connecticut Bar Association, Ethics Op. 02-04, 2002 WL 570601. 14 See Ronald J. Palagi, P.C., LLC v. Prospect Funding Holdings (NY), LLC, 302 Neb. 769 (2019). 15 See Bruce A Green (2013) Lawyers’ Professional Independence: Overrated or Undervalued? 46 Akron L. Rev. 599. 16 Washington DC’s liberal attitude towards non-lawyer partners in law firms is arguably less than meets the eye. Arizona will repeal its version of Rule 5.4 in 2021. Lawyers will be able to share fees, and form ‘alternative business structures’, with non-lawyers. See Order Amending the Arizona Rules of the Supreme Court and the Arizona Rules of Evidence, No. R-20-0034 (Ariz. Sup. Ct., August 27, 2020).

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England and Wales 4.23

4.20 It may be argued that lawyer-directed TPLF is nothing more than a form of factoring.17 Some US courts have noted that law firms, when they sell unearned fees, are engaging in a transaction recognised by the Uniform Commercial Code.18 Numerous courts have enforced such contracts.19 Nonetheless, the New York City Bar Association Commission on Professional Ethics recently held, in Formal Op. 2018-5 (‘Litigation Funders’ Contingent Interest in Legal Fees’), that lawyer-directed TPLF violates NYPRC 5.4(a) (which is identical to MRPC Rule 5.4(a)). 4.21 The New York City ethics opinion has been criticised, and it is not clear what effect, if any, it has had on the legal finance market in New York or elsewhere in the United States. Its reasoning has been criticised on a number of levels, the most significant, perhaps, that the judgement of New York courts has been the opposite, although, as the authors of the opinion point out, it is not the job of courts to directly enforce the rules of professional responsibility, and so, to the extent that judges have enforced New York contract law in the teeth of putatively unethical behaviour by lawyers, no conclusion can be drawn as to whether a lawyer should be disciplined for having engaged in a lawyer-directed TPLF contract.20

ENGLAND AND WALES Introduction 4.22 The context in which decisions concerning ethics in TPLF are made is quite different in England and Wales compared with the United States. The Courts of England and Wales as well as the legislature have been supportive of TPLF. 4.23 Mr Justice Roth recently commented that ‘TPLF is a well-recognised feature of modern litigation and facilitates access to justice for those who otherwise may be unable to afford it’.21 He went on to quote Tomlinson LJ in Excalibur Ventures LLC v Texas Keystone Inc (no 2),22 ‘litigation funding is an accepted and judicially sanctioned activity perceived to be in the public interest’. Mrs Justice Knowles in the Family Division of the High Court reiterated this 17 See Anthony J Sebok (2018) Selling Attorneys’ Fees 2018 U. Ill. L. Rev. 1207. 18 See PNC Bank v Berg, No. 94 C-09-208-WTQ, 1997 WL 527978, at 10 n.5 (Del. Super. Ct. 1997); Lawsuit Funding, LLC v Lessoff, No. 650757/2012, 2013 WL 6409971, at 5 (NY Sup. Ct. 2013); and Counsel Fin. Servs., L.L.C. v Leibowitz, No. 13-12-00103- CV, 2013 Tex. App. LEXIS 9252, at 26 (July 25, 2013). 19 See Fast Trak Inv. Co., LLC v Sax 2018 WL 2183237 (N.D. Cal. May 11, 2018) and Kelly, Grossman & Flanagan, LLP v Quick Cash, Inc., 35 Misc. 3d 1205(A), 950 N.Y.S.2d 723 (Sup. Ct. 2012). 20 See N.Y. City Bar Ass’n Comm. on Prof’l Ethics, Formal Op. 2018-5, at 6 n. 12. 21 UK Trucks Claim Limited v Fiat Chrysler Automobiles N.V. and Ors [2019] CAT 26. 22 [2016] EWCA Civ 1144 at [31].

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4.24  Third-party litigation financing and lawyers’ ethical obligations

point of view stating, ‘litigation funding practised by a funder adhering to the Code of Conduct has been endorsed by the senior courts in robust terms’.23 4.24 It could even be said that the use of TPLF has been encouraged. The Solicitors Regulation Authority (SRA) Code of Conduct 2011 included the requirement that solicitors discuss with the client how it will pay for fees, including whether the fees may be paid by someone else (para  1.16). This provision does not appear in the SRA Code of Conduct for Solicitors, Registered European Lawyers or Registered Foreign Lawyers (the ‘Solicitor Code’),24 revised in 2019. The Solicitor Code still requires solicitors to ensure that clients receive the best possible information about how their matter will be priced and, both at the time of engagement and when appropriate as their matter progresses, about the likely overall cost of the matter and any costs incurred (Art. 8.7). 4.25 There has been a long-standing debate as to whether TPLF will lead to an increase in frivolous or unmeritorious litigation. As demonstrated by the quotes above, this debate has now largely been settled in the UK, where it is perceived that TPLF is in the public interest. 4.26 It was perhaps always the case that these concerns were exaggerated. The well-established funders have meticulous due diligence procedures and will only invest in claims that are likely to succeed. It is possible that the widespread use of TPLF may lead to an increase in litigation overall because previously a claimant may not have been able to afford to bring a claim or the claimant was not aware that its rights had been breached. Whether this is a good thing will of course depend on your perspective. An argument that defendants should be protected by the fact that those who may bring a claim against them are ignorant of their rights or cannot afford to access the judicial system, is not, however, particularly attractive.25

Professional regulation 4.27 In England and Wales, the rules of professional responsibility are set by the SRA and developed through case law in the courts. The SRA Principles are guided by the ‘fundamental tenets of ethical behaviour’ which both individuals and firms are expected to uphold. These values are translated into expected standards of behaviour through separate codes of conduct for both solicitors

23 Akhmedova v Akhmedov [2020] EWHC 1526 (Fam), dated 12 June 2020. 24 Solicitors Regulation Authority SRA Code of Conduct for Solicitors, RELs and RFLs Available online: https://www.sra.org.uk/solicitors/standards-regulations/code-conduct-solicitors/ 25 Bentham made the same point two centuries ago about the consequences of the prohibition on TPLF in the common law: ’Wealth has indeed the monopoly of justice against poverty: and such monopoly it is the direct tendency and necessary effect of regulations like these to strengthen and confirm … The law created this monopoly: the law, whenever it pleases, may dissolve it.’ Jeremy Bentham, Defence of Usury (London: Payne and Foss, 1818). Available online: https://oll.libertyfund.org/titles/277#Bentham_0167_137.

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England and Wales 4.31

in the Solicitor Code and the Code of Conduct for Firms26 (the ‘Firm Code’) (together the ‘Codes’).27 4.28 While the Codes are separate, the SRA enforcement strategy emphasises that action may be taken against firms and/or individuals. In practice the Codes should be read together to understand the overall standards of behaviour expected of a law firm. In addition, the SRA has produced the Financial Services (Scope) Rules, which govern aspects of how firms conduct their businesses. 4.29 Where a firm or lawyer has breached their obligations under the Codes, the SRA may take enforcement action, including striking off individuals, closing firms and issuing fines. If a client wishes to pursue a claim for professional negligence, it may rely on a breach of the Codes to prove that the solicitor has breached its professional duties but such breach is not, in itself, sufficient to prove that a solicitor breached their duty of care or acted negligently.28 4.30 The complex issues relating to conflict of laws in the United States do not arise in the context of regulation of solicitors in England and Wales. The SRA Code must be adhered to by all solicitors, registered European Lawyers and registered foreign lawyers authorised by the SRA to provide legal services. SRA Principles 4.31

There are seven Principles, which require that solicitors act:

(1) in a way that upholds the constitutional principle of the rule of law, and the proper administration of justice; (2) in a way that upholds public trust and confidence in the solicitors’ profession and in legal services provided by authorised persons;29 (3) with independence; (4) with honesty; (5) with integrity; (6) in a way that encourages equality, diversity and inclusion; (7) in the best interests of each client. 26 SRA  Code of Conduct for Firms, 30  May 2018. Available online: https://www.sra.org.uk/ solicitors/standards-regulations/code-conduct-firms/ 27 Barristers have their own separate regulatory body, the Bar Standards Board, and must comply with the Code of Conduct contained in the Bar Standards Board Handbook. Available online: https://www.barstandardsboard.org.uk/the-bsb-handbook.html 28 Johnson v Bingley [1997] PNLR 392 – note this case referred to a predecessor of the Solicitor Code, the Code of Conduct 2007, but it is expected to apply to the later versions. It has been argued, however, that the duty to comply with the predecessor to the Solicitor Code is arguably a statutory duty under the Legal Services Act 2007 s 176 and the breach could have the same legal effect as a breach of any other statutory duty (Hollins v Russell [2003] EWCA Civ 178). 29 Solicitors Regulation Authority. SRA  Glossary. Available online: https://www.sra.org.uk/ solicitors/standards-regulations/glossary/#authorised-person

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4.32  Third-party litigation financing and lawyers’ ethical obligations

4.32 All of the above are potentially relevant in the context of TPLF, but perhaps the most relevant are Principles 2, 3, 5 and 7. When considered in the context of TPLF, lawyers must act independently of the funder and ensure that any rights a TPLF may have under a funding agreement do not inhibit a lawyer’s ability to act in the best interests of their client. The Codes Competence 4.33 As is the case in the United States, a fundamental obligation of a law firm is to ensure the service provided to clients is competent. Article  3 of the Solicitors Code and Article 4 of the Firm Code cover the requirement to maintain competence. Solicitors are required to: (1) ensure that the service provided to clients is competent and delivered in a timely manner (Solicitor Code 3.2 and Firm Code 4.2); (2) maintain competency to carry out the role and keep professional knowledge and skills up to date (Solicitor Code 3.3 and Firm Code 4.3); (3) consider and take account of the client’s attributes, needs and circumstances (Solicitor Code 3.4 and Firm Code 4.2). Given the interaction of the Principles and the Codes, it is clear that this duty of competence would extend to any advice provided by solicitors in relation to TPLF. Confidentiality 4.34 Lawyers and firms must keep the affairs of their clients confidential, unless disclosure is required or permitted by the law or the client consents. This duty extends to previous clients and solicitors also have a duty to make clients aware of all information material to the matter of which they have knowledge; these duties are codified in sections 6.3 and 6.4 of the Codes. 4.35 A third-party funder must be able to assess the merits of a prospective case and be kept informed of the progress of a case through the proceedings. This requires the sharing of confidential and legally privileged information. The consequences of not sharing such information can be seen from the case of Harcus Sinclair v Buttonwood Legal Capital Ltd and Ors.30 In this case the court held that a funder was entitled to terminate the funding agreement because the claimant’s solicitors had not provided sufficient information to support the chances of success being 60 per cent. 4.36 To satisfy this obligation lawyers should obtain a client’s consent before discussing their case with funders and continue to seek their client’s instructions 30 [2013] EWHC 1193.

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England and Wales 4.39

when negotiating funding agreements. Fortunately, in England, this problem is easily solved by all parties entering into a Non-Disclosure and Common Interest Privilege Agreement. These contracts set out in writing that there is an express acknowledgement that the parties share a common interest in the litigation and the exchange of information is covered by common interest privilege. Fee-splitting 4.37 There is no prohibition in the UK on fee-splitting as there is in the United States. There remains, however, a residual issue with respect to ‘hybrid’ damagebased agreements (DBAs). The Damages-Based Agreements Regulations 2013,31 introduced as part of the Jackson reforms,32 permit lawyers to work on a ‘no win, no fee’ basis and share up to 50 per cent of the client’s recovery on success. The potential return to solicitors working on a DBA can be far greater than, for example, working under a conditional fee agreement (CFA) where lawyers can obtain a success fee of up to 100 per cent of their fees from the client upon success.33 4.38 The uptake of DBAs among lawyers has, however, been very low.34 One reason for this may well be that it is not possible to enter into a ‘hybrid’ DBA whereby a DBA is combined with another form of retainer; for example, a portion of fees are paid for the duration of the claim irrespective of outcome and a portion paid on success. This prohibition appears to have been put in place because of a concern that hybrid DBAs ‘could encourage litigation behaviour based on a low risk/high returns approach.’35 4.39 There is growing pressure for the Government to amend these rules. Proposals to reform the DBA regulations put together by Professor Rachael Mulheron of Queen Mary University of London and Nicholas Bacon QC, were published in October 2019.36 31 SI 2013/609. 32 The Jackson reforms refer to a report on the costs of civil litigation by Lord Justice Jackson in December 2009, which was commissioned by the Master of Rolls. The reforms were enacted through a variety of legislation, including the Damages-Based Agreements Regulations 2013, SI 2013/609 and the Legal Aid, Sentencing and Punishment of Offenders Act 2012. 33 Until 2013, a claimant could recover the success fee from the adverse party This, however, is no longer permissible in litigation (these changes were implemented by the Legal Aid, Sentencing and Punishment of Offenders Act 2012 ss  44 and 46 which amend the relevant sections of the Courts and Legal Services Act 1990). It is still possible to recover such costs in arbitration, where the Tribunal is given wide discretion to award ‘legal and other costs of the parties (Arbitration Act 1996 ss 59(1)(c) and 63(3). See also Essar Oilfields Services Limited v Norscot Rig Management PVT Limited [2016] EWHC 2361 (Comm)). 34 See Post-Implementation Review of Part 2 of the Legal Aid, Sentencing and Punishment of Offenders Act 2012, Ministry of Justice, 7 February 2019, p 5. 35 John Hyde (2014) Government rules out hybrid DBAs Law Society Gazette 10  November 2014. Available online:. https://www.lawgazette.co.uk/law/government-rules-out-hybriddbas/5044959.article 36 See further Maura McIntosh (2019) Damages-based agreements: Proposals for reform Civil Litigation Features and Comment. The Law Society. 3  December 2019. Available online: https://communities.lawsociety.org.uk/civil-litigation-features-and-comment/damages-basedagreements-proposals-for-reform/6000585.article

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4.40  Third-party litigation financing and lawyers’ ethical obligations

Conflicts of interest 4.40 A fundamental obligation of a lawyer in England and Wales is not to act where there is a conflict of interest, with the exception of a limited number of situations. The Codes address conflicts of interest in sections 6.1 to 6.2. 4.41 A lawyer or firm must not act if there is an own-interest conflict or a significant risk of such. An own-interest conflict is defined as any situation where the lawyer’s duty to act in the best interests of any client in relation to a matter conflicts, or there is a significant risk that it may conflict, with the firm/lawyer’s own interests in relation to that or a related matter. However, where such conflict, or risk thereof, exists, a firm/lawyer may act in the situations specified by the Codes.37 4.42 Most of the time the interests of clients, lawyers and third-party funders are aligned. It is in the interests of all three parties for the claim to be a success and for any damages awarded or achieved through settlement to be as high as possible. There are, however, situations in which the interests of the parties may begin to diverge. 4.43 A  third-party funder is likely to think of the litigation purely as an investment. The quicker a funder is able to get a return on this investment, the higher the profit. A  party to litigation will of course have an eye to the time value of money but may be less concerned about this. While the litigant will want to maximise any damages, they may also be looking to assuage a sense of grievance, be seeking to make an ideological or political point or be motivated by other factors. This dynamic can have a bearing on settlement. It will almost always be in the interest of a funder to settle at a reasonable level as early as possible, perhaps more so than for a claimant. 4.44 Further conflicts may arise around the level of settlement. Where solicitors are acting on the basis of a CFA, there will come a time in the proceedings when the level of the solicitors’ fees may present a hindrance to the successful settlement of a claim. The claimant must obtain sufficient proceeds from the case to be able to cover the uplift portion of the CFA, which is no longer recoverable from the other side.38 4.45 It is accepted practice that entering a third-party funding agreement and securing payment of the lawyer’s fees does not constitute a conflict of interest. While a lawyer must act with integrity when explaining the case to a potential TPLF, the funder will usually procure their own legal advice on the merits of the case. 37 The Codes envisage the situations where a firm may have multiple clients and they will be permitted to act where the clients are ‘competing for the same objective’ or have a ‘substantially common interest in relation to the matter of the aspect of it, as appropriate’. The Code further stipulates a number of mandatory conditions to be met in such circumstances. 38 Legal Aid, Sentencing and Punishment of Offenders Act 2012 s 44.

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England and Wales 4.50

4.46 A conflict of interest may arise when a funder has too much influence over the decisions taken by solicitors. The boundary between permissible advice and impermissible control by a funder over a solicitor tracks the boundary that has developed since 1967 in England in the law of maintenance and champerty. To amount to maintenance and champerty a funding agreement must disclose an element of impropriety.39 If an agreement is found to be champertous, the agreement will be void and unenforceable as a matter of public policy. Pursuant to the indemnity principle, if the successful litigant did not have any costs to pay, they would not be able to recover costs from their opponent.40 4.47 While once again, in most cases the interests of the solicitor and the client will be aligned when it comes to the choice of a TPLF provider, there may also be room for conflicting interests. For example, certain TPLF providers may require the solicitor to work on a CFA when the solicitor may have a preference to be paid the full fees, there may be differences in the way in which the funding is drawn down that could impact upon the solicitor, or there may be differences in the way that after the event insurance (ATE) is obtained. Any direct incentive provided to the solicitor to choose one TPLF provider over another should be avoided. 4.48 There is also the potential for conflict to arise in the context of so-called ‘portfolio funding’. This term is used in different ways by different funders. The idea, however, generally centres on the risk to the funder being spread across a portfolio of cases. These cases may be for the same claimant, in which case the agreement can be entered into by the claimant. In this scenario, the funder will be able to cross-collateralise a loss in one case by a win in another. This reduces the risk for the funder and should make the overall funding less expensive. 4.49 Portfolio funding can also refer to a relationship between the law firm and a funder whereby the funder finances the firm’s ‘at risk’ portion of the litigation. Where a firm is working on several cases on the basis of a CFA or DBA, a funder may provide financing for that portion of the litigation. In this way, the funder’s risk is similarly spread across a number of different cases. 4.50 In the latter case, in order to avoid any conflict of interest, the client should be informed of this relationship and extra care must be taken that the client’s best interests are being taken into account when selecting the funder. In theory, funding on a portfolio basis in this way should decrease the cost of the funding, making it in the client’s interests as well as the law firm.

39 So as to constitute ‘wanton and officious intermeddling with the disputes of others’, as described by Fletcher Moulton LJ in British Cash & Parcel Conveyors v Lanson Store Services Co Ltd [1908] 1 KB 1006. 40 Hughes v Kingston Upon Hull City Council [1999]  QB  1193. See further, Matthew Amey Third-party litigation funding in England and Wales: an overview Practical Law. Available online: https://uk.practicallaw.thomsonreuters.com/8-521-3304?transitionType=Default&cont ext Data=(sc.Default)&firstPage=true#co_anchor_a710285

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4.51  Third-party litigation financing and lawyers’ ethical obligations

4.51 Conflicts already abound in the relationship between a solicitor and client. The model of the billable hour engenders a conflict as it is in the client’s interests for the solicitor to spend as few hours as possible on their case and in the solicitor’s interest to spend as much time as possible. The addition of a third-party funder adds a different complexion to this dynamic but does not fundamentally change it. The solicitor must always act in the best interests of the client and that is the premise that underlies all ethical challenges. Financial Services (Scope) Rules and Financial Services (Conduct of Business) Rules 4.52 For completeness, we address the Financial Services (Scope) Rules41 (the ‘Scope Rules’) which apply to firms carrying out regulated financial services activities. The regulated financial services activities are set out in Part 2 of the Financial Services and Markets Act 2000 and include dealing in, arranging, advising on, assisting in the administration of, and making arrangements with a view to carrying out contracts of insurance and carrying out consumer credit activities (other items are included but aren’t relevant to funding insurance). Where a law firm carries out such activities, they should be registered with the Financial Conduct Authority as an ‘exempt professional firm’. 4.53 The Scope Rules are focused on insurance activities and have been updated to implement the EU Insurance Distribution Directive (EU) 2016/97,42 which includes obligations for firms assisting clients with ATE. While ATE is insurance, rather than conventional TPLF, it plays a large role in the funding market. Funders will almost always require that ATE is in place to protect themselves from adverse costs awards.43 Although financed by the insurance markets, ATE is a way of raising funds to pay the costs of litigation and should be considered as an activity to be in the same vein as TPLF. The Scope Rules limit the insurance-related activities that firms may carry on and include assisting in the administration and performance of a contract of insurance. Such activities can only be carried on as an ancillary insurance intermediary. 4.54 The Financial Services (Conduct of Business) Rules44 then govern the information that solicitors should provide when carrying on insurance distribution activities. Broadly, lawyers must:

•

communicate all information, including marketing communications, in a way that is clear, fair and not misleading (Rule 9);

41 Solicitors Regulation Authority SRA  Financial Services (Scope) Rules. Available online: https://www.sra.org.uk/solicitors/standards-regulations/financial-services-scope-rules/ 42 Directive (EU) 2016/97 of the European Parliament and of the Council of 20 January 2016 on insurance distribution (recast). OJ L 26, 2.2.2016, p. 19–59. 43 It is clear that third-party funders are liable to pay adverse costs. Chapelgate Credit Opportunity Master Fund Ltd v Money and others [2020] EWCA Civ 246. 44 Solicitors Regulation Authority SRA Financial Services (Conduct of Business) Rules. Available online: https://www.sra.org.uk/solicitors/standards-regulations/financial-services-conductbusiness-rules/

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England and Wales 4.58

•

provide certain information in good time before the conclusion of the contract of insurance, including whether it’s a personal recommendation; the complaints procedure; and whether the lawyers represent the client or the insurer (Rule 10);

•

prior to the conclusion of the insurance, the lawyer must specify the client’s demands and needs and provide the client with a statement explaining them (Rule 12); and

•

ensure the client is given objective and relevant information about the policy so they can make an informed decision (Rule 21).45

Code of Conduct for Litigation Funders46 4.55 In November 2011, the Association of Legal Funders (ALF) was founded and, in accordance with the recommendation in Jackson LJ’s Final Report,47 published its first Code of Conduct for Litigation Funders (the ALF  Code).48 The ALF  Code was facilitated by the Civil Justice Council and launched on 23 November 2011. Since then the ALF Code has been updated from time to time. 4.56 The ALF Code sets out standards of practice and behaviour for litigation funders in England and Wales. Although the words ‘litigant’ and ‘litigation funding’ are used, the new Code does also apply to the funders of arbitration. 4.57 The ALF  Code has received judicial sanction. Mr Justice Roth, in UK Trucks Claim Limited v. Fiat Chrysler Automobiles N.V. and Ors49 said of it, ‘The basis of the ALF Code is to provide a satisfactory means of self-regulation of the litigation funding industry for the protection of those in receipt of TPLF, and the terms of the ALF Code, on its initial introduction, received the endorsement of Lord Justice Jackson.’50 4.58 The most recent iteration of the ALF Code dates from January 2018 and includes obligations to:

•

keep information and documentation provided to the funder confidential (Art. 7);

•

take reasonable steps to ensure the funded party has received independent advice on the terms of the legal finance agreement (Art. 9.1);

45 See also Rules 15 to 16 which govern the information a client must be provided with in relation to remuneration. 46 See also chapter 3 paras 3.8–3.54. 47 Review of Civil Litigation Costs: Final Report – Lord Justice Jackson. December 2009. 48 Code of conduct for litigation funders. Available online: https://associationoflitigationfunders. com/wp-content/uploads/2018/01/CODE-OF-CONDUCT-for-LITIGATION-FUNDERS-atJan-2018-FINAL.pdf 49 [2019] CAT 26. 50 [2019] CAT 26 at para 65.

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4.59  Third-party litigation financing and lawyers’ ethical obligations

•

not take steps to cause the funded party’s lawyers to act in breach of their professional duties (Art. 9.2);

• •

not seek to control the conduct of the dispute (Art. 9.3);

• •

only withdraw from funding in specific circumstances (Art. 11); and

maintain capital adequacy including the requirement to undertake an annual audit (Art. 9.4–9.5); refer disputes relating to settlement or termination to a Queen’s Counsel (Art. 13.2).

To date, there is no formal sanction for breaching the ALF Code other than the funder being removed from the ALF, if indeed the funder is a member.51

Conclusion 4.59 As with other aspects of a lawyer’s relationship with a client, different tools can be used to protect both the client and society from abuse of TPLF. Contract law is the first and easiest tool, since it is available, by definition, in every TPLF relationship. But legal ethics in both the United States and the UK necessarily go beyond contract and form a mandatory regime that imposes limits on a client, funder and lawyer, regardless of what they want. Such paternalism is also found in other aspects of the lawyer–client relationship, and, if handled with care, may help to grow the industry so it can serve even more clients. As the topics covered in this chapter reveal, funders need lawyers as allies, just as much as clients need lawyers. It is in the interest of all of the stakeholders in TPLF to develop fair and workable rules for the conduct of lawyers. It is equally in the interest of those same stakeholders that those rules be upheld with consistency and through the exercise of judicious discretion, so that the cost of TPLF does not become so high as to make it attractive only in theory, but not practice.

51 Association of Litigation Funders. Membership directory. Available online: https:// associationoflitigationfunders.com/membership/membership-directory/

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CHAPTER 5

Privilege and confidentiality Simon Walsh Cadwalader, Wickersham & Taft

Zachary Krug Woodsford, London

Introduction 5.1 English law 5.12 Application to third-party litigation funding under English law 5.47 US law 5.134 Application to third-party litigation funding under the laws of the United States 5.148 International arbitration 5.176

INTRODUCTION 5.1 This chapter addresses the issues of privilege and confidentiality which might arise when a party or their lawyer interacts with a third-party funder in litigation taking place in the courts of England and the United States. It starts by providing a brief overview of the general principles of the privilege regime existing in each jurisdiction, which is intended to serve as a backdrop to the privilege principles which potentially apply to the communications and relationships between claimant, funder and lawyer. We then seek to apply those privilege rules to some of the common circumstances in which questions of privilege might arise. The chapter also addresses the corollary issue of the disclosure of the funder’s identity in litigation, as well as in some common arbitral proceedings. Finally, the approach adopted towards privilege in international arbitration is briefly reviewed. 5.2 One of the most common questions, and often concerns, which arises in relation to the use of litigation finance is: how will the introduction of a thirdparty litigation funder into the relationship between lawyer and claimant affect the protection of legal professional privilege and the confidentiality of a claimant’s documents and communications? Understandably, this is a key consideration for claimants, lawyers and litigation funders alike. It is likely, both when seeking funding and throughout the life of the funded claim, that privileged and sensitive 81

5.3  Privilege and confidentiality

material will be shared between a claimant, their legal team, and the funder. Each has a common concern that their communications, including any advice provided by lawyers on the relative merits of the claims and legal strategies, do not lose the protections from disclosure that privilege provides and end up in the hands of their adversaries. 5.3 There are three principal ways in which the question of privilege in this relationship may arise: (i) The first is when a litigant is seeking offers for funding of the proceedings (or potential proceedings) from third-party funders. That process is likely to involve the claimant, their legal advisers (or both), providing material regarding the claim to potential funders. Initially that material may be fairly limited; sufficient to allow the funder to make an indicative decision whether to invest further time carrying out a more extensive due diligence review of the case. Once a funder expresses an initial interest in the claim, it is likely that a greater range of documents relating to the case will be shared with the funder in the due diligence phase, whereby the funder will carry out a more detailed review of the materials relating to the case in order to reach a final decision on whether to fund, and upon what terms. The material that is shared at that stage may be material which already exists, and much of which will be privileged in the hands of the claimant (for example, advice provided by the claimant’s lawyers to the claimant and any drafts of pleadings or witness statements). Some of that material may be prepared specifically for the prospective funder or funders (as opposed to being prepared for use in the proceedings). If a claimant is successful in obtaining a funding commitment, privileged material will likely then be exchanged between claimant, lawyers and funder throughout the proceedings themselves. To the extent that they apply, the ancient legal doctrines of champerty and maintenance prevent funders from controlling the litigation. However, even as passive investors, funders will have significant sums invested in litigation or arbitration and will want, and will often have a right, to be kept apprised of the progress of the proceedings so that they can monitor their investment. This becomes particularly acute when cases hit difficult periods and during discussions around potential settlements. Accordingly, it is perhaps the most sensitive documents that are likely to be shared between claimant, lawyer and funder. (ii) Second, what is the position as regards documents produced by third-party funders themselves? The investment process for many funders will be an involved one: various stages of review will be undertaken during the due diligence phase and commonly lawyers employed (in-house) by the funder carrying out that due diligence will report to others in the business, to investment committees, to boards and potentially to external investors. Those individuals may be lawyers; they may not be. Even in circumstances where the employees of the funders are lawyers, their role may not be entirely legal: funding sits at the intersection of law and finance; while the assessment of the merits of the claim to be funded is largely a legal review, 82

Introduction 5.5

that review informs a financial business decision made on the basis of an economic proposition. What is the status of materials which reflect those decisions? Funders may also seek to co-fund (or sell) their investments, either at the time of the initial investment or subsequently, and they may wish to share due diligence materials with those co-investors or buyers. All these processes leave a documentary trail, often recording not only the views and opinions of the lawyers prosecuting the case, but also the funder’s own thoughts and impressions. (iii) Third, to what extent are the documents evidencing the litigation funding arrangements between the parties (as opposed to documents pertaining to the merits of the claims) subject to disclosure? Are those litigation funding agreements privileged? Or are only certain parts of them subject to privilege? In many cases, the contents of the litigation funding relationship may be revealing to the opposing party. While the funding documents are unlikely to disclose the nature of the advice the legal team has provided in respect of the claims in any great detail, even the pricing of funding can be suggestive of the risk a funder perceives to exist on a particular case. Terms around adverse costs limits, funding limits, terms regarding settlement criteria: it can be seen how a tactical advantage might be sought from disclosure of such materials. 5.4 In England, privilege protection can, for present purposes, be divided into two categories: (i) Legal advice privilege: This applies to all communications made between lawyers and their clients for the purpose of giving or obtaining legal advice. Those communications must be made in confidence. It does not matter whether the communication is made directly between the client and their legal adviser or is made through an intermediate agent of either. It does not matter that litigation is not in contemplation. (ii) Litigation privilege: This applies to allow a client to withhold certain documents from disclosure once litigation has in fact commenced, or if it is reasonably in contemplation, at the time the document comes into being. It protects communications (be they written or oral) between: (i) the client or their lawyer, on the one hand; and (ii) third parties, on the other. It can also protect other documents created by the client or their lawyer, or created on their behalf. In order for communications and documents to be protected by litigation privilege, the document in question must have come into existence for the dominant purpose of being used in connection with the litigation that is contemplated, is pending or has commenced. This covers the gathering of evidence from third parties, or information which might lead to such evidence, for the purpose of the proceedings. 5.5 In the United States, again for present purposes, privilege protection falls into two categories: (i)

Attorney–client privilege: This protects the confidentiality of communications between an attorney and their client. Generally, four elements are required 83

5.6  Privilege and confidentiality

to establish the application of the attorney–client privilege: (1) there must be a communication (which can be oral or written); (2) it must have been made between privileged persons (that is, an attorney and their client); (3) it must have been made in confidence; and (4) have been made for the purpose of seeking, obtaining, or providing legal assistance to the client. Except in rare circumstances, attorney–client privileged communications cannot be the subject of compelled disclosure. (ii) The work product doctrine: This protects documents and ‘tangible things’ from disclosure, which have been prepared in anticipation of litigation or for trial by a party (or for a party) or that party’s representative. Generally, the courts apply one of two tests to determine whether a document was prepared in anticipation of litigation: (1) the ‘because of’ litigation test; or (2) the ‘primary purpose’ test. Under the broader ‘because of’ litigation test, material prepared ‘because of’ existing or expected litigation qualifies for protection of the work product doctrine. The narrower ‘primary purpose’ test protects material only when ‘the primary motivating purpose’ behind the creation of the document is to assist in pending or possible future litigation. 5.6 Just as England and the United States are said to be two countries separated by a common language, so too does privilege across those countries share that semblance of similarity: ostensibly both regimes apply similar protections, rooted in shared common law principles. The English concepts of legal advice privilege and litigation privilege are broadly mirrored by the attorney–client and work product doctrines applied in the United States. However, within that simplistic commonality, many differences in fact divide the principles applied in England and in the United States. Those differences are explored further below. 5.7 The English courts have not been called upon to address the question of how privilege applies to the communications and relationship existing between litigation funders, claimants and lawyers on many occasions. When they have done so, the cases show that as a general principle, and provided certain protections are maintained, the sharing of privileged material with a funder will not waive any legal professional privilege attaching to those documents, and that privileged material reflected in litigation funding documents will not lose its privileged quality. This is not, however, based on the development of any specific common law rule to address the interposition of a third-party funder into the lawyer–client relationship – it is simply an application of existing principles of English law regarding the circumstances in which the holder of privileged materials may share those materials with third parties without waiving the privilege. 5.8 There are a number of cases in England where disclosure of the litigation funding arrangements (as opposed to advice relating to the claims) or the funder’s identity have been ordered by the courts (many in the context of security for costs applications). However, disclosure of the funding arrangements has been in circumstances where those funding arrangements have had a relevance to the outcome of issues of liability in the proceedings themselves. That will certainly be the case in only the minority of circumstances. 84

English law 5.12

5.9 Until recently, the same could be seen in the US courts: there was a relative lack of case law on the intersection of litigation funding and privilege issues. However, as the use of litigation funding has grown, these decisions have become much more frequent. The majority of courts across the United States have found that communications with litigation funders should generally be protected from disclosure (either because the material is protected by the ‘work product’ doctrine or is simply irrelevant to the claims at issue). The US courts have been more reluctant to extend the attorney–client privilege to communications with litigation funders, and, despite the potential applicability of the common interest exception, in some instances have found that disclosure constitutes a waiver of the privilege protection. 5.10 As with most emerging areas of law, there is no bright-line rule that can yet be said to definitively exist in either jurisdiction, and the particular facts and circumstances of each case will ultimately drive the outcome of any decision on privilege. However, what is common in the United States and in England is that the maintenance of confidentiality over privileged material shared with a funder is key to preserving the protection from disclosure. Funders are well aware of this and structure their dealings with claimants and lawyers accordingly. The case law across the two jurisdictions also concurs that in circumstances where details of the funding arrangements are directly relevant to the substantive claims being determined (and not simply satellite litigation), those funding arrangements can be subject to disclosure in the way that all relevant documents would normally be. 5.11 Specific regimes in England (such as that relating to collective claims in relation to competition), as well as international arbitral institutions, have developed their own rules regarding disclosure of the fact that a particular claim is funded by a third party, and in respect of whether the identity of that funder should be made known. However, even those regimes which mandate disclosure of the fact that funding arrangements are in place, generally recognise the fundamental nature of the claimant’s right to assert protection from disclosure over legal advice relating to the claim and over sensitive funding terms. International arbitration raises its own, unique, challenges when addressing the question of the privilege regime applicable to the question of the funding arrangements and communications between a claimant, its lawyers and a funder. To date, no international standard has been agreed upon and each tribunal will have to make its own determination, based upon a conflict of laws analysis in each case.

ENGLISH LAW1 5.12 While the application of privilege in specific circumstances can be complex, one thing is clear: English law recognises the fundamental right of a 1

Other texts provide a full exposition on the laws of privilege in England and Wales. However, the basic principles are set out below.

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5.13  Privilege and confidentiality

party to protection of their consultations with legal counsel, such that they are not restrained from fully and openly providing instructions to, and obtaining advice from, their lawyers. The general principles of that protection are set out below. 5.13 Privilege (or ‘legal professional privilege’) is recognised to be a fundamental right granted by the common law. It is not simply a procedural device, it is also considered to be a substantive right.2 While it is rooted in confidence (and the maintenance of confidentiality in privileged material is a key element of its quality of privilege, as explained below), it is more than mere confidentiality: the protection is considered to be a fundamental principle of public policy, which provides an almost inalienable defence to disclosure.3 While there are exceptions to this rule, they are narrowly drawn.4 5.14 Communications between lawyers and their clients are subject to a special level of protection, which is not afforded to other professional advisers. The protection renders those communications immune from disclosure to others, regardless of their relevance to issues being determined by a court. This right is unique to the legal profession, being confined to information relating to legal advice, as opposed to information and advice given and received in other confidential professional relationships such as between an accountant or tax adviser and their client. While attempts have been made to extend the concept of privilege to protect from disclosure the advice of other professional advisers, the Supreme Court has refused to do so and thus enshrined this invulnerable level of protection for legal advice only.5 This is borne out of the special relationship that is recognised to exist between a client and their legal advisers, as Lord Taylor of Gosforth CJ in R v Derby Magistrates’ Court concluded: The principle which runs through all these cases, and the many other cases which were cited, is that a man must be able to consult his lawyer in confidence, since otherwise he might hold back half the truth. The client must be sure that what he tells his lawyer in confidence will never be revealed without his consent. Legal professional privilege is thus much more than an ordinary rule of evidence, limited in its application to the facts of a particular case. It is a fundamental condition on which the administration of justice as a whole rests.6

5.15 Privilege protects communications with all members of the legal profession – be they solicitors or barristers and be they external consultants or in-house counsel (that is to say, employees of the client).

2

Three Rivers District Council and others v Governor and Company of the Bank of England [2004] UKHL 48, Lord Scott at 26. 3 See ibid. 4 For an explanation of those exceptions, see Thanki The Law of Privilege 3rd edn, Oxford University Press Chapter 4C. 5 R  (Prudential PLC and another) v Special Commissioner of Income Tax and another [2013] UKSC 1. 6 [1996] AC 487 at p. 507C.

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English law 5.19

5.16 This right to resist the compulsory disclosure of information can be exercised in litigation or other adversarial legal processes, such as arbitration, as well as before regulatory enquiries. However, the right to resist the compulsory disclosure of information is not confined to such processes. Generally speaking, information that is covered by legal professional privilege cannot be subject to any order for compulsory production to another party at all, unless there is an express statutory power, or one by implication, that requires it.7 5.17 The cases considering legal professional privilege have, over time, developed a distinction between two types of privilege. Initially, protection from compulsory disclosure to an adversary was limited to information that was created in contemplation of litigious proceedings, what we now know as ‘litigation privilege’. However, that was subsequently extended to communications where legal advice was sought and given, even when no litigation was contemplated8); what we now know as ‘legal advice privilege’. 5.18 The two types of privilege have slightly different rationales for their existence. The rationale for litigation privilege rests on the principles of ‘access to justice, the proper administration of justice, a fair trial and equality of arms’ in litigation.9 That is to say, to obtain legal advice and to pursue adversarial litigation efficiently, the communication between a lawyer and their client, a lawyer and a third party, and any communication brought into existence for the dominant purpose of being used in litigation, must be kept confidential, without fear that what is said or written might be disclosed to an adversary. The rationale for legal advice privilege is rather that it advances the rule of law: [I]t is necessary in our society, a society in which the restraining and controlling framework is built upon a belief in the rule of law, that communications between clients and lawyers, whereby the clients are hoping for the assistance of the lawyers’ legal skills in the management of their (the clients’) affairs, should be secure against the possibility of any scrutiny from others, whether the police, the executive, business competitors, inquisitive busy-bodies or anyone else … It justifies, in my opinion, the retention of legal advice privilege in our law, notwithstanding that as a result cases may sometimes have to be decided in ignorance of relevant probative material.10

Legal advice privilege 5.19 Legal advice privilege has been said to protect ‘… all communications made in confidence between [lawyers] and their clients for the purpose of giving 7

R (Morgan Grenfell & Co Ltd) v Special Commissioner of Income Tax [2003] 1 AC 563 at 30, per Lord Hoffmann. 8 Greenough v Gaskell (1833) 1  M&K  98 at 103; Bolton v Liverpool Corporation (1833) 1 M&K 88 at 94. 9 Winterthur Swiss Insurance Co & Or v AG (Manchester) Ltd (in Liquidation) & Ors [2006] EWHC 839 (Comm), para 68. 10 Three Rivers District Council and others v Governor and Company of the Bank of England [2004] UKHL 48, Lord Scott at para 34.

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5.20  Privilege and confidentiality

or obtaining legal advice even at a stage where litigation is not in contemplation. It does not matter whether the communication is directly between the client and his legal adviser or is made through an intermediate agent of either’.11 5.20 For a communication or document to be subject to this form of privilege, it should fulfil the following criteria: (i) be a communication (including written or oral communication); (ii) which is made between a client and a lawyer (or an intermediate agent of either); (iii) which was made for the dominant purpose of giving or obtaining legal advice or assistance; and (iv) which was made in confidence. 5.21 This is therefore confined to a communication made in confidence between a lawyer and their client. A  communication with a third party is not included unless the third party is acting simply as the intermediate agent of either the lawyer or their client. Privilege extends not only to a communication containing advice given by the lawyer regarding the letter of the law, but also to communications in which the lawyer addresses matters in relation to the ‘relevant legal context’: ‘… legal advice is not confined to telling the client the law; it must include advice as to what should prudently and sensibly be done in the relevant legal context.’12 This is, however, subject to the limitation that, ‘… to extend privilege without limit to all solicitor and client communications upon matters within the ordinary business of a solicitor and referable to that relationship are too wide.’13 5.22 This formulation was approved by the House of Lords in Three Rivers District Council v Bank of England (No.6) where the issue was whether legal advice privilege extended to advice given by the Bank’s lawyers on ‘presentational issues’ in relation to the Bingham inquiry. Setting out his view of the limits of the ‘relevant legal context’, Lord Scott stated: If a solicitor becomes the client’s “man of business”, and some solicitors do, responsible for advising the client on all matters of business, including investment policy, finance policy and other business matters, the advice may lack a relevant legal context. There is, in my opinion, no way of avoiding difficulty in deciding in marginal cases whether the seeking of advice from or the giving of advice by lawyers does or does not take place in a relevant legal context so as to attract legal advice privilege. In cases of doubt the judge called upon to make the decision should ask whether the advice relates to the rights, liabilities, obligations or remedies of the client either under private law or under public law. If it does not, then, in my opinion, legal advice privilege would not apply. If it does so relate 11 Ibid. Lord Rodger at para 50. 12 Balabel v Air India [1988] Ch 317. 13 Ibid.

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English law 5.25

then, in my opinion, the judge should ask himself whether the communication falls within the policy underlying the justification for legal advice privilege in our law. Is the occasion on which the communication takes place and is the purpose for which it takes place such as to make it reasonable to expect the privilege to apply? The criterion must, in my opinion, be an objective one.14

5.23 The particular communication in issue need not contain the legal advice as such to be protected by privilege, so long as it is directly related to a solicitor’s duties as a legal adviser. Lord Carswell considered that: [A]ll communications between a solicitor and his client relating to a transaction in which the solicitor has been instructed for the purpose of obtaining legal advice will be privileged, notwithstanding that they do not contain advice on matters of law or construction, provided that they are directly related to the performance by the solicitor of his professional duty as legal adviser of his client.15

5.24 The breadth of communication covered is therefore wide, with not only the communication that contains the advice being protected but also those communications that form part of the continuum of communication which is necessary to allow both parties to remain informed, as well as information communicated from the lawyer to the client (or vice versa) to enable the lawyer to advise, and for the client to make informed decisions, in a relevant legal context.16 This may include references to matters in the public domain or to meetings and correspondence that would not, in themselves, be privileged. In Balabel v Air India, Taylor LJ’s judgment stated: In my judgment, therefore, the test is whether the communication or other document was made confidentially for the purposes of legal advice. Those purposes have to be construed broadly … Where information is passed by the solicitor or client to the other as part of the continuum aimed at keeping both informed so that advice may be sought and given as required, privilege will attach.17

5.25 The privilege also covers documents (or parts of documents) which ‘evidence’ or ‘reveal’ the substance of a privileged communication. This recognises that, certainly in the context of businesses and large organisations, legal advice received from legal advisers will inform the making of business decisions and will be digested and then reflected in internal documents reporting on those decisions. Where legal advice is enshrined in board minutes, for example, that advice should not lose its privileged quality. That is, however, confined to documents or other material which reproduce the legal advice or summarise or paraphrase its contents. Documents which merely reflect the fact that advice has been acted upon (for example, going ahead with a transaction

14 [2004] UKHL 48. Lord Scott at para 38. 15 Ibid. para 111. 16 Property Alliance Group Limited v The Royal Bank of Scotland Plc [2015] EWHC 3187(Ch). 17 [1988] Ch 317 at page 330E–F.

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5.26  Privilege and confidentiality

having received advice that it was lawful or advisable to proceed) will not be privileged. In Financial Services Compensation Scheme Ltd v Abbey National Treasury Services plc,18 David Richards J held that the concept did not protect any and every document from which legal advice could be inferred: Two considerations lead me to the view that, unless perhaps the inference is obvious and inevitable in which case the document is in substance a statement of the advice or communication, privilege does not attach to [documents which might allow an inference of the substance of legal advice provided, but did not state that advice]. First, it is the communication between the client and lawyer which is privileged either in its original form or in a summarised or paraphrased form. A  document which does not contain the communication in any form contains nothing to which the privilege attaches. [The claimant’s] submission that a document from which the substance of the communication may be inferred ‘evidences’ the privileged communication treats ‘evidences’ as carrying its factfinding meaning of ‘providing an evidential basis’. I  do not think that this is the sense in which the word is used in [Three Rivers No. 5] … and the other authorities. It is used, I  believe, in the narrower sense, consistent with The Good Luck and other cases, of reproducing, summarising or paraphrasing the communication. The second consideration is that inference is usually a matter of subjective judgment. Save in very clear cases, views may differ as to whether the inference can be made. A claim to privilege should not, in my judgment, depend on a subjective assessment of this sort … There are in any case many documents which are clearly not privileged but from which the substance of legal advice may be inferred. A  common example is a minute of a board meeting recording the director’s decision on a particular matter.

5.26 English law has for some time struggled with the balance to be struck in protecting from disclosure documents that are created for not only a legal purpose, but which may also serve a business or other function. The dividing line in the balance between protecting documents created for hybrid legal and other purposes, at least in respect of litigation privilege, was drawn with the instigation of the ‘dominant purpose’ test. The case of Waugh v British Railways Board19 held that a document which straddled both business and legal uses would be covered by litigation privilege only if the document came into existence for the dominant purpose of being used in connection with the litigation. 5.27 While many other jurisdictions (such as Australia) also apply a dominant purpose test outside of a litigation context in respect of communications for which the protection of legal advice privilege is sought, the position in England has been unclear for some time. The current law rests with a decision in the Court of Appeal in the case of R  (on the application of Jet2.com Ltd) v Civil Aviation Authority,20 which confirmed that a dominant purpose test does apply to both legal advice privilege as well as litigation privilege. That is to say, for legal advice privilege to apply, the dominant purpose for which the communication 18 [2007] EWHC 2868 (Ch). 19 [1980] AC 521, 541–2. 20 [2020] EWCA Civ 35.

90

English law 5.29

or document was brought into existence must have been for it, or its contents, to be used to obtain legal advice. The decision is an important one in general, and specifically in relation to the issues of third-party funding addressed below. It is common that the purpose of a document will not be clear cut, such as to rule its dominant purpose within or without the confines of the purposes of litigation or of obtaining legal advice. Many legal issues are now reviewed and resolved with the input of many disciplines of adviser and expert and when lawyers operate inhouse, fulfilling both commercial and legal roles. 5.28 An issue that has also caused some level of judicial debate is the question of who (or what) constitutes the ‘client’ in the client–lawyer relationship for the purposes of legal advice privilege, when a party is instructing lawyers. The question has remained an unsettled issue in the English courts since the decision of the Court of Appeal in 2003 of Three Rivers District Council v The Governor and Company of the Bank of England (No. 5).21 The case involved litigation brought against the Bank of England following the collapse of the bank BCCI. Prior to the litigation, the Bank was subject to a public inquiry into the collapse of BCCI. In the subsequent litigation, the Bank sought to resist disclosure to the claimants of documents prepared by employees of the Bank for its external lawyers during that inquiry. During the inquiry, the Bank had appointed three employees, who constituted a special unit within the Bank (the ‘BIU’), as the body with sole responsibility for communicating with its external lawyers in relation to the inquiry being carried out into the Bank. 5.29 The Bank claimed that the documents were privileged as they were brought into existence by employees of the Bank for the purpose of being passed to its lawyers. The Bank conceded that, because the Inquiry was inquisitorial rather than adversarial in nature, the documents were not covered by litigation privilege (as to which, see below). The question was whether the documents were instead covered by legal advice privilege. The result of Three Rivers (No. 5) was that the BIU was the ‘client’ to the exclusion of all other employees, for the purposes of legal advice privilege. Accordingly, any documents created by other employees to be passed to the lawyers, were not privileged, not being from the ‘client’ (with those employees being classed as third parties in these circumstances). The case has subsequently been challenged but remains good law. Following consideration of Three Rivers (No. 5) in the cases of RBS22 and Eurasian,23 the position is that: (i) the ‘client’ is the legal person seeking legal advice; and (ii) only those communications involving the individuals expressly or impliedly authorised by or on behalf of the client entity to give instructions (in the sense of being tasked with obtaining the advice) to the lawyer and the individuals expressly or impliedly authorised on behalf of the client entity 21 [2003] EWCA Civ 474. 22 The RBS Rights Issue Litigation [2016] EWHC 3161 (Ch). 23 Serious Fraud Office v Eurasian Natural Resources Corporation [2018] EWCA Civ 2006.

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5.30  Privilege and confidentiality

to receive the legal advice, will attract legal advice privilege. The person or persons authorised to give such instructions need not be the same person or persons authorised to receive and/or act on that advice. 5.30 Therefore, not every member of an organisation which receives legal advice will be the client for the purposes of the privilege and care must be taken when sharing a communication which is subject to legal advice privilege outside of those identified as the client, at the risk that they will be deemed to be third parties and potentially waive the privilege.

Litigation privilege 5.31

Litigation privilege protects from disclosure:

(i) a confidential communication between the lawyer and/or their client (on the one hand) and third parties (on the other); (ii) which is produced during the course of adversarial litigation, or when such litigation is pending or in reasonable contemplation; (iii) provided that the communication is made for the sole or dominant purpose of obtaining legal advice or of conducting that litigation. That is true whether it is the author of the document themselves, or the person under whose authority or direction the document was created, that had such a dominant purpose in respect of the material. 5.32 Determination of whether litigation is reasonably in contemplation such that litigation privilege can apply, will be a matter for assessment in each case. However, the Court of Appeal in USA v Philip Morris Inc24 has laid down some guidelines. Litigation cannot be in reasonable contemplation if it is a mere possibility, or if there is a distinct possibility that sooner or later someone might make a claim, or a person has a ‘general apprehension’ of future litigation. In the Philip Morris case, the mere fact that several other tobacco companies had been the subject of class action proceedings in the United States was not itself sufficient to create a reasonable prospect of Philip Morris being sued, in circumstances where there had been no letters before action or any other normal precursors to litigation. It was, however, not necessary to show that litigation had more than a 50 per cent chance of occurring. 5.33 Litigation may be reasonably in prospect even if the party’s decision whether to commence proceedings depends upon insurers granting ‘after the event’ (ATE) insurance, or upon a third party agreeing to fund the litigation, pursuant to an application form (over which privilege is claimed) being completed by that party.25 24 [2004] EWCA Civ 330. 25 Winterthur Swiss Insurance Company v AG (Manchester) Limited (In Liquidation) [2006] EWHC 839 (Comm).

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English law 5.37

5.34 The communication or document in question must also have been brought into existence with the dominant purpose of litigation. The test was set out by the House of Lords in Waugh v British Railways Board: [A] document which was produced or brought into existence either with the dominant purpose of its author, or of the person or authority under whose direction, whether particular or general, it was produced or brought into existence, of using it or its contents in order to obtain legal advice or to conduct or aid in the conduct of litigation, at the time of its production in reasonable prospect, should be privileged and excluded from inspection.26 [Emphasis added.]

5.35 The extent to which a communication or document can be said to have been brought about to ‘conduct or aid in the conduct of litigation’ has been the subject of much debate and is an important question in relation to the role of funders in litigation. This is examined in the relevant context below. 5.36 Both the litigation and legal advice privileges endure: in R  v Derby Magistrates’ Court,27 Lord Taylor referred to the long-established rule that a document protected by privilege continues to be protected so long as the privilege is not waived by the client; ‘once privileged, always privileged’.28 The privilege is that of the client and only they can waive it. The refusal of the client to waive their privilege for whatever reason, or for no reason, cannot be questioned or investigated by the court.29 While the client’s privilege is absolute, a client can consent to privileged communications being made available generally for disclosure. In that case the privileged nature of the communications is lost completely. However, a client can also agree to produce privileged communications for a limited purpose only. If that happens, the privileged nature of those communications is not lost completely, and the client can assert the right not to produce the same communications for any purpose outside the limited purpose for which they have agreed to produce them.

Common interest privilege 5.37 English law also recognises a further basis upon which privileged documents may be shared between parties, where those parties share a common interest in the communication: ‘common interest privilege’. Common interest privilege is not a separate category of privilege protection in itself; instead the doctrine of common interest privilege gives effect to the law’s recognition that, in certain circumstances, the legal professional privilege afforded to one party’s documents and communications can be asserted by another party when those two parties share a common interest. It is clear that a document for which common

26 [1980] AC 521, at 541–2. 27 [1996] 1 AC 487. 28 R v Derby Magistrates’ Court [1996] 1 AC 487, Lord Taylor CJ at 503. 29 Ibid.

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5.38  Privilege and confidentiality

interest privilege is claimed by a recipient must have been originally privileged in the hands of the sender. 5.38 Common interest privilege arises where one party voluntarily discloses a privileged document to another party, where the receiving party has a common interest in the subject matter of the communication or in litigation in connection with which the document was brought into being. In such circumstances, provided disclosure is given in recognition that the parties share a common interest, the document will also be privileged in the hands of the other party. 5.39 This form of privilege first arose in the Court of Appeal’s decision in Buttes Gas and Oil Co v Hammer (No 3).30 Originally, the privilege was confined to documents shared in litigation (actual or anticipated): There is a privilege which may be called a ‘common interest’ privilege. That is a privilege in aid of anticipated litigation in which several persons have a common interest. It often happens in litigation that a plaintiff or defendant has other persons standing alongside him—who have the self-same interest as he—and who have consulted lawyers on the self-same points as he—but these others have not been made parties to the action. Maybe for economy or for simplicity or what you will. All exchange counsel’s opinions. All collect information for the purpose of litigation. All make copies. All await the outcome with the same anxious anticipation—because it affects each as much as it does the others. Instances come readily to mind. Owners of adjoining houses complain of a nuisance which affects them both equally. Both take legal advice. Both exchange relevant documents. But only one is a plaintiff. An author writes a book and gets it published. It is said to contain a libel or to be an infringement of copyright. Both author and publisher take legal advice. Both exchange documents. But only one is made a defendant. In all such cases I think the courts should—for the purposes of discovery—treat all the persons interested as if they were partners in a single firm or departments in a single company. Each can avail himself of the privilege in aid of litigation. Each can collect information for the use of his or the other’s legal adviser. Each can hold originals and each make copies. And so forth. All are the subject of the privilege in aid of anticipated litigation, even though it should transpire that, when the litigation is afterwards commenced, only one of them is made a party to it. No matter that one has the originals and the other has the copies. All are privileged.31

5.40 However, it now seems clear that common interest privilege can apply beyond the field of litigation, in cases where only legal advice is in issue. As Rix J put it in Svenska Handelsbanken v Sun Alliance and London Insurance plc: It seems to me that if legal advice obtained by one person is passed on to another person for the sake of informing that other person in confidence of legal advice which that person needs to know by reason of a sufficient common interest between them, then it would be contrary to the principle upon which all legal professional privilege is granted to say that the legal advice which was privileged

30 [1981] QB 223. 31 Ibid. Lord Denning at 243.

94

English law 5.44

in the hands of the first party should be lost when passed over in confidence to the second party, merely because it was not done in the context of pending or contemplated litigation.32

5.41 What then constitutes a ‘common interest’ such as to trigger the application of the protection? That remains a fluid question: it is not ossified into a rigidly defined set of criteria and the boundaries appear to be widening rather than contracting (as Rix J observed in Hellenic Mutual War Risks Association (Bermuda) Ltd v Harrison (The Sagheera)33). 5.42 While the concept of common interest privilege was originally based upon a requirement that the parties should have a strict identity of interest ‘tantamount to them being partners in a single firm’ or, to have a sufficiently aligned interest such that they could appoint the same solicitor in relation to the matter in question, a more liberal approach now prevails, with the test having moved towards one of expectations of confidentiality. 5.43 In Formica Ltd v Export Credits Guarantee Department, Colman J characterised the issue as follows: The protection by common interest privilege of documents in the hands of someone other than the client must pre-suppose that such third party has a relationship with the client and the transaction in question which, in relation to the advice or other communications, brings that third party within that ambit of confidence which would prevail between the legal adviser and his immediate client. Where in circumstances of a mutual interest in a particular transaction or transactions the recipient of legal advice relating to such transactions passes documents or information containing that advice to someone who shares that interest, the essential question in each case is whether the nature of their mutual interest in the context of their relationship is such that the party to whom the documents are passed receives them subject to a duty of confidence which the law will protect in the interests of justice.34

5.44 The fact that the common interest should be in the confidentiality of the communication in question was highlighted in the more recent case of Winterthur Swiss Insurance Co & Or v AG (Manchester) Ltd (in Liquidation) & Ors: ‘These cases demonstrate that where a communication is produced by or at the instance of one party for the purposes of obtaining legal advice or to assist in the conduct of litigation, then a second party that has a common interest in the subject matter of the communication or the litigation can assert a right of privilege over that communication as against a third party. The basis for the right to assert this “common interest privilege” must be the common interest in the confidentiality of the communication.’35 32 33 34 35

[1995] 2 Lloyd’s Rep 84. [1997] 1 Lloyd’s Rep 160,167. [1995] 1 Lloyd’s Rep 692, at 699. [2006] EWHC 839 (Comm Ct), at para 78.

95

5.45  Privilege and confidentiality

5.45 As leading authors point out, there are certain categories of relationship where that commonality of interest is likely to exist, which includes such relationships as the insurer and insured, a company and its shareholder or director.36 However, those categories of relationship previously identified as giving rise to the privilege are not closed: The questions of what type of relationship between the two parties can give rise to a ‘common interest’ in the communication concerned has been considered in a number of cases. Amongst the types of relationship that can give rise to a ‘common interest’ are those of insured and insurer and insurer/reinsured and reinsurer. The cases have refused to be prescriptive about the circumstances in which the two parties will have a sufficient ‘common interest’ in the particular communications concerned. The issue has to be decided on the facts of the individual case.37

5.46 Common interest privilege is an important right, in that it allows both (or all) of the parties sharing the common interest to assert the privilege independently. That is not the case where a party holding privileged material shares that material with others, in circumstances that maintain the privilege for the original holder.

APPLICATION TO THIRD-PARTY LITIGATION FUNDING UNDER ENGLISH LAW 5.47 As demonstrated by the principles stated above, the protection of privilege primarily allows a client to confer with their lawyer in the confidence that an open, honest dialogue between them regarding the client’s legal affairs will not see the light of day. If that relationship becomes tripartite, through the introduction of a third-party litigation funder, does that position change? 5.48 While litigation funding in England, both of court proceedings and of arbitration, is a common feature of the modern legal landscape, English law currently provides little specific guidance on how issues of privilege are to be determined when third-party funders (or indeed ATE insurers) are parties to the lawyer–client relationship. The question has been addressed by the courts on only a handful of occasions, as set out below. 5.49 It is difficult to extrapolate clear principles of general application from the few cases that have addressed privilege in the context of third-party funding arrangements. Most of the consideration given to privilege issues in this context has taken place in very specific circumstances. Indeed, in the two cases discussed below in which funding arrangements were in fact subject to disclosure orders, 36 See, for example, Thanki The Law of Privilege 3rd edn, Oxford University Press para 6.36. 37 Winterthur Swiss Insurance Co & Or v AG (Manchester) Ltd (in Liquidation) & Ors [2006] EWHC 839 (Comm Ct) para 80.

96

Application to third-party litigation funding under English law 5.53

the disclosed funding documents were directly relevant to the claims at issue in the proceedings (an unlikely circumstance in most cases). 5.50 Even though the courts ordered disclosure in those instances, those decisions also highlighted that certain material aspects of the funding arrangements (such as the terms upon which funding had been provided and settlement provisions) which would reveal the substance of legal advice provided in relation to the claims, remained privileged. Those cases also took place against the background of an acceptance that, in principle, references to the legal advice as to the merits and/or strategy of the claims also remained firmly privileged despite being shared with the funder or being reflected in funding agreements. 5.51 As examined below, English law encompasses a well-developed set of principles in respect of the protection of privileged material from disclosure and the cases have not yet found any reason to apply a distinction to third-party funding arrangements, excepting those documents from the protections of legal professional privilege which would otherwise apply.

Privilege in communications between claimants, lawyers and funders 5.52 It is inevitable that a claimant seeking third-party finance will be required to share privileged information relating to the claim with potential funders. Any thorough assessment of the case as an investment proposition will require the funder to review the key documents in the claim (which may or may not be privileged). A funder will want evidence that the merits of the claim are strong enough to warrant an investment and, if so, on what terms. Those terms will reflect the risks inherent in the claim. The evidence of such risks is normally best demonstrated through existing advice as regards the merits of the claim provided to the claimant by the claimant’s solicitors or counsel. Alternatively, where no such advice exists, the funder may request that the legal team provides an assessment of the merits to the claimant, to be shared with the funder, or that the lawyers provide the funder with that assessment directly. Will legal advice privilege apply to communications between claimants, lawyers and funders? 5.53 A funder’s investment in a claim has a binary outcome: either the claim is successful at trial or settles and, subject to any enforcement issues, the funder’s investment is returned with a premium; or it is not successful and money is lost, both through the payment of legal fees to the lawyers prosecuting the case and, potentially, depending upon the cost-shifting rules of the relevant forum and the contractual obligations undertaken by the funder, in paying a portion of the legal fees incurred by the defendant. Therefore, a central element of the funder’s assessment is to hear about the potential weaknesses and risks in the case from the lawyers advising the claimant, from external lawyers engaged to provide an opinion on the claims, or from the funder’s own legal team. In that way the funder can assess the risks that exist to the claim, and can determine whether 97

5.54  Privilege and confidentiality

those risks are ones that the funder is prepared to accept, and, importantly for the funder, whether those risks are sufficiently represented by the potential return on the case. 5.54 Since it may be that the most sensitive of issues in the case are the very issues that a funder needs to address as part of its due diligence process, and are likely to form the subject of correspondence between the two, the funder and the claimant are aligned: it is in the interests of neither party for the protections of privilege to be lost. It is common for claimants or potential claimants to seek funding offers from not one, but often many separate third-party funders, be it on their own account, through their own lawyers, or via the various brokers operating in the market. How then, does that affect the confidential and privileged nature of the documents which are shared during that process? 5.55 Privilege has as its root the concept of confidentiality. While not every communication made in confidence between lawyer and client is privileged (and the confidentiality of a document alone is not in itself a ground to resist disclosure), it is a necessary ingredient for privilege to exist: without it, no privilege from disclosure can arise. A  document which is confidential and privileged does not lose its confidential quality by virtue of the sole fact that it has been shared with or seen by a party other than the client or the lawyer in question. Accordingly, where privileged material has been communicated to a select number of third parties, and that communication has maintained the confidentiality of the privileged material as against the outside world (be that expressly or impliedly), privilege is unlikely to be held to be lost such that an adversary in litigation could insist on disclosure of the material. These principles remain true, regardless of whether ‘common interest privilege’38 or ‘joint interest privilege’ are applicable. 39 5.56 This principle has been tested in England in several cases, including the cases of City of Gotha v Sotheby40 and USP  Strategies plc v London General Holdings.41 In Gotha, Sotheby’s was a co-defendant to a claim against it and the seller of a piece of art. The co-defendant had shared with Sotheby’s a privileged advice and notes of a meeting provided to its lawyers relating to the claim, where no express duty of confidence was in place on the part of those with whom the privileged communications were shared. The court proceeded on the basis that there were implied obligations of confidentiality based upon what had been intended and understood by the parties, that is that the documents would not be subject to disclosure to the wider world and were disclosed only for a limited, specific purpose:

38 Described at paras 5.37–5.46, above. 39 For a description of joint interest privilege, see, for example, Thanki, The Law of Privilege 3rd edn, Oxford University Press para 6.01. 40 [1998] 1 WLR 114, CA. 41 [2004] EWHC 373 (Ch).

98

Application to third-party litigation funding under English law 5.59

… where communications, the subject of legal professional privilege, are disclosed to a third party by the holder of the legal professional privilege for a limited and specific purpose, legal professional privilege is only waived for that limited and specific purpose as against the third party and not as against the privilege holder’s opposing litigant … That is, it is possible to have a limited waiver of legal professional privilege in respect of a non-litigant third party, and yet maintain fully that privilege against a litigant party. This is even more the case where the holder of the privilege has disclosed the relevant communication upon the condition that privilege and confidentiality be maintained and that condition has been accepted.42

5.57 In USP  Strategies plc v London General Holdings, the defendants successfully prevented the use of privileged material by the claimants which had been obtained by a third party, where the disclosure of the privileged material had been made subject to an express confidentiality agreement. That confidentiality agreement primarily related to ensuring the confidence of client data and trade secrets; it did not expressly provide that privileged material was subject to duties of confidentiality. 5.58 It is therefore clear that, while sharing privileged material cannot ever be said to be without risk, English law provides significant protection from disclosure to third parties for those sharing privileged material in circumstances of confidence, to a limited audience, for limited purposes. Accordingly, when a party shares privileged material with a funder or funders, such as legal advice, it can do so without waiving its rights to resist disclosure to the wider world provided confidentiality is maintained. The cases show that this is true even in circumstances where the obligation of confidentiality was not put in place for the specific protection of the privileged material or was implied. It is equally clear, however, that the best possible prevention for waiver of privilege, when privileged material is shared between claimant, lawyer and funder (or any other third party), will be achieved if the confidentiality of those documents and communications is maintained in the strongest terms. Funders are, of course, well aware of this, and any professional funder will be careful to ensure that any distribution of privileged material outside of lawyer and client takes place in strictly confidential circumstances. This is normally under a formal confidentiality or non-disclosure agreement (NDA), preventing the disclosure of the material by the funder to third parties. 5.59 Those NDAs should make clear that the parties intend for privilege in the shared documents to be maintained, and for no waiver of privilege to occur. Indeed, funders in England which are members of the Association of Litigation Funders (ALF),43 are obliged to ensure that member funders will ‘observe the confidentiality of all information and documentation relating to the dispute to the extent the law permits and subject to the terms of any Confidentiality or Non-

42 City of Gotha v Sotheby [1998] 1 WLR 114, CA. Quoting with approval the New South Wales Court of Appeal in the case of Goldberg v Ng [1994] 33 NSWLR 639. 43 The ALF is the self-regulatory body of member funders in England.

99

5.60  Privilege and confidentiality

Disclosure Agreement agreed between the Funder and the Funded Party.’44 It is also regularly seen that the parties express an agreed ‘common interest’ in the material shared (as to the effect of which, see paras 5.73–5.78, below). 5.60 That is the position when a claimant or lawyer shares material that is already privileged in the claimant’s hands with the funder. What if a claimant or lawyer prepares material directly for a third-party funder? In that instance, no legal advice privilege would appear to apply to those documents: those communications are not communications between a client and lawyer for the purposes of seeking or obtaining legal advice. However, it might be argued that such documents are privileged insofar as they tend to reveal the nature of privileged advice given to the claimant.45 Litigation privilege may apply to such documents, if the dominant purpose of the document is for the conduct of the litigation, but certain categories of document have been found not to fall within that definition, as explained in paras 5.61–5.72 below. Will litigation privilege apply to communications between claimants, lawyers and funders? 5.61 As set out at para 5.4 above, litigation privilege serves to protect from disclosure communications ‘between parties or their solicitors and third parties for the purpose of obtaining information or advice in connection with existing or contemplated litigation’ which are made for the sole or dominant purpose of conducting that litigation.46 It also shelters other documents created with that same purpose. 5.62 Could it be said that communications between the claimant (or their lawyers) and the funder (as the ‘third party’), or documents created during the funding process to assist in conducting the litigation (by any party), are subject to litigation privilege? Litigation funding agreements themselves have expressly been found by the courts not to be subject to litigation privilege (although, as discussed below, if and insofar as the disclosure of the funding arrangements would or might give the other side an indication of the advice which was being sought or the advice which had been given, it would be covered by ‘legal advice privilege’). 5.63 The most common form of communication between claimant (or lawyer) and funder is likely to be the sharing of privileged advice. As discussed above, the law caters for the situation where a holder of privileged material shares legal advice or other privileged documents with a funder in confidential circumstances. Provided confidentiality is maintained, privilege can equally be maintained. Litigation privilege does not provide the third party with any right to assert the privilege independently; only the client of the lawyer may do that. Little 44 See Article 7 of the ALF’s Code of Conduct for Litigation Funders, January 2018. 45 See para 5.25, above. 46 Three Rivers District Council v Bank of England (No.6) [200]  UKHL  48, Lord Carswell at para 102.

100

Application to third-party litigation funding under English law 5.65

therefore appears to be gained by seeking to apply litigation privilege where legal advice privilege applies. However, litigation privilege is wider than legal advice privilege in that it also directly protects communications between the claimant/ lawyer and a third party where the dominant purpose of the document exchanged with the third party is ‘to obtain legal advice or to conduct or aid in the conduct of litigation …’47 5.64 The question then is whether communications between a client or lawyer and a funder (or documents created on behalf of the client or lawyer) have as their sole or dominant purpose the purpose of obtaining legal advice or of conducting, or aiding in the conduct of, litigation for litigation privilege to attach. Traditionally, litigation privilege related to the protection of material which was to be used in the preparation of a defence or brief: ‘matters for the brief’ or ‘materials for evidence’ (see for example, Southwark and Vauxhall Water Company v Quick:48 ‘… if a party seeks to inspect a document which comes into existence merely as the materials for the brief, or that which is equivalent to the brief, then the document cannot be seen, for it is privileged’). However, litigation privilege now protects a wider scope of material, and the case law has provided a range of answers as to what documents might be considered to be for the purposes of ‘conducting’ or to be ‘in aid of the conduct’ of litigation. 5.65 In an unreported judgment by Popplewell J  in the case of Excalibur Ventures LLC  v Texas Keystone LLC,49 Excalibur sought to argue that the claimant’s communications with funders regarding attempts to obtain funding (both with the ultimate funder of the claim and other potential funders), as well as documents evidencing the terms of the funding which was finally reached, were subject to litigation privilege by virtue of those documents being brought into existence for the dominant purpose of the instant litigation. Popplewell J found that the principle was not wide enough to cover all documents brought into existence for the purposes of actual or contemplated litigation, finding that if such an approach were to be adopted, ‘where a litigant buys a new suit in order to appear as a witness … all documents and information in relation [to] that purchase [would be] privileged.’50 Therefore, a funding agreement between a litigant and a third-party funder, although for the purposes of litigation generally, is no more within litigation privilege than a ‘receipt for the purchase by the litigation of that suit”’51 He went on to agree with the previous authorities that ‘it is the use of the document or its contents in the conduct of the litigation’ which attracts the privilege.

47 48 49 50

Waugh v British Railways Board [1980] AC 521, 543–4 per Lord Edmund-Davies. Brett LJ. (1878) 3 QBD 315, 320. [2012] EWHC 2176 (QB). [2012] EWHC 2176 (QB). The case is unreported. However, a summary appears as an annex to the 2018 Report by the ICCA–Queen Mary Task Force on Third-Party Funding in International Arbitration. 51 See the unreported judgment of Popplewell in Excalibur, referenced by Thanki The Law of Privilege 3rd edn, Oxford University Press para 3.85.

101

5.66  Privilege and confidentiality

5.66 The documents sought by the defendant in disclosure were found to be relevant to the claims and defences put forward in the case. Accordingly, disclosure of the documents was ordered. Excalibur raised an objection that disclosure of a party’s funding arrangements would give the defendant a ‘tactical advantage’ in the conduct of the litigation and asked for redactions of the documents to be allowed. Popplewell J  found it difficult to determine the extent to which knowledge of the arrangements might provide such a tactical advantage, when those funding terms were not known and did not consider that this was a significant factor in his discretion to order redactions. However, the defendants had offered to meet these concerns by specifying appropriate redactions. Popplewell J ordered that the appropriate redactions to the funding documents would be to prevent the disclosure of: the amount of any success fee; the terms setting out the circumstances allowing for termination by the funder or lawyers; and the provisions relating to the rights of the funder (or others) to be notified of any settlement proposals made. 5.67 These issues have also arisen in the related context of ATE insurance.52 The due diligence phases of a funding application and an ATE application bear similarities. Both gather information from claimants to enable the ATE insurer or funder to assess the risks of the claims, and to price those risks accordingly. In funding, this is carried out in many ways, but often the claimant’s lawyers will prepare written material regarding the claims to be provided to funders. Third-party brokers have also emerged in the market to act as intermediaries for claimants that are seeking funding. These brokers will approach several funders, often simultaneously, in search of the best possible funding terms for a claimant. These brokers may employ their own ‘funding proposal’ documents, setting out a precis of the facts and merits in respect of a claim. In ATE insurance, insurers will commonly elicit the information they require, at least initially, by way of a pro forma application or insurance proposal form. 5.68 The rationale for the creation of each and all of these documents could be said to be the same: the party seeking insurance (or funding) for their claim has the aim of pursuing claims which they might otherwise not be able to do. The aim of the insurer or funder at this stage is to determine, based on the facts and legal merits presented, whether to insure the risk or fund the claim. In the context of ATE insurance, the English courts have held that: [A]t the time those communications were created, litigation was contemplated. The aspiration of the potential [claimants] was that they could pursue claims for their personal injuries or other claims and they began the vetting process with the aim of litigating their claims. NIG, as the potential ATE insurer, must have

52 ATE or ‘after the event’ insurance is a form of legal expense insurance which can be acquired after an event which will form the basis of litigation has already arisen. Coverage varies, but it commonly covers any exposure of the insured to adverse costs in litigation. It may also cover an insured’s own legal expenses. Funders may require a funded party to acquire ATE insurance to cover exposure to adverse costs (or may acquire it on behalf of the funded party, or indeed on their own behalf).

102

Application to third-party litigation funding under English law 5.70

considered that litigation in relation to each potential [claimant] was a distinct possibility, although whether it became a probability would depend on the vetting process.”53

5.69 Having held that litigation was in contemplation for litigation privilege to apply, the court went on to consider whether those documents were created for the ‘dominant purpose of obtaining legal advice’ in respect of that contemplated litigation. The court concluded that application forms produced by potential claimants at the request of an ATE insurer had as their dominant purpose to assist the insurer to decide whether or not to issue an ATE policy (without which no litigation would occur). The potential litigation was a ‘subsidiary reason for producing the documents’: In the end I have concluded that, at the time that these documents were created, the dominant purpose was to make a decision on whether the ATE Policy would be issued and the potential claim funded. If the policy was not issued, then there would be no litigation. I appreciate that there are indications in the documents (to which Miss Carr drew my attention) which suggest that there will be litigation. But that was not guaranteed until the ATE Policy had been issued. I accept that a subsidiary reason for producing the documents was the potential litigation, but it was not what was uppermost in the minds of [the ATE insurers and the claimants] at the point they were created.54

5.70 Accordingly, litigation privilege was denied in respect of the documents which sought insurance for the claims, on the basis that the dominant purpose was one which would lead to a decision on whether or not to litigate the claim, with the potential litigation being only ‘a subsidiary reason’.55 The result in Winterthur has, however, been questioned by leading commentators.56 It is suggested by Thanki that the dominant purpose test ought to have been fulfilled in this case by analogy with the cases of Plummers and Re Highgrade. In Plummers Ltd v Debenhams plc),57 a report by a company’s accountants into whether or not the company could call in loans made to a third party which had previously alleged that the loan was not immediately repayable, hence rendering litigation virtually inevitable, was found to be subject to litigation privilege. In Re Highgrade Traders Ltd,58 a report by experts commissioned by an insurer concerned about whether a claim for fire damage was fraudulent and so should be refused, was also found to be covered by litigation privilege. Further, in Guinness Peat Properties v Fitzroy Robinson Partnership,59 a report by an insured to their insurer about the circumstances of a possible claim under the insured’s professional indemnity

53 Winterthur Swiss Insurance v AG (Manchester) Ltd [2006] EWHC 839 (Comm Ct) at para 90. 54 Ibid. para 91. 55 Para 91. 56 Thanki The Law of Privilege 3rd edn, Oxford University Press para 3.99 and fn 267. 57 [1986] BCLC 447. 58 [1984] BCLC 151 (CA). 59 [1987] 1 WLR 1027 (CA).

103

5.71  Privilege and confidentiality

policy was found to be subject to litigation privilege. On these bases, Thanki suggests that the decision in Winterthur was overly restrictive. 5.71 However, documents sent by a party’s lawyer to lenders seeking finance for a litigation have also been held to fail the dominant purpose test. Patten J in Dadourian Group International Inc v Simms held: Most of the letters are simply requests to various banks to consider the loan and to arrange a valuation of the security. The only exception is the letter of 8 September 2005 which gives Dexia Private Bank a summary of the issues in the action but is largely taken up with the details of the proposed facility. None of these communications is in my view covered by litigation privilege. Discussions with third party lenders about funding do not amount to communications whose sole or dominant purpose is the obtaining of advice or information for use in the proceedings.60

5.72 The current state of the law in England, therefore, is unclear but it appears that communications between lawyers or the claimant and funders or insurers (as third parties) during the pre-litigation stage which relates to the funding or insurance of a litigation, while in common parlance might be said to be ‘in connection with’ or brought into existence to ‘conduct’ the litigation at hand, will not, on the whole, attract litigation privilege. It should be noted that these cases do not affect the position that any material which is subject to legal advice privilege and is shared with a funder or insurer in appropriately couched circumstances of confidentiality, should not lose that privileged status. Will common interest privilege apply to communications between claimants, lawyers and funders? 5.73 At the date of writing, the English courts have not yet been asked to answer the question of whether the relationship between a funded party and third-party funder would provide ‘common interest’ protection to privileged documents shared by the funded party, and the argument does not appear to have been advanced (perhaps because the question of whether documents were privileged in the hands of a funder was based upon a limited waiver argument, rather than upon common interest which would not seem to provide any further protection). 5.74 Could it apply to litigation funding arrangements, on the basis that a funded party and a funder (or insurer) share a common interest in the outcome of the claim? The closest analogy would appear to be that of the insurer and insured in respect of ATE insurance. Both have a common interest, at least commercially, in a successful outcome to the case. In England, common interest privilege has been held to apply where an insured provides documents to an insurer, since

60 [2008] EWHC 1784 (Ch) at paras 105–106.

104

Application to third-party litigation funding under English law 5.77

they generally have a common interest in the litigation to which the insurance relates.61 5.75 As referred to at para  5.44 above, Mr Justice Aikens provided some guidance in Winterthur Swiss Insurance Co & Or v AG (Manchester) Ltd (in Liquidation) & Ors62 as to when common interest privilege will apply: [W]here a communication is produced by or at the instance of one party for the purpose of obtaining legal advice or to assist in the conduct of litigation, then a second party that has a common interest in the subject matter of the communication or the litigation can assert a right of privilege over that communication as against a third party. The basis for the right to assert this ‘common interest privilege’ must be the common interest in the confidentiality of the communication.63 [Emphasis added]

5.76 Therefore, and as more fully explained at paras 5.37–5.46, above, the question appears to be whether the documents are created in circumstances where there is an expectation of confidentiality, given a shared interest in the subject matter of the communication. In some other jurisdictions, the scope of common interest privilege has been held to apply where the common interest is commercial as opposed to legal. In the Canadian case of Pitney Bowes of Canada Ltd. v The Queen64 legal opinions relating to a commercial transaction were disclosed between parties negotiating a commercial transaction, in order to put the parties ‘on an equal footing’ in negotiations. The Canadian Federal Court held that in those circumstances, those opinions were given for the ‘benefit of multiple parties’ with an expectation that they would remain confidential to the outside world (and, as the Canadian Federal Court recognised, each case will turn on its facts). The premise was that the intention of the parties was not to cause a limited disclosure for a purpose to cause the loss of privilege as against the wider world. 5.77 It might be said that parallels could be drawn between these cases and the involvement of a third-party funder, to whom similar, limited, disclosures are made. The question has not arisen in the cases in which privilege and thirdparty funding have been discussed, and indeed the question of common interest privilege is seldom before the courts itself. It has been suggested that this is so because it in fact has limited utility: the concepts of limited loss of confidence or limited waiver commonly protect documents shared between parties – the key difference being that in circumstances where common interest privilege arises, both the disclosing party and the recipient may assert the privilege as if it were their own, which is not the case where a privileged document is shared by one party with another.65

61 Guinness Peat Properties Ltd v Fitzroy Robinson Partnership [1987] 1 WLR 1027. 62 [2006] EWHC 839 (Comm Ct). 63 Ibid. para 78. 64 (2203) 225 DLR (4th) 747, 751–2. 65 See Thanki The Law of Privilege 3rd edn, Oxford University Press para 6.24.

105

5.78  Privilege and confidentiality

5.78 The common interest privilege position set out above is, again, untested, but is likely to be the same in the pre-funding (or pre-litigation) stage as well as after funding has commenced.

Are documents produced by funders covered by privilege? 5.79 As discussed above, while funders, in general, retain a passive role in the claims that they fund, there will be a number of interactions between the funder, the claimant and the legal team, both before funding commences (in the due diligence phase) and as the case progresses. Funders will often require updates on the progress of claims, in order that they can monitor the status of their investment. Often, reputable professional funders will also act as a significant additional resource, providing valuable input on potential case strategies, legal or factual issues. 5.80 Those interactions with the lawyers will commonly create further documents, as will the funder’s own internal processes. There are a number of further categories of documents that could come into being as part of the funder’s investigation into, review of, funding and monitoring of the claims. These include: (i) producing internal assessments on the merits of the claims for internal consumption by the funder, its board and/or advisory organs (normally during the due diligence phase described above); (ii) commenting on legal materials produced by the claimant’s lawyers for the purposes of the claims (such as pleadings or expert reports); (iii) seeking legal advice (for the funder’s own account) on the merits of the claims for external solicitors or counsel; (iv) preparing and negotiating economic terms for the funding of the claims (such as economic modelling of claim outcomes); (v) preparing drafts of litigation funding agreements and ancillary documents, such as any relevant retainers with law firms prosecuting the claims, liaising with ATE insurers in respect of adverse costs coverage; and (vi) if funding is committed to the claim; producing materials reflecting the monitoring of the funder’s investment in the case, including its ongoing assessment of the case as a legal and economic proposition. 5.81 As regards assessment of the respective merits of a claim for funding, as well as reviewing the advice provided to the claimant in respect of the merits of the claim, a funder may also engage solicitors or counsel to provide further advice in respect of the merits. In the course of seeking that advice, as well as sharing contemporaneous documents or existing legal advice relating to the claim, the funder is likely to create documents itself (for instance, instructions to counsel). Where the funder seeks its own external legal advice on the merits of the claims 106

Application to third-party litigation funding under English law 5.84

(or indeed on any other aspect of a potential or actual funding commitment), the position appears simply to be indistinguishable from any other client–lawyer relationship: legal advice privilege will apply to protect such communication from disclosure, provided that the funder is the ‘client’ of that external counsel for those purposes. 5.82 Many professional litigation funders are staffed by legal professionals and practising lawyers. Those individuals will often carry out extensive analyses of the legal advice provided by the claimant’s lawyers, to assess whether they share the lawyer’s view of the claims or have concerns about the legal arguments. Where legally qualified staff within the funder report to the funder, as their client, on the legal issues related to the case, again, the position appears to be indistinguishable from any other relationship between in-house lawyer and internal client: legal advice privilege will apply to protect such material from disclosure. Equally, where legally qualified members within the funder advise on legal issues relating to the papering of litigation funding transactions, the same principle applies. 5.83 Those examples appear clear. However, it will quickly be recognised from considering the above list that a number of the documents which might be generated by a funder during the funding process could serve two purposes. While they may serve a legal purpose, in examining or furthering the claim at hand, they will also often be key to the economic decisions to be taken by the funder in committing to funding and also in monitoring the claims as an ongoing investment. Where should that dividing line be drawn? 5.84 While the funder may hold a unique position in its business of the funding of legal claims as assets, such that the division of legal and business issues may feel particularly blurred, the question of whether a lawyer is acting in a business or legal capacity (and, as such, providing legal advice) is present in many business contexts outside of litigation funding and has been addressed by the English courts at length. That question arises in both the context of in-house and external lawyers, but is perhaps most acutely apparent with the former. In Balabel v Air India, it was held that legal advice includes ‘advice as to what should prudently and sensibly be done in the relevant legal context’: … [T]he test is whether the communication or other document was made confidentially for the purposes of legal advice. Those purposes have to be construed broadly. Privilege obviously attaches to a document conveying legal advice from solicitor to client and to a specific request from the client for such advice. But it does not follow that all other communications between them lack privilege. In most solicitor and client relationships, especially where a transaction involves protracted dealings, advice may be required or appropriate on matters great or small at various stages. There will be a continuum of communication and meetings between the solicitor and client. The negotiations for a lease such as occurred in the present case are only one example. Where information is passed by the solicitor or client to the other as part of the continuum aimed at keeping both informed so that advice may be sought and given as required, privilege will attach…

107

5.85  Privilege and confidentiality

Moreover, legal advice is not confined to telling the client the law; it must include advice as to what should prudently and sensibly be done in the relevant legal context.66

5.85 Three Rivers No. 6 sets out that the test for whether the lawyer is advising on legal rights, obligations or liabilities in the relevant legal context: …If a solicitor becomes the client’s ‘man of business’, and some solicitors do, responsible for advising the client on all matters of business, including investment policy, finance policy and other business matters, the advice may lack a relevant legal context. … In cases of doubt the judge called upon to make the decision should ask whether the advice relates to the rights, liabilities, obligations or remedies of the client either under private law or under public law. If it does not, then, in my opinion, legal advice privilege would not apply. If it does so relate then, in my opinion, the judge should ask himself whether the communication falls within the policy underlying the justification for legal advice privilege in our law. Is the occasion on which the communication takes place and is the purpose for which it takes place such as to make it reasonable to expect the privilege to apply? The criterion must, in my opinion, be an objective one.67

5.86 However, the particular communication in issue need not contain the legal advice as such: … [A]ll communications between a solicitor and his client relating to a transaction in which the solicitor has been instructed for the purpose of obtaining legal advice will be privileged, notwithstanding that they do not contain advice on matters of law or construction, provided that they are directly related to the performance by the solicitor of his professional duty as legal adviser of his client.68

5.87 Therefore, a broad protection applies to a communication between a lawyer (be it in-house or external) and their client (that is, the funder) which cloaks in privilege not only the legal advice itself, but also, as set out at para 5.24, the continuum of communication related to that advice (even where that would not normally be privileged), provided that communication remains within a relevant legal, rather than a business, context. Care must also be taken that the identity of the ‘client’ within the funder is clear, for the reasons described in paras 5.28–5.30, above. However, as will be the case with all businesses, documents pertaining purely to the business operations of the funder, such as its assessment of the economics of a claim, the funding models to be employed or other (nonlegal) issues around structuring the funding are unlikely to fall within that legal context regardless of whether they are produced by legal staff.

66 [1988] 1 Ch 317. 67 Three Rivers District Council v Bank of England (No.6), [2004] UKHL 48 per Lord Scott at para 38. 68 Ibid. Lord Rodger at para 111.

108

Application to third-party litigation funding under English law 5.91

5.88 The business of funders is of course the assessment of and financing of legal claims as assets. That process involves assessing legal risks and the economic returns available or desirable, based upon those risks. Funding ratios, funding structures, pricing, warranties – all reflect the assessment of the funder as a monetisable asset. On an ongoing basis throughout the claim, funders will monitor both the legal and the financial progress of the claim, to ensure it remains an economic proposition, given the current state of progress. Those issues will be reported internally – to management, investment committees, boards and investors – and naturally those documents will reflect the legal assessments of the claims and describe strategic objectives for the proceedings. 5.89 The funding business therefore perhaps represents a unique challenge in drawing a clear dividing line between the legal advice being provided by an in-house team and advice on business-side issues. Any reporting within the funder may inevitably contain interwoven assessments of legal and financial issues, with the financial issues being parasitic on the legal. Regardless of the potentially intermingled business, financial and legal nature of such documents, material which reflects legal advice will be protected from disclosure under the normal rules. In any event, if any such documents were to be sought in disclosure by an adversary in litigation in the underlying funded claims, it is unlikely that there would be many instances where such documents would be relevant to substantive issues being determined in the case, being simply commercial decisions around the provision of funds to progress the case. Different considerations might arise in circumstances where the funder and funded party were in dispute.

Disclosure of funding arrangements 5.90 Finally, once a claimant has obtained funding and the litigation has commenced, what is the position of the documents that reflect the funding arrangements themselves? Clearly the funding arrangements reached between a funder and claimant will be of commercial sensitivity – the structure of the funding, the pricing of the finance and settlement provisions will all provide insights into the claims that might be utilised by an opposing party to seek a tactical advantage in proceedings. 5.91 In the area of competition litigation in England, the disclosure of funding arrangements is mandatory in certain circumstances. In order for collective proceedings to be commenced, the Rules of the Competition Appeal Tribunal require the claimant to demonstrate that it has adequate funding arrangements in place. This is addressed at paras 5.131–5.133, below. Outside of that context, the question has not arisen to be tested in many cases before the English courts. The courts have long had the power to order a party to disclose the name and address of a third-party funder of a claim (as opposed to the funding arrangements themselves) in the context of applications for security for costs, where the existence of funding has been admitted or 109

5.92  Privilege and confidentiality

proved.69 Disclosure in those circumstances is based upon the idea that parties are entitled to some protection from the risk of their opponent not being able to meet the defendant’s costs, if ordered to do so. Where a claimant is insolvent or of limited means, if the claim fails and the funding party does not meet the claimant’s liability for the defendant’s costs, a defendant has no practical way of recovering its legal costs. Accordingly, as matter of policy, the funder can be called upon to bear the burden of providing security for costs (a power granted to the defendant in 25.14(2)(b) of the Civil Procedure Rules (CPR)). In order to be able to make an application for security, the defendant must of course know the identity of the funder. However, the case law to date has refused to order disclosure of a funding agreement itself on the basis that it was not necessary to allow the defendant to make an application for security. 5.92 In Wall v The Royal Bank of Scotland Plc,70 the claimant had refused to reveal the identity of the third-party funder supporting the claim. The court held that while CPR 25.14 did not specifically provide a power to order disclosure of the funder, that rule conferred an ‘inherent, ancillary power’ for the court so to do. However, this power could not be used as a ‘fishing expedition’ and such disclosure would only be granted if there is good reason to believe the claimant is in receipt of litigation funding and an application for security for costs would have reasonable prospects of success. 5.93 The question also arose and received considerable judicial commentary in the case of Estera Trust (Jersey) Limited, Herinder Singh v Jasminder Singh, Verite Trust Company Limited, Jemma Trust Company Limited, Edwardian Group Limited, Jasminder Singh and Herinder Singh (as trustees of the English Trusts) (commonly referred to as In the Matter of Edwardian Group Limited).71 The case related to unfair prejudice proceedings brought under the Companies Act 2006 s 994. The petitioners in the case were minority shareholders in Edwardian Group Ltd, the holding company for a group of companies which owned and managed a portfolio of hotels, with assets in the region of £1 billion. The respondents were the other principal shareholders in the company, as well as the company itself. 5.94 The petitioners sought a purchase of their shares in the company by the other shareholders, at a fair price. One of the acts of unfair prejudice upon which the petitioners were relying was the removal of Mr Herinder Singh as a director of the company in 2009, some six years before the petition was presented. The respondents argued that the delay in bringing the proceedings was a basis for the court to refuse to grant the relief sought. Further, the respondents argued that the delay should lead the court to value the shares at a date in the past, rather than the date of the petition. The delay was therefore a part of the substantive issues under debate in the case.

69 See Reeves v Sprecher and Others [2007]  EWHC  3226 (Ch) and Raiffeisen Zentralbank Osterreich Ag v Cross Seas Shipping Limited and others [2003] EWHC 1381 (Comm). 70 [2016] EWHC 2460 (Comm). 71 [2017] EWHC 2805 (Ch).

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Application to third-party litigation funding under English law 5.98

5.95 The petitioners’ positon was that the delay from 2009 to 2015 was, at least in part, related to the fact that they did not have sufficient funding to conduct the litigation to trial. They pleaded that during that period they had actively sought funding to commence the litigation, but had not succeeded in obtaining it. 5.96 During the disclosure phase of the proceedings, the petitioners disclosed certain litigation funding documents which were communications between various representatives of the petitioners and potential funders. The identity of those potential funders was revealed. In the documents relating to the funding which were produced, the petitioners had redacted parts of those documents which were said to ‘refer to, reproduce, summarise, embody or otherwise reveal directly or indirectly the nature, content [or] effect of privileged communications’. The basis for making those redactions was said to be legal professional privilege. As well as those redacted documents, some documents relating to the petitioners’ attempts to obtain funding were withheld. It should be noted that those documents did not include documents relating to the negotiation and agreement with the current funder of the proceedings. 5.97 The respondents had accepted that, prima facie, redactions made to documents which concealed direct references to the petitioners’ legal advice as to the merits and/or strategy could justify a claim for privilege as that material would clearly be subject to legal advice privilege. However, the petitioners had apparently gone further than that in making redactions which concealed portions of the documents which ‘tended to reveal’ the advice which the petitioners had received, the petitioners submitting: The documents which have been withheld or redacted are privileged, in that they tend to reveal the advice which the Petitioners have received in relation to the merits of the case, in relation to strategy and tactics, and in relation to the funding itself. Furthermore, these are matters where the Court can properly, in the exercise of its discretion, refuse disclosure in any event (regardless of whether they are relevant to an issue in the case).72

5.98 It was said by the petitioners that sight by the respondents of these redacted sections to the litigation funding documents would allow them a ‘collateral advantage’, by giving an insight into the petitioners’ legal advice on the merits of the dispute, as well as insight into the sensitive terms of the funding, in particular those addressing settlement. They highlighted a number of areas where disclosure of the funding documents might allow such insights to be drawn, namely: (a) settlement; (b) valuation; (c) term and amount of funding; 72 Ibid. para 16.

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5.99  Privilege and confidentiality

(d) definitions of success and provisions as to termination; (e) the funder’s return; (f) amount and protection of security; (g) certain representations and warranties; and (h) certain conditions precedent and document requests. 5.99 As the judge recited, in England, as a matter of public policy, legal advice privilege protects not only the documents and communication containing the legal advice, but also extends to other material that ‘evidences’ the substance of that communication.73 The argument in Edwardian turned on whether it sufficed for a claim to legal advice privilege that one could infer the substance of a party’s legal advice from a document, such as a funding agreement. The respondents submitted that the ability to infer underlying legal advice from a secondary document was not a ground on which to claim privilege, unless the inference of the substance of the advice was obvious. They relied upon the decision of David Richards J  in Financial Services Compensation Scheme Ltd v Abbey National Treasury Services plc,74 in which the judge found that unless: perhaps the inference is obvious and inevitable in which case the document is in substance a statement of the advice or communication, privilege does not attach to such documents. First, it is the communication between the client and lawyer which is privileged either in its original form or in a summarised or paraphrased form. A  document which does not contain the communication in any form contains nothing to which privilege attaches.75

5.100 The petitioners relied in response on Lyell v Kennedy (No 3)76 (‘Lyell’) and Ventouris v Mountain.77 In Lyell, the Court of Appeal refused to order the disclosure of original documents which had been collected for the purpose of preparing a defence in litigation and for the purpose of instructing counsel in that litigation, finding that the documents would give the other party ‘a clue to the advice given by the solicitor’ and accordingly they were privileged.78 That was on the basis that such documents attracted legal advice privilege rather than litigation privilege. In Ventouris v Mountain, the ratio of Lyell was summarised as follows: The ratio of the decision is, I think, that where the selection of documents which a solicitor has copied or assembled betrays the trend of the advice which he is 73 See Three Rivers DC v Bank of England (No 5) [2003] QB 1556 at 19 and 21; and see also the declaration made by the Court of Appeal in that case which is quoted in Three Rivers DC v Bank of England (No 6) [2005] 1 AC 610 at 14. 74 [2007] EWHC 2868 (Ch). 75 Financial Services Compensation Scheme Ltd v Abbey National Treasury Services plc [2007] EWHC 2868 (Ch) at para 17. 76 (1884) 27 Ch D 1. 77 [1991] 1 WLR 607. 78 Cotton LJ, page 26.

112

Application to third-party litigation funding under English law 5.105

giving the client the documents are privileged. [Counsel] for the plaintiff put this forward as an exception to what he claimed was the general rule, that nonprivileged documents do not acquire privilege simply by being copied. If the ratio I have given is correct, the authority is consistent with the fundamental principle underlying the privilege.79

5.101 The judge was also referred to three further authorities in which that principle was applied. In the first case, Barr v Biffa Waste Services Ltd,80 Coulson J had to consider a claim to privilege in relation to an ATE insurance policy. He held that the policy was not the subject of litigation privilege but he accepted as correct a concession by counsel that legal advice privilege could be claimed for material in relation to the ATE policy ‘which would allow the reader to work out what legal advice had been given.’ 81 5.102 In the second case, Arroyo v BP  Exploration Company (Colombia) Ltd,82 the Senior Master took the same approach and cited Cotton LJ’s judgment in Lyell, finding as privileged ATE policy documents which would ‘give a dud’ to the parties’ thinking. 5.103 In the final case, Excalibur Ventures LLC  v Texas Keystone Inc,83 Popplewell J had to consider a claim to privilege in relation to a party’s attempts to obtain litigation funding. He held that the documents in question were not the subject of litigation privilege but at para 23 he said: If and insofar as the disclosure of the funding agreements would or might give the other side an indication of the advice which was being sought or the advice which was being given, it would be covered by legal advice privilege.

5.104 The judge in Edwardian preferred the position taken in Lyell and Ventouris and also drew on Australian authority, adopting the distinction drawn in AWB v Terence Cole84 between a case where there is a ‘definite and reasonable foundation in the contents of the document’ for the suggested inference as to the substance of the legal advice given and merely something which would allow one to ‘wonder or speculate whether legal advice had been obtained and what was the substance of that advice’.85 Accordingly, terms of funding documents from which the substance of the legal advice given can be inferred, are presently protected by legal advice privilege. 5.105 It should be noted that in Edwardian, the redacted documents in issue had been included in the list of documents available for the respondents to inspect. 79 Bingham LJ, page 615F. 80 [2009] EWHC 1033 (TCC). 81 At para 48. 82 [2010] EWHC 1643 (QB). 83 [2012] EWHC 2176 (QB). 84 [2006] FCA 571. 85 Edwardian at para 36.

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5.106  Privilege and confidentiality

The petitioners had not sought to resist disclosure of those documents in their full form (on the basis of relevance, privilege or otherwise), nor had the petitioners sought to modify ‘standard disclosure’ such as to omit those documents from the scope of disclosable documents. Given that approach, the argument therefore centred on whether redacted documents, which the petitioners had not sought to keep out of disclosure, should be made available for inspection in their full form. The effect of that was that the respondents had a right to inspect those documents, with the only power the court had to prevent that disclosure being on privilege grounds (in the view of the judge in Edwardian) – he did not have any other discretion than the limited exceptions set out in CPR 31.3.86 That discretion did not provide the judge with the power to prevent disclosure on the basis of those documents providing a ‘tactical advantage’ to the respondents, if disclosed. 5.106 The judge noted that in Excalibur87 and the RBS Rights Issue Litigation,88 that the court had proceeded on the basis that it did in fact hold a discretion to withhold inspection of relevant, non-privileged, documents on grounds which went beyond those in CPR 31.3.89 The judge’s view in Edwardian was that: However, I consider that a court should be cautious before exercising its discretion under CPR r 31.12 in order to withhold proportionate inspection of relevant nonprivileged documents on a ground which does not come within rule 31.3 but on account of an assertion that inspection would give the inspecting party a tactical advantage in the litigation.90

5.107 It should also be noted that in Edwardian, the arguments regarding privilege did not relate to the current funding sought and obtained for the claim to proceed, only to the previous attempts to seek funding. No application was made for the disclosure of the current funding arrangements. That question was subsequently put to the judge, who refused to make an order that the petitioners disclose any documents relating to their current funding, including the following reasons: (2)

if there were to be an application for specific disclosure, there would need to be a consideration of the relevance of the documents relating to current funding …

(4)

I am not persuaded, certainly on the material prepared for the inspection application, that the identity of the current funder will be material to the issues to be considered at the trial;

86 The judge was referred to Excalibur Ventures LLC v Texas Keystone Inc [2012] EWHC 2176 (QB) at para  24 and re RBS  Rights Issue Litigation [2017] 1  WLR  1999 at paras 175–187. In both of these cases, the court proceeded on the basis that it had a discretion to withhold inspection of a relevant non-privileged document on grounds which appeared to go beyond the exceptions in CPR 31.3. 87 Excalibur Ventures LLC v Texas Keystone Inc [2012] EWHC 2176 (QB). 88 RBS Rights Issue Litigation [2017] 1 WLR 1999. 89 Edwardian at para 47. 90 Edwardian at para 50 .

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Application to third-party litigation funding under English law 5.110

(5)

I am cautious about ordering the disclosure of the identity of the current funder without being satisfied that its identity will be relevant to an issue at the trial.91

5.108 Interestingly, and perhaps in recognition of an acceptance of certain terms being likely to be privileged, the solicitors for the first respondent offered to agree that, in relation to the current funding documents, the petitioners should be free to redact parts of such documents which revealed the petitioners’ legal advice or which revealed: (1) the amount of a success fee or premium being charged to reflect the contracting party’s assessment of the merits of the case; (2) any circumstances in which the solicitor or the funder could terminate the funding arrangement; and (3) any terms by which the solicitors or the funder would require to be consulted on whether offers should be accepted. 5.109 Since the case turned on a specific issue (whether the delay in the claimants’ proceeding with their claim was due to funding), the historic funding arrangements bore a relevance to the claims that in more straightforward funding circumstances might not exist. The judge also recognised that the identity of the current funder was unlikely to be material to the case, and accordingly was not relevant at all, thus requiring no privilege ‘defence’ to prevent disclosure. Further, as pointed out by the judge, the question of whether these documents contained privileged material, and whether the court had any power to prevent their disclosure, arose only because the petitioners had included these documents in their list for documents available for inspection to the respondents. They had not sought to object to standard disclosure and kept those documents out of the inspection list. 5.110 Therefore, it can be said that the cases in which terms of funding arrangements have come to be disclosed on the basis that privilege does not attach to those documents involve unusual circumstances and bear a common theme. In each case, it has been argued that the documents were relevant to the determination of substantive issues in the case or in respect of an interlocutory issue. In those cases, documents that are prima facie relevant are potentially disclosable and require a ground to resist such disclosure. That ground has in these cases been privilege. It is unlikely that, in general terms, the communication between a plaintiff or its lawyers and a litigation funder will be relevant to any substantive issue in the proceedings and should not be liable to orders for production on that basis, before any issue of privilege were to arise.

91 Edwardian at para 50.

115

5.111  Privilege and confidentiality

Parallels with ATE? 5.111 Ostensibly, third-party funders and ATE insurers have the same relationship with a funded claimant: all have an interest in the claim proceeding successfully and in preventing the disclosure of legal advice or other sensitive material that would not otherwise (ie  absent the existence of funder or ATE insurer) be disclosable to an adversary and may prejudice the chance of the claims succeeding. 5.112 In the case of the litigation funder, on success, they will be entitled to a commission on their investment but if the matter is unsuccessful, the funder will be exposed to the lost investment in the legal fees expended in prosecuting the case. In jurisdictions that adopt cost-shifting, as well as the funder having to meet the claimant’s own legal costs, the funder may also be exposed to the defendant’s legal costs if an indemnity has been provided to the claimant by the funder for those costs, or if the jurisdiction exposes the funder to adverse costs risks directly. In cases where a funder provides an indemnity, that indemnity may itself be backed by an ATE insurance product. 5.113 In the case of the ATE insurer, in the event of the claim failing, the insurer will be exposed to the insured event: be it the adverse costs, the claimant’s own-side legal costs, or both. In addition, ATE insurers may structure their offering such that the premium payable by the insured if the case succeeds will be increased, thus providing an insurer with an interest in a maximised damages recovery. 5.114 Potentially, the final forms of funding agreement and ATE policy are instructive to an adversary of the legal advice that has been provided and the perceived risks posed by the case. As discussed at para 5.90, above, and further at para 5.117, below, that may be apparent from many terms of those agreements. The courts in England have recognised circumstances in which ATE polices could be privileged on that basis. 5.115 The case of Arroyo & Others v BP Exploration Company (Columbia) Limited,92 was a group litigation relating to claims by a large number of Colombian farmers. In the mid-1990s the Ocensa pipeline was laid to carry oil from the Cusiana–Cupiagua oilfield in central Colombia to the Caribbean coastline at Coveñas. Some 109 claimants brought claims concerning 73 farms that the Ocensa pipeline caused damage to those farms. The claims were brought in England by virtue of certain of the defendants involved in the project being domiciled there. 5.116 At the case management stage, the defendants applied for disclosure of the claimants’ ATE insurance policy. They did so on the basis that since the claims were being advanced by rural Columbian farmers, the majority of whom were 92 [2010] EWHC 1643 (QB).

116

Application to third-party litigation funding under English law 5.118

‘peasant farmers’, without sight of the terms of the ATE policy put in place by the claimants, the defendants would have no comfort on the level of insurance cover available to cover the defendants’ costs if the claim failed, nor any clarity over the conditions and exceptions to that cover. Further, the ATE cover would be relevant to any application for security for costs that the defendants might need to make. Accordingly, should the defendants be forced to defend the claim and defeat the claims, they might face considerable difficulty enforcing any costs order against the claimants. The defendants submitted that this uncertainty caused them prejudice because they could not assess ‘how best to conduct the litigation’. At that time, the insurance premium paid by a claimant for ATE cover was recoverable from the defendant if the claim succeeded (that is no longer the case) and the defendants were therefore unable to determine a major component of the costs they were likely to face if they lost. These factors, the defendants said, established an ‘inequality of arms’ between the claimants (who knew what costs they could recover if they won; and could make a proper assessment of the likely costs if they lost) and the defendants (who could not). They were thus ‘litigating in the dark’. 5.117 The claimants resisted disclosure of the ATE policy, inter alia, on the basis that it was protected by both legal advice and litigation privilege. The Senior Master agreed with the claimants that the ATE policy was not subject to disclosure (principally because the ATE policy was irrelevant to the claims and he had no general power under the CPR to compel its disclosure). However, the documents were, in the Master’s view, in any event privileged and disclosure was likely to prejudice the claimants in the conduct of the litigation: An opposing party would derive obvious tactical advantage from inspection of the detail of a [conditional fee agreement] CFA or ATE policy. The amount of the success fee or premium would reflect the contracting parties’ assessment of the merits of the case. It would be of considerable utility to an opponent to know in what circumstances a solicitor or insurer could terminate the funding arrangement (for example if an offer above a certain level were made). The arrangements may well contain rights for solicitors, insurers and co-insureds to be consulted on whether offers should be accepted. Knowledge of the detail of those arrangements could enable an outsider to provoke conflicts of interests between the parties. Knowing the precise circumstances in which a party is or is not liable to pay his solicitor, is or is not insured, or is or is not liable to pay an insurance premium, is obviously useful to a party seeking to negotiate a settlement. And again, the precise terms which the parties have negotiated will cast light on their underlying view of the merits, for both CFAs and ATE policies are contracts which centre on risk-related contingencies and, where they are individually negotiated, the terms will inevitably reflect the parties’ perceptions and apportionments of those risks.93

5.118 He went on: The very fact that the terms of the insurance were negotiated suggests that the policy terms took into account specific litigation risk factors and the views and

93 Ibid. para 48.

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5.119  Privilege and confidentiality

tactics of the Claimants’ lawyers. I have no doubt whatsoever that there has to be a risk that if the Defendants were able to compare and contrast the insurers’ standard terms with such amendments and changes as have been made by the tailor-made terms they might be able to work out the Claimants’ solicitors’ advice in respect of chances of success and / or tactics if nothing else …94

5.119 His decision was based upon the fact that the ATE policy had been individually negotiated between the lawyers for the claimants and the insurers and had been produced ‘for the purposes of litigation’. He accepted the claimants’ argument that the terms of the policy would necessarily reflect both the legal advice from the claimants’ lawyers and also the views formed by the lawyers and the insurers as to the risks of the litigation and that, ‘on any view, the terms of the policy would (in the words of Cotton LJ in Lyell v Kennedy (No3) (1884) 27 Ch D 1 (CA), 26) “give a dud to the parties’ thinking”.’ The judge compared the policy to a solicitor’s bill of costs which is privileged ‘as it might disclose the way in which the litigation is being approached’.95 On that basis, he concluded that the policy was privileged, on the grounds of legal advice privilege. 5.120 Further, he found that since the policy came into existence for the purpose of supporting litigation (its purpose being to aid the claimants ‘to obtain legal advice or to conduct or aid in the conduct of litigation’96), the policy was also subject to litigation privilege in any event, because: It seems to me to be plain that by its nature, knowledge of the terms of an ATE policy would be of tactical advantage to the opposing party in the litigation. I have no doubt that that is why the opportunity was not taken in the CPR to make a party give information about the terms of such a policy as well as about the premium payable under it during the course of the litigation before assessment. It would be very surprising if it were not protected by litigation privilege in these circumstances. The Defendant has identified no reason for supposing that it is not. It concedes that the documents connected to the negotiation of the policy would be privileged, but simply asserts that the end product of the negotiations enjoys no protection. I  agree with Mr Layton that this is not a position which makes sense.97

5.121 However, the Senior Master was clear that the privilege protection held to exist in Arroyo was specific to the facts at hand, where the policy had been specifically negotiated and would be revelatory of the advice provided: ‘Privilege is generally a mixed question of fact and law. If an ATE policy is in wholly standard terms and on a “one size fits all” premium (as is often the case in,

94 Ibid. para. 95 Arryo & Others v BP  Exploration Company (Columbia) Limited [2010]  EWHC  1643 (QB) para  59; Chant v Brown (1852) Hare 790, 68  ER  735; IBM  Corp v Phoenix [1995] 1  ALL ER 413 (Ch), 424. 96 Lord Edmund Davies in Waugh v BRB [1980] AC 521 (HL). 97 Arroyo & Others v BP Exploration Company (Columbia) Limited [2010] EWHC 1643 (QB) para 60.

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for example, fast track personal injury cases), there may be no viable claim for privilege (or in any event no practical point in asserting privilege) as every aspect of the policy will already be in the public domain.’98 5.122 The Senior Master also was of the view that such an ATE policy was brought into existence for the dominant purpose of litigation such as to bring it within litigation privilege: In my judgment, it cannot be said that the communications in the negotiation and drafting of this policy and the final agreed policy were not brought into existence for the dominant purpose conducting litigation and also that the same are likely to reflect legal advice given us to prospects and tactics. It seems to me that the dicta in the paragraphs in the judgment of Aikens J as he then was, in the case of Winterthur Swiss Insurance v AG (Manchester) Ltd [2006] EWCH 839 (Comm) in this case, support the view that the Claimants are entitled to claim privilege for the policy. In my judgment, the production of the policy cannot be compelled.99

5.123 In making this finding, the Senior Master rejected the judgment in Barr and Others v Biffa Waste Service Ltd (Westmill Landfill Group Litigation)100 which had found that an ATE policy was not subject to litigation privilege (although in that case the judge did accept a redaction of the premium, as potentially reflective of the legal advice received on the merits). 5.124 As to the question of whether the legitimate interests of the defendant in some way overrode the prejudice to the claimant of revealing the ATE terms such that there was a ‘level playing field’ in the proceedings, the Senior Master was of the view that the defendant was: not entitled to be in any better position than any other Defendant facing an impecunious Claimant merely because that Claimant has the benefit of a CFA and of ATE insurance. The existence of that combination of CFA and ATE gives the Defendant a right under the CPR which it would not otherwise have had, to know of its existence if it is to be used under the rules to extract the additional liabilities (and latterly the level of cover and whether the premium is staged) but that is as far as it goes. Mr Gibson may well be right that the result is that the Defendant does not know whether if it succeeds, its costs will be paid. This may well mean that for tactical purposes it has to assume that they will not or to assume that the Claimants’ solicitor’s statement that the cover is up to £1.8 million is correct.101

5.125 Therefore, in Arroyo, the ATE policy was said not to be disclosable in that it benefitted from both legal advice privilege (on account of the specifically negotiated terms reflecting the legal advice sought) and litigation privilege (on

98 Ibid. para 64. 99 Ibid. para 67. 100 [2009] EWHC 1033 TCC. 101 Arroyo & Others v BP Exploration Company (Columbia) Limited [2010] EWHC 1643 (QB) para 50.

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account of its creation for the purposes of conducting litigation). However, as stated above, caution should be exercised in relying upon the decision in Arroyo as authority for a blanket assertion that ATE policies can be subject to legal advice privilege: it turned on the specifically negotiated nature of the terms. Further, as regards litigation privilege, the Senior Master’s acceptance that the policy was created for the dominant purpose of litigation conflicts with later judgments, such as that in Excalibur, which found litigation funding documents were not the subject of litigation privilege. Further, in the RBS Rights Litigation,102 Hildyard J declined to follow the Arroyo judgment, finding that no litigation privilege and no legal advice privilege could apply to an ATE policy (while accepting that redactions may be required for elements which betray any legal advice given). 5.126 Where the authorities do align, however, is that if the terms of a document (be it a funding agreement or an ATE policy) are revelatory of the legal advice provided, on the principles discussed above, it can attract legal advice privilege. This would be in line with the approach taken by Popplewell J in Excalibur. In those circumstances a claim to litigation privilege would not be necessary. 5.127 In the recent case of Jalla & Ors v Royal Dutch Shell Plc & Ors,103 Stuart-Smith J  appeared to adopt a different approach. In that case, in their skeleton argument for an interlocutory hearing relating to an earlier judgment, the defendants had sought disclosure by the claimants of various documents relating to the Damages-Based Agreement104 (DBA) entered into by the claimants with various legal representatives and in relation to ‘any third-party funding arrangements’: [T]he Defendants reiterate their requests for clarity regarding the following points: (i) the exact role played by the Claimants’ legal representatives, Johnson & Steller, particularly in light of the Damages Based Agreement entered into with the Claimants (in relation to which we reiterate our request for further information); (ii) the exact role played by Johnson & Steller’s ‘agents’, the law firm Rosenblatt Limited, particularly given that they were to be remunerated from ‘Johnson & Steller’s share of its DBA in the event of success’ (Letter from Claimants dated 8 October 2019); and (iii) any third party funding arrangements, including the extent to which (a) any third party funders stood to benefit from a favourable outcome, and (b) any third party funding included funding to cover adverse costs orders against the Claimants.105 [Emphasis added.]

5.128 Stuart-Smith J  ordered the disclosure of the requested material, finding that:

102 [2017] EWHC 463. 103 [2020] EWHC 738 (TCC). 104 A damages-based agreement is an arrangement between a client and their lawyer in which the solicitor’s legal fees are only payable in the event the claim is successful, and are paid, with a success fee, from the proceeds of the claim. 105 Jalla & Ors v Royal Dutch Shell Plc & Ors [2020] EWHC 738 (TCC) para 18.

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The information is relevant both to questions of costs and to settlement and, in my judgment, should be provided in order that the Defendants and the Court may understand what the risks to which the Defendants are exposed may be and the extent to which the playing field is, in this respect, not level. This Court is prepared to take judicial notice of the fact that settlement of large litigation is rendered virtually impossible in the absence of reasonable transparency about these matters.106

5.129 The judgment appears to record that the claimant’s counsel believed that the claimants had in fact provided that information to the defendants, that is to say they had chosen not to object to disclosure (on the basis of those terms of the arrangements being privileged or otherwise confidential). However, the judge then gave the claimants the opportunity to raise objections to providing details of the DBA and any funding. 5.130 At the time of writing, it is unknown whether any such objections to disclosure were put forward and if so, whether the judge declined to uphold those objections on the basis of his finding that the documents would be disclosable such that the defendants should have an understanding of ‘what the risks to which the Defendants are exposed may be’. This form of ‘level playing field’ argument between the claimant and defendant was rejected in Arroyo. It is submitted that it would be premature to read this order, made at a very early stage in the litigation, as seeking to carve a different path to that adopted in the cases cited above, and instead to recognise that this decision was likely made against a factual backdrop that is not apparent from the reported judgment of this interlocutory hearing. Disclosure of funding arrangements in the Competition Appeal Tribunal 5.131 In England, a person wishing to bring a claim as a representative of a class in collective proceedings before the Competition Appeal Tribunal must be authorised to do so by the Tribunal through the grant of a Collective Proceedings Order (CPO).107 The Tribunal may authorise a person to act as class representative and grant a CPO only if it considers it just and reasonable for them to do so. The Competition Tribunal Rules and the Enterprise Act 2002 set out various factors to be considered in that assessment and several of those relate to the adequacy of the representative’s funding arrangements, both as regards their own costs and their ability to meet the other side’s costs.108 The rationale is, of course, to ensure that claims brought on behalf of class members are backed by resources sufficient to see the claims through to conclusion for the benefit of the class: as far as the potential class are concerned, and indeed as

106 Ibid. para 19. 107 Competition Act 1998 s 47B. 108 See Enterprise Act 2002 Sch 4 para 15B e; Competition Appeal Tribunal Rules rule 78.

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far as the Tribunal was concerned, one point of concern is that the actions are funded and will not grind to a halt for lack of money.109 5.132 Accordingly, at an early stage in collective proceedings relating to competition matters in England, the question of the funding arrangements, both for own-side legal costs and for adverse costs, will have to be addressed. That is not to say that the entirety of the funding documents will be made available to the defendant and to the public or potential members of the class. The Tribunal will allow redactions to material which is reflective of legal advice and to commercially sensitive material in the funding documents, and further, ‘confidentiality ring’ mechanisms may be put in place to limit the disclosure of funding (or other material) to certain advisers (see, for example, Justin Gutmann v First MTR South Western Trains Limited and Another110 and Justin Gutmann v London & South Eastern Railway Limited111). 5.133 However, as Roth J pointed out, disclosure of the terms of funding and ATE arrangements should be sufficient to inform potential members of the class of ‘as much as possible’ about the claim from which they are said to benefit, both to allow for informed opt-out by class members but also more generally: We are concerned in any proposed class action or collective proceedings that as much as possible should be in the public domain so that proposed Class Members, not just on any question of whether they want to opt out, but just generally, should be able to see as much as possible of what is proposed for their benefit and in their name.112

US LAW The attorney–client privilege 5.134 The attorney–client privilege protects from disclosure communication a client makes confidentially to their attorney. The privilege, which is the ‘oldest of the privileges for confidential communications known to the common law,’ serves to ‘encourage full and frank communication between attorneys and their clients and thereby promote broader public interests in the observance of law and administration of justice.’113 Nevertheless, the doctrine has been described as ‘[n]arrowly defined, riddled with exceptions, and subject to continuing criticism.’114

109 Roth J in Justin Gutmann v First MTR South Western Trains Limited and Another and Justin Gutmann v London & South Eastern Railway Limited. Cases 1304/7/7/18 and 19. 110 Case 1304/7/7/18. 111 Case 1305/7/7/19. 112 Justin Gutmann v First MTR South Western Trains Limited and Another and Justin Gutmann v London & South Eastern Railway Limited. Cases 1304/7/7/18 and 19. 113 Upjohn Co. v United States 449 U.S. 383, 389 (1981). 114 United States v Schwimmer 892 F.2d 237, 243 (2d Cir. 1989).

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5.135 In the United States, there is no single rule or formulation of the attorney– client privilege. Instead, it has been articulated in federal and state courts and codified in various jurisdictions. Thus, while every jurisdiction recognises the attorney–client privilege, the application of the doctrine varies based on individual statutes and common law. See Federal Rule of Evidence 501 (‘The common law – as interpreted by United States courts in the light of reason and experience – governs a claim of privilege’); In re Grand Jury Investigation115 (articulating an eight-part test for application of the privilege in the Ninth Circuit); United States v Int’l Broth. of Teamsters116 (similar test in the Second Circuit); see also California Evidence Code § 954 (articulating the test for California); New York’s Civil Practice Law and Rules § 4503(a)(1)(articulating the test for New York). 5.136 Nevertheless, despite some important nuances, across all jurisdictions there is significant commonality. In general, in order for a communication to be protected by the attorney–client privilege, the following elements must be present: (1) there must be a written or oral communication; (2) made in confidence between (3) a client and (4) their attorney (5) for the purpose of seeking or providing legal advice.117

Waiver by third-party disclosure 5.137 Critical to the attorney–client privilege is the confidential nature of the communication between attorney and client. As such, the privilege may be waived if the communication expands beyond these parties – for example, by including a third party in a privileged discussion with an attorney or sharing an otherwise privileged communication with a third party. In general, a knowing and voluntary disclosure of otherwise privileged communications to a third party ‘is inconsistent with the attorney–client privilege and thus waives the privilege.’118 5.138 However, not all third-party disclosures will result in a waiver. For example, disclosure of communication with a client’s or an attorney’s agents or consultants will not generally result in a waiver where such disclosures are deemed necessary to obtain or render legal advice and are made in a manner consistent with the underlying requirement of confidentiality. See United States v Kovel119 (privilege could extend to third parties like an accountant where ‘the communication [with the third party is] made in confidence for the purpose of obtaining legal advice from the lawyer’); California Evidence Code § 952 115 974 F.2d 1068, 1071 n.2 (9th Cir. 1992). 116 119 F.3d 210, 214 (2d Cir. 1997). 117 See Edna S. Epstein The Attorney-Client Privilege and the Work Product Doctrine, 65 The American Bar Association, 5th Ed. 2007 (citing United States v United Shoe Mach. Corp. 89 F. Supp. 357, 358-59 (D. Mass. 1950)). 118 Powers v Chicago Transit Auth. 890 F.2d 1355, 1359 (7th Cir. 1989); see also In re Grand Jury Proceedings 78 F.3d 251, 254 (6th Cir. 1996) (‘By voluntarily disclosing her attorney’s advice to a third party, for example, a client is held to have waived the privilege because the disclosure runs counter to the notion of confidentiality.’). 119 296 F.2d 918 (2d Cir. 1961).

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(disclosure to persons who are ‘present to further the interest of the client’ or ‘to whom disclosure is reasonably necessary for the transmission of the information or the accomplishment of the purpose for which the lawyer is consulted’ is not a waiver).

Common interest exception 5.139 Further, some communications with third parties that are not agents or strictly necessary for the provision of legal advice may still be maintained as privileged where the parties share significant common legal interests. The socalled ‘common interest doctrine’ or ‘common interest privilege’ is a generally recognised (if inconsistently applied) exception to the rule of waiver for thirdparty disclosures. 5.140 While sometimes called a ‘privilege’, common interest is not an independent basis on which to claim privilege and may only be invoked to prevent the waiver of a pre-existing privilege. See Cavallaro v United States120 (‘The common-interest doctrine prevents clients from waiving the attorney– client privilege when attorney–client communications are shared with a third person who has a common legal interest with respect to these communications.’). 5.141 Although courts have not been uniform in the articulation of the doctrine, in order for the common interest exception to apply, communications typically must be made between parties that share a common legal interest and the communications must be in furtherance of that common interest. See United States v Bergonzi121 (‘The common interest privilege … applies where (1) the communication is made by separate parties in the course of a matter of common interest; (2) the communication is designed to further that effort; and (3) the privilege has not been waived’). 5.142 The closer the interests are aligned, the more likely the doctrine will apply. Indeed some courts require the interests be identical. Moreover, those common interests must be legal, not merely commercial. See Duplan Corp. v Deering Milliken, Inc.122 (requiring ‘that the nature of the interest be identical, not similar, and be legal, not solely commercial’); Bank of America v Terra Nova Insurance123 (‘The mere fact that the parties were working together to achieve a commercial goal cannot by itself result in an identity of interest between the parties.’). However, not all articulations are as strict. For example, under the Restatement’s formulation the common interest may be ‘either legal, factual, or strategic in character’ and the interests of the separate parties ‘need not be entirely congruent.’124 120 284 F.3d 236, 250 (1st Cir. 2002). 121 216 F.R.D. 487, 495 (N.D. Cal. 2003). 122 397 F. Supp. 1146, 1172 (D.S.C. 1974). 123 211 F. Supp. 2d 493, 497 (S.D.N.Y. 2002). 124 Restatement (Third) of the Law Governing Lawyers § 76.

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The work product doctrine 5.143 The work product doctrine protects material prepared in anticipation of litigation or trial that, if disclosed, would reveal an attorney’s strategy or mental impressions. See Hickman v Taylor125 (barring ‘unwarranted inquiries into the files and the mental impressions of an attorney’); Federal Rule of Civil Procedure 26(b)(3) (‘Ordinarily, a party may not discover documents and tangible things that are prepared in anticipation of litigation or for trial by or for another party or its representative’). 5.144 The underlying principle of the work product doctrine is – like attorney–client privilege – to promote the provision of legal advice by providing a protected sphere for an attorney to do their work. As the US Supreme Court noted in Taylor v Hickman, the ‘proper preparation of a client’s case demands that [the attorney] assemble information, sift what he considers to be the relevant from the irrelevant facts, prepare his theories and plan his strategy without undue and needless interference.’126 Moreover, opposing counsel should not be permitted ‘to perform [their] functions … on wits borrowed from their adversary.’127 Allowing an adversary to impinge on this sphere would provide an unfair advantage and, more broadly, could potentially chill how attorneys prepare and provide legal advice in the adversarial system; for example, by limiting written analysis, consideration of alternative theories and counterarguments, or exploring potential weaknesses in a client’s case. 5.145 In determining whether materials were prepared in anticipation of litigation, US courts have generally applied two broad standards. A  majority consider whether the materials at issue were prepared ‘because of’ pending or anticipated litigation, as articulated by the Second Circuit in United States v Adlman.128 By contrast, a minority apply a more narrow ‘primary purpose’ test which requires that litigation be the ‘primary motivating purpose’ of the material’s creation, articulated by the Fifth Circuit in United States v El Paso Co.129 The difficulty lies in assessing materials that may have both a legal and a business purpose. Under the ‘because of’ standard, work product attaches to documents prepared ‘because of the prospect of litigation’ if the materials were prepared to help evaluate ‘the desirability of a business transaction, which, if undertaken, would give rise to litigation.’130 The majority view allows for the reality that business decisions may frequently be informed by potential litigation. However, this ‘overlap between business and litigation reasons for the creation of the disputed documents’ can be difficult to square within the more restrictive primary purpose test.131 125 329 U.S. 495, 510–512 (1947). 126 Ibid. 127 Ibid. at 516 (Jackson J, concurring). 128 134 F.3d 1194, 1198 (2d Cir. 1998). 129 682 F.2d 530 (5th Cir.1982). 130 United States v Adlman 134 F.3d at 1195. 131 See Carlyle Inv. Mgmt. L.L.C. v Moonmouth Co. S.A 2015 WL 778846, *9 (Del. Ch. Feb. 24, 2015).

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5.146 The protection afforded by the work product doctrine is not absolute, but rather, may be qualified depending on the nature of the material and the need for disclosure. Courts have distinguished attorney work product into two categories: ordinary work product containing ‘raw factual information’, and ‘opinion work product’, containing ‘counsel’s mental impressions, conclusions, opinions or legal theories.’132 Opinion work product enjoys ‘a nearly absolute immunity and can be discovered only in very rare and extraordinary circumstances.’133 By contrast, ordinary work product may be discoverable if it is non-privileged, relevant, and ‘the party shows that it has substantial need for the materials to prepare its case and cannot, without undue hardship, obtain their substantial equivalent by other means.’134 5.147 An important distinction between attorney–client privilege and the work product doctrine is that work product may be more readily shared with other parties without a concomitant waiver.135 Rather, only the disclosure of work product material in a manner that is inconsistent with keeping it from an adversary will result in a waiver.136 Thus, where a disclosure is made in the context where there is reasonable expectation of confidentiality – for example, because the parties share a common interest or under a confidentiality agreement – no waiver should result.137

APPLICATION TO THIRD-PARTY LITIGATION FUNDING UNDER THE LAWS OF THE UNITED STATES 5.148 Bearing in mind the general principles of attorney–client privilege and work product doctrine outlined above, this section surveys how US courts have applied these concepts in the context of litigation funding. 5.149 Until recently, there was a relative lack of case law on the intersection of litigation funding and privilege issues. However, with the continued growth of litigation funding in the legal industry, these decisions have become much more frequent. As discussed below in more detail, the vast majority of courts have found that communication with litigation funders should generally be protected

132 In re Green Grand Jury Proceedings 492 F.3d 976, 981-82 (8th Cir. 2007) (citing Baker v Gen. Motors Corp. 209 F.3d 1051, 1054 (8th Cir. 2000)). 133 In re Green Grand Jury Proceedings 492  F.3d at 981–82; see also Upjohn v United States 449 U.S. 383, 401 (1981) (‘Opinion work product cannot be disclosed simply on a showing of substantial need and inability to obtain the equivalent without undue hardship’). 134 Fed. R. Civ. P. 26(b)(3). 135 See United States v Deloitte LLP  610  F.3d 129, 139 (D.C. Cir. 2010) (‘While voluntary disclosure waives the attorney–client privilege, it does not necessarily waive work-product protection.’). 136 See In re Chevron Corp. 633 F.3d 153, 165 (3d Cir. 2011) (disclosure of work product may result in waiver if the disclosure ‘substantially increase[s] the opportunities for potential adversaries to obtain the information.’). 137 See Deloitte 610 F.3d at 141.

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from disclosure, either because the material is protected by the work product doctrine or is simply irrelevant to the claims at issue. 5.150 By contrast, courts have been more reluctant to extend attorney–client privilege to communications with litigation funders, and, despite the potential applicability of the common interest exception, in some instances have found that disclosure constitutes a waiver of the privilege. But as with most emerging legal issues, there is no bright-line rule yet and the particular facts and circumstances of the case will ultimately drive the result. 5.151 Despite the emergence of a clear trend to deny discovery into litigation funding arrangements, defendants regularly seek discovery and enter into costly motion practice to compel disclosure. Why? Some of this may be attributable to typical defence litigation tactics, whether an effort to increase costs, raise the spectre of champerty or outside interference, or perhaps put pressure on the funder–plaintiff relationship. Yet, at the same time, for precisely the reason that communication with litigation funders has been deemed protected by the work product doctrine (they are likely to contain counsel’s thoughts on key issues), this material is a tantalising prize that may be hard to resist, despite the likelihood of such efforts being in vain. 5.152 The leading case is Miller UK Ltd v Caterpillar, Inc.,138 which involved an equipment part supplier’s claims of trade secret misappropriation against its former customer, Caterpillar. As the costs of litigation against a larger and better resourced defendant became daunting, Miller engaged in discussions with a number of litigation funding entities, and ultimately, entered into a litigation funding agreement with a funder.139 Subsequently, Caterpillar sought to argue as part of its own defence that Miller’s engagement of funding constituted illegal champerty and maintenance and sought discovery about the funding, claiming, inter alia, that the documents were relevant to determine who was the real party in interest and to support a defence of champerty. Miller objected to the discovery requests, arguing that the documents were not relevant, and in any event, were protected by the attorney–client privilege, work product and ‘common interest’ doctrines.140 5.153 In its analysis, the court in Miller distinguished between ‘two broad categories’ of material. The first was the ‘deal documents’, which ‘encompasses documents evidencing the structure and terms of the funding transaction.’ The second were documents ‘submitted to potential third party funders’ in order to secure funding. As to the ‘deal documents’, the court concluded that they were simply not relevant to the claims and defences at issue in the case. While they were ‘obviously relate[d] to the case’ – and were likely to be of keen interest to Caterpillar – this did not end the inquiry because Caterpillar had failed to cogently tie the documents to the actual matters at issue in the case. While the 138 17 F. Supp. 3d 711 (N.D. Ill. 2014). 139 Ibid. at 719. 140 Ibid. at 721.

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scope of discovery in the United States is broad, the court in Miller ultimately denied disclosure because ‘[d]iscovery of matter not “reasonably calculated to lead to the discovery of admissible evidence is not within the scope of Rule 26(b) (1).”’141 5.154 By contrast, as to the second category of information – materials submitted to the potential funders in soliciting a funding agreement – the court in Miller concluded that such materials, unlike the deal documents, likely contained relevant information.142 That is hardly surprising, given that in order to secure litigation funding, the plaintiff’s attorneys will typically provide some form of analysis of the claims and defences at issue. As to this material, the plaintiff Miller argued that while it might contain relevant information, it was nevertheless not discoverable because it was protected from disclosure by attorney–client privilege, as protected work product or under the ‘common interest’ doctrine. 5.155 The court recognised that while ‘legal advice relating to business matters clearly’ is privileged, here the materials were not prepared in order to obtain legal advice; rather, the ‘contemplated funding transaction was merely commercial or financial.’143 As such, the materials were unlikely to be privileged in the first instance.144 Nevertheless, the court went on to consider whether even if the materials contained otherwise privileged information, the transmission to third-party funders would result in a waiver. On this point, the court noted that disclosures fell squarely within the traditional rules of waiver and rejected plaintiff’s argument that it shared a ‘common interest’ with the funder. Specifically, the court reasoned that while a funding agreement aligned the plaintiff and the funder, it did not give rise to a common legal interest: ‘A shared rooting interest in the “successful outcome of a case” – and that is what Miller explicitly alleges here – is not a common legal interest.’145 5.156 However, as to work product, the court concluded that the material clearly contained counsel’s mental impressions and that, as the Second Circuit admonished in Adlman, ‘work-product protection should not be denied to a document that analyses expected litigation merely because it is prepared to assist in a business decision.’146 That such material was shared with a funder is no different: ‘Materials that contain counsel’s theories and mental impressions created to analyse Miller’s case do not necessarily cease to be protected because they may also have been prepared or used to help Miller obtain financing.’147. This, however, did not end the inquiry. While the disclosure of work product to a third party does not result in an automatic waiver (unlike attorney–client privilege in most instances), the disclosure may still be made in a manner that 141 Ibid. (quoting Oppenheimer Fund, Inc. v Sanders 437 U.S. 340, 352, (1978)). 142 Ibid. at 730. 143 Ibid. at 730–731. 144 Ibid. at 731. 145 Ibid. at 732 (original emphasis). 146 Ibid. at 734 (citing United States v. Adlman 134 F.3d 1194 (2d Cir. 1998)). 147 Ibid. at 735.

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protects the underlying confidentiality of the material and does not meaningfully increase the opportunity for adversaries to obtain the information. Here, the court noted that most of the communication with funders had been made pursuant to confidentiality agreements and was therefore protected as work product.148 However, for material shared with a funder in the absence of a confidentiality agreement, work product would be waived.149 5.157 Since Miller, numerous federal (and some state) courts have had the opportunity to opine on these issues and further articulate how and when privilege and work product apply in the context of litigation funding. The majority have approached these questions with a similar analytical framework as Miller and have generally reached the same conclusion; typically finding that communication with funders falls within the protections of work product or is not, in any event, relevant to the claims at issue. Many stop the analysis there – but those that go on to consider the applicability of attorney–client privilege have in some cases found a common interest, but more often held it to be inapplicable.

Relevance of litigation funding 5.158 Putting aside issues around the scope of privilege and work product, it should be emphasised that the fact of litigation funding itself is rarely actually relevant to the underlying disputes. To be sure, there may be information provided to a funder that, was it not otherwise protected from disclosure, would satisfy the broad relevance standards of US discovery rules. But typically, skirmishes over litigation funding material are ancillary tactical discovery disputes and do little to drive the ultimate resolution of the claims. As one court recently admonished: ‘At best, the discovery [into litigation funding] is a side issue that does not help advance this complex litigation.’150 Thus, as litigation funding has become more widely used, courts have increasingly held that in most instances, litigation funding is simply irrelevant: ‘As a general matter, courts across the country that have addressed the issue have held that litigation funding information is generally irrelevant to proving the claims and defences in a case.’151

148 Ibid. at 740. 149 Ibid. at 740–41. 150 In re Valsartan N-Nitrosodimethylamine (NDMA) Contamination Prod. Liab. Litig. 405  F. Supp. 3d 612, 619–20 (D.N.J. 2019). 151 Fulton v Foley 2019 WL 6609298, at *2 (N.D. Ill. Dec. 5, 2019) (collecting cases); see also In re Valsartan 405 F. Supp. 3d at 619–20 (a ‘plethora of authority that holds that discovery directed to a plaintiff’s litigation funding is irrelevant’); United Access Techs, LLC  v AT&T  Corp. 2020 WL 3128269 at *1 (D. Del. June 12, 2020) (‘defendant had failed to meet the threshold requirement to show that the litigation funding-related discovery it seeks here is relevant’); V5 Techs. v Switch 2019  WL  7489108 at *6 (D. Nev. Dec. 20, 2019) (denying production of litigation funding information as irrelevant); MLC Intellectual Prop., LLC v Micron Tech. 2019 WL 118595 at *2 (N.D. Cal. Jan. 7, 2019) (denying discovery as irrelevant); VHT, Inc. v Zillow 2016 WL 7077235 at *1–2 (W.D. Wash. Sept. 8, 2016) (denying discovery ‘[w]ithout some objective evidence that any of [defendant’s] theories of relevance apply to [the] case’).

129

5.159  Privilege and confidentiality

5.159 As a plaintiff’s actual litigation funding is generally of limited, if any, relevance, a plaintiff’s potential litigation funding is even less relevant. As such, courts have been quick to limit discovery into potential, unconsummated, or abandoned discussions about litigation funding. See Space Data Corp. v Google LLC.152 5.160 Further, while arguments around the relevance, privilege, and disclosure of funding tend to occur relatively early in the lifecycle of a litigation (typically during fact discovery), the same logic should apply – indeed, with even more strength – to exclude discussion of litigation funding at trial. For example, a handful of courts have precluded trial testimony related to funding as irrelevant and that any probative value would be ‘substantially outweighed by the danger of unfair prejudice to [plaintiff] and of confus[ion]’ to the jury.153 5.161 The general irrelevance of litigation funding is not surprising, because despite the speculative ‘parade of horribles’ that defendants seeking information about litigation funding typically raise,154 in most instances a plaintiff’s finances have no real bearing on the merits of the case. How a plaintiff funds litigation – be it through its own capital, contingency law firm, external debt or third-party litigation funding – is irrelevant.155

Application of the work product doctrine 5.162 Despite growing skepticism as to the relevance of litigation funding, most courts that oversee inquiries into litigation funding – typically, in the context of discovery disputes – have gone on to consider the application of the work product doctrine. The vast majority of ‘[c]ourts that have examined this issue have generally held that litigation funding documents are protected by the work product doctrine.’156 Decisions holding that communication or material

152 2018 WL 3054797 at *1 (N.D. Cal. June 11, 2018) (‘[P]otential litigation funding is a side issue at best.’); Cont’l Circuits LLC v Intel Corp. 435 F. Supp. 3d 1014, 1019 (D. Ariz. 2020) (same). 153 See CXT Sys., Inc. v Academy, Ltd. No. 2:18-cv-00171-RWS-RSP, D.I. 424 (Jan. 27, 2020) (motion in limine excluding reference to funding); Eidos Display, LLC  v Chi Mei Innolux Corp., 2017 WL 2773944 at *1 (E.D. Tex. May 26, 2017) (same); AVM Techs, LLC v Intel Corp. 2017 WL 1787562,at *3 (D. Del. May 1, 2017) (precluding testimony of defendant’s expert because funding terms were not relevant to patent licensing). 154 In re Valsartan 405 F. Supp. 3d at 619–20. 155 See Benitez v Lopez 2019  WL  1578167 at *1 (E.D.N.Y. Mar. 14, 2019) (‘Whether plaintiff is funding this litigation through savings, insurance proceeds, a kickstarter campaign, or contributions from the [an outside party] is not relevant to any claim or defence at issue.’ (quoting Yousefi v Delta Elec. Motors, Inc. 2015 WL 11217257 at *2 (W.D. Wash. May 11, 2015)). 156 Fulton v Foley 2019 WL 6609298 at *3 (N.D. Ill. Dec. 5, 2019).

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Application to third-party litigation funding under the laws of the United States 5.164

shared with funders are protected by work product are now numerous and overwhelmingly consistent.157 5.163 However, a handful of courts have held work product inapplicable under the particular facts or ordered limited discovery on narrow issues. For example, in Acceleration Bay v Activision Blizzard, the court applying the stricter ‘primary purpose’ test for work product, concluded that material related to obtaining financing for prospective litigation were too attenuated to be deemed work product. According to the court, the documents at issue were ‘prepared with a “primary” purpose of obtaining a loan, as opposed to aiding in possible future litigation. For that reason alone, the communications are not work product.’158 However, the Acceleration Bay decision has been critiqued as being an outlier that is contrary to the prevailing, albeit still emerging, decisions in other courts. Not only did it apply – perhaps incorrectly – the narrower primary purpose test, but the decision may be limited to its particular unusual facts, including that the plaintiff had previously denied having responsive material and did not promptly assert a privilege. 5.164 Other courts, even applying the stricter primary purpose test have upheld claims of work product. For example, in International Oil, the court instructed that the purpose must be determined in light of the plaintiff’s goals, not the funder’s: 157 See Cont’l Circuits LLC v Intel Corp. 435 F. Supp. 3d 1014, 1021 (D. Ariz. 2020) (Litigation funding materials are protected work product and ‘any business-sustaining purpose of the litigation funding agreements in this case is “profoundly interconnected” with the purpose of funding the litigation.’); Hoist Fitness Sys. v TuffStuff Fitness Int’l 2018 WL 8193374 at *8 (C.D. Cal. May 14, 2018) (‘Several courts have found that the attorney work product protection that attaches to litigation financing/insurance documents is not waived when these documents are disclosed to third-party litigation funders or insurers.’); United States v Homeward Residential, Inc. 2016 WL 1031154 at *6 (E.D. Tex. Mar. 15, 2016) (‘The Court finds that the litigation funding information is protected by the work product doctrine. The litigation funding documents were between Fisher and actual or potential litigation funders and were used to possibly aid in future or ongoing litigation); Lambeth Magnetic Structures, LLC  v Seagate Tech. (US) Holdings 2018 WL 466045 at *5–6 (W.D. Pa. Jan. 18, 2018) (denying discovery of materials shared with litigation funders under work product doctrine); Viamedia, Inc. v Comcast Corp. 2017  WL  2834535 at *1 (N.D. Ill. Jun. 30, 2017); (due diligence documents shared between claimant and litigation funder were protected work product); Odyssey Wireless, Inc. v Samsung Elecs. Co. 2016 WL 7665898 at *5 (S.D. Cal. Sept. 20, 2016) (denying discovery under work product doctrine and collecting cases); Doe v Soc’y of Missionaries of Sacred Heart 2014 WL 1715376 at *3 (N.D. Ill. May 1, 2014) (‘[T]the Financing Materials identified by Plaintiff in his privilege log constitute opinion work product.’); Devon IT, Inc. v IBM Corp. 2012 WL 4748160 at *1 n.1 (E.D. Pa. Sept. 27, 2012) (denying litigation funding discovery as protected work product where it was ‘quite evident that the documents [sought] were prepared by counsel … in anticipation of and during litigation’); Mondis Tech, Ltd. v LG  Elecs, Inc. 2011 WL 1714304 at *3 (E.D. Tex. May 4, 2011) (‘All of the documents were prepared … with the intention of coordinating potential investors to aid in future possible litigation. The Court holds that these documents are protected by the work product protection.’); see also Carlyle Inv. Mgmt. L.L.C. v Moonmouth Co. S.A. 2015 WL 778846 at *9 (Del. Ch. Feb. 24, 2015) (‘[D] ocuments prepared by or for a third-party funder and shared between the funder and a party’s counsel constitute work product.). 158 Acceleration Bay LLC v Activision Blizzard, Inc. 2018 WL 798731 at *2 (D. Del. Feb. 9, 2018).

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5.165  Privilege and confidentiality

The question is not the purpose of [the funder’s] involvement in communications with [the client] and his counsel. It does not matter that [the funder’s] obvious purpose is to obtain a return on its investment, just as it does not matter that counsel’s purpose typically is to earn a fee.

Instead, because the plaintiff’s purpose was to ‘seek assistance of [the funder] to enable him to fund his litigation efforts,’ the ‘“primary purpose” [was] facilitating rendition of legal services’ and therefore was protected under the work product doctrine.159 Nevertheless, given the potential dual nature of litigation funding-related documents, the difference between the majority and minority tests can be critical, which the Delaware Chancery Court highlighted in Carlyle Investment Management v Moonmouth: ‘Courts generally apply either the broader “because of litigation” test or the narrower “primary purpose” test. In the context of litigation funding, the choice of test may be outcomedeterminative.’160 5.165 Some cases have also distinguished between the different type of information at issue when considering the work product protection. These decisions recognise that while the bulk of material related to litigation funding is likely to contain critical opinion work product, it may also contain ordinary work product and factual information. In limited circumstances, the latter categories may be obtained on a showing of substantial need or through appropriate redactions.161 5.166 However, it will be in a rare situation that information related to litigation funding will be so critical to a defendant’s case that it can satisfy the substantial need requirement or show that such information could not be obtained elsewhere through less burdensome means.162

159 In re Int’l Oil Trading Co. 548 B.R. 825, 839 (Bankr. S.D. Fla. 2016). 160 Carlyle Inv. Mgmt. L.L.C. v Moonmouth Co. S.A. 2015 WL 778846 at *8 (Del. Ch. Feb. 24, 2015). 161 See Fulton v Foley 2019 WL 6609298 at *4 (N.D. Ill. Dec. 5, 2019) (quashing subpoena to funder but ordering plaintiff to produce ‘any non-opinion, fact-based materials’ provided to funder, with redactions as appropriate); In re Int’l Oil Trading Co. 548 B.R. 825, 839 (Bankr. S.D. Fla. 2016) (permitting production of funding agreement but allowing redaction of ‘certain terms of the agreement might disclose attorney mental impressions and opinion about the case’); Morley v Square, Inc. 2015  WL  7273318 at *3 (E.D. Mo. Nov. 18, 2015) (ordering production of documents ‘with redactions of the protected information while revealing the underlying facts conveyed to the litigation funders’). 162 See Cont’l Circuits LLC v Intel Corp. 435 F. Supp. 3d 1014, 1023 (D. Ariz. 2020) (defendant could not satisfy heavy burden of substantial need for otherwise protected work product material shared with litigation funder); Lambeth Magnetic Structures, LLC  v Seagate Tech. (US) Holdings 2018  WL  466045 at *4 n.4 (W.D. Pa. Jan. 18, 2018) (‘[Defendant] has not established a need for these documents nor that it will suffer undue hardship if they are not produced.’); United States v Ocwen Loan Servicing, LLC 2016 WL 1031157 at *7 (E.D. Tex. Mar. 15, 2016) (defendants ‘have not demonstrated that a substantial need exists’); Charge Injection Techs, Inc. v E.I. DuPont De Nemours & Co. 2015 WL 1540520 at *5 (Del. Super. Ct. Mar. 31, 2015) (defendant unable to show ‘compelling need).

132

Application to third-party litigation funding under the laws of the United States 5.168

Application of attorney–client privilege and common interest exception 5.167 While US courts have been relatively expansive in the application of the work product doctrine in the context of litigation funding, they have been substantially more reticent to expand the sphere of protection afforded by attorney–client privilege. This reflects the underlying policies inherent in the related doctrines. Work product protection is intended to allow attorneys to prepare the case without interference and to prevent an adversary from gaining an unfair advantage. Attorney–client privilege, by contrast, encourages frank confidential discussion between lawyer and client for the purpose of obtaining legal advice. As a policy matter, we tolerate that the privilege is ‘in derogation of the search for the truth’ because it encourages the seeking of legal advice and will, in turn, lead to more lawful outcomes.163 But because evidentiary privileges are disfavoured, they are strictly construed. While litigation funding fits comfortably within the protections of work product, the potential involvement of third parties in the chain of privileged communication is harder for courts to accept. 5.168 Most courts have applied a similar reasoning to Miller, concluding that funding-related material is not communication between privileged parties for the purpose of seeking legal advice, and that any privilege attached to otherwise privileged material shared with third-party funders would likely be waived in the absence of a common interest. For example, in Cohen v Cohen, the court concluded that communication with a funder was not privileged because it was not ‘necessary to facilitate Plaintiff’s communications with counsel.’164 First, the court rejected the argument that the funder should be included within that limited category of agency-like relations – such as accountants, translators, experts – that under Kovel and its progeny are sometimes deemed to be within the sphere of privilege because they are necessary to facilitate the provision of legal advice.165 Here, because the ‘primary purpose’ of the funder was to decide whether to fund the action and thereafter to comment on legal strategy to ‘maximize the chances of a return on [the] investment,’ it was not ‘a specific function necessary to effectuate legal representation.’166 Thus, though from a practical perspective the funding may have been necessary to secure plaintiff’s counsel of choice, it was not strictly necessary to the provision of legal advice. Such considerations may be relevant in the context of work product (which was not at issue in Cohen), but not for attorney–client privilege.167

163 Miller, 17 F. Supp. at 731 (quoting United States v Nixon 418 U.S. 683, 710 (1974)). 164 Cohen v Cohen 2015 WL 745712 at *3 (S.D.N.Y. Jan. 30, 2015). 165 Ibid. (‘The necessity element [required by Kovel] goes beyond mere convenience and…requires [that] the involvement [of the third party] be indispensable or serve some specialised purpose in facilitating the attorney client communications.’). 166 Ibid. 167 Compare In re Int’l Oil Trading Co. 548 B.R. at 839 (because the plaintiff’s primary purpose in seeking funding was to facilitate rendition of legal services).

133

5.169  Privilege and confidentiality

5.169 As to the applicability of the common interest exception, courts have been split. In Cohen, for example, the court concluded that it did not apply because the nature of any interest was more commercial than legal: ‘Although the two may have a common financial interest in the outcome of this litigation, that relationship does not fall into the narrow category primarily reserved for colitigants pursuing a shared legal strategy.’168 A similar rationale is reflected in a number of other decisions, which construe the interests as being dissimilar and largely commercial rather than legal.169 5.170 By contrast, some courts have taken a more pragmatic approach and found the common interest exception to be applicable. The decision in International Oil is instructive. There the court acknowledged that some authorities had rejected the application of the common interest exception on the narrow grounds that the plaintiff and funder did not have identical legal interests.170 Nevertheless, the court adopted a broader articulation of the common interest which only required that the ‘third party and the privilege holder are engaged in some type of common enterprise and that the legal advice relates to the goal of that enterprise.’171 Further, the court gave substantial weight to both the purposes of the funding and the confidential nature of the relationship between the plaintiff and the funder. Because the disclosure of information to the litigation funding was as a practical matter ‘necessary to obtain informed legal advice’ and the funder ‘did not intend to disclose their communications to third parties,’ the court concluded they had a ‘common cause.’172 Likewise, other decisions applying the common interest exception have emphasised the fact that obtaining financing is intimately tied to the litigation and that the disclosures to third parties are under ‘controlled conditions’ that do not undermine the privilege.173

168 Cohen v Cohen 2015 WL 745712 at *4. 169 See In re Dealer Mgmt. Sys. Antitrust Litig. 2020  WL  3050280 at *4 (N.D. Ill. June 8, 2020) (‘communications with lenders, financiers, or other parties whose sole interest in a case is financial are not entitled to common interest privilege protection’); Acceleration Bay LLC  2018  WL  798731 at *2 (D. Del. Feb. 9, 2018) (no common interest because plaintiff had failed to show that it ‘possessed identical legal interests’ or ‘were otherwise “allied in a common legal cause”’ at the time of the communications); Miller 17  F. Supp. 3d at 732 (shared interest in the outcome of the case is not a common legal interest); Leader Techs., Inc. v Facebook, Inc. 719 F. Supp. 2d 373, 376 (D. Del. 2010) (acknowledging it was a ‘close call’ but concluding no common interest with funder because the interests must be ‘identical, not similar, and be legal, not solely commercial’). 170 See In re Int’l Oil Trading Co. 548 B.R. at 832 (citing Leader and Miller). 171 Ibid. at 833. 172 Ibid. 173 See Devon IT, Inc. v IBM Corp. 2012 WL 4748160 at *1 (E.D. Pa. Sept. 27, 2012) (plaintiff might ‘not have been able to pursue without the financial assistance’ of the funder and confidentiality provisions ameliorated concerns of waiver); Walker Digital, LLC  v Google, Inc. 2013  WL  9600775 at *1 (D. Del. Feb. 12, 2013) (confidentiality and common interest agreement with funder sufficient to avoid waiver); Rembrandt Techs, L.P. v Harris Corp. 2009  WL  402332 at *7 (Del. Super. Ct. Feb. 12, 2009) (common interest applied because agreements ‘clearly document[ed] the parties’ intent that their communications should be kept confidential’).

134

Application to third-party litigation funding under the laws of the United States 5.174

Affirmative disclosure of litigation funding 5.171 There is no general requirement to affirmatively disclose the presence of litigation funding in ordinary non-class litigation in federal court. Federal courts have long required the affirmative disclosure of certain financially interested nonparties at the outset of the case. Rule 7.1 of the Federal Rules of Civil Procedure mandates a disclosure statement identifying both a party’s parent company and the identification of any publically traded company with more than 10% ownership of a party. Many individual districts have supplemented Rule 7.1 with their own local rules, which can potentially be read more broadly to cover any kind of financial interest, potentially including a litigation funder’s. 5.172 However, the purpose of these general disclosure requirements has traditionally been seen as precaution to identify and alert the court to any potential conflicts. For example, the Central District of California’s Local Rule 7.1-1 expressly notes that the disclosure is ‘[t]o enable the Court to evaluate possible disqualification or recusal.’ Many of the local rules maintain Rule 7.1’s focus on publically traded companies or define financial interest with a focus on ownership.174 5.173 There is some ambiguity as to whether these general disclosure requirements should be read broadly to encompass affirmative disclosure of litigation funding. Given the emanating purpose of the disclosure requirement – to identify court-related conflicts, not party-focused discovery – there is a good argument that they should not.175 Nevertheless, absent a revision to the rules or specific guidance from the courts, this ambiguity remains and will largely be governed by individual preferences in specific cases. 5.174 By contrast, some courts have mandated that funding be disclosed in the context of class actions and multi-district litigations (MDLs). For example, the Northern District of California requires that in any class, collective or representative action, parties disclose entities that are ‘funding the prosecution of any claim or counterclaim.’176 While the Northern District of California is the only jurisdiction to expressly mandate affirmative disclosure, other courts overseeing class actions and other group actions have inquired into the nature of the plaintiff and class counsel’s funding relationships.177 Unlike ordinary commercial litigation disputes, judges in these actions often take a more significant role in overseeing the litigation, from assessing the adequacy and 174 See N.D. Ohio L.R. 3.13(b) (requiring disclosure of ‘[a]ny publicly held corporation or its affiliate that has a substantial financial interest in the outcome of the case’); N.D. Cal. 3–15 (requiring disclosure of any party with a financial interest which is defined by reference to 28 U.S.C. § 455 as ‘ownership of a legal or equitable interest … or a relationship as director, adviser, or other active participant in the affairs of a party…’). 175 Cf. MLC Intellectual Prop., LLC v Micron Tech. No. 14-CV-03657-SI, 2019 WL 118595 at *2 (N.D. Cal. Jan. 7, 2019) (rejecting argument that funded plaintiff had failed to comply with Local Rule 3-15 by failing to identify litigation funder). 176 N.D. Cal. Standing Order ¶ 19 (Nov. 1, 2018). 177 See In re Nat’l Prescription Opiate Litig. 2018 WL 2127807 at *1 (N.D. Ohio May 7, 2018) (ordering in camera submissions relating to financing terms).

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5.175  Privilege and confidentiality

appointing lead counsel to approving settlement terms. Moreover, class actions and MDLs frequently, though by no means always, involve consumers or smaller, potentially less-sophisticated plaintiffs, which may raise special concerns. Indeed, some judges liken their duty to the class as akin to a fiduciary.178 As such, courts tend to play a more active role in scrutinising the underlying relationships, including those as to funding. However, even in this context, disclosure is usually made in camera and is limited to narrow issues.179

Conclusion 5.175 As discussed above, given the strict confidentiality agreements in place and the congruent interests of plaintiffs and funders (whether they be deemed strictly legal or commercial), there is little reason to believe that the provision of information to litigation funders undermines either the work product doctrine or attorney–client privilege. But the debate obscures a more practical point. A  frequent criticism of litigation funding is a concern that funding will lead to an increase in unmeritorious cases being filed. As the Supreme Court of Minnesota recognised in recently abolishing Minnesota’s common law doctrine of champerty, that concern is largely unwarranted given that that litigation funders tend to have rigorous diligence and demanding investment guidelines: It is ‘unlikely that [litigation funders] will fund frivolous claims because they only profit from their investment if a plaintiff receives a settlement that exceeds the amount of the advance – an unlikely result in a meritless suit.’180 Yet if this concern remains, it is another argument in favour of prohibiting substantial discovery or construing attorney–client and work product privileges in a narrow fashion. Litigation funders need accurate information to assess the underlying merits of case. But concerns about privilege and potential disclosure can hamper or limit the flow of information between lawyer and funder. In this sense, limiting discovery of funding may lead to better outcomes, both in individual meritorious cases and for the broader judicial system.

INTERNATIONAL ARBITRATION 5.176 International arbitration presents its own challenges in respect of ensuring that privilege, professional secrecy and confidentiality are maintained.

178 See Barbara J. Rothstein & Thomas E. Willging Federal Judicial Center’s Managing Class Action Litigation: A Pocket Guide for Judges (3d Ed.) at p. 12 (‘Some courts “have gone so far as to term the district judge in the settlement phase of a class action suit a fiduciary of the class” and to impose “the high duty of care that the law requires of fiduciaries.”’ (quoting Reynolds v Beneficial National Bank 288 F.3d 277, 280 (7th Cir. 2002)). 179 See In re Nat’l Prescription Opiate Litig. 2018 WL 2127807 at *1 (ordering in camera production to ascertain issues of conflicts or control but noting that ‘[a]bsent extraordinary circumstances, the Court will not allow [litigation funding] discovery’); see also Kaplan v S.A.C. Capital Advisors 2015 WL 5730101 at *3–5 (S.D.N.Y. Sept. 10, 2015) (denying motion discovery of litigation funding documents in class action as irrelevant as to adequacy under Rule 23). 180 Maslowski v Prospect Funding Partners LLC 944 N.W.2d 235 (Minn. 2020).

136

International arbitration 5.179

The initial challenge in international arbitration arises with the threshold question of which privilege rules should apply to a party’s (or both/all of the parties’) privileged documents. That is a question that remains without any internationally recognised norm and is the subject of much debate.181 Few institutional rules make specific provisions in respect of privilege issues. Instead, institutional rules leave the question to the Tribunal as to how matters of evidence should be addressed and whether ‘strict rules’ of evidence should be applied.182 Even fewer institutional rules address the role of a third-party funder’s role in arbitral proceedings. While that provides flexibility to Tribunals, the ultimate arbiters of the issue, it also means that there is a lack of clarity and certainty for parties when those issues arise. 5.177 The lack of any internationally accepted standard rules in respect of privilege means that a disparity may rapidly appear between the protection afforded, at a national level, to each of the international parties to an arbitral reference. These differences can be especially stark when opposing parties are from common law and civil law backgrounds, respectively. The question of how to resolve that can often be a complex one for tribunals to navigate, and it is not uncommon for international arbitral tribunals to adopt a ‘closest connection’ or ‘most favoured nation’183 test to avoid the consideration of what can become a multi-faceted conflict of laws analysis to determine which applicable law governs the existence and scope of any privilege protection claimed by the parties. 5.178 This is perhaps an attractive approach in circumstances where a number of national laws might be of possible application: (i) the law of the jurisdiction of the claimant (or party from whom production is sought); (ii) the law of the jurisdiction where the counsel of each party practises; (iii) where the communications took place or the relevant documents were created; (iv) the law of the jurisdiction where the physical documents are held; (vi) the law of the seat of the arbitration; (vii) the law governing the substance of the dispute or the law in relation to which the legal advice was provided; (viii) the law governing the arbitration agreement; or (ix) the law of the jurisdiction in which disclosure is sought. 5.179 Given the lack of international homologation on this issue, tribunals have a wide discretion under most institutional rules to apply rules as evidence as they deem fit, within the confines of the parties not having agreed otherwise. The International Bar Association (IBA) Rules on the Taking of Evidence provide a bedrock of guidance on how questions of privilege should be addressed, which essentially recognise that no international consensus has been reached and it is, 181 Many texts address the question of which principles and rules tribunals hearing international arbitrations may follow when seeking to determine issues of privilege. The aim of this chapter is not to provide a treatise on the applicable privilege regimes nor indeed the questions which might be posed during such analysis, but to highlight issues for consideration in respect to the potential disclosure of third-party funding arrangements. 182 See, for example, Rule 22.1(vi) of the London Court of International Arbitration Rules. 183 That is to say, where two parties are subject to different privilege regimes which would lead to an inequality of protection, the Tribunal will apply the most favourable level of privilege protection to the documents of both parties.

137

5.180  Privilege and confidentiality

in each case, a question of the Tribunal carrying out a conflict of laws analysis to determine the relevant applicable national privilege rules, and then to apply those rules. The IBA  Rules at Article  9.2(b) permit a Tribunal to ‘exclude from the evidence or production any document because of legal impediment or privilege under legal or ethical rules determined by the tribunal to be applicable’. 5.180 As discussed above, the application of individual national laws to the parties can lead to significant degrees of variation in the privilege protection afforded to the documents in question held by each side. Recognising that an imbalance in the protections afforded to each party might arise, the IBA Rules also seek to find a reasonable or fair outcome, with Article 9(3) setting out a list of factors that a tribunal can take into account as it evaluates the existence of legal impediment or privilege under Article 9.2(3): In considering issues of legal impediment or privilege under Article 9.2(b), and insofar as permitted by any mandatory legal or ethical rules that are determined by it to be applicable, the Arbitral Tribunal may take into account: (a)

any need to protect the confidentiality of a Document created or statement or oral communication made in connection with and for the purpose of providing or obtaining legal advice;

(b)

any need to protect the confidentiality of a Document created or statement or oral communication made in connection with and for the purpose of settlement negotiations;

(c) the expectations of the Parties and their advisors at the time the legal impediment or privilege is said to have arisen; (d)

any possible waiver of any applicable legal impediment or privilege by virtue of consent, earlier disclosure, affirmative use of the Document, statement, oral communication or advice contained therein, or otherwise; and

(e) the need to maintain fairness and equality as between the Parties, particularly if they are subject to different legal or ethical rules.

5.181 Further, Article  9.2(e) further allows a tribunal to decline to order production on ‘grounds of commercial or technical confidentiality that the Arbitral Tribunal determines to be compelling.’ A tribunal may well consider that in order to meet the objectives of ‘fairness and equality’ towards the parties under Article 9.2(3)(c) and taking into account ‘the expectations of the Parties and their advisors at the time the legal impediment or privilege is said to have arisen’ under Article 9.2(3)(e) as set out above, that where there are divergences between the level of privilege afforded to each party’s documents under respective national laws, the applicable privilege protection should be the most expansive available. The guidelines provided in the IBA  Rules therefore provide several potential bases for a party seeking to object to the production of materials that are likely to have been shared with funders (as privileged) or to be withheld on the basis that they are commercially confidential. 5.182 A wide-ranging survey of the privilege position in various jurisdictions as regards third-party funding published in 2018 by the ICCA–Queen Mary Task 138

International arbitration 5.185

Force on Third-Party Funding in International Arbitration, proposed a series of principles as regards the specific treatment of third-party funders (in respect of privilege issues): B.

Principles Regarding Privilege and Professional Secrecy

B.1. The existence of funding and the identity of a third-party funder is not subject to any legal privilege. B.2. The specific provisions of a funding agreement may be subject to confidentiality obligations as between the parties, and may include information that is subject to a legal privilege; as a consequence, production of such provisions should only be ordered in exceptional circumstances. B.3. For information that is determined to be privileged under applicable laws or rules, tribunals should not treat that privilege as waived solely because it was provided by parties or their counsel to a third-party funder for the purpose of obtaining funding or supporting the funding relationship. B.4. If the funding agreement or information provided to a third-party funder is deemed to be disclosable, the tribunal should permit appropriate redaction, or take other appropriate measures, and limit the purposes for which such information may be used.184

5.183 As regards the disclosure of the identity of the funder, institutional arbitration rules have begun to address the existence of third-party funding in international arbitration, with the direction of travel being an obligation on disclosure of the identity of the third-party funder. This issue has been raised in the context of preventing conflicts of interest between the members of the tribunal and the funder. Undisclosed relationships between a member of the tribunal and the funder, even if unknown to the arbitrator, may give rise to grounds for challenge to the arbitrator, their subsequent removal, or challenge to the arbitral award itself. Early disclosure of the presence of a funding party can therefore be useful as a means of preventing potentially very costly and problematic consequences of non-disclosure or late disclosure. 5.184 In 2016, the ICC adopted a ‘Guidance Note for the disclosure of conflicts by arbitrators’. The Guidance Note sets out possible issues which might affect the independence and impartiality of arbitrators, including the existence of thirdparty funding, and requires disclosure to the parties. The Guidance Note states that when evaluating whether a disclosure is required, arbitrators should consider ‘relationships with any entity having a direct economic interest in the dispute or an obligation to indemnify a party for the award.’ 5.185 That description matches the definition of third-party funding found in the IBA’s 2014 Guidelines on Conflicts of Interest, which require the funded party

184 Chapter 5 Privilege and Professional Secrecy, page 15, ICCA Report of the ICCA–Queen Mary Task Force On Third-Party Funding in International Arbitration, April 2018.

139

5.186  Privilege and confidentiality

to disclose any such entity ‘at the earliest opportunity’.185 The IBA Guidelines equate funders with the parties for the purposes of disclosure of conflicts: Third-party funders and insurers in relation to the dispute may have a direct economic interest in the award, and as such may be considered to be the equivalent of the party. For these purposes, the terms ‘third-party funder’ and ‘insurer’ refer to any person or entity that is contributing funds, or other material support, to the prosecution or defence of the case and that has a direct economic interest in, or a duty to indemnify a party for, the award to be rendered in the arbitration.186

5.186 Other rules, such as the Investment Arbitration Rules of the Singapore International Arbitration Centre (SIAC Investment Rules) from 2017, expressly empower the tribunal to order the disclosure of third-party funding.187 5.187 Finally, the International Centre for the Settlement of Investment Disputes (ICSID) is due to issue a revised set of arbitration and institution rules in the second half of 2020. One of the proposals, upon which ICSID has consulted, is an obligation on the parties to disclose the existence, name and address of any third-party funder either on registration of the Request for Arbitration, or immediately upon the conclusion of a funding agreement (Proposed Rule 14). The rationale for such disclosure is again the prevention of conflicts of interest, which might arise with the tribunal. While the proposed changes to the ICSID Rules do not include any requirement to disclose the terms of funding arrangements, should those terms become relevant and material to the outcome of the dispute, the proposals empower the tribunal to order disclosure. Those proposals reflect what is already common practice in ICSID claims: tribunals consistently require disclosure of the fact that a claim is funded by external means, commonly require the identity of the funder to be revealed, and occasionally require the terms of the funding to be revealed.188 5.188 International arbitration diverges from litigation not only by virtue of the privilege or privileges that may apply to documents held by a party to the proceedings but also as to whom such duties of disclosure can be aimed. Documents held by the claimant, as a party to the arbitration, as well as documents exchanged between a party to the arbitration and a funder, which remain in the hands of the party, are susceptible to disclosure in that arbitration (subject of course to the applicable document production regime in that reference). However, in arbitral proceedings, a third-party funder is unlikely to be a party to the arbitration and, as such, will not fall within the jurisdiction of the tribunal in

185 See General Standard 7a. 186 Explanation to General Standard 6, at para (b). 187 Rule 24(l). 188 Muhammet Çap & Sehil Insaat Endustri ve Ticaret Ltd. Sti. v Turkmenistan (ICSID  Case No. ARB/12/6); Oxus Gold plc v Republic of Uzbekistan, (UNCITRAL); EuroGas Inc. and Belmont Resources Inc. v Slovak Republic (ICSID Case No. ARB/14/14); RSM v Saint Lucia (ICSID Case No. ARB/12/10); S&T Oil Equipment & Machinery Ltd v Romania (ICSID Case No. ARB/07/13).

140

International arbitration 5.189

respect of any orders for production of documents to them directly. Accordingly, the internal documents produced by the funder recording their views on the claims (and which have not been shared externally) are unlikely to be subject to disclosure to the opposing parties. 5.189 Finally, it should be remembered that, regardless of what stance is taken in the arbitration regarding the disclosability of communications with funders, or details of the funding arrangements, litigation before state courts related to the arbitration may lead to the question of any privilege in those documents being assessed on a different basis. That could arise at any stage: a party might seek injunctive relief in support of the arbitration at its outset or seek other court sanctions, such as pre-emptory relief. State court assistance might be sought for the production of documents in aid of the arbitration (for example, using the document production powers under United States Statute 28  U.S.C. §  1782). Those state courts may not address issues of privilege in the same way. Accordingly, funders, claimants and their lawyers would be well advised to always make the most robust arrangements possible in relation to privileged material shared between claimant, funder and lawyer.

141

CHAPTER 6

The litigation funding agreement Alex Lempiner Woodsford, Philadelphia

Jonathan Barnes Woodsford, London

Introduction 6.1 Key stakeholders in the litigation funding agreement 6.4 Key characteristics of the litigation funding agreement 6.14 Key clauses in the litigation funding agreement 6.22 Miscellaneous provisions 6.53 The closing 6.56 Expert advice required 6.61 Conclusion 6.64

INTRODUCTION 6.1 Although usually staffed largely by litigation lawyers, litigation funders do not provide legal advice or legal representation. Legal services are not their product and claimants are not their clients. Litigation funders are investors,1 financiers who underwrite and accept litigation risk in return for potentially high rates of return. Litigation funding is a financial transaction, attractive to claimants for its non-recourse nature – if the litigation claims are unsuccessful, then the funder has no redress to the claimant or any of the claimant’s assets for repayment. Litigation law firms are drawn to litigation funding transactions because they can prove to be a reliable revenue source to help expand and/ or steady their law practice. Because of the high stakes2 involved with these structured, often passive, investments the specific terms and conditions of the funding agreement become of paramount importance, with the fine details of its contractual provisions ultimately determining the probability of how much risk, and what size reward, these transactions could bring to each of the parties. 1 Investors in a business and commercial sense. Whether litigation funders are investors or traders from a tax perspective is discussed in chapter 13. 2 See chapter 12.

143

6.2  The litigation funding agreement

6.2 As this chapter will highlight, because litigation funding is a financial transaction, it is the definitive agreement entered into between the funder and the claimant – the litigation funding agreement (LFA) – that is the heart of litigation funding. As is the case with any commercial contract, an LFA must be sensibly tailored to appropriately allocate risk and reward to the parties on opposing sides of the deal. By assigning rights and obligations to each of the funder, the claimant3 and the claimant’s law firm, a well-structured funding agreement should justly allocate the financial costs and benefits of pursuing the litigation among the parties. A  clearly drafted funding agreement that is openly understood by all the parties is imperative to limit the potential for expost litigation over the interpretation of its provisions, which would only serve to reduce the overall value of the transaction to the parties. Moreover, there are common-law doctrines4 and professional rules of legal practice5 that need to be carefully considered when drafting the LFA. In recent years, litigation funding has exploded into a booming industry. As the primary market for litigation funding continues to mature with secondary and tertiary offerings for these investments further developing, securitised interests in the LFA may become tradable commodities, with the true value of these investments largely dependent on the breadth, clarity and enforceability of the negotiated contractual provisions contained in the LFA. 6.3 Before taking a deep dive into dissecting the sections of the LFA, it is important to distinguish between the two broad categories of claim that can be supported by litigation funding: commercial and consumer. Commercial claims are generally considered to be large, business-to-business disputes, or claims involving State entities, that are complex in nature and high value (worth millions of dollars, rather than thousands). Examples include intellectual property,6 breach of contract, class action7 and antitrust litigation. By contrast, consumer claims are individual suits often involving an unsophisticated claimant seeking a relatively low value recovery. Examples include personal injury or employment-related claims. The distinction between these two main sectors of the litigation funding market is important because the laws that govern the consumer side differ from those applicable to commercial litigation funders. As such, the structure of the LFA commonly offered in the separate markets, and their respective terms and conditions, are also very different. This chapter focuses exclusively on commercial LFAs, with each of the primary sections of a standard commercial LFA separately discussed below in detail.

3 4 5 6 7

The party bringing a lawsuit is often referred to as the claimant in England, and the plaintiff in the United States. We refer to the claimant throughout this chapter. See chapter 2. See chapter 4. See chapter 9, Part A. See chapter 9, Part D.

144

Key stakeholders in the litigation funding agreement 6.8

KEY STAKEHOLDERS IN THE LITIGATION FUNDING AGREEMENT 6.4 The three key parties to a litigation funding arrangement are the funder, the claimant and the claimant’s law firm. While it is possible for these three parties to sign up to a single contract, it is more common for there to be a triangular structure. (1) The funder and the claimant enter into the LFA. (2) The claimant and the law firm enter into a retainer/engagement agreement. (3) The law firm provides the funder with certain commitments, in what might be described as a ‘deed of adherence’ or a ‘certificate of compliance’. 6.5 The relationship between the claimant and its law firm is covered elsewhere.8 This chapter is largely concerned with the LFA, the contract between the funder and the claimant. Before turning to the LFA, we touch briefly on the contract between the funder and the claimant’s law firm. 6.6 The law firm will often confirm in an agreement with the funder to the ongoing compliance by the law firm with the most fundamental terms in the LFA. These ‘adherence papers’ between the law firm and the funder can take many forms and vary depending on the specific circumstances of the litigation matter. Typically, the lawyers will confirm to the funder that they will comply with their obligations in their engagement/retainer agreement with the claimant; will not cause, including by omission, the claimant to breach any of its obligations pursuant to the LFA and, in particular, the obligations relating to the lawyers; and if the lawyers have agreed to cap their fees, to diligently prosecute the claim on behalf of the claimant to its final determination, irrespective of whether the funder’s commitment is exhausted. 6.7 Funders are obviously keen to ensure that, if the claim is won, they are paid their agreed success fee, which normally sits at the top of the agreed priority of payments (the ‘waterfall’) set out in the LFA. Funders, therefore, prefer to receive their agreed share of the gross proceeds directly from the lawyers rather than take the counterparty risk of having proceeds pass through the claimant’s hands. To that end, the LFA may memorialise the claimant’s irrevocable instructions to the lawyers to distribute gross proceeds in accordance with the waterfall and so prevent the claimant from ignoring the LFA and instructing the lawyers to pay all to them. In turn, that irrevocable instruction allows the lawyers to agree, in the deed of adherence, to distribute proceeds in accordance with the LFA. It’s not a merely theoretical point. In 2016 Mr Justice Popplewell in the English High Court sentenced a claimant ‘bent on putting the Claim Proceeds beyond the reach of [the funder] and of the court’ to 21 months imprisonment for contempt of court.9

Which claimant entity should sign the litigation funding agreement? 6.8 The parties who will need to sign the LFA will depend on whether the claimant is a natural person or a separate corporate body. When the claimant is a 8 Chapter 4. 9 Therium (UK) Holdings Ltd v Brooke & Ors [2016] EWHC 2477 (Comm) para 12.

145

6.9  The litigation funding agreement

legal entity such as a corporation or a limited liability company, the funder may require that those individuals in ultimate control of the entity sign the LFA to support the claimant’s obligations and accept responsibility to the funder for any material breaches of the LFA by the claimant. The need for reassurances from the owners of the claimant will largely depend on the entity’s financial strength and stability. If the claimant is, for example, a large public company with a significant balance sheet, then assurances from those in control of the entity should not be needed. The funder can rest assured that these claimants have the financial backing to support a damages award in the unlikely event that the funder has to enforce a material breach of the LFA by the claimant. On the other hand, if the claimant is a single-member limited liability company with the litigation claims as its only real balance sheet asset, then the funder will likely need the LLC’s controlling member to agree that the claimant’s obligations under the LFA will be respected by those in control of the claimant. 6.9 A reason that the funder looks for these reassurances from the owners of the claimant is because a material breach of the LFA by the claimant could create risks to the funder that were not part of the funder’s underwriting and could substantially change the return profile of the investment. If the claimant is an entity that does not have any financial stake to lose because it will not have any assets in jeopardy when the funder is required to enforce a judgment against it, then the claimant’s owners may not view their obligations to the funder seriously and may recklessly take action, or fail to act, in a way that causes a material breach of the LFA and financial harm to the funder. In situations where sufficient support for the claimant’s financial stability does not exist and the claimant’s owners are not comfortable with being a party to the LFA, alternatives include:

•

A requirement that the claimant post additional collateral which would only be accessible to the funder to compensate for damages caused by a material breach of the LFA by the claimant.

•

A requirement that the claimant’s majority shareholder(s) enter into a deed of adherence similar to that required of the claimant’s lawyers described above. Typically, the shareholder(s) would: –

confirm receipt of a copy of the LFA and the lawyers’ engagement; and

–

agree to procure that the claimant will observe and perform its obligations under the LFA and the lawyers’ engagement.

6.10 Such obligations are similar in their effect to the guarantees routinely given to, for example, banks and landlords when businesses without significant assets borrow working capital or take a lease. If a shareholder is in control of its corporate vehicle and intends to comply with its obligations there should be no objection in principle to giving such a guarantee. Further, the shareholder(s) commitment can be tailored to the particular circumstances by, for example, limiting it to specific obligations in the LFA or a capped amount. 146

Key characteristics of the litigation funding agreement 6.14

Corporate due diligence 6.11 In order to obtain a clear and complete picture of the organisational and management structure of a corporate claimant and fully appreciate its financial position, the funder should conduct appropriate corporate and financial due diligence on the claimant and its affiliated entities. The review undertaken by the funder in this regard is much like the one that a bank or a State-licensed lending institution would perform on its corporate borrower counterparts. Often it is the results of the funder’s diligence inquiries that will determine whether the funder will require the claimant’s owners to provide the assurances in the LFA referred to above. 6.12 In the UK, a significant amount of corporate information is publicly available at Companies House. This is helpful not just when considering the financial position of prospective claimant counterparties but also when assessing a potential defendant’s ability to meet a claim. In most US states, there is no direct equivalent of Companies House, and no requirement for private companies to make accounts or annual returns publicly available. For that reason, litigation funders in the US generally have to ask a comprehensive set of corporate and financial due diligence questions.

Litigation funding and the lawyer–client relationship 6.13 Litigation funding agreements must be drafted to make clear that the funder will not unduly interfere with the lawyer–client relationship.10 While the antiquated doctrines of champerty, maintenance and barratry have been significantly curtailed in the UK and in many US jurisdictions,11 these medieval concepts must nonetheless be considered when drafting the LFA. Many funders, particularly in the US, take the view that they are best protected by champerty and maintenance arguments by remaining strictly passive in the litigation in which they invest, leaving the claimant and claimant’s law firm with complete control over all decision making, as per the terms of the retainer agreement. LFAs therefore often include express provisions to the effect that the funder shall remain passive and shall not interfere in any way with the lawyer–client relationship between the claimant and the claimant’s law firm.

KEY CHARACTERISTICS OF THE LITIGATION FUNDING AGREEMENT The litigation funding agreement is much like a bank credit agreement 6.14 A  comparison of a standard LFA to a traditional term loan credit agreement between a bank and its corporate borrower reveals that they are very 10 See further at chapter 4. 11 See chapter 2.

147

6.15  The litigation funding agreement

similarly structured with many corresponding clauses.12 Litigation funding agreements, like bank loan documents, include advance draw-down mechanics and representations and warranties by both the claimant as well as the funder, along with affirmative and negative covenants whereby the claimant makes ongoing promises to the funder to take, or refrain from taking, certain actions related to the funding transaction. Similar to its banking counterpart, an LFA also includes termination provisions which, like events of default in a credit agreement, offer the funder the right to terminate its funding commitment and reduce its financial exposure if certain circumstances have changed the risk profile of the investment.

The funder’s security 6.15 Because a material breach of a representation and warranty or a covenant by the claimant can create substantial harm to the funder, the LFA will often include a grant of security over the claims as collateral to protect the funder from any such damage, in the same way that bank loans are often secured by pledged assets of the borrower. 6.16 The funder may also, in US parlance, take a lien on the litigation claims as collateral so that in the event of the claimant’s insolvency, the funder will be a secured creditor with a priority interest in any proceeds from the claims. In order to have a priority interest in the litigation proceeds, a funder must perfect its lien by filing a financing statement with the secretary of state in the state of the claimant’s residence. 6.17

The following type of clause is commonly found in US LFAs: As security for any amount owed to Funder, Claimant hereby grants Funder a continuing, first priority, perfected security interest in the all present and future Revenue Events, Gross Revenues, the Claims, any future actions in which the Claims are asserted, and any payments, distributions, recoveries, and/or proceeds resulting therefrom or attributable thereto (including any and all rights of Claimant to receive any of the foregoing) (‘Collateral’), wherever located, whether now owned or hereafter acquired or arising, and all proceeds thereof. In the event of Claimant’s default or breach of any of its obligations pursuant to this Agreement, Funder shall have all the rights and remedies of a secured party under the [State of Claimant’s Residence] Uniform Commercial Code. Furthermore, Funder shall have all rights to take any action it deems necessary or desirable to protect the Collateral, including amounts spent to pay patent maintenance fees at any time. Funder may file a financing statement or other appropriate documents with such government offices as Funder deems necessary to protect and/or perfect its security interest in the Collateral. Any amounts spent by Funder to protect the Collateral shall be deemed Contributions hereunder. Claimant hereby grants Funder an irrevocable power of attorney to take any and all actions to protect the Collateral at any time. In the event Funder has received payment of

12 Chapter 13 considers the tax implications of these similarities.

148

Key characteristics of the litigation funding agreement 6.21

all amounts owed to it pursuant to this Agreement and no further Contributions are to be made, then, on Claimant’s request, Funder shall execute all appropriate documents prepared by Claimant and necessary to release Funder’s security interest in the Collateral.

6.18 In the UK, the terminology is different and may be created by a separate document – a legal charge – but the effect is much the same. The fixed charge could charge the claimant’s:

•

•

rights, title and interest in and to all: –

monetary claims accruing under or by virtue of the agreement and/or other arrangements giving rise to the litigation;

–

security for costs funded by the funder;

–

proceeds from the claim;

–

money credited to the account opened to collect and hold proceeds; and

relevant insurance policies.

6.19 A legal charge created by UK companies and limited liability partnerships must be registered at Companies House within 21 days of its creation. A charge not so registered becomes void (so far as any security is conferred by it) against the liquidator, the administrator or any creditor of the company that created it.13 The funder would merely be an unsecured creditor. A defendant searching the claimant’s name on the Companies House register could find details of the charge, including the funder’s name, and so a funder can’t have both a charge relating to the claim and anonymity. 6.20 Where the litigation relates to a single asset, or a discrete category of assets, it is common for the funder to take security over the assets in question. For example, in patent infringement litigation, a funder may take security over patents that are in dispute in the litigation. See further, chapter 9, Part A.

Litigation funding agreements are non-recourse transactions 6.21 Although LFAs share many similarities with bank loan agreements, one area in which they differ substantially is that, most typically, litigation funding arrangements are non-recourse transactions with the funder’s financial interest limited only to a portion of the revenue produced from the litigation claims. If there are no proceeds generated from the litigation, then the funder does not get paid back its funding contributions and the funder does not receive any return on its investment. Moreover, save for certain limited circumstances, including

13 Companies Act 2006 s 859H.

149

6.22  The litigation funding agreement

breach of contract, the funder has no recourse to the claimant or any of its assets for financial reimbursement. The LFA is generally, therefore, not viewed as a debt instrument and these transactions are not characterised as loans.14

KEY CLAUSES IN THE LITIGATION FUNDING AGREEMENT The funder’s option 6.22 The LFA is usually entered into prior to the completion of the funder’s due diligence, ie  before the funder is in a position to commit to fund, and is therefore structured as an option for the funder to make a commitment to the funding of the claims after the funder has completed its diligence. When the LFA is signed by both the funder and the claimant, a diligence period begins, which is generally the date that is 30 to 45 days after the later of (i) the signing of the LFA and (ii) the date that the funder has received all of the due diligence materials from the claimant and claimant’s law firm. If the funder has not exercised its option to commit to the funding on the terms stated in the LFA by the expiration of the diligence period, then the claimant has the right to terminate the LFA and seek funding from another source. 6.23 Alternatively, the LFA can be entered into subject to conditions precedent. For example, in the UK, the claimant and the funder may want to find suitable after-the-event insurance cover15 before finally committing to litigation. The parties should be obliged to try to satisfy the conditions precedent in their control within a reasonable period, after which the LFA should terminate either automatically or on notice.

The litigation funder’s commitment 6.24 The litigation funder’s commitment under the LFA can cover a range of litigation expenditures, including lawyer fees and/or out-of-pocket costs (often referred to in the UK as disbursements) needed to pursue the claims, and in some cases, even a tranche for certain of the claimant’s operating expenses or to monetise a portion of the claimant’s interest in litigation revenue. 6.25 In jurisdictions with adverse costs consequences,16 including England and other parts of the UK, the LFA should expressly include or exclude the funder’s liability to pay adverse costs if the claim is lost. If the funder does take on liability for adverse costs, the LFA should be clear on whether its liability is unlimited or capped at an agreed figure and cover how this additional risk is 14 For the tax perspective on this issue, see chapter 13. 15 See further, chapters 7 (para 7.113) and 8 (para 8.72). 16 See further, chapter 7.

150

Key clauses in the litigation funding agreement 6.29

priced. As the UK courts can order the funder to pay adverse costs irrespective of anything agreed between claimant and funder, if the claimant retains any adverse costs risk the LFA might also include an indemnity from the claimant to the funder. Of course, this only has any real value if the claimant has the means to pay the funder in the event that the claim ultimately fails. 6.26 Some litigation funders are more flexible than others with the facility structures that they can offer to claimants, with a few funders willing to draft a highly bespoke LFA to meet a claimant’s particular needs. A properly structured funding facility should fit together like a well-woven tapestry with the funder’s commitment under the LFA intricately interlaced with the claimant’s law firm’s engagement under the retainer agreement. It is essential to a proper functioning funding arrangement that the interests of the funder and the claimant’s law firm in the proceeds from a revenue event do not crowd out the claimant’s interests so that the claimant would be disincentivised to make an economically rational decision when it comes to potential resolutions of the dispute. 6.27 If the funder’s commitment is to cover lawyer fees, in order for the proper alignment of interests between the claimant’s law firm, the funder and the claimant, it is fairly common for the claimant’s law firm to take a discount on its standard hourly rates and agree to a cap of their total fees in exchange for a back-end contingency interest in the litigation proceeds. The claimant’s law firm’s discount in these structures generally ranges from 20 to 80 per cent but it is the cap on the total lawyer fees that is most important to both the funder and the claimant. In some cases, the claimant’s law firm will also be asked to agree on fee limits through certain milestones in the litigation which serves well to reduce the funder’s capital exposure until the hurdle of certain forecasted risks can be overcome. These milestone caps on the claimant’s law firm’s fees will also benefit the claimant since the more contributions that the funder makes towards legal expenses for the litigation, the higher the funder’s success fee when based on a multiple of the funder’s contributions. 6.28 The LFA will generally provide that the funder’s commitment to pay for out-of-pocket expenses is tied to an itemised budget with sub-budgets for categories of costs that are needed to pursue the litigation claims. Again, depending on the nature of the proceedings, there may be further limits to the budget based on milestones in the litigation. 6.29 The discipline of a properly costed budget and the release of tranches of funding against important milestones in the litigation is in both the claimant’s and the funder’s interests. However, litigation lawyers rarely profess to any ability to accurately budget and many maintain that it’s impossible given the allegedly infinite twists and turns that any given litigation can take. In truth it may be that it is a boring task and one that funders struggle to insist on when competing for good investment opportunities. Funders then have to take a broad-brush approach and price in the knowledge that the cost of the claim will usually go up and the claim value will usually go down. If the numbers still work for the claimant and the funder after these adjustments, the budget detail becomes less critical. 151

6.30  The litigation funding agreement

6.30 It is extremely important for the claimant and claimant’s law firm to carefully consider the scope of the budget and confirm, based on the current set of facts and reasonable projections, that the funder’s commitment should be sufficient to enable the claimant’s law firm to properly pursue the claims against the defendants. The funder will generally require that the claimant or claimant’s law firm assume responsibility for any budget overruns and cover any costs or fees that are needed beyond the funder’s stated commitment. In some cases, the funder and the claimant may be able to pre-negotiate the cost for additional tranches of funding but these additional amounts will generally be made available only at the discretion of the funder based on its assessment of the merits of the claims at the time of the claimant’s request.

The funder’s success fee 6.31 Litigation funding transactions are high risk, high reward investments17 and the merits of the litigation claims must be carefully underwritten with the funder’s success fee appropriately aligned to the risks being assumed. In order to properly account for the investment risks, the funder’s success fee is generally calculated as the greater of (i) a fixed fee and (ii) either or both of: (x) a multiple of the funder’s commitment or contributions, or (y) a percentage of the gross revenue that is produced from the litigation claims. Very often, these multiples and percentages increase as periods of time elapse from the signing date of the LFA. It is essential to a well-structured facility that the funder’s success fee and the claimant’s law firm’s contingency interest do not crowd out the claimant’s interest so that the claimant is always properly incentivised to accept reasonable value from the defendant for the resolution of the claims.

The litigation funding process 6.32 A  standard litigation funding arrangement provides for a funding process whereby, on a periodic basis, most often monthly, the claimant’s law firm can submit a funding request notice to the funder for reimbursement of fees and expenses that have been incurred in connection with the LFA. The funder usually requires that the funding request notice be accompanied by copies of the invoices evidencing the expenses to be paid with the funding along with a budget tracker updated to reflect the expenses covered by the funding request. The funder may also require that in connection with the funding request notice, the claimant reaffirms the representations and warranties in the LFA and the claimant’s law firm confirms that no material adverse developments have occurred in the litigation. 6.33 The funder will review the invoices and confirm that the expenses to be paid with the funding request are properly documented and consistent with the 17 See further, chapter 12.

152

Key clauses in the litigation funding agreement 6.38

budget before depositing the contributions into the law firm’s trust account. The law firm can then use the funds in the trust account to pay the legal expenses that are supported by the funding request. The funder will generally require that all of the contributions made into the trust account are used to pay legal expenses before further contributions are to be made. However, in some cases, depending on the nature and size of the litigation, the funding facility may be more openly structured with the funder making lump sum deposits into the claimant’s law firm’s trust account for the payment of expenses to be incurred on a goingforward basis by the claimant’s law firm with documentary support for those expenses provided along the way or at the request of the funder.

Representations and warranties 6.34 The representations and warranties made by the parties in the LFA are statements of present or past facts which are relevant to the funding transaction. The representations and warranties required from the claimant will vary depending on whether the claimant is a natural person or a corporate entity as well as on the subject matter of the target litigation. The purpose of the representations and warranties is to drive full and accurate disclosure by the claimant and to properly allocate the risk of a misunderstanding of fact to the party who is in the best position to assume that particular risk. 6.35 The LFA contains a section where the funder and the claimant each make certain representations and warranties to each other. When the claimant is a legal entity, both parties respectively give assurances on basic corporate formalities such as their due organisation, valid existence, and good standing in their state of organisation. The funder and the claimant will also both confirm that the LFA and the transactions provided therein have been duly authorised, are legal, valid and binding obligations, and do not present any conflicts with the party’s other contractual obligations. 6.36 The claimant will also be required to make representations and warranties to the funder regarding the litigation claims, and the accuracy of the disclosures that were made to the funder. These disclosures cover all of the materials that were submitted to the funder by the claimant in connection with the funder’s due diligence of the investment. 6.37 Other representations and warranties that the claimant may be required to provide to the funder involve assurances of no liens or other encumbrances on the litigation claims or its proceeds and ensuring the funder’s first priority security interest in the collateral. 6.38 The claimant should carefully review each of its representations and warranties to confirm accurate statements and to schedule those items that need to be carved out. For instance, in order to make a representation and warranty that there are no encumbrances on a patent, the claimant would need to exclude any existing lienholders, even if their interests will be subordinated to the funder. 153

6.39  The litigation funding agreement

In the event that there is a material misrepresentation made by the claimant in the LFA, the funder could have recourse through a breach of contract claim for the sustained damages. This is an instance where the claimant (and the owner of the claimant as discussed earlier in the chapter) may have a level of financial responsibility to the funder even though the litigation funding advances are strictly non-recourse. The non-recourse nature of the funding facility does not protect the claimant from liability for material breaches of the LFA. 6.39 Claimants may seek to limit the breadth of certain representations and warranties with a qualifier that the representation and warranty is made to ‘the best of claimant’s knowledge’. Depending on the nature of the representation and warranty, a funder may allow such a qualification, but will usually require that ‘knowledge’ be defined to include not only actual knowledge or awareness of a particular fact or circumstance but also constructive knowledge such that if the claimant had exercised reasonable care and diligence, the claimant would have known or been aware of such fact or circumstance. The purpose of the representations and warranties is to properly allocate the risk of facts or circumstances to the party in the best position to assume the risk that the facts or circumstances are inaccurate. The risk that the claimant should have known the fact or circumstance had the claimant conducted reasonable due diligence must lie with the claimant. Since the litigation claims are the subject matter of many of the representations and warranties, the claimant, who is closer to the litigation claims then the funder, is usually the party who is in the best position to assume the risk that the representation and warranty is inaccurate.

Claimant covenants 6.40 The covenants in the LFA are promises made by the claimant to the funder to either take certain affirmative actions or refrain from taking certain actions which could negatively affect the funder’s interest in the proceeds expected to be generated from the litigation. These undertakings include assisting the funder with its diligence of the litigation claims and providing full and accurate disclosure to the funder of any new developments in connection with the litigation. The claimant must also agree not to shop the claims to another funding source during the diligence period or after the funder exercises its option to commit to the funding so that there are no other parties with competing interests in the claims. The funder will also want to be assured that the claimant will maintain its solvency during the course of the litigation as a bankruptcy filing could seriously disrupt the progress of the litigation and materially affect the funder’s financial interest in the claims. The claimant will also be precluded from taking any action that would effectively subordinate the funder’s interest in the claims. 6.41 The covenants in the LFA will vary depending on the nature of the litigation to be funded. For instance, when seeking funding for a patent infringement matter,18 the claimant will promise to continue ownership of the 18 See chapter 9, Part A.

154

Key clauses in the litigation funding agreement 6.43

patents, maintain the patents in good standing, refrain from encumbering the patents and take those actions reasonably necessary to pursue a recovery from the defendants. Like the representations and warranties, the claimant must fully appreciate its ongoing obligations to the funder because the failure to meet these commitments could result in a breach of the LFA and liability to the funder. 6.42

Other typical claimant covenants include obligations to:

• • •

act in good faith in its dealings with the funder and the lawyers;

•

use all reasonable endeavours to recover proceeds as soon as reasonably possible.

prosecute the claim diligently; comply with the reasonable advice of the lawyers and assist their professional conduct of the claim; and

Class representatives 6.43 Litigation funding is often used in class actions and other litigation in which the named claimant has a special role as a representative for others.19 In the UK, for example, since 2015 a (single) class representative may bring an opt-out class action on behalf of class members for damage caused by breaches of competition law.20 In this instance, the claimant’s covenants might be modified to reflect the claimant’s role as the representative of a class of claimants and, again, the nature of the litigation. They might also include obligations to:

• •

act fairly and justly in the interests of the class members;

•

take all reasonable steps to achieve the authorisation of the class representative and the certification of the action by the court (the Competition Appeal Tribunal);22 and

•

following an application for a Collective Settlement Approval Order,23 seek to satisfy the court that the terms of the settlement relating to costs and expenses are in accordance with the LFA and are just and reasonable.

19 20 21 22 23

make the lawyers aware of any issue that may compromise the class representative’s obligations to the class members, in accordance with the Competition Appeal Tribunal Rules;21

See chapter 9, Part D. Treaty on the Functioning of the European Union Art 101 and the Competition Act 1998 s 47B. The Competition Appeal Tribunal Rules 2015, SI 2015/1648. Ibid. Rules 78 and 79. Ibid. Rule 94 or 97.

155

6.44  The litigation funding agreement

The distribution waterfall 6.44 While much focus is deservedly given to the structure and amount of the funder’s success fee, it is almost as important for the distribution waterfall in the LFA to be properly designed. The order of distribution of revenue produced from the litigation becomes most relevant when a resolution to the litigation fails to generate sufficient revenue to pay the funder its full entitlement. The distribution waterfall must properly account for the risks that each party assumes as well as incentivise economically rational decision making on the part of the claimant. 6.45 Almost universally in every funding arrangement, the first tier of distribution of revenue is to the funder to return back its total contributions. The only real exception is when the claimant has also made contributions to fund the litigation either prior to the funder’s commitment or alongside the contributions made by the funder under the LFA. In this case, the first tier may be a pro rata share distribution to the funder and the claimant based on their respective percentages of the total contributions. 6.46 In the second tier of revenue distributions, the funder may receive a priority payment on a portion of its success fee and then in the third tier the funder will likely receive a negotiated allocation of the remaining gross revenue based on a percentage until the funder receives its success fee in full. 6.47 Then, any remaining proceeds will be shared between the claimant and the claimant’s law firm according to the terms of the retainer agreement. There can be a number of additional levels to the waterfall depending on the funder’s commitment. 6.48 The interplay between the waterfall distribution and the funder’s success fee must allow for a fair distribution of the revenue produced from the litigation. A good rule of thumb is that the success fee and waterfall distribution provisions in the LFA shall be structured to avoid the claimant receiving less than 50 per cent of the net revenue (after accounting for the contributions made by the funder) from the resolution of the litigation. Because these structures can be complicated, the funder will often include examples of the operation of the distribution provisions in various revenue event scenarios to add further clarity to the contractual provisions of the LFA. 6.49 A UK waterfall may look different to a US waterfall if the claimant or the funder has effected after-the-event insurance.24 In that case, if the insurer has paid out cash/adverse costs (because, for example, the claimant has lost a preliminary hearing before winning the final hearing) the insurer will want that cash repaid at the top of the waterfall/at the same time the funder is repaid its cash contribution/ funding. After-the-event insurance premiums can be paid in full when the policy is incepted, deferred and contingent on the successful outcome of the claim or 24 See further, chapters 7 (para 7.113) and 8 (para 8.72).

156

Key clauses in the litigation funding agreement 6.52

a combination of the two. Deferred and contingent premiums tend to be higher because the insurer, like the funder, is taking the risk that the claim will lose and it won’t be paid. The deferred and contingent premium is analogous to the funder’s success fee (its gross profit element) and the insurer will want to be paid this premium at the same time that the funder is paid its success fee, often in the second tier after the funder and insurer have been repaid their cash contributions and made whole.

Termination rights 6.50 The LFA will include a section that provides the claimant and the funder with rights to terminate the agreement in certain scenarios. The funder’s termination rights in the LFA can be triggered by the claimant’s material breach of the LFA or upon a material adverse development in the litigation, such as the termination or resignation of the claimant’s law firm or the discovery of information that materially weakens the merits of the claim or substantially reduces the claimant’s projected damages against the defendant. Other termination rights may accrue to the funder as a result of a protracted timeframe in the litigation, like the claimant’s failure to timely file the complaint or the trial not being scheduled by a certain date. 6.51 In the United States the parties are largely free to agree whatever termination provisions they like. Arguably, there is a rough and ready balance if the claimant has complete control over the litigation and the funder has an unfettered right to terminate funding. In the UK, however, funder members of the Association of Litigation Funders of England and Wales agree to comply with the Association’s code of conduct.25 The code states that a funder member may only terminate an LFA if it reasonably: (1) ceases to be satisfied about the merits of the dispute; (2) believes that the dispute is no longer commercially viable; or (3) believes that there has been a material breach of the LFA by the funded party. 6.52 In many cases, the standard LFA will entitle the funder to the return of its contributions and the payment of its success fee in the agreed waterfall upon recovery, irrespective of the funder terminating the funding commitment. As a result, the claimant and its transactional counsel need to carefully review the funder’s termination rights because depending on their breadth, the funding commitment to the claimant may be much less than the claimant had initially perceived. If the claimant raises a concern that the funder would still be entitled to the success fee even after the LFA is terminated by the funder, the funder

25 See chapter 3 for a fuller description of the self-regulation of third-party litigation funding in England and Wales.

157

6.53  The litigation funding agreement

will often agree in certain termination scenarios to reduce the success fee proportionally with the unused percentage of the funding commitment at the time of termination.

MISCELLANEOUS PROVISIONS 6.53 Like the case with all commercial transactional documents, the LFA will also include various miscellaneous or ‘boilerplate’ provisions that are often not the primary focus of the claimant’s review. However, claimants and their transactional counsel have to be careful not to overlook these details which could have very important legal implications for the manner in which the LFA is construed and how the parties will resolve a dispute over its interpretation. 6.54 The claimant and the funder have a mutual interest in maintaining the confidentiality of their funding arrangement and the terms and conditions of the LFA.26 Properly crafted confidentiality provisions will protect the funder’s communications with the claimant’s law firm and the claimant from disclosure/ discovery until such time as it may be most beneficial to the claimant to make a voluntary disclosure, which can often be used as leverage in settlement discussions. 6.55 Claimants should also carefully consider the governing law and dispute resolution provisions in the LFA which provides the jurisdiction whose law will oversee the parties’ rights under the LFA, and how a disagreement between the parties will be handled. The governing law provision of the LFA should be the laws of a State with a favourable history of enforcing LFAs. The LFA will often provide for arbitration as the agreed form of dispute resolution in order to ensure that the proceedings are private and confidential.

THE CLOSING 6.56 If, after the completion of its diligence, the funder believes that the case would make a good investment, the funder will notify the claimant and claimant’s law firm that the funder intends to proceed with the closing under the LFA. The funder will propose a closing date when the claimant and the funder will exchange the closing deliverables required under the LFA. The closing for an LFA should be relatively straightforward with only a few items that need to be prepared by the claimant, the claimant’s law firm and the funder. Alternatively, if the LFA provides that funding is subject to conditions precedent, for example the funder’s investment committee’s approval, the funder will notify the claimant that the conditions have been fulfilled (or waived by the funder if applicable) and that the LFA is now unconditional. 26 See further at chapter 5.

158

Expert advice required 6.61

6.57 One of the principal deliverables at closing will be an updated version of the retainer agreement between the claimant and the claimant’s law firm. The funder will likely require that the retainer agreement incorporates, or at least cross-references, the waterfall distribution provisions from the LFA and provides that in the event of any conflict between the LFA and the retainer agreement, the terms of the LFA will control. The funder would also be prudent to require that the retainer agreement includes a provision providing that it cannot be amended in a manner that would adversely affect the funder without the funder’s written consent. 6.58 Other items to be delivered at the closing by the claimant or the claimant’s law firm may include a closing certificate signed by the claimant including a bring-down of the representations and warranties as of the closing date and an affirmation of compliance with the covenants in the LFA, including full and accurate disclosure of all due diligence materials. Also, if the claimant had any existing liens or charges which needed to be terminated or subordinated to the funder, evidence to that effect will need to be provided to the funder at the closing. 6.59 The funder will have certain items to deliver to the claimant at the closing as well. The funder will file its financing statement with the secretary of state in the state of the claimant’s residence on the closing date to perfect its security interest in the claims. The funder will also provide a closing certificate to the claimant which brings down the funder’s representations and warranties as of the closing date. Finally, if the LFA provides for an initial contribution to be made by the funder on the closing date, the funder will arrange for the wire to be made to the trust account. Once the closing deliverables have been exchanged and any contributions made to the trust account, the funder will notify the claimant and the claimant’s law firm that the closing of the LFA has occurred. 6.60 Within a few days after the closing, the funder may arrange a ‘kick-off funding call’ with the claimant and the claimant’s law firm to walk through the mechanics of the funding request process and introduce the individuals in the funder’s accounting department who will process the funding request notices. It would be helpful for outside counsel to include whoever will be handling the accounting of the expenses for the law firm on the kick-off call as well to ensure that the process runs as smoothly as possible on both sides.

EXPERT ADVICE REQUIRED Understanding the US tax implications of the litigation funding agreement 6.61 Like all financial endeavours, the manner in which the transactions under the LFA are afforded tax treatment can have significant implications to the parties. This is covered in detail in chapter 13. 159

6.62  The litigation funding agreement

Claimants should get proper advice on the litigation funding agreement 6.62 In addition to being advised on the tax implications of the LFA, because the nuances of the LFA can have such importance for the balancing of the risks and rewards that the litigation funding transaction can bring to the claimant, a prudent claimant may engage experienced transactional lawyers, rather than simply relying on its litigation lawyers, to review and negotiate the LFA on its behalf. It is of the utmost importance that the claimant has a full understanding of its rights and obligations under the LFA and the lawyers who will litigate the case may not be best suited to provide the claimant with this independent legal representation. 6.63 As with helping to identify knowledgeable tax advisers, an experienced funder should be able to offer claimants a number of skilled transactional counsel that have represented the funder’s counterparts on prior funding facilities.

CONCLUSION 6.64 As this chapter has highlighted, litigation funding is a financial transaction. It has similarities with the credit agreements offered by US commercial banks, and funders have been compared at times to venture capital firms. While the probability of success in the underlying litigation is the risk that is underwritten in a litigation funding transaction, it’s the nuances of the terms and conditions in the LFA that will ultimately determine much of the actual value that the arrangement will have to the parties. Not long after the closing under the LFA is completed and the funding kick-off call takes place, the funder, the claimant and the claimant’s law firm will all separately pull out of their drawers (or more likely up on their screens) their copy of the LFA to refer to its specific terms and conditions. One of the primary goals for a successful litigation funding transaction is that each of these parties has a clear understanding of the LFA provisions prior to the execution of the agreement, not after the closing has occurred. Hopefully this chapter offers some useful insights to help claimants and their advisers accomplish this goal and have a better appreciation of the heart of the litigation funding transaction.

160

CHAPTER 7

Adverse costs and security for costs Steven Friel Chief Executive Officer, Woodsford

Introduction 7.1 Adverse costs in England and Wales 7.8 English case law from the 1980s and 1990s 7.11 The ‘purity test’ developed by the English courts in Dymocks and Hamilton v Al Fayed 7.19 The Australian case of Gore v Justice Corp foreshadows Arkin 7.27 Arkin 7.36 Excalibur 7.50 Davey v Money 7.70 Litigation funder’s liability for adverse costs in the Australian securities class action regime 7.89 Security for costs in England and Wales 7.96 ATE as security for costs 7.113 Adverse costs in international arbitration: institutional rules 7.123 Investor v State arbitration 7.132 Commercial arbitration 7.163 Conclusions 7.178

INTRODUCTION 7.1 Many jurisdictions around the world apply a ‘loser pays’1 principle to the costs of litigation. England, which is the primary focus of this chapter, is the spiritual home of this principle, so much so that it is sometimes referred to as ‘the English rule. 7.2 For centuries,2 English courts have ordered the losing party in litigation to pay a large proportion of the costs (legal fees and other disbursements; for 1 Also referred to as ‘costs follow the event’ or ‘costs shifting’. 2 In British Columbia (Minister of Forests) v Okanagan Indian Band (2003) 114 CCR 2d 108, LeBel J said at para 19: ‘The jurisdiction to order costs of a proceeding is a venerable one. The English common law courts did not have inherent jurisdiction over costs, but beginning in the late 13th century they were given the power by statute to order costs in favour of a successful party. Courts of equity had an entirely discretionary jurisdiction to order costs according to the dictates of conscience.’

161

7.3  Adverse costs and security for costs

example, expert witness costs) incurred by the winning party. These are often referred to as adverse costs. They can be significant. In English commercial litigation, for example, costs can run into the millions.3 7.3 Where a defendant, during the course of litigation, has reasonable grounds to believe that the claimant bringing proceedings against them will ultimately be unable to meet an order for payment of adverse costs, they may apply to the court for an order that the claimant provide security for costs. Security may be provided in a number of ways; for example, a payment into a bank account held or supervised by the court, or a payment into a trust account operated jointly by both the claimant’s and defendant’s solicitors.4 The security can be applied against any adverse costs order made against the claimant, with any balance returned to the claimant. 7.4 As with many other English legal principles, the ‘loser pays’ principle has been exported, or is otherwise reflected, around the world. In particular, most legal systems that are based on the English common law, including Australia, which is also considered in this chapter,5 closely follow the English rule on costs. 7.5 The United States is one of the few countries that does not follow the English rule on costs, neither at federal nor state level.6 In New York, for example, the losing party is generally not required to pay the attorneys’ fees of the prevailing party except in specific types of case (such as some consumer protection or civil rights lawsuits) or if the unsuccessful party engaged in frivolous conduct in connection with the litigation; for example, if the case was ‘completely without merit in law’.7 Costs (ie expenses other than legal fees) may be awarded to the prevailing party in both the New York state system (although set by statute, and usually minimal) and the federal system (where costs include some court and transcript fees, witness fees and document copying costs,8 and a small statutory daily attendance fee for expert witnesses). Given the limited relevance of adverse costs to US litigation, this chapter looks only briefly at the US position. 7.6 Just as England is the spiritual home of the ‘loser pays’ principle, it is arguable that London is the spiritual home of international arbitration. Many English litigation concepts, including, to some extent, costs rules, have been

3 The RBS Rights Issue case (see para 7.100 below) provides an extreme example of the costs of English litigation. The law firm Herbert Smith Freehills acted for the bank in defence of a claim brought by a group of former RBS shareholders who claim they were misled into participating in a 2008 rights issue. The bank estimated that its costs, if the case ran to trial and beyond, would exceed £100 million. In a May 2017 case management hearing, Mr Justice Hildyard described the bank’s estimate of costs as ‘staggering’. 4 See below at para 7.113 et seq for a discussion of after the event (ATE) insurance as security for costs. See also chapter 8, Part D. 5 See paras 7.27 and 7.89. 6 Alaska is an exception. See Alaska Rules of Civil Procedure, rule 82. 7 22 NYCRR 130–1.1; see also Fed R Civ P 11. 8 28 USC section 1920.

162

Adverse costs in England and Wales 7.9

adopted into international arbitration. This chapter therefore looks at the position in both international commercial arbitration and investor–State arbitration.9 7.7 The primary relevance of adverse costs and security for costs to litigation finance is perhaps obvious. The costs of litigation are one of the major risks of litigation, and litigation finance offers a method of risk transfer. Whether by operation of contract10 or by operation of the legal principles described further in this chapter, a third-party litigation funder may itself become liable for adverse costs and/or security for costs (and will need to price the cost of funding accordingly11).

ADVERSE COSTS IN ENGLAND AND WALES12 7.8 The English court’s jurisdiction to deal with litigation costs is based on the Senior Courts Act 1981 s 5113 (which will be referred to throughout this chapter as Section 51), which provides that the costs of civil litigation ‘shall be in the discretion of the court… The court shall have full power to determine by whom and to what extent the costs are to be paid.’ 7.9

Rule 44.2 of the Civil Procedure Rules provides that:

(1) The court has discretion as to: (a) whether costs are payable by one party to another; (b) the amount of those costs; and (c) when they are to be paid. (2) If the court decides to make an order about costs: (a) the general rule is that the unsuccessful party will be ordered to pay the costs of the successful party; but (b) the court may make a different order.

9 10 11 12

See paras 7.123–7.177 below. See also chapter 9, Part C. See chapter 6. See chapter 12. In Hong Kong litigation, Order 62, Rule 6A of the Rules of the High Court and sections 52A and 52B of the High Court Ordinance empower the courts to order any third party, including a third-party funder, to pay costs. In contrast, no US legislation requires, and no published cases have held, that a third-party litigation funder should liable for adverse costs (including attorneys’ fees). 13 The current statutory provision is derived from the Supreme Court of Judicature Act 1890 s  5, which evolved into the Supreme Court Act 1981. The Constitutional Reform Act 2005 established a new Supreme Court which, on 1 October 2009, replaced the Appellate Committee of the House of Lords. To avoid confusion, the Supreme Court Act 1981 was renamed the Senior Courts Act 1981. While many of the cases referred to in this chapter predate the renaming of the 1981 Act, we refer throughout to the Senior Courts Act 1981.

163

7.10  Adverse costs and security for costs

7.10 While it has always been clear that potential adverse costs liability applies to the parties in the litigation (ie the claimant(s) and the defendant(s)), it has not always been clear whether and to what extent the potential liability extends to third parties who are not directly involved in the litigation, but who may have an interest.14

ENGLISH CASE LAW FROM THE 1980S AND 1990S 7.11 Prior to the House of Lords decision in Aiden Shipping v Interbulk15 it was thought that Section 51 contained an implied limitation restricting its application to parties in the proceedings. 7.12 But in Aiden Shipping16 Lord Goff put an end to that assumption. He agreed with the first instance judge in a case that ordered shipowners to pay certain costs that had been incurred during the course of their litigation with the ship’s charterers; such costs were to include the costs that the charterers were required to pay to their sub-charterers as a result of separate proceedings between those last two mentioned parties. In the vast majority of cases, it would no doubt be unjust to make an award of costs against a person who is not a party to the relevant proceedings. But, as the facts of the present case show, that is not always so…It is surely consistent with the interests of justice that, in such a case, the court’s jurisdiction to make a global order for costs relating to both sets of proceedings should not be fettered by the imposition of an implied limitation upon that Jurisdiction.17

7.13 In essence, His Lordship was of the opinion that the discretionary power to award costs in subsection 51(1) was expressed in wide terms, and it was open to the court to make an order for costs against a ‘stranger to the litigation’. 7.14 Longmore J  in McFarlane v EE  Caledonia Ltd (No  2)18 ordered that costs be paid by a commercial organisation which had funded the plaintiff under the terms of a contract which would have given the organisation 12.5 per cent of the plaintiff’s damages. His Honour said at 373:

14 In Shah v Karanjia [1993] 4 All ER 792, Vinelott J referred to the old decision of Hayward v Giffard (1838) 4 M & W 194, 150 ER 1399 as authority for the proposition that: ‘… the court cannot order a person with a legitimate interest in a suit, who has maintained it, to pay the costs of the suit if it fails.’ 15 [1986] 2 WLR 1051. 16 See also the decision of the High Court of Australia in Knight v FP Special Assets Ltd (1992) 107  ALR  585 (construing O  91 r1 of the Queensland Supreme Court rules), and Tompkins J in the New Zealand case Carborundum Abrasives Ltd v Bank of New Zealand (No. 2) [1992] 3 NZLR 757 (construing rule 46 of the New Zealand High Court rules). 17 Aiden Shipping Co Ltd v Interbulk Ltd [1986] 1 AC 965, 980. 18 [1995] 1 WLR 366.

164

English case law from the 1980s and 1990s 7.17

It may well be that it is not necessary in every case of lawful maintenance that the maintainer should accept a liability for a successful adverse party’s costs; for example, a member of a family or a religious fraternity may well have a sufficient interest in maintaining an action to save such maintenance from contractual illegality, even without any acceptance of liability for such costs. But in what one may call a business context (eg  insurance, trade union activity, or commercial litigation support for remuneration) the acceptance of such liability will always, in my view, be a highly relevant consideration.

7.15 In Murphy v Young and Co’s Brewery,19 the plaintiffs were insured under a legal expenses policy which covered them for their legal costs up to a maximum of £25,000 in any action which they might reasonably bring. They brought an action for unfair dismissal against the defendant but they were unsuccessful and the defendant was awarded its costs in a sum in excess of £42,000. The insurer paid out £25,000 under its policy but the plaintiffs had insufficient funds to meet the short fall of £17,000. The defendant unsuccessfully applied for a costs order against the insurers pursuant to Section 51. 7.16 Phillips LJ (with whom Sir John Balcombe and Butler-Sloss LJ agreed) said that: An order under section 51 that a non-party pay costs will only be justified when exceptional circumstances make such an order reasonable and just.20

7.17 His Lordship provided a non-exhaustive list of the categories of exceptional circumstances that may justify such an order at 1601–1602 of his judgment: (1) In Giles v Thompson,21 Lord Mustill suggested that the current test of maintenance should ask the question whether: ‘there is a wanton and officious intermeddling with the disputes of others in which the meddler has no interest whatever, and where the assistance he renders to one or the other party is without justification or excuse.’ Where such a test is satisfied, I would expect the court to be receptive to an application under section 51 that the meddler pay any costs attributable to his intermeddling. (2) Where a non-party has supported an unsuccessful party on terms that place the non-party under a clear contractual obligation to indemnify the unsuccessful party against his liability to pay the costs of the successful party, it may well be appropriate to make an order under section 51 that the non-party pay those costs directly to the successful party. … (3)

Where a trade union funds unsuccessful litigation on behalf of a member the following factors, in addition to the funding itself, are likely to be

19 [1997] 1 WLR 1591. 20 At 1604. 21 [1994] 1 AC 142.

165

7.18  Adverse costs and security for costs

present and, where they are, to make it appropriate to order the union to pay the successful party’s costs should such an order be necessary: (a)

an implied obligation owed by the union to its member to do so: see (2) above;

(b)

an interest on the part of the union in supporting and being seen to support the member’s claim;

(c)

the conduct of the litigation;

(d)

expectation based on convention that the union will bear the costs of the successful party should the member lose.

(4)

Where an unsuccessful defendant’s costs are funded by insurers who have provided cover against liability, which is not subject to any relevant limit, the same considerations that I have set out under (3) are likely to apply.

(5)

The position is more complex where a defendant’s costs have been funded by insurers at risk under a policy under which their liability is limited to a sum which is insufficient to cover both liability and costs.

7.18 The insurers in Murphy avoided liability for adverse costs, in part because they exercised no control over the conduct of the litigation, and could not have been accused of ‘wanton and officious intermeddling’ in the dispute.22 Eight months after the decision in Murphy, Phillips LJ once more presided in the Court of Appeal in another costs claim against an insurer in TGA Chapman Ltd v Christopher.23 On this occasion the insurers were unable to avoid liability, in part because they had funded the defence of the claim and they had controlled the conduct of the litigation. His Lordship stated: ‘It must be rare for litigation to be funded, controlled and directed by a third-party motivated entirely by its own interests.’

THE ‘PURITY TEST’ DEVELOPED BY THE ENGLISH COURTS IN DYMOCKS AND HAMILTON V AL FAYED 7.19 Dymocks Franchise Systems (NSW) Pty Ltd v Todd & Ors (No. 2),24 is a decision of the Privy Council on appeal from the Court of Appeal of New Zealand. Interestingly, having reviewed a great number of authorities on the issue of the court’s discretion to order a third party to pay costs from the UK, Australia and New Zealand, their Lordships were of the view that there was no

22 In Tharros Shipping Co Ltd v Bias Shipping Ltd (No 3) [1997] 1 Lloyd’s Rep 246, the Court of Appeal reiterated an earlier statement that it had made in Murphy that the mere fact of funding did not render it reasonable and just that the funder should pay the costs of the successful adverse party. 23 [1998] 1 WLR 12. 24 [2004] UKPC 39.

166

The ‘purity test’ developed by the English courts in Dymocks and Hamilton v Al Fayed 7.23

material difference in the approach taken in the various different jurisdictions to the exercise of this discretion.25 7.20 In earlier proceedings, related to franchises whereby Australian booksellers Dymocks allowed the Todds to open bookstores in New Zealand, the Todds were ordered to pay Dymocks’ costs of litigation in the New Zealand Court of Appeal and in the Privy Council. The Todds were unable to pay. Dymocks therefore sought an order that the costs be paid by Associated Industrial Finance, a private company beneficially owned by Mrs Todd’s family. Associated had provided the Todds with financial assistance to meet the demands of the litigation with Dymocks. 7.21 Both the Todds and Associated had been independently advised by leading counsel that the Todds had a good prospect of succeeding against Dymocks. Associated instructed a solicitor to negotiate on their behalf with the Todds’ solicitors the terms upon which together they would fund the litigation and, were it to succeed, would distribute any sums recovered by way of damages and costs. There was a substantial amount of evidence before the court concerning Associated’s involvement in, and control over, the litigation. 7.22 Their Lordships were content to assume for the purposes of this application that a non-party could not ordinarily be made liable for costs if those costs would in any event have been incurred even without such nonparty’s involvement in the proceedings. On the facts of this case, however, their Lordships concluded that, but for Associated’s involvement, the Todds would not have pursued their appeal to the Court of Appeal and thus occasioned the costs both in that court and on the further appeal to the Privy Council. 7.23 Lord Brown of Eaton-under-Heywood summarised the principles by which the discretion to order costs to be paid by a non-party is to be exercised as follows: (1)

Although costs orders against non-parties are to be regarded as ‘exceptional’, exceptional in this context means no more than outside the ordinary run of cases where parties pursue or defend claims for their own benefit and at their own expense…

(2)

Generally speaking the discretion will not be exercised against ‘pure funders’, described in para 40 of Hamilton v Al Fayed (No.2) [2003] QB 1175, 1194 as ‘those with no personal interest in the litigation, who do not stand to benefit from it, are not funding it as a matter of business, and in no way seek to control its course’. In their case the court’s usual approach is to give priority to the public interest in the funded party getting access to justice over that of the successful unfunded party recovering his costs and so not having to bear the expense of vindicating his rights.

25 The Privy Council considered the decision of the full court of the Federal Court of Australia in Kebaro Pty Ltd v Saunders [2003] FCA 5 to be one of most helpful of the many authorities on the point. That decision discusses in detail a number of the leading cases in all three jurisdictions (including Hamilton v Al Fayed) without suggesting any difference of approach between them.

167

7.24  Adverse costs and security for costs

(3) Where, however, the non-party not merely funds the proceedings but substantially also controls or at any rate is to benefit from them, justice will ordinarily require that, if the proceedings fail, he will pay the successful party’s costs. The non-party in these cases is not so much facilitating access to justice by the party funded as himself gaining access to justice for his own purposes… (4)

Perhaps the most difficult cases are those in which non-parties fund receivers or liquidators (or, indeed, financially insecure companies generally) in litigation designed to advance the funder’s own financial interests.

7.24 In short, Lord Brown here drew a distinction between (i) cases in which the funder does not take a stake in the outcome of the litigation or control it (pure funding), and (ii) cases in which the funder does have a financial interest in the outcome or takes control of the litigation (commercial funding). 7.25 Hamilton v Al Fayed (No.2)26 was part of a long-running parliamentary ‘cash for questions’ scandal. It was alleged that Neil Hamilton, then a Conservative Member of Parliament27 had corruptly solicited and received payments and benefits in kind as a reward for parliamentary services rendered to businessman Mohammed Al Fayed. Third parties provided a fighting fund to aid Mr Hamilton in a libel case against Mr Al Fayed, anticipating the return of their money if he was successful. Simon Brown LJ (as he then was) observed (at para 47): By the same token that Phillips LJ in the Murphy case28 found legal expenses insurance to be in the public interest … so too in my judgment the pure funding of litigation (whether of claims or defences) ought generally to be regarded as being in the public interest providing only and always that its essential motivation is to enable the party funded to litigate what the funders perceive to be a genuine case. This approach ought not to be confined merely to relatives moved by natural affection but rather should extend to anyone—not least those responding to a fund-raising campaign— whose contribution (whether described as charitable, philanthropic, altruistic or merely sympathetic) is animated by a wish to ensure that a genuine dispute is not lost by default.

7.26 That contrasts with the position where the funding party is in the business of funding litigation and is (or appears to be) motivated not by solicitude for the cause but by its own prospective financial benefit.

THE AUSTRALIAN CASE OF GORE V JUSTICE CORP FORESHADOWS ARKIN 7.27 The Australian High Court confirmed in Knight v FP Special Assets29 that a court can order costs against a non-party. That was a case in which the 26 [2003] QB 1175. 27 More recently a UKIP Member of the Welsh National Assembly. 28 [1997] 1 WLR 1591. 29 (1992) 174 CLR 178.

168

The Australian case of Gore v Justice Corp foreshadows Arkin 7.33

High Court considered that it was appropriate for the receivers of a company to be held personally liable for the costs that the company, as the losing party, would otherwise have been liable to pay. 7.28 In a third-party litigation funding context, the Knight case was cited in Gore v Justice Corp Pty Ltd,30 where the Federal Court of Australia in New South Wales framed the issues as follows in the first paragraph of the judgment: The issue that has led to this appeal addresses the role of a stranger who has financially assisted an applicant in the prosecution of a civil proceeding. In circumstances where the stranger stands to participate in the benefits of a judgment should the applicant be successful, should that stranger be at risk to pay some or all of a respondent’s costs in the event of the litigation being resolved in favour of the respondent?

7.29 In what the court described as a ‘long-running battle’, the law firm Clayton Utz was held to have been negligent in respect of the legal services that it had rendered to a mining company, Montague. When the litigation moved into the damages phase, Montague entered into a litigation funding agreement with Justice Corporation. The litigation funding agreement, which was disclosed to Clayton Utz, provided that Justice Corporation would be responsible for any adverse costs. 7.30 The first instance judge found in favour of Montague, ordering Clayton Utz to pay damages and costs. However, on appeal, Montague’s damages were significantly reduced to the nominal amount of $20 only and Montague was ordered to pay a significant amount of Clayton Utz’s costs. 7.31 Three days before the appeal hearing, and unbeknownst to Clayton Utz, Montague and Justice Corporation purported to cancel the litigation funding agreement, and replace it with a loan that required Montague to repay to Justice Corporation all monies that had been advanced to it by Justice Corporation, together with interest, capped at the amount of any judgment sum or the amount of any sum that was received in settlement of Montague’s claim against Clayton Utz. 7.32 After the publication of the full court’s reasons for judgment, Clayton Utz called upon Justice Corporation to pay its costs. It was then, for the first time, that Montague and Justice Corporation made known to Clayton Utz that the litigation agreement had earlier been cancelled and replaced with the loan agreement. 7.33 Justice Corporation refused to make payment, and so Clayton Utz applied to the court for an order that Justice Corporation pay its costs.

30 (2002) FCR 429 FCA 354.

169

7.34  Adverse costs and security for costs

7.34 The first instance judge refused to make an order for costs against the litigation funder. Some of the costs were incurred before the litigation funding agreement was executed, and some of the costs were incurred in relation to appeal proceedings that Justice Corporation did not fund. In any event, the judge concluded that, as Justice Corporation played no active part in the conduct of the litigation, there was ‘not enough’ to bring home a liability for costs against it. He accepted that Justice Corporation may have made a ‘significant financial contribution’; he allowed that Justice Corporation may have provided the ‘sinews of war’, but ultimately it had no ‘say in how the war was conducted’. 7.35

This decision was reversed by the Federal Court, which stated: It is true that Justice Corporation had no control over the litigation, as did the receivers in Knight, but Justice Corporation was entitled to share in the proceeds of a victory – a factor that would not have been enjoyed by the receivers in Knight. … Justice Corporation cannot obtain, in our opinion, any assistance from the cancellation of the Litigation Agreement and the execution of the Loan Agreement. Clayton Utz knew about the Litigation Agreement. It is reasonable to infer that it relied upon its contents. Clayton Utz did not, however, learn of the existence of the Loan Agreement until after the publication of the Full Court judgment. For reasons best known to them, Montague and Justice Corporation withheld disclosure of its existence. Furthermore, it could not be said that these proceedings involved matters of public interest or, indeed, matters that extended beyond the immediate interests of Montague and Clayton Utz such that an order for costs against a stranger would have been inappropriate. Justice Corporation, whilst not controlling the litigation, had a direct financial interest in the outcome of the case; it offered no explanation for its participation in the litigation and the only inference must be that it was a commercial investment. It was prepared to take a commercial risk, to meet Montague’s costs, to protect Montague against an order for costs in favour of Clayton Utz and, in return, it hoped to profit from its investment. No extenuating circumstances exist to save Justice Corporation from an order that it pay some of Clayton Utz’s costs.

ARKIN 7.36 Of all the English cases on the subject, the decision of the Court of Appeal in Arkin v Borchard Lines31 has arguably had the most impact on the development of the law and business of litigation funding, certainly among the group of London-based businesses that dominate the industry. Most of the major litigation funders in operation today were founded in the years immediately following the Arkin decision, and the structure of their deals and the drafting of their contractual terms, not to mention the content of their marketing materials, drew heavily from that decision. 31 (No 2) [2005] 1 WLR 3055.

170

Arkin 7.42

7.37 Mr Arkin was the managing director and sole shareholder of a shipping company that he contended was forced out of business by the anti-competitive conduct of the defendants. After the collapse of his company, Mr Arkin’s financial position was bleak. He lived on his State pension. He was advised that he had a good legal claim under Articles 81 and 82 of the Treaty of Rome, but he was unable to pay the costs of litigation. 7.38 Mr Arkin was initially granted public funding, known as legal aid, for his claim, something that seems remarkable today.32 However, his legal aid was withdrawn shortly after the litigation was commenced. His solicitor and barrister agreed to act for him on a conditional fee basis,33 and separately Mr Arkin entered into an agreement with a professional litigation funding company (MPC) to provide funding for expert evidence. 7.39 When the litigation funding agreement was being entered into, it was envisaged that MPC might have to spend about £600,000 and that the probable settlement range was between £3.5 million and £7 million. The litigation funding agreement provided that in exchange for financing the expert evidence and support, MPC would receive 25 per cent of the total recoveries up to £5 million and 23 per cent above that figure thereafter. MPC could have expected to make only a very modest profit of about £30,000 if the case was settled at the lower end of the predicted range, though that would obviously rise if the settlement was higher. 7.40 The litigation funding agreement provided that the funder was entitled to attend meetings with the legal team during the litigation, and that Mr Arkin should not compromise the proceedings without the prior consent of the funder (any dispute on significant steps or settlement to be decided by Mr Arkin’s counsel). 7.41 MPC did not agree to pay any of the defendants’ costs or to provide any finance for Mr Arkin to take out any after-the-event (ATE) cover in respect of such costs. 7.42 In the end, the case was lost at trial. The reasons for that loss, and the role played by MPC, were summarised by Colman J:34

32 Lord Neuberger, then President of the UK Supreme Court, provided a brief history of legal aid in his May 2013 lecture From Barretry, Maintenance and Champerty to Litigation Funding: ‘The introduction of legal aid by the Legal Aid and Advice Act 1949 did not only represent the most important piece of legislation to ensure that ordinary citizens should have access to the courts, but it was also the most important statutory breach of the rule against maintenance. Following its introduction in 1950, successive pieces of legislation have gradually cut down eligibility for civil legal aid. When the civil legal aid scheme started in 1950, it provided around 80% of the population with a means-tested entitlement to legal aid. By 1973, this had dropped to 40%, and by 2008, it only applied to just under 30%.’ Private competition law claims of the type brought by Mr Arkin would certainly not qualify for legal aid today. 33 See chapter 8, Part D. 34 [2004] 1 Lloyd’s Rep 88 at para 67.

171

7.43  Adverse costs and security for costs

Counsel’s advice was that Mr Arkin had a very strong claim. As matters have emerged at the trial, Mr Arkin had a claim that had real substance in respect of Article 82, some substance in respect of Article 81 and little substance in relation to causation and proof of loss. I have no doubt, whatever, that Mr Arkin received advice from counsel given in good faith with a genuine belief in the strength of his claim. It is not difficult to appreciate that in a case of this size and complexity counsel concentrated on the liability issues. I do not speculate on the extent, if any, to which, in forming his pre-trial optimistic view of Mr Arkin’s position, leading counsel appreciated the evidential problems presented by causation of loss in this case.

7.43 Colman J ordered Mr Arkin to pay a substantial portion of the defendants’ costs.35 Mr Arkin did not pay the costs. The defendants therefore sought a nonparty costs order against MPC for the entire costs of the proceedings. 7.44 Colman J considered a number of authorities on litigation funding and non-party costs orders and concluded that support of litigation furthered the important public policy objective of facilitating access to justice. He held that, provided that such support was not attended by adverse features which would offend against the prohibition of champerty,36 such support was to be encouraged, not discouraged. He took the view that MPC had not acted in a champertous manner, and that making it liable for the defendants’ costs would discourage the funding of litigation. Accordingly, he held that no non-party costs order should be made against MPC. 7.45 The defendants appealed. Before the appeal was heard, the Privy Council delivered its judgment in Dymocks. This led the Court of Appeal in Arkin to state:37 While we do not dispute the importance of helping to ensure access to justice, we consider that the judge was wrong not to give appropriate weight to the rule that costs should normally follow the event … In our judgment the existence of this rule, and the reasons given to justify its existence, render it unjust that a funder who purchases a stake in an action for a commercial motive should be protected from all liability for the costs of the opposing party if the funded party fails in the action. Somehow or other a just solution must be devised whereby on the one hand a successful opponent is not denied all his costs while on the other hand commercial funders who provide help to those seeking access to justice which they could not otherwise afford are not deterred by the fear of disproportionate costs consequences if the litigation they are supporting does not succeed. If a professional funder, who is contemplating funding a discrete part of an impecunious claimant’s expenses, such as the cost of expert evidence, is to be potentially liable for the entirety of the defendant’s costs should the claim fail, no professional funder will be likely to be prepared to provide the necessary funding. The exposure will be too great to render funding on a contingency basis 35 See [2004] 2 Costs L.R. 267 at para 1. 36 See chapter 2. 37 At para 38.

172

Arkin 7.48

of recovery a viable commercial transaction. Access to justice will be denied. We consider, however, that there is a solution that is practicable, just and that caters for some of the policy considerations that we have considered above. … Our approach is designed to cater for the commercial funder who is financing part of the costs of the litigation in a manner which facilitates access to justice and which is not otherwise objectionable. Such funding will leave the claimant as the party primarily interested in the result of the litigation and the party in control of the conduct of the litigation. We consider that a professional funder, who finances part of a claimant’s costs of litigation, should be potentially liable for the costs of the opposing party to the extent of the funding provided. [Emphasis added.]

7.46 This limitation on the funder’s potential liability for adverse costs has become known as the Arkin Cap.38 It has been subject to significant debate.39 7.47 In the Final Report of the Review of Civil Litigation Funding in December 2009,40 Sir Rupert Jackson stated: In my view, the criticisms of Arkin are sound. There is no evidence that full liability for adverse costs would stifle third-party funding or inhibit access to justice. No evidence to this effect is mentioned in the judgment. Experience in Australia is to the opposite effect … It is perfectly possible for litigation funders to have business models which encompass full liability for adverse costs. This will remain the case, even if ATE insurance premiums (in those cases where ATE insurance is taken out) cease to be recoverable under costs orders … 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).

7.48

Sir Rupert recommended: … that either by rule change or by legislation third-party funders should be exposed to liability for adverse costs in respect of litigation which they fund. The extent of the funder’s liability should be a matter for the discretion of the judge in

38 The Arkin Cap has not been adopted in other jurisdictions. In New Zealand, for example, all matters of costs are at the discretion of the court (High Court Rule 14.1). Funders may be liable for adverse costs. The level of such costs is not limited to the amount of funding provided (Waterhouse v Contractors Bonding Ltd [2013] NZSC 89, [2014] 1 NZLR 91 at para 53). 39 For example, the City of London Law Society’s Litigation Committee wrote: ‘We consider that the court should have the ability to order the third-party funder in an unsuccessful case to pay all of the successful defendant’s costs (subject to assessment in the usual way) and its ability to do so should not be circumscribed by the principle in Arkin.’ 40 Lord Justice Jackson (2009) Review of Civil Litigation Costs: Final Report TSO. Available online: www.judiciary.uk/wp-content/uploads/JCO/Documents/Reports/jackson-final-report-140110.pdf

173

7.49  Adverse costs and security for costs

the individual case. The funder’s potential liability should not be limited by the extent of its investment in the case.

7.49 While Sir Rupert Jackson’s recommendation that there should be rules or legislation to abolish the Arkin Cap has not been taken up, the Arkin Cap has been limited by case law. Two of the most striking cases, Excalibur and Davey v Money, are dealt with below.

EXCALIBUR 7.50 In a highly complex and high value litigation, Excalibur claimed to be entitled to an interest in a number of oil fields in Kurdistan. Excalibur entered into a conditional fee agreement with the law firm Clifford Chance, pursuant to which its fees had been discounted by 40 per cent in return for an uplift in the event of success. In addition, Excalibur secured a significant amount of thirdparty funding. 7.51 When the case reached the Court of Appeal, Lord Justice Tomlinson was at pains to point out that the entities which provided the funding were not members of the Association of Litigation Funders (ALF)41 and had no real experience of litigation in the UK. He said that the due diligence undertaken by the funders before agreeing to support this claim was inadequate. 7.52 Between November 2010 and March 2013 the funders advanced £31.75  million. Some of the funders had no direct contractual nexus with Excalibur or Clifford Chance, having provided funding via others (in what might be described as ‘sub-funding’ arrangements). The funding was used both towards Excalibur’s own costs and to enable Excalibur to comply with an order requiring it to afford security for the defendants’ costs. 7.53 The claim failed on every point, whether put in contract, which was the primary claim, or in tort, where five causes of action were pursued: interference with contract, interference with business relations, breach of fiduciary duty, fraud by misrepresentation and fraud by concealment.42 7.54 In his costs judgment,43 Christopher Clarke LJ summarised the claim as ‘essentially speculative and opportunistic’, and listed many examples of the egregious manner in which the litigation was pursued, including ‘aggressive and unacceptable correspondence from Clifford Chance, the product of the misplaced zeal with which the partner responsible, Mr Alex Panayides, pursued what the judge aptly termed the war of attrition of which it formed part’. The claim was met with ‘a resounding, indeed catastrophic, defeat’. 41 See chapter 3, para 3.9. 42 [2013] EWHC 2767 (Comm). 43 [2013] EWHC 4278 (Comm).

174

Excalibur 7.60

7.55 It was not surprising, therefore, that the claimant was ordered to pay the defendants’ costs on an indemnity (ie enhanced) basis. 7.56 By the time the case came before the Court of Appeal in July 2016, there were a number of questions to be answered.44

Should the Arkin Cap be scrapped? 7.57

Tomlinson LJ noted:45 We are not on this appeal asked to revisit that decision. I understand that some consider the solution thus adopted to be over-generous to commercial funders, but that is a debate for another day upon which I express no view.

Should the Arkin Cap be calculated only by reference to the amount a litigation funder provided in respect of the funded litigant’s costs, or should the cap also include any amount provided by way of security for costs? 7.58 The funders submitted that by advancing money for the provision of security for costs, they conferred upon the defendants a benefit in the shape of the secured funds from which they could recoup themselves in the event of successfully defeating the claim. The funders argued that they could be taken to have assumed the risk that the funds they advanced would be used to defray the defendants’ costs and thus lost, but they could not reasonably be said to have assumed the liability to meet the costs of the opponent party in an additional amount in excess of that advanced for this specific purpose.46 7.59 The Court of Appeal was unpersuaded by these arguments, and agreed with Christopher Clarke LJ that the money the litigation funders advanced to Excalibur to enable it to provide security for costs was an investment in the claim just as much as the money provided to pay Excalibur’s own costs. Both are components to be included in arriving at a figure for the Arkin Cap.

Where the claimant’s conduct leads the court to order indemnity costs, should the litigation funders be liable for costs on such an indemnity basis, or only on the standard basis? 7.60 The enquiry into whether it is appropriate to direct costs to be paid on an indemnity basis is highly fact-dependent. To award costs on an indemnity scale 44 [2016] EWCA Civ 1144. 45 At para 28. 46 See the judgment of Fisher J in the High Court of New Zealand, in Arklow Investments Ltd v MacLean [unreported] 19 May 2000, cited by Lord Brown in Dymocks.

175

7.61  Adverse costs and security for costs

is a departure from the norm and one therefore looks for something, whether it be the conduct of the relevant party or parties, or the circumstances of the case, which takes the case outside the norm.47 7.61 The Excalibur funders argued that it was not appropriate to direct them to pay costs on the indemnity basis because they had themselves been guilty of no discreditable conduct. The Court of Appeal disagreed for two reasons. First, Civil Procedure Rule (CPR) 44 makes clear that the conduct of the parties is one, but only one, of the circumstances to be taken into account. Second, the size of the claim and its effect on the defendants would, without more, justify indemnity costs being ordered against the funders. 7.62

Tomlinson LJ stated:48 I can see no principled basis upon which the funder can dissociate himself from the conduct of those whom he has enabled to conduct the litigation and upon whom he relies to make a return on his investment.

7.63

He wished to emphasise that: the derivative nature of a commercial funder’s involvement should ordinarily lead to his being required to contribute to the costs on the basis upon which they have been assessed against those whom he chose to fund. That is not to say that there is an irrebuttable presumption that that will be the outcome, but rather that that is the outcome which will ordinarily, in the nature of things, be just and equitable.49

Is it appropriate to make third-party costs orders against a party that has not directly provided funding to the claimant? 7.64 While it is readily understood that the court might make an order for costs against a party that has funded litigation through a direct contractual nexus with the claimant, can the court order costs against (i) the owners of such a party, or (ii) any other party that provides funding to the funder, but not directly to the party in litigation? 7.65 The funders argued that to make the owners of the ultimate funder liable for the adverse costs would be an impermissible piercing of the corporate veil. 7.66 The Court of Appeal did not agree. Gloster LJ pointed out in the course of argument before the Court of Appeal that, if an order under Section 51(3) is available only against a funder who has entered into a contractual relationship 47 Balmoral v Borealis (UK) Ltd [2006]  EWHC  2531 (Comm); Three Rivers District Council v Governor & Company of the Bank of England [2006] 5 Costs LR 714; Euroption Strategic Fund Ltd. v Skandinaviska Enskilda Banken AB [2012] EWHC 749 (Comm). 48 At para 24. 49 Para 27.

176

Davey v Money 7.70

with the funded litigant, then by use of a special purpose vehicle funders would be able to insulate themselves from exposure to the Section 51(3) jurisdiction and thus escape their responsibilities. In his judgment, Tomlinson LJ referred to comments made by Lewison LJ in Threlfall v ECD Insight Ltd,50 that in making an order under Section 51(3) the court is not fettered by the legal realities but can look to the economic realities.51 7.67 The funders argued that, in order to attract a non-party costs order, a party would be expected to have some direct involvement in the conduct of the litigation, consisting in more than simply ‘funding of the funder’. 7.68

Again, the Court did not agree, holding that it is: …well-established that justice will ordinarily require a non-party costs order against a funder not just where the funder substantially controls the proceedings but also where the funder stands to derive a substantial benefit from the proceedings.52

7.69 To some, the Excalibur decision significantly curtailed the Arkin Cap and greatly increased the risk to funders. However, as Tomlinson LJ said:53 I do not think that these conclusions will come as any surprise to the professional funder members of the ALF. Making due allowance for schadenfreude, their public comments on the judge’s judgment in this case reflect a recognition that the funders here were inexperienced and did not adopt what the ALF membership would regard as a professional approach to the task of assessing the merits of the case.

DAVEY V MONEY54 7.70 Ms Davey made a claim against Mr Money and others, including serious allegations tantamount to dishonesty. Ms Davey received positive advice on 50 [2014] 2 Costs LO 129. 51 In the Australian case Ryan Carter and Esplanade Holdings Pty Ltd v Caason Investments Pty Ltd & Ors [2016] VSCA 236, the Court of Appeal of the Supreme Court of Victoria upheld a non-party costs order against a litigation funder and the funder’s only shareholder, its sole director and company secretary. Arguments that making a costs order against the company director was ‘piercing the corporate veil’ were rejected. The judge said: ‘In my view, it would not be in the interests of justice if corporate funders were able to be established with limited paid up capital and virtually no assets, so that those truly standing behind the litigation would not be exposed to any adverse costs order. A costs order against such persons associated with the funder does not, in substance, ignore the independent legal entity of a company, but rather ensures that the costs order is directed to those persons who in substance were funding the litigation and, to the extent they were, exercising influence or control in relation to the litigation.’ 52 Para 52. 53 At para 30. 54 Julie Anne Davey v James Money, Jim Stewart-Koster (Joint Administrators of Angel House Developments Limited); Chapelgate Credit Opportunity Master Fund Limited v Dunbar Assets Plc; Julie Anne Davey v Chapelgate Credit Opportunity Master Fund Limited [2019] EWHC 997 (Ch), 2019 WL 01670926.

177

7.71  Adverse costs and security for costs

the merits of the claims from Stephen Davies QC, and she retained Mr Davies and the law firm Mishcon de Reya to handle the litigation pursuant to separate conditional fee agreements. Mr Davies QC put 50 per cent of his fees at risk. Mishcon de Reya put 25 per cent of its fees at risk. 7.71 Ms Davey received litigation funding from a commercial funder, ChapelGate, a fund managed by Orchard Global Asset Management LLP. The litigation funding agreement provided that ChapelGate would provide funding of up to £2.5 million (the commitment amount). If Ms Davey was successful in the litigation, any sums she recovered from the defendants (case proceeds) were to be distributed according to the following ‘waterfall’: (a) firstly, to repay the funding provided by ChapelGate; (b) secondly, to pay to ChapelGate a ‘funder’s profit share’, calculated on an increasing scale by reference to the stage at which the claim was won or settled. This would be 30 per cent of the commitment amount if the claim was won or settled at an early stage, increasing to the greater of 250 per cent of the commitment amount or 25 per cent of (case proceeds less the commitment amount) if the case was won or settled after the commencement of the trial; (c) thirdly, to pay outstanding legal and expert fees and disbursements falling within an agreed budget, excluding uplifts; (d) fourthly, to pay legal or expert fees that exceeded the agreed budget, together with any uplifts or other amounts due under the conditional fee agreements of Mishcon de Reya and Mr Davies QC; and (e) finally, to pay the residual amount to Ms Davey. 7.72 The original intention was that up to £1  million of the commitment amount provided by ChapelGate would be used by Ms Davey to purchase ATE insurance against an adverse costs order of up to £2.5  million; and that if the premium for the ATE policy exceeded £1 million, Ms Davey should provide the necessary further monies. In the event, however, Ms Davey did not obtain any ATE cover. Orchard made a proposal to resolve this issue, in an email which stated as follows: Normally we require that the claimant obtain ATE insurance to cover adverse costs risk. This is because if a case is lost and the defendant fails to pay the other side’s costs, the funder may be liable to pay an amount of those costs up to the amount it funded i.e. ChapelGate’s maximum liability on a case without insurance is equal to 2x the actual amount funded. This is known as Arkin liability (after the case in which the rule was established). We originally committed £2.5m in this case, including £1m to pay the premium on the insurance … To ensure we can still run the case, the lawyers have agreed that their fee will be £1.25m. If we fund that entirely then, together with our Arkin risk, we end up back at £2.5m of total risk (i.e. no change). Therefore our fee is still calculated on £2.5m.

178

Davey v Money 7.80

7.73 The litigation funding agreement was amended accordingly (in an amendment referred to by Snowden as the A&W Agreement). The requirement for Ms Davey to obtain ATE insurance was waived; the commitment amount was halved to £1.25  million; and the definition of the funder’s profit share was changed so that references to the commitment amount were replaced with references to the ‘commitment amount multiplied by 2’. 7.74 Thereafter, ChapelGate obtained ATE insurance for itself to limit its own exposure to an adverse costs order arising out of the proceedings. The sum insured under the policy was £650,000. The premium, to be paid at the resolution of the case (ie deferred, rather than upfront) was either £487,500 if the proceedings were settled before trial, or £1.3 million if the trial was won. In either case, however, the premium was only payable to the extent that ChapelGate recovered any monies under the litigation funding agreement. 7.75 Ms Davey lost the case. Expert and factual witnesses relied on by Ms Davey were found to be unsatisfactory. The evidence of one of the experts was held to have been ‘obviously re-engineered just before he gave evidence in an unsuccessful attempt to overcome the effect of a serious error which he had spotted in his original report’. One of the factual witnesses ‘was an unreliable witness who was prone to exaggeration and inaccuracy’. 7.76 The judge held that an order for costs on the indemnity basis was appropriate because the conduct of Ms Davey’s claim had taken the situation away from the norm.55 Serious allegations had been made that were found to be wholly unfounded. The judge wished to mark his disapproval of the way in which the case had been fought and lost. 7.77 The defendants claimed that their costs amounted to around £7.5 million. Ms Davey was ordered to make payments on account of £3.9 million. She failed to make any payment toward such costs. The defendants therefore sought nonparty costs orders under Section 51 against ChapelGate. 7.78 In light of the decision of the Court of Appeal in Excalibur, ChapelGate accepted that a non-party costs order should be made against it under Section 51, on the same indemnity basis as the order made against Ms Davey. 7.79 The first issue which Snowden J had to decide was whether the liability of ChapelGate to the defendants should be for all of the costs, or only those which the defendants incurred after the date of the litigation funding agreement. 7.80 The defendants submitted that ChapelGate in effect stood to benefit from all the work done from the start of the litigation, and hence that it should be liable for all of the adverse costs without limitation of time. However, Snowden

55 See Excelsior Commercial and Industrial Holdings Ltd v Salisbury Ham Johnson [2002] EWCA Civ 879.

179

7.81  Adverse costs and security for costs

J  considered that he was bound by the judgment of Christopher Clarke LJ in Excalibur:56 I do not think it appropriate to make an order the effect of which is that [the thirdparty litigation funder] will be liable for costs which they have played no part in causing the defendants to incur. The fact that they are, in a sense, inheritors of the work of others is not sufficient reason.57

7.81 The next issue for Mr Justice Snowden was whether to apply the Arkin Cap58 to ChapelGate’s liability for adverse costs. 7.82 The defendants contended that the Court of Appeal in Arkin had not intended to lay down a rule or guideline to be applied mechanistically in every case where a third-party costs order is sought against a professional funder; and that no such rule or guideline could override or modify the principal requirement under Section 51, which is that the court should exercise its discretion on costs justly. 7.83 The defendants relied on a number of matters in support of their argument that it would be contrary to justice for the Arkin Cap to be applied, including that ChapelGate knew both that Ms Davey’s allegations had very serious reputational implications for the defendants and that Ms Davey could not afford to pay any substantial award of costs against her if the claim failed, and that the litigation funding agreement entitled ChapelGate to a substantial proportion of any damages that might be recovered in priority to Ms Davey. 7.84 ChapelGate contended that the Arkin Cap served a legitimate purpose in enabling litigation funders to limit their exposure to adverse costs and hence to operate their funding models on the basis of a predictable maximum exposure. It submitted that the principle accepted by the Court of Appeal in Arkin was that commercial funders should not suffer what he described as an ‘open-ended’ exposure to adverse costs because this would deter them from providing finance for litigation – and hence access to justice. 7.85 ChapelGate submitted that the Court of Appeal in Arkin intended to prescribe a principle of general application to guide judges in the future exercise of their discretion in the interests of consistency and certainty. 7.86 Referring to the distinction drawn by Lord Brown in Dymocks between pure funders and commercial funders, Snowden J stated:59 56 [2014] EWHC 3436 (Comm), at para 151. 57 See also the judgment of Simon Brown LJ in Hamilton v Al Fayed [2003] QB 1175 at para 54; the decision of the Privy Council in Dymocks Franchise System (NSW) Pty v Todd [2004] 1  WLR  2807 at para  20; the judgment of Rix LJ in Goodwood Recoveries v Breen [2006] 1 WLR 2723 at para 74. 58 See the decisions of Colman J at trial ([2003] EWHC 687 (Comm)), on Part 20 costs ([2004] 2 Costs L.R. 267), and on non-party costs ([2004] 1 Lloyds Rep. 88). 59 At paras 80 to 106.

180

Davey v Money 7.86

In the case of pure funding, priority is ordinarily given to the public interest in enabling a party who would not otherwise be able to afford to litigate getting access to justice by arranging funding from an outside source; whereas in the case of commercial funding, the priority is ordinarily that a successful unfunded party should be able to recover his costs and not have to bear the expense of vindicating his rights. … Although the Court of Appeal [in Arkin] went on to propose a particular approach to cases involving commercial funders, I accept the Defendants’ submission that the Court of Appeal should not be taken to have been intending to prescribe a rule to be followed in every subsequent case involving commercial funders. … I also consider it to be significant that there is no subsequent authority in which the Arkin cap has been treated as a principle to be applied automatically in any case involving a commercial funder. In short, what has become known as the Arkin cap is, in my judgment, best understood as an approach which the Court of Appeal in Arkin intended should be considered for application in cases involving a commercial funder as a means of achieving a just result in all the circumstances of the particular case. But I do not think that it is a rule to be applied automatically in all cases involving commercial funders, whatever the facts, and however unjust the result of doing so might be. … … I  do not suggest that ChapelGate itself directed the way that the case was conducted, it nevertheless had every opportunity to investigate and form a view as to the nature of the claim and the support for the allegations which were being made before choosing to fund it. Specifically, by the time ChapelGate entered into the Funding Agreement, pleadings had long closed, discovery had taken place and witness statements had been exchanged. … a commercial funder chooses which claims to support, its involvement is derivative, and there is no principled basis upon which the funder can disassociate itself from the conduct of those whom it has enabled to conduct the litigation and upon whom it relies to make a return on its investment. … [I]t must in any event have been apparent to ChapelGate (i) that Ms. Davey was most unlikely to be able to pay any substantial costs awarded against her, and (ii) that the costs of [the Defendants] were likely to be very substantial and well in excess of the amount which ChapelGate itself proposed to invest in the litigation. Appreciation of the former doubtless drove the initial requirement for an ATE policy to be taken out by Ms Davey, and the latter must have been obvious from the fact that the Defendants had instructed separate sets of lawyers and experts to deal thoroughly with the different cases made against them… [A]s a result of the A&W  Agreement, ChapelGate effectively halved its commitment to the funding of the litigation from £2.5 million to £1.25 million, whilst retaining the same potential share of the recoveries, and removing the requirement for the purchase by Ms. Davey of ATE protection for adverse costs liability to the Defendants… [T]here is no legal obligation upon a funder to ensure that an ATE policy is purchased to protect a defendant. Nevertheless, the decision to enter into the A&W Agreement does highlight the fact that ChapelGate was

181

7.87  Adverse costs and security for costs

closely focussed on its own self-interest in funding the litigation as a commercial venture, and that there was no correlation between the amount that it chose to invest in the litigation and the costs to which the Defendants were exposed. … In the instant case, the use of the Waterfall structure in the Funding Agreement meant that ChapelGate had first priority to any recoveries from the litigation… Finally, I  am not persuaded by the policy argument made by [counsel for ChapelGate] that if I were not to apply the Arkin cap in this case, commercial litigation funders would be discouraged from providing funding in the future, essentially because my decision would signal that they might have an ‘openended’ exposure to adverse costs.

7.87 The Court of Appeal upheld the court’s first instance decision60 with Lord Justice Newey agreeing that he did ‘not consider that the Arkin approach represents a binding rule’. Lord Justice Newey highlighted the discretion retained by judges who, depending on the facts, ‘may consider it appropriate to take into account matters other than the extent of the funder’s funding and not to limit the funder’s liability to the amount of that funding’. 7.88 In Sharpe v Blank and Others,61 a group litigation order (GLO) claim brought against Lloyds Bank in respect of its acquisition of HBOS, the court found that the funder’s liability for adverse costs was joint and several with the claimants and was not contingent on the claimants failing to discharge the costs order.

LITIGATION FUNDER’S LIABILITY FOR ADVERSE COSTS IN THE AUSTRALIAN SECURITIES CLASS ACTION REGIME 7.89 In the Australian case Wigmans v AMP Ltd (No 3),62 five open securities class actions were commenced against AMP Limited arising from conduct said to have been revealed in April 2018 by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. Those revelations are said to have led to a substantial fall in AMP’s share price on 17 April 2018. 7.90 The Wigmans proceedings were commenced in the Supreme Court of New South Wales. The other four proceedings were commenced very shortly after in the Federal Court of Australia. Following contested jurisdictional proceedings, all five proceedings were ultimately brought to the Supreme Court of New South Wales.

60 See Chapelgate Credit Opportunity Master Fund Ltd v Money and others [2020] EWCA Civ 246. 61 [2020] EWHC 1870 (Ch). 62 [2019] NSWSC 162.

182

Litigation funder’s liability for adverse costs in the Australian securities class action regime 7.95

7.91 Wigmans and AMP sought an order that either the Federal Court Applicants themselves, or their litigation funders, pay the costs of the contested jurisdictional proceedings. 7.92 It was not disputed that the Court had power to make a costs order against the litigation funders. The question was whether such an order was required by the interests of justice. 7.93 Counsel for Wigmans summarised the applicable general principles as follows: The general rule is that costs follow the event. A successful party ‘is prima facie entitled to a costs order’.63 The object of a costs order is not to penalise the unsuccessful party; rather, ‘the rationale of the order is that it is just and reasonable that the party who has caused the other party to incur the costs of litigation should reimburse that party for the liability incurred’.64 Unreasonable conduct is not a necessary condition to the exercise of the power to make a costs award.65 Factors relevant to the exercise of discretion in favour of making an award of costs against a non-party include: whether the non-party is properly described as the ‘real party’ to the litigation; whether the non-party is funding the litigation;66 whether the non-party has an interest in the litigation, such as an entitlement to the fruits of the litigation if a party succeeds; whether the non-party is involved in the litigation ‘purely for commercial gain’; whether the non-party has played an active part in the conduct of the litigation; the ability of the party in whose favour a costs order is to be made to recover from a party. 7.94 Although it was accepted that the making of an award of costs against a non-party is ‘exceptional’, the Australian court referred with approval to the comments from Dymocks Franchise Systems at para 25 that ‘exceptional in this context means no more than outside the ordinary run of cases where parties pursue or defend claims for their own benefit and at their expense’. 7.95 The Court held that the contested jurisdictional proceedings were ‘exceptional’ in this sense. They represented a forum dispute between representative parties in five funded open class action proceedings of a kind that was unprecedented. Each of the litigation funders67 stood to gain a substantial benefit if their funded party won the ‘carriage dispute’.

63 64 65 66

Re the Minister for Immigration and Ethnic Affairs; ex parte Lai Qin (1997) 186 CLR 622. Latoudis v Casey (1990) 170 CLR 534. PM Works Pty Ltd v Management Services Australia Pty Ltd [2018] NSWCA 168 at para 57. FPM Constructions Pty Ltd v Council of the City of Blue Mountains [2005] NSWCA 340 at para 210. 67 Including Augusta Ventures Limited, International Litigation Funding Partners Pte Ltd, and Therium Litigation Finance (Australia) Limited.

183

7.96  Adverse costs and security for costs

SECURITY FOR COSTS IN ENGLAND AND WALES68 7.96 In Australia, if a matter is funded, the court will generally order security for costs.69 In the case of Perera v Getswift Ltd,70 the court observed, ‘it is accepted that in the event that funders are using the processes of the court in order to procure a commercial benefit, a sine qua non of this is the provision of adequate security’. The December 2018 Australian Law Reform Commission Report on Class Action Proceedings and Third-Party Litigation Funders71 recommended that there be a statutory presumption that a litigation funder will provide security for costs. 7.97 The position in England is less straightforward. In particular, the potential exposure of litigation funders to orders for costs against them at the end of the day does not of itself mean that an order for security for costs should be granted. 7.98 An English court may order a claimant to provide security for costs. Pursuant to CPR 25.13, the court may make an order for security for costs if it would be just to do so and one or more of the following conditions applies: the claimant is resident in a jurisdiction where it would be difficult to enforce a costs order; if a corporate entity, or acting on behalf of another as a nominal claimant (other than a representative claimant under Part 19 of the CPR), there is reason to believe that it will be unable to pay the defendant’s costs if ordered to do so; the claimant has withheld or changed his or her address with a view to evading the consequences of the litigation; or the claimant has taken steps in relation to his or her assets that would make it difficult to enforce an order for costs against him or her. 7.99 CPR 25.14 enables a defendant to obtain an order for security for costs against someone other than the claimant if the court is satisfied, ‘having regard

68 In Hong Kong, Order 23, Rule 1 of the Rules of the High Court provides that the court can order security for costs against the plaintiff only. The court has no power to order security for costs against a third-party funder. In contrast, in Bermuda, in the case Phoenix Global Fund Limited and another v Citigroup Fund Services (Bermuda) Limited and the Bank of Bermuda Limited [2007] Bda LR 61, the Bermuda Supreme Court ordered a third-party funder to put up security for costs. US courts do not order a party to provide security except if the party is seeking a preliminary injunction or a temporary restraining order in advance of the adjudication of the dispute on the merits. See, for example, NY CPLR s 6312(b); Fed R Civ P 65(c). The court will set the amount of security required to ‘an amount that the court considers proper to pay the costs and damages sustained by any party found to have been wrongfully enjoined or restrained’ (Fed R Civ P 65(c)). 69 Idoport Pty Ltd v National Australia Bank Ltd [2001]  NSWSC  744. The position is similar in New Zealand, where it was confirmed by the High Court in Highgate on Broadway Ltd v Devine [2013] NZHC 2288, [2013] NZAR 1017 at para 22(d) that the fact the plaintiff is funded is a ground for the order of security. 70 [2018] FCA 732. 71 Australian law Reform Commission (2019) Integrity, Fairness and Efficiency—An Inquiry into Class Action Proceedings and Third-Party Litigation Funders (ALRC Report 134). Available online: https://www.alrc.gov.au/publication/integrity-fairness-and-efficiency-an-inquiry-intoclass-action-proceedings-and-third-party-litigation-funders-alrc-report-134/

184

Security for costs in England and Wales 7.101

to all the circumstances of the case, that it is just to make such an order’ and that that other person has either (a) assigned the right to the claim to the claimant with a view to avoiding the possibility of a costs order being made against them, or (b) contributed or agreed to contribute to the claimant’s costs in return for a share of any money or property which the claimant may recover in the proceedings, and ‘is a person against whom a costs order may be made’. 7.100 The RBS Rights Issue Litigation72 was a long-running case arising out of the global financial crisis of 2008. The claims, managed under a GLO, related to what the claimants contended were untrue and misleading statements in a prospectus issued in respect of a rights issue of RBS shares in 2008. Some of the claimants were funded by Hunnewell BVI, a commercial litigation funder, but not a member of the ALF, and a Manx company called London and Northern Capital Partners (LNCP). 7.101 Mr Justice Hildyard set out the following factors as relevant in assessing whether an interlocutory order against a non-party under CPR  25.14(2)(b) to secure a contingent liability pursuant to Section 51 is appropriate and just: (1) Whether it is sufficiently clear that the non-party (ie  the funder) is to be treated as ‘having in effect become in all but name a real party motivated to participate by its commercial interest in the litigation’. In particular, the court will apply the ‘purity test’ referred to in paras 7.19 to 7.26 above. (2) Whether there is a real risk of non-payment such that security against the contingent liability should be granted. The security for costs regime exists to protect defendants against the risk that a costs award in their favour would go unsatisfied. An order for security is ordinarily therefore only appropriate where such a real, and not fanciful, risk exists. (3) Whether there is a sufficient link between the funding and the costs for which recovery is sought to make it just for an order to be made. The applicant will need to show at least some causal link between the non-party’s conduct and costs incurred.73 (4) Whether a risk of liability for costs has sufficiently been brought home to the non-party, either by express warning, or by reference to what a person in its position should be taken to appreciate as to the inherent risks. Following the confirmation in Aiden Shipping v Interbulk74 that Section 51 was not restricted in its application to parties in the proceedings, it was usually thought to be requisite that the party seeking a costs order against a nonparty should warn the non- party of his intention to do so.75 However, most English judges now assume that commercial litigation funders are alive

72 [2017] WLR(D) 370, [2017] 1 WLR 4635, [2017] EWHC 1217 (Ch), [2017] WLR 4635. 73 Globe Equities Ltd v Globe Legal Services Ltd [1999] BLR 232, Morritt LJ (as he then was) at 241; Byrne v Sefton Health Authority [2002] 1 WLR 775, Chadwick LJ at para 35. 74 [1986] AC 965. 75 Symphony v Hodgson [1994] QB 179, Balcombe LJ at 193.

185

7.102  Adverse costs and security for costs

to the risk of a costs order against them, and the requirement for express warning has gradually been diluted.76 (5) Whether there are factors, including, for example, a delay in the making of an application for security or likely adverse effects such as to tip the overall balance against making an order. 7.102 Hunnewell BVI accepted that it contributed to some of the claimants’ costs of the proceedings in return for a share of any money or property which those claimants may recover, and is a person against whom a costs order may be made, thereby fulfilling the requirement of CPR 25.14(2)(b). One of the grounds on which Hunnewell BVI opposed the application was its submission that it was well able to meet any award for costs. However, the court found that insufficient financial information was provided in respect of Hunnewell BVI’s ‘wherewithal’. In particular, no accounts of any description were provided. Hunnewell BVI is not a member of the ALF. Ultimately, the court held that it was appropriate to make an order against Hunnewell BVI. 7.103 LNCP did not accept that it should be treated as a commercial litigation funder. It had never previously been involved in the business of litigation funding, and argued that it was a somewhat reluctant funder of the RBS case, having got involved only when it appeared that the action would fail without its financial support. It said that its funding was provided on terms that were much less generous to LNCP than would be demanded by many commercial funders. Nor, LNCP submitted, did it anticipate or expect that it would become liable for a non-party costs order or security for costs. 7.104 The court was concerned about a lack of clarity and transparency in the evidence put forward by LNCP. However, the court was ultimately persuaded that the positions of Hunnewell BVI and LNCP were, ‘on the admittedly sparse evidence before the Court’, different. Hunnewell BVI knew that potential exposure to a liability for adverse costs was an inherent risk of its business of funding what, for it, was a commercial adventure in which it has no other interest. By contrast, LNCP did not fund as a business venture. Litigation funding was not its line of business nor was its primary motivation in providing funding to profit thereby. In the spectrum, and in contrast to Hunnewell BVI, LNCP seemed to the court to be closer to a ‘pure funder’ than a professional litigation funder. The court did not order LNCP to provide security for costs. 7.105 The judgment of Hildyard J  in The RBS  Rights Issue Litigation (No. 2) (Ch) 77 was considered by Mr Justice Foskett in Sandra Bailey & Ors v Glaxosmithkline UK  Ltd,78 in which it was alleged against the defendant, the manufacturer of an antidepressant drug, that it was ‘defective’ within the Consumer Protection Act 1987 s  3. The defendant issued an application for 76 Deutsche Bank v Sebastian Holdings [2016] 4 WLR 17, Moore-Bick LJ at para 32. 77 [2017] EWHC 1217. 78 [2017] EWHC 3195 (QB), [2017] 6 Costs LR 1209, [2017] WLR(D) 850, [2018] 4 WLR 7.

186

Security for costs in England and Wales 7.111

security for costs at a little over £6.8  million against the claimants’ litigation funder, Managed Legal Solutions Limited (MLS), pursuant to CPR  25.14. MLS was joined as an additional party for the purposes of responding to that application. 7.106 It was not disputed that the defendant had a right to apply for security for costs against MLS, that the court had jurisdiction to make such an order, and that it was likely that an order for security would be made. Nor was it disputed that MLS was balance sheet insolvent and was reliant for its liquidity on its shareholder, Mr Michael Hunt, who was said to be very wealthy, and with a previous conviction for dishonesty. MLS was not a member of the ALF. 7.107 The essential issue for decision by Mr Justice Foskett was the quantum of the security to be granted. There was a disagreement between the parties about the applicability of the Arkin Cap to the issue of security in this case. The funders argued that, as the court was likely to apply the Arkin Cap if the case was ultimately lost by the claimants, the court should not order security that would exceed the cap. 7.108 Foskett J noted that the court in Arkin was addressing the issue of costs at the conclusion of the case, not in the context of an interlocutory application for security for costs. However, the argument of MLS is that if the Arkin Cap falls to be applied at the conclusion of the present case and, accordingly, limits the amount that may be recovered by the defendant, it would be wrong for security in a sum greater than the cap to be permitted. 7.109 The question for Foskett J  was whether the Arkin Cap imposed an absolute prohibition against awarding more at the conclusion of the trial than the amount contributed by the funder to the litigation. In his decision, Fosket J made clear that he was not a fan of the Arkin Cap. 7.110 Foskett J referred to the criticism of the Arkin Cap by Sir Rupert Jackson in his Review of Civil Litigation Funding: Final Report referred to in paras 7.47 to 7.49 above,79 and noted also that the observations of the Court of Appeal in Arkin were ‘made in 2005 when the funding landscape was different from that which it is now and at the time there was not even an established voluntary regulatory structure in place’. 7.111 A clearly dominant factor in Foskett J’s conclusion that the Arkin Cap was not set in stone was that ‘the unquestioned imposition of the Arkin Cap’ would of itself fetter the general and wide discretion afforded to the court by CPR 25.14.

79 See also Cook on Costs (2017).

187

7.112  Adverse costs and security for costs

7.112 In Rowe v Ingenious Media Holdings PLC,80 the court ordered Therium, a litigation funder and founding ALF member, to provide security for costs. While Therium’s position as a founder member of the ALF was a positive factor, Mr Justice Nugee described it as ‘striking’ that no actual financial information about Therium was adduced in evidence.

ATE AS SECURITY FOR COSTS 7.113 The current iteration of commercial litigation funding is a relatively recent phenomenon. Most of the major players in the market, including most members of the ALF, were founded between 2008 and 2011. Long before this, however, there was a vibrant London-based market in legal expenses insurance (LEI). One particular form of LEI, ATE insurance, covers parties for the risk of adverse costs. 7.114 The ATE market is well developed in England, less so in other jurisdictions, even in a number of jurisdictions that have adopted the principle of adverse costs.81 7.115 In court proceedings, security for costs usually takes the form of a payment into court or the provision by the claimant of a bond. Other alternatives available in litigation, and also in arbitration, include payment into an escrow account, bank guarantees, parent company guarantees, a solicitor’s undertaking or, in some circumstances, an ATE insurance policy. 7.116 In Premier Motorauctions Ltd & Anor v Pricewaterhousecoopers LLP & Anor,82 the Court of Appeal held that an appropriately framed ATE insurance policy could in theory answer an application for security for costs, but only if the ATE policy provided ‘sufficient protection’ to the defendant for the claimant being unable to meet the defendants’ costs. Whether an ATE policy would provide that protection will depend upon the terms of the particular policy. In the Premier Motorauctions case, the court held that the ATE cover provided did not give sufficient protection to the defendants because the policy could be avoided by the insurer. The ability for the insurer to avoid the policy led the court to conclude that there was reason to believe that the claimant would be unable to pay the defendants’ costs and security for costs was granted. It should be noted that the court considered the ATE policy as part of its determination of whether it had jurisdiction to grant the order for security for costs (ie whether there was reason to believe the claimants would not be able to pay the defendants’ costs), and not as part of its discretion to grant or refuse an order for security once jurisdiction had been established. As to discretion, the court noted that once it is satisfied that the claimants are insolvent, that there was jurisdiction to order

80 [2020] EWHC 235 (Ch). 81 In Hong Kong, for example, while there is no legislative or regulatory prohibition on ATE, it is not commonly used. That is likely to change as Hong Kong liberalises it rules on alternative fee arrangements in litigation (see chapter 3, paras 3.149 to 3.157). 82 [2017] EWCA Civ 1872.

188

ATE as security for costs 7.122

security for costs, and that an order would not stifle the claim, it is normally appropriate to order security. 7.117 In a further ruling, the High Court held that an ATE policy could be sufficient security, when accompanied by a deed of indemnity from the ATE insurer (ie when the deed constituted a separate promise by the insurer to pay the defendant’s costs, which was not subject to the same avoidance rights as the ATE policy itself) (Recovery Partners GB and another v Rukhadze and others83). 7.118 In Rowe v Ingenious Media Holdings PLC,84 Mr Justice Nugee highlighted that in general, ATE policies are not designed to provide security for costs and cited his concerns about a ‘real, and not a fanciful risk, that the ATE policies will not respond in full’. Mr Justice Nugee did not write off the potential that sufficient protection could be provided by ATE and encouraged litigation funders and ATE insurers to ‘develop a form of policy that could both act as insurance for claimants and sufficient protection for defendants’. 7.119 Concerns about avoidance by the insurer were also recently cited in Hotel Portfolio II UK Ltd (In liquidation) v Ruhan85 and Apollo Ventures Co Ltd v Manchanda and others,86 both of which resulted in security for costs being ordered despite the existence of ATE policies.

Australia 7.120 In DIF III Global Co-Investment Fund LP (formerly Babcock & Brown DIF III  Global Co-Investment Fund LP) v BBLP LLC (formerly Babcock & Brown LP),87 the court accepted as adequate security a deed of indemnity proffered by an ATE insurer based overseas. 7.121 In Capic v Ford Motor Company of Australia Ltd, the court approved security for costs being provided by way of a deed of indemnity from an ATE insurer in the UK, together with a payment of $20,000 into court for the purpose of covering the enforcement costs of the deed in the UK. 7.122 However, in Petersen Superannuation Fund Pty Ltd v Bank of Queensland Ltd,88 Yates J, while accepting that an appropriately worded ATE policy may be capable of providing sufficient security for an opponent’s costs, in the circumstances of that case and based on the terms of the ATE policy before him, rejected an ATE insurance policy from an overseas insurer as providing sufficient security. 83 [2018] EWHC 95 (Comm). 84 [2020] EWHC 235 (Ch). 85 [2020] EWHC 233 (Comm). 86 [2020] EWHC 2206 (Comm). 87 [2016] VSC 401 (DIF). 88 [2017] FCA 699.

189

7.123  Adverse costs and security for costs

ADVERSE COSTS IN INTERNATIONAL ARBITRATION: INSTITUTIONAL RULES 7.123 While arbitral panels generally have wide discretion in the allocation of costs, the principle of ‘costs shifting’ (ie the loser pays the winner’s costs) is prevalent in arbitration in numerous jurisdictions. 7.124 Many international arbitration rules expressly provide that the costs of arbitration shall in principle be borne by the unsuccessful party. 7.125 Article  28 of the 2014 Rules of Arbitration of the London Court of International Arbitration89 states: 28.2 …The Arbitral Tribunal shall decide the proportions in which the parties shall bear such Arbitration Costs … 28.3 The Arbitral Tribunal shall also have the power to decide by an award that all or part of the legal or other expenses incurred by a party (the ‘Legal Costs’) be paid by another party … 28.4 The Arbitral Tribunal shall make its decisions on both Arbitration Costs and Legal Costs on the general principle that costs should reflect the parties’ relative success and failure in the award or arbitration or under different issues, except where it appears to the Arbitral Tribunal that in the circumstances the application of such a general principle would be inappropriate under the Arbitration Agreement or otherwise. The Arbitral Tribunal may also take into account the parties’ conduct in the arbitration, including any co-operation in facilitating the proceedings as to time and cost and any non-co-operation resulting in undue delay and unnecessary expense. Any decision on costs by the Arbitral Tribunal shall be made with reasons in the award containing such decision.

7.126 See also Article  52(2) of the 2015 Arbitration Rules of the China International Economic and Trade Arbitration Commission,90 Article  35.2 of the 1998 Arbitration Rules of the German Institution of Arbitration (Deutsche Institution für Schiedsgerichtsbarkeit e.V., DIS);91 Article  42(1) of the 2012 Arbitration Rules of the Permanent Court of Arbitration92 and Article 42(1) of the 2010 Arbitration Rules of the United National Commission on International Trade Law (UNCITRAL).93 7.127 Other rules simply authorise the tribunal to make an award apportioning costs, without stating any presumption in favour of the ‘costs follow the event’ principle.

89 www.lcia.org/Dispute_Resolution_Services/lcia-arbitration-rules-2014.aspx 90 www.cietac.org/index.php?m=Page&a=index&id=106&l=en 91 www.disarb.org/de/16/regeln/dis-arbitration-rules-98-id10 92 www.pca-cpa.org/en/services/arbitration-services/pca-arbitration-rules-2012/ 93 www.uncitral.org/pdf/english/texts/arbitration/arb-rules-revised/arb-rules-revised-2010-e.pdf

190

Investor v State arbitration 7.132

7.128 Article 38 of the 2017 Rules of Arbitration of the International Chamber of Commerce (ICC)94 states: 1.

The costs of the arbitration shall include the fees and expenses of the arbitrators and the ICC administrative expenses fixed by the Court, in accordance with the scale in force at the time of the commencement of the arbitration, as well as the fees and expenses of any experts appointed by the arbitral tribunal and the reasonable legal and other costs incurred by the parties for the arbitration. …

4.

The final award shall fix the costs of the arbitration and decide which of the parties shall bear them or in what proportion they shall be borne by the parties.

5.

In making decisions as to costs, the arbitral tribunal may take into account such circumstances as it considers relevant, including the extent to which each party has conducted the arbitration in an expeditious and cost-effective manner.

7.129 See also Article  34 of the 2018 Arbitration Rules of the Hong Kong International Arbitration Centre;95 Article  34 of the 2014 International Centre for Dispute Resolution Rules96 and Rule 37 of the 2016 Arbitration Rules of the Singapore International Arbitration Centre.97 7.130 While most arbitral tribunals have the power to order one of the parties to pay another party’s costs, they do not have the power to order that a third party (a ‘stranger’ to the arbitration) such as a litigation funder, pay adverse costs or security for costs. This is because arbitral tribunals have jurisdiction only over the parties who are bound by the arbitration agreement from which the arbitrators derive their power. Arbitral tribunals do not have an inherent jurisdiction in the same way that national courts do. 7.131 So, if litigation funders cannot be held liable for adverse costs or security for costs, how might litigation funding become relevant to the costs’ liabilities of the parties? This question can best be examined by looking, first, at investor– State arbitration, and thereafter briefly at international commercial arbitration.

INVESTOR V STATE ARBITRATION 7.132 In Kardassopoulos and Fuchs v The Republic of Georgia,98 the respondent was found to have unlawfully expropriated Mr Kardassopoulos’ investment, in 94 https://iccwbo.org/dispute-resolution-services/arbitration/rules-of-arbitration/ 95 https://www.hkiac.org/arbitration/rules-practice-notes/hkiac-administered-2018 96 https://www.icdr.org/sites/default/files/document_repository/ICDR_Rules.pdf 97 https://www.siac.org.sg/our-rules/rules/siac-rules-2016 98 ICSID Case Nos. ARB/05/18 and ARB/07/15, Award (3 March 2010).

191

7.133  Adverse costs and security for costs

breach of Article 13(1) of the Energy Charter Treaty, and to have breached the fair and equitable treatment standard applicable to Mr Fuchs’ investment under Article 2(2) of the Georgia/Israel bilateral investment treaty. 7.133 The claimants requested that they be awarded their costs in the proceedings, including the costs of their legal representation, experts’ fees and related disbursements, as well as their share of all arbitration costs already paid or payable to the International Centre for Settlement of Investment Disputes (ICSID). They referred to a number of factors which, in their view, weighed in favour of a full costs award, including that the claimants had prevailed on jurisdiction and liability, in the face of the respondent raising ‘every conceivable defence’. 7.134 The respondent submitted that it would not be fair or appropriate for Georgia to bear the costs of the arbitrations, nor the costs of the claimants’ legal representation, for a number of reasons, including that the claimants should not be awarded costs because those costs had been borne in part by a third-party investor (reported to have been the German company Allianz Litigation Funding). 7.135 Article  61(2) of the ICSID  Convention confers on the tribunal broad discretion in assessing and allocating the costs of an arbitration proceeding: In the case of arbitration proceedings the Tribunal shall, except as the parties otherwise agree, assess the expenses incurred by the parties in connection with the proceedings, and shall decide how and by whom those expenses, the fees and expenses of the members of the Tribunal and the charges for the use of the facilities of the Centre shall be paid. Such decision shall form part of the award.

7.136 The tribunal99 noted that ICSID arbitration tribunals have exercised their discretion to award costs which follow the event in a number of cases, demonstrating that there is no reason in principle why a successful claimant in an investment treaty arbitration should not be paid its costs. Further, the tribunal observed: that among those factors identified by the Respondent in support of its submissions on costs is the fact that the Claimants have an arrangement with a third-party concerning the financing of these proceedings. The Tribunal knows of no principle why any such third-party financing arrangement should be taken into consideration in determining the amount of recovery by the Claimants of their costs. In this connection, the Tribunal notes that, while not directly applicable, the Georgia/Greece and Georgia/Israel BITs both provide in their respective dispute settlement provisions that a Contracting Party shall not raise as an objection at any stage of the proceedings the fact that the investor has received compensation or an indemnity under an insurance contract in respect of all or part of the damages incurred (Georgia/Greece BIT, Article 9(5) and Georgia/Israel BIT, Article 8(3).

99 Mr L  Yves Fortier, CC, O, QC, Professor Francisco Orrego Vicuña and Professor Vaughan Lowe, QC.

192

Investor v State arbitration 7.140

It is difficult to see why in this case a third-party financing arrangement should be treated any differently than an insurance contract for the purpose of awarding the Claimants full recovery.

7.137 They concluded that it was appropriate and fair in this case to award the claimants their costs of the arbitrations, including legal fees, experts’ fees, administrative fees and the fees of the Tribunal in the total amount of US $6,235,429, plus additional disbursements in the amount of US $1,706,868. 7.138 RSM  Production Corporation v Saint Lucia,100 related to a dispute about an oil exploration licence in an area off the coast of Saint Lucia, is a truly exceptional case. The respondent sought an order of security for costs, arguing that such an order was necessary in order to protect its procedural right to request that the claimant be ordered to reimburse some or all of the respondent’s costs at the conclusion of the proceedings. The respondent alleged that there was a material risk that the claimant would be unable or unwilling to comply with a costs award issued against it. The respondent referred to prior arbitrations under the auspices of the ICSID, in which the claimant failed to honour its obligations under costs awards or requests for payment of advances. 7.139 The claimant was supported by a litigation funder. The respondent argued that it was likely that, while the funder would share in the benefit of a positive outcome for the claimant, it would likely not ensure that the claimant complied with any costs order following a negative outcome for the claimant. 7.140 The respondent’s application for security for costs was based on Article 47 of the ICSID Convention and ICSID Arbitration Rule 39.3. Neither of these provisions deals with the tribunal’s power to order security for costs explicitly. No prior ICSID tribunal had ordered security for costs and, the claimant argued, prior to there being an award of costs at the end of the case, the possibility of such an award was purely hypothetical; consequently, it cannot constitute a ‘right to be preserved’ under Article 47 of the ICSID Convention and ICSID  Arbitration Rule 39.18. While a number of ICSID tribunals had previously ruled that an order for security for costs does, generally, not fall outside an ICSID tribunal’s power,101 provided exceptional circumstances exist, there were no known ICSID rulings in which such exceptional circumstances were found to be established.

100 ICSID  Case No. ARB/12/10, Decision on Saint Lucia’s Request for Security for Costs (13 August 2014). 101 Libananco Holdings Co. Limited v Republic of Turkey (ICSID Case No. ARB/06/8), Decision on Preliminary Issues of June 23, 2008, para 57; Emilio Agustín Maffezini v Kingdom of Spain (ICSID Case No. ARB/97/7), Procedural Order No. 2 of October 28, 1999; Commerce Group Corp. & San Sebastian Gold Mines, Inc. v Republic of El Salvador, Decision on El Salvador’s Application for Security for Costs of September 20, 2012, para  45; Víctor Pey Casado, Fundación Presidente Allende v Republic of Chile (ICSID Case No. ARB/98/2), Decision on Provisional Measures of September 25, 2001, para 88.

193

7.141  Adverse costs and security for costs

7.141 The question for the tribunal, therefore, was whether the circumstances in the present case were so unique that, unlike all previous cases, they could be considered exceptional. 7.142 The problem for the claimant was that the tribunal clearly considered its behaviour in previous proceedings to be discreditable. In a separate decision,102 the tribunal found that the record before it, far from allaying apprehensions about RSM’s ability or willingness to satisfy the awards for ICSID’s expenses and requests for advances in this proceeding, exacerbates the apprehensions. Claimant’s submissions to the Tribunal are equivocal, confusing, and contradictory. Claimant plainly acknowledges that it may not be able to satisfy a monetary award … Further, as Claimant’s counsel admitted during the Hearing, it is a fair inference that RSM has third-party funding in this matter. The third-party funding exacerbates the concern engendered by RSM’s conduct in the Annulment Proceeding and the Treaty Proceeding. It places an unfunded RSM and the third-party funder(s) in the inequitable position of benefitting from any award in their favor yet avoiding responsibility for a contrary award. Thus, unless this Tribunal requires advance payment of ICSID administrative fees and expenses, it is a reasonable inference, based on RSM’s conduct in the Annulment Proceeding and the Treaty Proceeding, and its impecuniousness here, that those fees and expenses will never be paid. It is the view of the Tribunal that these circumstances constitute a showing of ‘good cause’ to alter the presumptive allocation of advance payments. Claimant should be required to make all such interim advances, including Respondent’s one-half share of advances heretofore ordered, subject to its right to seek reimbursement if required by the Tribunal’s final award.

7.143 The Tribunal concluded from the Claimant’s conduct in other proceedings that there was a material risk that Claimant would not reimburse Respondent for its incurred costs. Thus, contrary to the situation in previous ICSID cases where tribunals have denied the application for security for costs (inter alia) because there was no evidence concerning the financial situation of the opposing party,103 it has been established to the satisfaction of the Tribunal that Claimant does not have sufficient financial resources. Whereas it has previously been held that such financial limitations as such do not provide a sufficient basis for ordering security for costs, the circumstances of the present case are different. In particular Claimant’s consistent procedural history in other ICSID and non-ICSID proceedings provide compelling grounds for granting Respondent’s request.

102 On whether the claimant should be required to pay all advances as an exception to the rule as provided for in ICSID Administrative and Financial Regulation 14(3)(d): Decision on Saint Lucia’s Request for Provisional Measures of December 12, 2013, paras 71–74. 103 See, eg, Libananco Holdings Co. Limited v Republic of Turkey (ICSID Case No. ARB/06/8), Decision on Preliminary Issues of June 23, 2008, para  59; Víctor Pey Casado, Fundación Presidente Allende v Republic of Chile (ICSID Case No. ARB/98/2), Decision on Provisional Measures of September 25, 2001, para 89.

194

Investor v State arbitration 7.145

7.144 As to the fact that the Claimant was in receipt of third-party funding, the Tribunal stated: Moreover, the admitted third-party funding further supports the Tribunal’s concern that Claimant will not comply with a costs award rendered against it, since, in the absence of security or guarantees being offered, it is doubtful whether the third-party will assume responsibility for honoring such an award. Against this background, the Tribunal regards it as unjustified to burden Respondent with the risk emanating from the uncertainty as to whether or not the unknown third-party will be willing to comply with a potential costs award in Respondent‘s favor.

7.145 One of the arbitrators, Gavan Griffith QC, took the unusual step of providing additional assenting reasons for his support of the above finding: 12. It is increasingly common for BIT claims to be financed by an identified, or (as here) unidentified third-party funder, either related to the nominal claimant or one that engages in the business venture of advancing money to fund the Claimant’s claim, essentially as a joint-venture to share the rewards of success but, if security for costs orders are not made, to risk no more than its spent costs in the event of failure. 13.

Such a business plan for a related or professional funder is to embrace the gambler’s Nirvana: Heads I win, and Tails I do not lose.

14. The founders of the Convention could not have foreseen in any way the emergence of a new industry of mercantile adventurers as professional BIT claims funders. It is no reach to find that, as strangers to the BIT entitlement, such funders also should remain at the same real risk level for costs as the nominal claimant. In this regard, the integrity of the BIT regimes is apt to be recalibrated in the case of a third-party funder, related or unrelated, to mandate that its real exposure to costs orders which may go one way to it on success should flow the other direction on failure. 15.

Costs orders may be significant, the more so proportionally to a small State such as the Respondent here. An extreme recent example of costs awards in a Treaty claim is the recent Award in Hulley Enterprises Ltd (Cyprus) v The Russian Federation (18 July 2014), where the claimant’s costs were allowed at $79m.

16.

For these brief reasons, my position is that, unless there are particular reasons militating to the contrary, exceptional circumstances may be found to justify security of costs orders arising under BIT claims as against a third-party funder, related or unrelated, which does not proffer adequate security for adverse cost orders. An example of contrary circumstances might be to establish that the funded claimant has independent capacity to meet costs orders.

17.

For that reason, I am inclined not so much to fix the orders here made to the peculiar, and truly one-off, defaulting costs history of the RSM Group, but to the discrete third-party funding issue.

18.

My determinative proposition is that once it appears that there is third-party funding of an investor’s claims, the onus is cast on the claimant to disclose all relevant factors and to make a case why security for costs orders should not be made.

195

7.146  Adverse costs and security for costs

7.146 Another arbitrator, Judge Edward Nottingham, issued a dissenting opinion: 17. In reaching its decision concerning security for costs, the Majority relies in part on its conclusion, based on the sketchiest of records, that Claimant has third-party funding to finance its case. It also justifies its broad interpretation of tribunals’ powers under Article 47 and Rule 39 by observing that, in 1965, when the ICSID Convention was drafted, ‘issues such as third-party funding and thus the shifting of the financial risk away from the claiming party were not as frequent, if at all, as they are today.’ In my view, this rationale illustrates the wisdom of tribunals’ hewing closely to the words of the governing documents (the Convention and Arbitration Rules) and the mischief which can follow if individual tribunals adjudicating particular cases latch on to broad language in the governing documents as a warrant to address matters which, if they were matters of general concern, could and should be addressed by the ICSID Administrative Council after input and consultation with all interested parties. 18.

The Majority’s conclusion that there is third-party funding here and that the existence of such funding supports its decision is based on a one-sentence admission elicited from Claimant’s counsel during the Tribunal’s First Session. There is no evidence concerning the identity of the funder or any other information about the funder. There is no evidence of the funder’s financial means. There is nothing in the record about the arrangement between Claimant and the funder.

19. The financing of ICSID arbitrations by persons or entities other than the parties themselves may well raise issues of general or particular concern. Should third-party funding ever be permitted? If so, under what conditions? Is such funding a legitimate tool allowing the pursuit of meritorious claims which otherwise could not be brought? Or is it a form of reprehensible barrarty? What information about the nature of the funding or the identity of the funder should be relevant? What are the terms of the funding contract? Indeed, how is third-party funding defined? Would an insurance contract under which a State financed the defense of a case fit the definition? 20.

There may be other issues raised by a regime concerning security for costs and the part which third-party funding may have in deciding whether and when security for costs may be appropriate. In my view, the general concerns about third-party funding and security for costs can and should be addressed by the Administrative Council in its rule-making capacity, if there is a problem that needs to be dealt with. Until the Administrative Council is more explicit about the matter, an individual tribunal should not be using general language of unlimited elasticity to accomplish the result which the tribunal regards as appropriate.

7.147 Significantly, particularly in circumstances involving improper conduct on the part of the respondent, a funded claimant may be able to recover not only the costs of the arbitration but also the premium or success fee paid to the funder. 7.148 EuroGas Inc. and Belmont Resources Inc. v Slovak Republic104 was a dispute referred to arbitration pursuant to the bilateral investment treaties between 104 ICSID Case No. ARB/14/14, Procedural Order No.3 – Decision on the Parties’ Requests for Provisional Measures.

196

Investor v State arbitration 7.151

the United States of America and the Czech and Slovak Federal Republics and between Canada and the Slovak Republic, and the ICSID  Convention.105 The dispute arose out of the claimants’ alleged ownership of Rozmin, a Slovak company that, until 2005, held the exclusive rights for mining activities at one of the world’s largest talc deposits, located in Slovakia. 7.149 The respondent sought an order for security for costs, alleging that the claimants ‘have a history of engaging in fraud and reneging on payment obligations’ and that they do not have the means to pay for the costs of the arbitration proceedings, which were entirely funded by third parties. 7.150 The claimants contended that the respondent’s request went against the very purpose of the ICSID framework, which aims at providing investors with direct access to a neutral forum for the resolution of their dispute with a State. According to the claimants, ‘given that the power struggle in investor– State disputes is generally in favor of the State, any additional financial burden imposed on claimants is very likely to unduly restrict their ability to bring forward meritorious claims’. 7.151 The tribunal106 noted that, as held in RSM  v Grenada,107 security for costs may only be granted in exceptional circumstances,108 ‘for example, where abuse or serious misconduct has been evidenced’.109

105 Convention on the Settlement of Investment Disputes between States and Nationals of Other States, which entered into force on 14 October 1966. 106 Professor Pierre Mayer, Professor Emmanuel Gaillard, and Professor Brigitte Stern. 107 Rachel S. Grynberg, Stephen M. Grynberg, Miriam Z. Grynberg and RSM  Production Corporation v Government of Grenada, ICSID Case No. ARB/10/6, Tribunal’s Decision on Respondent’s Application for Security for Costs, 14 October 2010, para 5.19; see Víctor Pey Casado Fondation Président Allende c. la République du Chili, Affaire CIRDI/ARB/98/2, 25 September 2001, para 86. 108 RSM  Production Corporation v Saint Lucia, ICSID  Case No. ARB/12/10, Decision on the Respondent’s Request for Security for Costs, 13 August 2014, para 48; Phoenix Action, Ltd. v Czech Republic, ICSID Case No. ARB/06/5, Decision on Provisional Measures, 6 April 2007, para  32; Plama Consortium Limited v Republic of Bulgaria, ICSID  Case No. ARB/03/24, Order of the Tribunal on the Claimant’s Request for Urgent Provisional Measures, 6 September 2005, para 38; Saipem S.p.A. v People’s Republic of Bangladesh, ICSID Case No. ARB/05/7, Decision on Jurisdiction and Recommendation on Provisional Measures, 21  March 2007, para  175; Occidental Petroleum Corporation and Occidental Exploration and Production Company v Republic of Ecuador, ICSID  Case No. ARB/06/11, Decision on Provisional Measures, 17  August 2007, para  59; Rachel S. Grynberg, Stephen M. Grynberg, Miriam Z. Grynberg and RSM Production Corporation v Grenada, ICSID Case No. ARB/10/6, Decision on Respondent’s Application for Security for Costs, 14 October 2010, para 5.17; Commerce Group Corp. & San Sebastian Gold Mines, Inc. v Republic of El Salvador, ICSID Case No. ARB/09/17, Decision on El Salvador’s Application for Security for Costs, 20  September 2012, para 44; Burimi S.R.L. and Eagle Games SH.A. v Republic of Albania, ICSID Case No. ARB/11/18, Procedural Order No. 2, 3 May 2012, para 34. 109 Commerce Group Corp. & San Sebastian Gold Mines, Inc. v Republic of El Salvador, ICSID  Case No. ARB/09/17, Decision on El Salvador’s Application for Security for Costs, 20 September 2012, para 45.

197

7.152  Adverse costs and security for costs

7.152 The Tribunal distinguished the outlier case RSM v Saint Lucia case, in which: an ICSID tribunal ordered security for costs. However, the underlying facts in that arbitration were rather exceptional since the claimant was not only impecunious and funded by a third-party, but also had a proven history of not complying with cost orders. As underlined by the arbitral tribunal, these circumstances were considered cumulatively.110

7.153 The Tribunal concluded that: no such exceptional circumstances have been evidenced in the instant case. The Claimants have not defaulted on their payment obligations in the present proceedings or in other arbitration proceedings. The Tribunal is of the view that financial difficulties and third-party-funding – which has become a common practice – do not necessarily constitute per se exceptional circumstances justifying that the Respondent be granted an order of security for costs.

7.154 In South American Silver Limited v Bolivia,111 the respondent requested the tribunal112 to order the claimant to provide a cautio judicatum solvi113 for an amount of at least US $2.5 million. According to the respondent, one of the three key reasons to grant the order was that the claimant was funded by a ‘hidden’ third-party funder, ‘confirming the Claimant’s inability to bear the costs of the arbitration’. The respondent requested the tribunal to order the terms of the litigation funding agreement. 7.155 Referring to the opinion of Gavan Griffith QC in RSM v Saint Lucia, the respondent argued that in cases where a funder is involved, a presumption in favour of granting a cautio judicatum solvi exists. 7.156 The claimant argued that ‘[a]n order of security for costs in this proceeding is unnecessary and would be grossly disproportionate. It would impose a significant financial hurdle to the pursuit of a non-frivolous claim and frustrate access to justice.’ 7.157 The claimant urged the tribunal to reject the request of security for costs and, while the claimant was prepared to disclose the name of its funder, to reject the request for disclosure of the funding agreement.

110 RSM  Production Corporation v Saint Lucia, ICSID  Case No. ARB/12/10, Decision on the Respondent’s Request for Security for Costs, 13 August 2014, para 86. 111 PCA Case No. 2013-15. 112 Dr Eduardo Zuleta Jaramillo, Prof. Francisco Orrego Vicuña and Mr Osvaldo César Guglielmino. 113 Defined by the Hague Conference on International Law in the following terms: ‘In its modern sense, the cautio judicatum solvi is the obligation placed on the plaintiff in an action at law to deposit a certain sum for the purpose of guaranteeing to the defendant the settlement without complication of the costs and expenses which the non-suited plaintiff may be ordered to pay.’

198

Investor v State arbitration 7.162

7.158 The claimant argued that the respondent’s requests should be denied for four reasons: (i) the claimant did not have a history of unpaid, prior adverse costs awards; (ii) the claimant’s poor financial condition was a result of the respondent’s measures at issue in this arbitration; (iii) the existence of a thirdparty funder does not warrant security for costs; and (iv) the respondent had failed to establish that the speculative risk of an unpaid, adverse costs award substantially outweighs the immediate harm that such a measure would impose on the claimant. 7.159 The claimant noted that ‘the only investment tribunal that has ever issued security for costs did so primarily because of the claimant’s notorious history of failing to pay prior cost awards’, and that in his controversial assenting opinion in that case, Gavan Griffith QC conceded that security for costs should not be granted when the source of the claimant’s financial difficulties is the measures alleged to be in breach of the investment treaty. 7.160 The claimant also considered that the mere existence of a third party funding the arbitration is not a sufficient reason for an order of security for costs. On the contrary, the claimant said, the existence of a funder indicates that the claim is plausible on the merits. 7.161 The Tribunal started its analysis by noting that: security for costs (cautio judicatum solvi) is an instrument of English law that has been seen with certain reservations in arbitration in countries of other legal traditions. In investment arbitration, only in one case (RSM v. Saint Lucia), the tribunal (with two strong separate and dissenting opinions) granted security for costs because it found circumstances that merited it.

7.162 The Tribunal continued: the decisions of investment tribunals that have awarded costs against claimants have affirmed that the existence of a third-party that finances the claimant is not, by itself, a factor that should be taken into account in the determination of costs.114 The Tribunal shares this approach and considers that it would not be consistent with such approach to consider the mere existence of a third-party funder as an exclusive factor to determine costs in an earlier stage of the proceedings, this is, in the evaluation of a request for security for costs. It is true that, as Bolivia affirms, one of the arbitrators in RSM  v. Saint Lucia suggested that the mere existence of a funder should be seen as a situation of exceptional circumstance and that the other party has the burden of proving the contrary, this is, to show that there is no exceptional case. However, the position of the majority was the opposite. Additionally, in the decision in EuroGas v. Slovak

114 Ioannis Kardassopoulos & Ron Fuchs v Georgia ICSID Cases Nos. ARB/05/18 y ARB/07/15, Award, March 3, 2010, ¶ 691; RSM  Production Corp. v Grenada ICSID  No. ARB/05/14, Annulment Proceeding, Order of the Committee Discontinuing the Proceeding and Decision on Costs, April 28, 2011, pp. 18–19, ¶ 68.

199

7.163  Adverse costs and security for costs

Republic, cited by Bolivia, and which is subsequent to RSM v. Saint Lucia, the tribunal stated that the mere existence of a third-party funder is not an exceptional situation justifying security for costs.115 … The Tribunal considers that while the existence of a third-party funder may be an element to be taken into consideration in deciding on a measure as the one requested by Bolivia, this element alone may not lead to the adoption of the measure. The existence of the third-party funder alone does not evidence the impossibility of payment or insolvency. It is possible to obtain financing for other reasons. The fact of having financing alone does not imply risk of non-payment. If the existence of these third-parties alone, without considering other factors, becomes determinative on granting or rejecting a request for security for costs, respondents could request and obtain the security on a systematic basis, increasing the risk of blocking potentially legitimate claims.116 … Finally, concerning the disclosure of the terms of the financing agreement entered into with the third-party funder, the Tribunal will reject such request. Firstly, because, for the above-mentioned reasons, exceptional circumstances required to order security for costs are not present and the mere existence of the funder is not sufficient to order it. Therefore, it is not relevant under these particular circumstances to determine whether the third-party funder would assume or not an eventual costs award in favor of Bolivia. Secondly, because no additional circumstances have been proven that, in the opinion of the Tribunal, warrant the modification of the decisions already taken concerning document production in the corresponding procedural phase.

COMMERCIAL ARBITRATION 7.163 Commercial arbitrations are usually bound by strict confidentiality. There are therefore very few reported cases about third-party funding in commercial arbitration. One exceptional example is Essar Oilfield Services Ltd v Norscot Rig Management Pvt Ltd.117 7.164 In ICC arbitration, seated in London, before sole arbitrator Sir Philip Otton, Essar Oilfields Services Limited (Essar), a well-resourced multinational, was held liable to pay damages to the much smaller Norscot Rig Management Pvt Limited (Norscot), for repudiatory breach of an operations management 115 EuroGas Inc. & Belmont Resources Inc. v Slovak Republic ICSID  Case No. ARB/14/14, Procedural Order No. 3 – Decision on Requests for Provisional Measures, June 23, 2015, ¶ 123. 116 Gustav F.W. Hamester GmbH & Co. K.G. v Ghana, ICSID Case No. ARB/07/24, Award, June 18, 2010, ¶ 15. 117 [2016] EWHC 2361 (Comm), 2016 WL 04772390.

200

Commercial Arbitration 7.170

agreement. Essar was found liable to Norscot for the total sum of around US $12 million, including around US $4 million in respect of costs. 7.165 The arbitrator was highly critical of Essar’s conduct towards Norscot, both during the currency of the agreement and also for most of the arbitration period. The arbitrator found that Essar’s conduct was so bad as to justify an order for indemnity costs, ie at an enhanced rate. 7.166 The arbitrator held, among other things, that Norscot was entitled to the costs of litigation funding which it had obtained in order to bring the arbitration. The litigation funder, Woodsford Litigation Funding, had made an agreement with Norscot in 2011, whereby it advanced to it the sum of around £647,000 for the purpose of the arbitration. That agreement entitled it, in the event of Norscot’s success, to a fee of 300 per cent of the funding or 35 per cent of the recovery. In that regard, Norscot sought as against Essar the total sum of just over £1.94 million, being the sum now owed to Woodsford. 7.167 The arbitrator held that he was entitled so to order in his discretion, relying on both the UK Arbitration Act 1996 (the 1996 Act) and the ICC Rules. Section 61 of the 1996 Act provides that: (1) The tribunal may make an award allocating the costs of the arbitration as between the parties, subject to any agreement of the parties. (2) Unless the parties agree otherwise, the tribunal shall award costs on the general principle that costs should follow the event except where it appears to the tribunal that in the circumstances this is not appropriate in relation to the whole or part of the costs. 7.168 Section 59 of the Act is a defining section. It defined ‘the costs of the arbitration’ as including ‘the legal or other costs of the parties’. 7.169 Article 31(1) of the 2012 ICC Rules (now contained in Article 38(1) of the 2017 Rules, provides in substantially the same terms and, in particular, says that the costs of the arbitration shall include the reasonable legal and other costs incurred by the parties for the arbitration. 7.170 The arbitrator said that ‘Essar had set out to cripple Norscot financially’ and that Essar ‘intended to exert and did, in fact, exert commercial pressure on Norscot before and throughout the arbitral process … it was a David and Goliath battle’. The arbitrator referred to the exploitative manner in which Essar had acted towards Norscot prior to and during the dispute and said that: As a consequence, Norscot had no alternative, but was forced to enter into the litigation funding to the full cost of 300 per cent of the sum advanced by the funder or 35 per cent of the sum recovered, whichever was the higher. The funding costs reflect standard market rates and terms for such facility, as evidenced by the expert statement of Mr. Blick, a broker in litigation funding.

201

7.171  Adverse costs and security for costs

7.171 The arbitrator observed that: The magnitude of the arbitration resulted in a substantial amount for the claimant’s costs in the region of US$3 million. Essar was undoubtedly aware that Norscot’s costs could not be financed from its own resources … and it was forced into ‘litigation funding’… It was blindingly obvious to [Essar] that the claimant was at a distinct financial disadvantage … and would find it difficult if not impossible to pursue its claims by relying on its own resources. The respondent probably hoped that this financial imbalance would force the claimant to abandon its claims.

7.172 The arbitrator accepted that the claimant had no credible alternative source of funding: The conduct of the respondent before and during the dispute was a blatant attempt to drive Norscot ‘from the judgment seat’. … They pursued their claims with courage and determination. They undertook a huge financial burden and gamble in entering into the funding arrangement. The claimant’s conduct throughout … cannot be faulted. Justice and the merits point in [the direction of the claimant’s].

7.173 Finally, he said that: The tribunal has a discretion to include in ‘other costs’ the costs of litigation funding … and it reflected market rates and the terms of such a facility. The claimant was forced to enter into such an arrangement if it was to secure justice. It succeeded substantially in all its claims.

7.174 Essar challenged the costs order, in proceedings before His Honour Judge Waksman QC in the English High Court, which had supervisory jurisdiction over the London-seated arbitration. 7.175 Essar argued that, as a matter of construction of s 59(1), ‘other costs’ do not include the costs of litigation funding of the kind claimed here, so the arbitrator had no power to include them in his costs order. Therefore, Essar argued, there was a serious irregularity under s 68(2)(b) of the of the 1996 Act, because the arbitrator exceeded his powers and, given the amount ordered, it would cause substantial injustice to Essar if it had to be paid. 7.176 HHJ Wacksman referred to the ICC Commission Report of 2015 headed ‘Decisions on Costs in International Arbitration’.118 The considerations contained in this Report are intended to inform users of arbitration how tribunals may allocate costs in accordance with the parties’ agreement and/or any applicable rules or law. …

118 https://iccwbo.org/publication/decisions-on-costs-in-international-arbitration-icc-arbitrationand-adr-commission-report/

202

Conclusions 7.178

The successful party will itself ultimately be out of pocket upon reimbursing such costs to the third-party funder and may therefore be entitled to recover its reasonable costs, including what it needs to pay to the third-party funder, from the unsuccessful party. The tribunal will need to determine whether these costs were actually incurred and paid or payable. The fact that the successful party must in turn reimburse those costs is, in itself, largely immaterial … If there is evidence of a funding arrangement that is likely to impact on the nonfunded party’s ability to recover costs, that party might decide to apply early in the proceedings for interim or conservatory measures … Success fees and uplifts In reality, funding arrangements are rarely limited solely to the costs of the arbitration. Usually, the third-party funder will require payment of an uplift or success fee … As a tribunal only needs to satisfy itself that a cost was incurred specifically to pursue the arbitration, has been paid or is payable, and was reasonable, it is feasible that in certain circumstances the cost of capital, eg bank borrowing specifically for the costs of the arbitration or loss of use of the funds, may be recoverable … The requirement that the cost be reasonable serves as an important check and balance in protecting against unfair or unequal treatment of the parties in respect of costs, or improper windfalls to third-party funders. Tribunals have from time to time dealt with this when assessing the reasonableness of costs in general, sometimes including the success fee in the allocation of costs and sometimes not, depending on their view of the case as a whole.

7.177 The judge concluded, as a matter of language, context and logic, that ‘other costs’ can include the costs of obtaining litigation funding. … the arbitrator ruled in detailed and robust terms that Essar drove Norscot into this expensive litigation because of its own reprehensible conduct going far beyond technical breaches of contract, in order to vindicate its rights. Further, as the tribunal found, Norscot had no option, but to obtain this funding from this third-party funder. As a matter of justice, it would seem very odd and certainly unfortunate if the arbitrator was not entitled under section 59(1)(c) to include the costs of obtaining third-party funding as part of ‘other costs’ where they were so directly and immediately caused by the losing party.

CONCLUSIONS 7.178 The potential expense involved in bringing or defending litigation presents a major risk to parties and third party litigation funders, since costs are consistently incurred from the point of retainer to enforcement. Third party litigation funders ought to undertake decisions on pricing mindful of further risk exposure to liability for adverse costs and/or security for costs. To summarise the main points addressed in this chapter: 203

7.178  Adverse costs and security for costs

•

In England, and a number of other jurisdictions that follow the English rule on adverse costs, including Australia, courts (but not arbitral tribunals) have wide discretion to make a costs order against third parties to the litigation, including litigation funders. Particularly if a funded party is unable or unwilling to satisfy any order for costs against it, the court may make an equivalent order against the litigation funder.

•

There is effectively a presumption that commercial litigation funders have such a potential liability for adverse costs. Funders who are motivated only by a desire to afford access to justice, and who do not seek a commercial return, are less likely to be subject to an adverse costs order.

•

A litigation funder’s liability is not limited to standard costs. If the funded party’s conduct of the litigation was such that the court considers it appropriate to make an order for indemnity (ie enhanced) costs, the court may make an equivalent order against the litigation funder, even if the funder had no control over the funded party’s conduct.

•

A litigation funder’s liability is not limited by the corporate veil, or other contractual methods of distancing the funder from the funded party. The court has power to make an order against any party that seeks a financial benefit from the litigation, whether or not that party has direct contractual privity with a party to the litigation.

•

In England, in a judicial invention that has not been replicated elsewhere, including in Australia, the Arkin Cap will in most (but not all) circumstances operate to limit a litigation funder’s liability for adverse costs to an amount equal to the amount of funding provided by the funder to the funded party.

•

Just as the courts have an inherent jurisdiction to make an order for costs against litigation funders, they may also make an order that a litigation funder provide security for costs.

•

Arbitral tribunals only have jurisdiction over the parties to the arbitration. Unlike courts, arbitral tribunals do not have inherent jurisdiction to make costs orders, or security for costs orders, against third parties, including funders. However, an arbitral tribunal’s decision on whether, and to what extent, to make an order for costs, or security for costs order, against a funded party may take into account the fact of funding.

204

CHAPTER 8

Other methods of financing litigation A State funding B Pro bono, philanthropic, charitable and ‘revenge’ funding C Insurance D Contingency and conditional fee agreements

205

PART A

State funding Ravi Nayer Partner, Brown Rudnick LLP, London

Razzaq Ahmed Associate, Brown Rudnick LLP, London

England and Wales United States Contingent litigation funds

8.3 8.12 8.14

8.1 As with many industries that provide professional services to individuals and companies, access to legal advice continues to evade a significant portion of the global population due to its cost. Legal services providers fall into a variety of price points. The spectrum extends from ‘high street’ law firms – which offer legal advice to individuals and small businesses on a wide range of legal issues – to international law firms that represent the world’s largest multinational corporates, engaging in a variety of complex issues that impact a wide breadth of stakeholders. 8.2 In the majority of jurisdictions with an established legal profession, the State provides funds for legal advice or representation by providing access to lawyers free of charge or at heavily discounted rates to those otherwise unable to afford the cost. These programmes are typically referred to as ‘legal aid’; the rules, regulations and ongoing provision of which are found in a country’s primary or secondary legislation. The primary recipients for diminishing state funding are vulnerable members of society (whose characteristics are defined in the next section) in order to ensure the best deployment of justice and in many cases to ensure a fair trial can occur.

ENGLAND AND WALES 8.3 In England and Wales, State funding is provided through the Legal Aid Agency (LAA), an executive agency of the Ministry of Justice. The LAA, which replaced the Legal Services Commission in April 2013, exists to commission and administer legal aid services in England and Wales in accordance with the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO) as well as policies and strategies set by the Ministry of Justice. 207

8.4  Other methods of financing litigation

8.4 LASPO’s introduction was driven primarily by pressures to reduce the legal aid budget and hence the Act sought to discourage unnecessary litigation at public expense, make material savings and ensure that legal aid was more targeted. 8.5 Availability: Legal aid is available in response to a number of scenarios that litigants may face in both the criminal and civil spheres, including those problems typically engaging an individual’s fundamental rights (housing, domestic violence, challenges against government decisions and asylum).1 Funding for advice and representation arising from these issues is dictated by the LAA’s budget as stipulated by the Ministry of Justice, which at the time of writing is estimated at £1.7 billion.2 This represents a 34 per cent fall in real terms since 2010, the effect of which has been well publicised in recent years.3 The reduction in the LAA budget is exacerbated by the wider 25 per cent reduction in the Ministry of Justice’s budget over the same period, which observers might assume will only further reduce as a proportion of GDP following the impact of the Covid-19 crisis. Before LASPO, any matter could form the basis of an application for legal aid unless it had been specifically excluded by the Legal Services Commission. LASPO reversed this position by excluding certain civil matters, such as family law, employment law and welfare benefits law, from the scope of legal aid unless they met the criteria of ‘exceptional’ cases.4 8.6 Eligibility: Litigants must, in order to qualify for legal aid in England and Wales, demonstrate that they are financially unable to obtain legal advice and representation through other means. ‘Means testing’, which considers a potential litigant’s income, dependents and living costs, is a requirement for all criminal cases and most civil cases. In criminal proceedings, the prerequisite financial circumstances for an individual to be eligible for funding are contained in the Criminal Bills Assessment Manual and Standard Crime Contract 2017 as well as the LAA’s website.5 If eligible, individuals may seek funding for appearances in the Magistrates’ court, their committal, any appeal to the Crown Court and trial stages. For trials, individuals may be asked to make a contribution and if found not guilty, may recover their contributions with interest. In the civil cases the means test is set out in the Lord Chancellor’s Guidance and the Civil Legal

1

See the Legal Aid, Sentencing and Punishment of Offenders Act 2012 Sch 1for a full list of civil matters. 2 Permanent Secretary ‘Ministry of Justice’ Main Estimate Memorandum 2019–20 dated 19 May 2019. Available online: https://www.parliament.uk/documents/commons-committees/ Justice/estimates-memoranda/MoJ-Estimates-2019-20.pdf (last accessed: 10 April 2020). 3 See Organ and Sigafoos The Impact of LASPO on Routes to Justice Equality and Human Rights Commission 118; Legal aid; how has it changed in 70 years? The Guardian 26  December 2018. Available online: https://www.theguardian.com/law/2018/dec/26/legal-aid-how-has-itchanged-in-70-years (last accessed: 10 April 2020); The Secret Barrister: Stories of the Law and How Its Broken. London: Picador, 2019. 4 Sturge, Zayed, and Bellis The Spending of the Ministry of Justice House of Commons Library, October 2019. Available online: https://commonslibrary.parliament.uk/research-briefings/cdp2019-0217/ (last accessed: 10 April 2020). 5 Guidance on criminal legal aid means testing. Available online: https://www.gov.uk/guidance/ criminal-legal-aid-means-testing (last accessed: 10 April 2020).

208

England and Wales 8.7

Aid (Financial Resources and Payment for Services) Regulations 2013.6 The latter outlines qualification thresholds for gross income, monthly disposable income and disposable capital.7 Historically, the UK Government has exempted payments made under Government schemes in eligibility assessments for legal aid. In the case of the Windrush8 and Grenfell Tower9 compensation schemes, payments made to affected individuals are excluded from eligibility assessments to ensure that any future applications for legal aid are not disadvantaged. This accommodation for compensation received through the resolution of secondary legal claims involving the UK  Government creates a precedent for issues that may arise in the future which are likely to need a similar response. 8.7 Exceptional case funding: The Lord Chancellor’s funding guidance sets out further instances where litigants may seek legal aid. The guidance applies where the matter is not within the scope of LASPO and where the failure to provide funding would cause breaches of an individual’s Convention rights,10 or rights to legal services that are enforceable EU rights (by reference to the principles identified in the Lord Chancellor’s funding guidance or any relevant case law).11 While Article  6(3)(c) of the European Convention on Human Rights outlines the specific right to legal assistance in the context of criminal proceedings, it is silent in relation to civil proceedings. However, the European Court of Human Rights has recognised that there are circumstances in which the failure of the State to provide civil legal aid may amount to breach of an individual’s rights under the European Convention on Human Rights. The Lord Chancellor’s funding guidance provides exhaustive directions that caseworkers within the LAA must consider prior to deciding exceptional cases. These include:

• •

the consequences of an individual not bringing or defending proceedings;12 whether the case merely involves money or current (as opposed to historic) issues of life, liberty, health and bodily integrity, welfare of children or vulnerable adults, protection from violence or abuse, or physical safety;

6 SI 2013/480. 7 Civil Legal Aid (Financial Resources and Payment for Services) Regulations 2013, SI 2013/480 reg 8. 8 Disregard of compensation payments made to claimants of the Windrush compensation scheme Guidance for providers, Legal Aid Agency, May 2019. Available online: https://assets. publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/798892/ Guidance_on_disregard_of_Windrush_compensation_scheme_payments.pdf (last accessed: 10 April 2020). 9 Discretionary Disregard of Payments made to Victims of Grenfell Tower Fire Guidance for providers. Legal Aid Agency, July 2017. Available online: https://assets.publishing.service. gov.uk/government/uploads/system/uploads/attachment_data/file/628867/grenfell-guidanceon-disregarded-payments.pdf (last accessed: 10 April 2020). 10 Within the meaning of the Human Rights Act 1998. 11 See R (Gudaviciene) v Director of Legal Aid Casework [2014] EWCA Civ 1622 at §31. It is as yet unclear how this applies following the UK’s departure from the EU (ie Brexit) and there has been no government or LAA advice on whether position has changed since Brexit. 12 There is no requirement to provide legal aid to ensure total ‘equality of arms’ between an applicant and opponent. Instead, each party is given a reasonable opportunity to present their case so they are not at a substantial disadvantage compared to the opponent per De Haes and Gijsels v Belgium (1998) 25 EHRR 1

209

8.8  Other methods of financing litigation

• if the case is financial, the sums at stake; and • whether the claim relates to adjustments, care provision or medical equipment without which the applicant cannot live an independent life.

8.8 The majority of commercial disputes that arise would likely not qualify for exceptional case funding unless a significant element of the claim relates to an individual’s rights under the European Convention on Human Rights or similar fundamental rights.13 However, there remain civil claims that extend far beyond this limited list of rights, including breach of contract, statutory claims, tort and family proceedings that involve the determination of civil rights and obligations. Private family law proceedings, in particular those concerning the right of contact with and residence of the applicant’s child or the division of matrimonial assets, will generally involve the determination of civil rights and obligations. In the context of business, private law claims involving the determination of rights or obligations under a contract will generally involve the determination of civil rights and obligations.14 8.9 Challenges and perspectives: A  number of commentators have concluded that the introduction of LASPO has served to restrict the availability of state funding for litigation and, by extension, restricted access to justice for the most vulnerable in England and Wales. The National Audit Office, Commons Public Accounts and Justice Select Committee have stated that the changes are particularly detrimental in respect of civil legal aid.15 The eligibility criteria for state funding has also deprived many who, but for their savings and assets, would qualify on the basis of low income. The House of Commons has observed scenarios where working people on low incomes accused of wrongdoing are being systematically denied their right to a fair trial.16 The Law Society of England and Wales highlighted this scenario amongst other examples of LASPO’s effect on access to justice in a 2018 report responding to the Ministry of Justice’s review of LASPO.17 In the specific context of State funding for civil matters, the Government’s LASPO and budget approach has resulted in an 82 per cent decrease in qualifying cases per year; for criminal matters the decrease is around 13 Two cases that discussed the lawfulness of exceptional funding in comparison with the European Convention on Human Rights include Gudanaviciene and Ors v Director of Legal Aid Casework and the Lord Chancellor [2014] EWCA Civ 1622 and I.S. v Director of Legal Aid Casework and the Lord Chancellor [2015] EWHC 1965 (Admin) and [2016] EWCA Civ 464. 14 There are further examples listed in the Annex to the Lord Chancellor’s Guidance, available online: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/ file/477317/legal-aid-chancellor-non-inquests.pdf (last accessed: 10 April 2020). 15 Harper. The effects of LASPO on civil legal aid in Wales Public Law Project, June 2018. Available online: https://publiclawproject.org.uk/wp-content/uploads/2018/07/LASPOA_ briefing_Wales.pdf (last accessed: 10 April 2020). 16 Prat, Brown and Sturge. Debate Pack: The Future of Legal Aid House of Commons Library, October 2019. Available online: https://commonslibrary.parliament.uk/research-briefings/cdp2018-0230/ (last accessed: 10 April 2020). 17 See The Law Society Access to British justice increasingly only for the few Press release, September 2018. Available online: https://www.lawsociety.org.uk/news/press-releases/accessto-british-justice-increasingly-only-for-the-few/ (last accessed: 10 April 2020).

210

England and Wales 8.11

30  per  cent. Assuming funding is available, solicitors have found it difficult to obtain the necessary funds to appoint experts and the alternative method of ‘exceptional case’ funding has been reported to take a significant amount of time. As an example, organisations that have made urgent applications for funding with imminent hearing dates have reported that responses have not always been received within the five working day period.18 8.10 Alternative UK State-Funded Models: In some sectors where state funding for litigation is not widely available, the Government has instead opted for a funded ‘ombudsman’ style scheme. The Financial Ombudsman Service (FOS), which was established and set up under the Financial Services and Markets Act 2000,19 seeks to settle disputes between consumers (and some small businesses) and UK-based businesses providing financial services.20 While strictly not litigation, the FOS provides individuals and small businesses with an alternative and riskfree route to justice (in cases that are within the FOS’s jurisdiction). Whereas civil litigation is conducted pursuant to rules of civil procedure (including cost shifting), the FOS operates pursuant to statutory rules and the Financial Conduct Authority’s handbook. Parties are still able to provide submissions of law and fact, but matters are decided by adjudicators and ombudsmen employed by the FOS rather than a judge, although decisions can be referred to the Administrative Court for the matter to be judicially reviewed. While the FOS takes into account the law, codes and good practice that applied at the time of the event, its fundamental role is in practice more aligned with mediation than litigation, as it aims to procure a result for the parties that is fair, just and reasonable. 8.11 While the FOS has received criticism for its inefficiency and inability to provide justice in a timely manner, it has a number of proponents who argue that it provides a key service for individuals who would otherwise be unable to resolve disputes or would not qualify for legal aid. The Pensions Ombudsman, which is a non-departmental public body stewarded by the Department of Work and Pensions, performs a similar role in respect of pensions and there have been calls to introduce a State-funded Housing Dispute Service to address the gap that has emerged in respect of housing-related legal issues.21 These schemes are attractive and welcomed by litigants as they do not employ the cost-shifting rules that apply to litigation in England and Wales (where the parties must assess the litigation risk if they are unsuccessful and may be required to pay costs). 18 Watts Exceptional Case Funding Public Law Project, May 2018. Available online: https:// publiclawproject.org.uk/wp-content/uploads/2018/05/Exceptional-Case-Funding-Briefing.pdf (last accessed: 10 April 2020). 19 The powers of the FOS are set out in the Financial Services and Markets Act 2000 Part XVI and Sch 17. 20 The FCA undertook a consultation to extend the FOS’s jurisdiction to consider small business disputes (fewer than 50 employees, annual turnover of under £6.5 million and an annual balance sheet total of under £5 million) in addition to consumer disputes through an amendment to the definition of ‘eligible complainant’ and DISP 2 in the FCA Handbook. See PS18/21, available online: https://www.fca.org.uk/publication/policy/ps18-21.pdf 21 Andrew Arden QC. Solving Housing Disputes Justice Committee, 2020. Available online: https://justice.org.uk/wp-content/uploads/flipbook/27/book.html

211

8.12  Other methods of financing litigation

UNITED STATES 8.12 For the US litigant, access to State funding has a different format. While the approach in England and Wales to criminal and civil funding is driven by the UK  Government, the US approach is defined by interpretations of the US  Constitution and results in a split approach to State funding for civil and criminal cases. Consequently, while aligned in their aim of providing funding to those that cannot afford legal advice or representation, the two countries’ state funding approaches differ significantly. 8.13 The US equivalent to the LAA is the Legal Services Corporation (LSC), which awards grants to over 100 legal services providers situated throughout the United States using a competitive grants process. The key difference from the England and Wales model is that the LSC only makes provision for civil matters. State funding for criminal matters is separate following the decision in Gideon v Wainwright,22 where the US Supreme Court held that US states are required under the Sixth Amendment of the US  Constitution to provide an attorney to defendants in criminal cases who are otherwise unable to afford their own. The US Supreme Court did not extend this right to representation for civil matters. The LSC was set up under the Legal Services Corporation Act 1974 and its remit is set by Congress. It exists, like the LAA, to afford low-income litigants with legal advice and representation. The most frequent cases the LSC funds are in relation to family, housing, consumer issues, employment, military veterans and claims arising from natural disasters. As the LSC operates a ‘grant’ model, organisations that benefit from LSC funding must adhere to Government regulations that, among other things, invoke record-keeping obligations and prohibit particular legal activities, including lobbying and using funds for the purposes of class action lawsuits. The budget for the LSC (approximately US $600 million in 2020) has been criticised as inadequate and resulted in 40 per cent of all eligible legal problems receiving no service of any kind. The shortfall in federal funding channelled through the LSC has meant action at state level has been needed. To that end, in New York and California, legislation has been introduced to ensure funding is available for housing-related disputes in circumstances where LSC conditions are not met or where LSC-originated funding is not available.

CONTINGENT LITIGATION FUNDS 8.14 More recently, numerous stakeholders in the international legal community and those looking to secure future potential sources of State funds for litigation have advocated the establishment of contingent legal aid funds (CLAF) on a national basis. In its simplest form, a CLAF is a self-funding scheme that funds litigation for qualifying litigants or cases in the public interest using recoveries from previous proceedings following a positive result. In many ways, CLAFs are designed to operate in a similar fashion to mainstream litigation 22 372 U.S. 335 (1963).

212

Contingent litigation funds 8.19

funders or ‘with-profits’23 funds, although they seek to provide access to justice rather than investment returns. A supplementary legal aid scheme (SLAS) is a hybrid product of a CLAF bolted onto and administered by an existing legal aid organisation (such as the LAA).24 8.15 While such schemes would typically be able to fund a wider set of cases, they suffer from increased volatility; unlike conventional legal aid schemes, CLAF and SLAS models must achieve a minimum success rate in order to remain available and sustainable. Volatility is the most significant threat to CLAF sustainability, which litigation funders seek to mitigate using high merits thresholds. The CLAFs and SLASs in existence (which are discussed below) have implemented similar tests, although there is a balance to be struck. Too high a merits threshold dilutes the scheme’s core principle of increasing access to justice. 8.16 The Justice Select Committee of the United Kingdom first outlined its proposals for a CLAF model in 1978 and has revisited this suggestion on numerous occasions. Lord Justice Jackson commented in his 2010 ‘Review of Civil Litigation Costs’ report, on the concept of a CLAF that: Financial modelling should be undertaken to ascertain the viability of one or more CLAFs or a SLAS after, and subject to, any decisions announced by Government in respect of the other recommendations of this report (Recommendation 16).

8.17 At the date of writing, the UK is yet to implement a CLAF or SLAS. There are, however, a number of jurisdictions that have successfully implemented such schemes. 8.18 Hong Kong: The existing State-funded legal aid scheme was supplemented by a SLAS in 1984 in respect of personal injury and a range of negligence cases alongside its existing State-funded legal aid scheme. The SLAS still exists and has received further Government funding since its inception to broaden its application to further case categories. The SLAS has a higher eligibility criterion than the existing legal aid scheme but enables cases to be funded where they would otherwise be refused on merits by the legal aid scheme. The scheme is funded by levies on damages recovered (emulating the litigation funder model). The levy is 10 per cent in respect of cases that proceed to trial and 6 per cent in respect of cases that settle in advance of a trial on the merits. 8.19 Australia: Two states in Australia operate variants of a contingent litigation fund. Legal Aid Western Australia created a SLAS in 2009 for civil 23 With-profits funds are long term investment products which are designed to provide investors with consistent returns using a ‘smoothing’ process, whereby the fund intentionally reduces returns in high-growth periods (and builds reserves) and increases returns in low-growth periods (deploying reserves). 24 See The merits of a Contingent Legal Aid Fund: Second Discussion Paper The General Council of the Bar. Available online: https://www.biicl.org/files/4756_claf_second_report.pdf

213

8.20  Other methods of financing litigation

proceedings for litigants who are ineligible for legal aid grants. The scheme is accessible to those who pass a merits and means test but in contrast to conventional legal aid schemes, litigants must apply through a lawyer willing to act on their behalf. The scheme covers immigration, breach of contract, public liability, insurance and inheritance disputes but does not cover family, criminal, immigration, commercial or environmental disputes.25 The SLAS is funded by 20 per cent of any damages recovered in the event of success. If a litigant is awarded legal costs the money must be repaid to the SLAS. If litigants are unsuccessful the SLAS does not impose charges on the litigant and the litigant is responsible for any adverse cost orders. 8.20 South Australia created a CLAF in 1992 which has funded approximately 1,500 civil claims since its inception and has led to over AU $200 million in damages for litigants. The Law Society of South Australia, which acts as trustee to the fund, requires South Australian solicitors to inform their clients about the CLAF in certain circumstances.26 Like the Western Australian SLAS, the CLAF is accessible to those who pass a merits and means test and who also have a lawyer willing to act on their behalf. They can apply for one of two types of funding:

•

Disbursements-only funding: The CLAF funds disbursements alone on the condition that the solicitor (and counsel) enters into a conditional fee arrangement with the litigant.27 Successful litigants repay the amount received plus a 100 per cent uplift; or

•

Full funding: The CLAF funds solicitor costs, counsel costs and any disbursements. Litigants who received full funding repay the amount received and 15 per cent of their damages.

8.21 The Law Society of South Australia states that in practice, the CLAF funds the majority of cases on a disbursements-only funding basis, which transfers the majority of the litigation risk onto solicitors and counsel. 8.22 Canada: Canada provides two further CLAF examples. The Ontario Class Proceedings Fund was founded in 1992 through an amendment to the Law Society Act 1990 and the introduction of the Class Proceedings Act 1992. In its first 20 years of activity, the Law Foundation of Ontario, which funds and administers the CLAF, approved 60 per cent of the applications it received.28 Unlike other CLAFs or State funding sources, the Ontario Class Proceedings 25 See Summary of the Western Australian Civil Litigation Assistance Scheme. Available online: https://www.legalaid.wa.gov.au/get-legal-help/get-lawyer-run-your-case/civil-litigationassistance-scheme 26 Australian Solicitors’ Conduct Rules rule 16A. 27 In the event of the action being unsuccessful the solicitor and counsel will not charge the claimant. 28 Out of 130 applications, 82 were approved of which 30 resulted in settlements. See Class Proceedings Fund–20 Years in Review December 2012 at p  13. Available online: www. lawfoundation.on.ca/wp-content/uploads/CPF-Brochure-2013.pdf

214

Contingent litigation funds 8.24

Fund has the primary objective of funding class action litigation that has a public interest. 8.23 The fund sustains itself through a 10 per cent levy on any damages the class is awarded.29 However, unlike other CLAFs, in the event that class litigants are unsuccessful, the levy is not collected and the fund pays any adverse costs. Consequently, the fund’s committee undertakes a rigorous merits assessment of funding applications. The Law Society Act 1990 and associated regulations outline eight merit factors that the committee must take into account and which were considered in Edwards v Law Society of Upper Canada:30

•

An analysis of the prima facie case (with at least a 50 per cent chance of success);

• • • •

The class litigants’ prior fund-raising efforts;

•

Whether the defendant has the ability to pay the compensation sought by the class litigants;

• •

That the case involves substantial monetary relief; and

The proposed use of funds; Whether the matter is in the public interest; Whether the application meets the requirements for certification as a class action;

The matter does not require excessive disbursements.

8.24 Class litigants are able to use the fund for a range of public interest cases, including employment recoveries, environmental damage and government breaches.31 Despite the stringent assessment criteria, the fund continues to face sustainability issues due to rising costs and the effect of the cost-shifting system in Ontario.32 The Law Commission of Ontario recently reported that costs have increased from an average of CA $50,000 per case in 2001 to an average of almost CA $450,000 in 2017.33 Judges have noted that the fund’s objective to indemnify class litigants in unsuccessful cases, together with the effect of increased costs, has resulted in the fund being financially vulnerable.34

29 In Martin v Barrett [2008] O.J. No. 3813, the court determined that the CLAF’s 10 per cent levy should be determined by reference to the net recovery by the litigant, ie after the deduction of legal fees and any other costs incidental to the settlement. 30 (1994) 36 CPC (3d) 116. 31 See Fresco v CIBC (2012) ONCA 444 (unpaid overtime); Seed v Ontario (2012) ONSC 2681 (government duty of care); and Smith v Inco (2012) ONSC 5094 (environmental damages). 32 The cost-shifting system where the unsuccessful party pays the successful party’s costs. 33 See Class Actions, Final Report Law Commission of Ontario, July 2019 at p  79. Available online: https://www.lco-cdo.org/wp-content/uploads/2019/07/LCO-Class-Actions-ReportFINAL-July-17-2019.pdf (last accessed: 10 April 2020). 34 Ibid.

215

8.25  Other methods of financing litigation

8.25 The Fonds d’aide aux actions collectifs in Québec is a more conventional CLAF administered by the provincial Ministry of Justice. In contrast to the Ontario fund, the Québec fund covers individual litigants’ legal fees and disbursements. If successful, the funded amount is recouped. The Québec fund means tests applicants and requires a written statement of facts to enable it to make a funding decision, a process which is aligned with many CLAFs in other jurisdictions. 8.26 European Union: More recently there have been proposals for a European CLAF. Members of the European Coalition for Corporate Justice have suggested the establishment of an EU fund to provide financial support for litigating cases relating to violations of democracy, rule of law and fundamental rights. Article III of the United Nations Guiding Principles, which was adopted by the EU in 2011, forms the foundation of the proposal as it obliges member states to ensure effective access to judicial remedy for victims of human rights violations by businesses operating inside and outside their territory.35 The European Consumer Organisation also published a 2012 report that suggested the creation of a public fund dedicated to the financing of collective redress brought by consumer organisations which could be funded by State deposits and a share of any fines collected.36 However, such European CLAFs are yet to be established.

35 See Proposed EU  Litigation Fund must cover business & human rights cases European Coalition for Corporate Justice, September 2018. Available online: https://corporatejustice.org/ news/8488-proposed-eu-litigation-fund-must-cover-business-human-rights-cases 36 See Litigation funding in relation to the establishment of a European mechanism of collective redress BEUC, February 2012 at p 4. Available online: https://www.beuc.eu/publications/201200074-01-e.pdf

216

PART B

Pro bono, philanthropic, charitable and ‘revenge’ funding Ravi Nayer Partner, Brown Rudnick LLP, London

Razzaq Ahmed Associate, Brown Rudnick LLP, London

Pro bono 8.27 Philanthropic and charitable funding 8.44 ‘Revenge’ funding 8.52

PRO BONO 8.27 Law firms have become sources of funding in their own right in recent years by operating alternative business structures and offering litigants ways to offset litigation risk through conditional fee arrangements, which are discussed in chapter 8, Part D, and also chapter 4. However, litigants are also able to access legally qualified personnel through pro bono routes. 8.28 Illustratively, pro bono is defined by the American Bar Association under ABA Model Rule 6.1 as: legal services [provided] without fee or expectation of fee to: (1) persons of limited means or (2) charitable, religious, civic, community, governmental and educational organizations in matters which are designed primarily to address the needs of persons of limited means.37

8.29 In essence, pro bono describes the retainer where a legal services provider bears the legal cost that would otherwise be payable by the litigant. However while representation and advice is essentially provided at zero cost, adverse cost orders remain the litigant’s responsibility.

37 See ABA Model Rule 6.1: Voluntary Pro Bono Publico Service. Available online: https://www. americanbar.org/groups/probono_public_service/policy/aba_model_rule_6_1

217

8.30  Other methods of financing litigation

8.30 There are broadly two inter-related sources of pro bono representation and advice available in most jurisdictions, namely (i) lawyers and (ii) nongovernmental organisations (NGOs) and charities.

Lawyers, ie law firms, barristers’ chambers, alternative business structures and in-house legal teams 8.31 As a collective, law firms have the largest breadth of legal experience, expertise and resources available for pro bono representation and legal advice. Historically, lawyers at these firms have been constrained by pressures of target hours and revenue generation, thereby reducing the time available for pro bono matters. A combined effort in recent years to encourage more pro bono activity has led to firms introducing target pro bono hours and, in the case of some firms, including all pro bono activity in each fee-earner’s annual target hours. The ‘Collaboration for Pro Bono Plan’ in the UK is an example of a firm-led initiative (and implemented by 60 UK and US law firms) which introduces an annual target of 25 hours per fee-earner to be ‘spent’ on pro bono matters. 8.32 Law firms typically source their pro bono case load through pro bono NGOs or charities and who may undertake means and merits tests on behalf of a law firm to ensure a given matter aligns with the law firm’s own objectives. In particular, international law firms typically partner with NGOs, authorities, education institutions and charities local to where their offices are based. 8.33 These law firms are less affected by financial factors than other sources of litigation funding. Aside from losing the billable revenue of fee-earning time, law firms are not impacted by (i) investment return targets, (ii) financial sustainability (as in the case of CLAFs), or (iii) limitations imposed by statutes (as in the case of legal aid organisations). Law firms can therefore focus their services on litigants who require specialist representation and advice on matters that raise complex points of law, are important to a law firm’s strategy or the individual lawyer. 8.34 In the UK, law firms are encouraged by the Law Society of England & Wales to sign the Pro Bono Charter; a public statement signed by a range of law firms, in-house teams and alternative business structures, which states: Pro bono legal work is always only an adjunct to, and not a substitute for, a proper system of publicly funded legal services. Pro bono acts as an adjunct to state funded services, which provides an exceptionally important contribution to society, helping many vulnerable people, families on lower incomes, charities and international communities, whose legal needs would otherwise be left unmet.38

38 See The Pro Bono Charter: get involved. Available online: https://communities.lawsociety.org. uk/civil-litigation-features-and-comment/the-pro-bono-charter-get-involved/5064069.article.

218

Pro bono 8.40

8.35 The Pro Bono Protocol operates alongside the Pro Bono Charter and is a guide for law firms engaging in pro bono activities. The Protocol is endorsed by professional bodies representing UK lawyers including the Law Society of England and Wales, the Bar Council of England and Wales and the Chartered Institute of Legal Executives.39 8.36 In the United States, given that representation for civil matters is not a constitutional right, there is a significant level of reliance on law firms to provide ad hoc legal support through pro bono activities. While there are no state bar requirements for lawyers to report pro bono service, the American Bar Association states that: Every lawyer has a professional responsibility to provide legal services to those unable to pay. A lawyer should aspire to render at least (50) hours of pro bono publico legal services per year. In fulfilling this responsibility, the lawyer should (a) provide a substantial majority of the (50) hours of legal services without fee or expectation of fee.40

8.37 The inclusion of a pro bono target within the rules indicates the weight placed on pro bono work by the US legal profession. Very few jurisdictions outside of the United States are as prescriptive at an individual level and instead rely on firms to willingly set levels of minimum commitment, such as the ‘Collaboration for Pro Bono Plan’ in the UK.

Non-governmental organisations and charities 8.38 NGOs and charities are significant in the success of pro bono representation and advice for litigants in many jurisdictions. 8.39 In England and Wales the National Pro Bono Centre acts as a hub for all pro bono charities across the legal sector and houses the main charities that provide and oversee pro bono activities.41 In practice, the centre allows lawyers to refer pro bono clients they are unable to assist directly and also serves as a venue for pro bono charities. 8.40 LawWorks is one such example of a charity supported by the National Pro Bono Centre – it is a membership organisation supporting volunteers from

39 See Pro Bono Manual The Law Society of England and Wales, November 2016 at p 8. Available online: https://www.lawsociety.org.uk/support-services/practice-management/pro-bono/probono-manual/ 40 See ABA Model Rule 6.1: Voluntary Pro Bono Publico Service. Available online: https://www. americanbar.org/groups/probono_public_service/policy/aba_model_rule_6_1 41 These include Advocate, LawWorks, London Legal Support Trust, The Access To Justice Foundation, LAG, Pro Bono Community, Justfair, and Litigant in Person Support Strategy. See also The National Pro Bono Centre: http://www.nationalprobonocentre.org.uk/about-us/ (last accessed: 10 April 2020).

219

8.41  Other methods of financing litigation

over 130 law firms and legal teams across England and Wales and is funded by 27 charitable trusts and organisations. Its objectives are to provide (i) access to justice for individuals in need of advice, who are not eligible for legal aid and are without the means to pay for a lawyer, and (ii) brokering legal advice to small not-for-profit organisations, to support the continuation and expansion of their services to people in need. LawWorks and other similar charities serve as examples of key intermediaries that connect litigants with highly experienced lawyers within firms on issues relating to property, charity, corporate matters, employment, intellectual property, tax and data protection. 8.41 Similarly, barristers who are willing to offer pro bono services to litigants are often associated with Advocate, which was established in 1996 and works with over 4,000 volunteer barristers.42 Like LawWorks, Advocate provides pro bono representation and legal advice to litigants unable to obtain them privately or through legal aid. 8.42 The Free Representation Unit (FRU) provides legal advice, case preparation and advocacy in employment, social security, and some criminal injury compensation tribunal cases to those who cannot obtain them privately or do not qualify for legal aid. The FRU operates using a volunteering model so lawyers provide their time free of charge. However, the FRU can only be accessed by members of the public through a referral by an agency such as Citizens Advice, national law centres, or firms of solicitors. 8.43 The tradition of pro bono in the US legal community has led to a significant number of NGOs operating as referral organisations at the state level. Furthermore, almost 40 law schools require students to engage in pro bono or public service as a condition of graduation.

PHILANTHROPIC AND CHARITABLE FUNDING 8.44 High-net-worth individuals and charitable foundations offer a further source of litigation funding that is most often associated with ‘impact’ litigation. The overarching aim for such funding often seeks to use the court system to effect societal change.43 This type of funding is therefore by a degree of nuance distinct from charitable funding for pro bono organisations. In the case of the former, funds are used for the payment of representation and advice. In the case of the latter, funds are used to maintain organisations that operate to connect litigants with lawyers providing representation and advice on a voluntary basis.

42 Advocate was founded as the Bar Pro Bono Unit in 1996 by Peter Goldsmith QC and started with only 350 volunteer barristers. 43 The terms ‘philanthropic funding’ and ‘charitable funding’ are treated identically in this section.

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Philanthropic and charitable funding 8.48

8.45 Unlike other forms of funding, philanthropists’ primary objective is not usually the reimbursement of costs or investment returns. Instead, funding is targeted on matters that have the ability to provide justice for communities or societal groups who are otherwise unable to source funding or where organisations cannot afford to pursue costly litigation. Consequently, philanthropic funding is more aligned with funding sources that aim to increase access to justice (such as pro bono). In such circumstances, high-net-worth individuals and charitable foundations may be incentivised to step in and fund a litigant’s claim. Technological advances have also enabled the public to donate philanthropically on crowdfunding platforms, extending sources of philanthropic funding beyond a jurisdiction’s borders. Although crowdfunding can be used to fund litigation with a view to generating a return, it is also possible for people to offer their financial support for a cause or project without seeking any return. 8.46 In recent years, impact litigation has generated positive media coverage but has also been referred to as ‘a continuation of politics by other means.’44 However, philanthropists’ reasons for funding litigation may also take a more altruistic form in line with the following case studies.

Anti-tobacco litigation 8.47 One example of altruistic philanthropic funding is the US $4 million ‘Anti-Tobacco Trade Litigation Fund,’ set up by Bloomberg Philanthropies and the Bill & Melinda Gates Foundation in 2015 and managed by the US-based not-for-profit ‘Campaign For Tobacco-Free Kids.’ Its aim is to help low- and middle-income countries defend themselves against lawsuits relating to alleged breaches of international trade and investment agreements with tobacco companies. These companies have threatened lengthy and costly litigation with the intent of discouraging countries from enacting or implementing life-saving tobacco control laws such as the introduction of plain packaging and larger pictorial warnings on cigarette packs. Bill Gates, outlining the rationale for his foundation’s contribution to the Fund, stated: Country leaders who are trying to protect their citizens should not be deterred by threats from huge tobacco companies.

8.48 Adopting a similar model to contingent legal advice funds, access to the Anti-Tobacco Trade Litigation Fund was conditional on a country meeting predetermined conditions including:

•

The importance of the issue’s resolution to both the specific low- or middleincome country, and to other countries that are considering similar action;

•

The legal defensibility of the tobacco control measure being challenged;

44 Schuck P  (2006) Meditations of a Militant Moderate Lanham, Md.: Rowman & Littlefield, p 103.

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8.49  Other methods of financing litigation

• • •

The probability of success on the merits to an international trade challenge; The size of the population that will benefit from the law; and The commitment of the government to tobacco control and to participating fully in the defence of the measure being challenged.45

8.49 The Fund also stipulated that proceeds could only be used in the defence of a case and for expenses directly related to the conduct of the litigation such as legal fees and costs, expert fees and other litigation related costs.46 The conditions of the Fund’s use therefore serves as an example for how litigants’ behaviour can be influenced and how philanthropists can exercise control over litigants applying to use their funds.

Voting rights litigation 8.50 The State Infrastructure Fund in the United States serves as an example of a philanthropic fund that supports litigation to challenge unconstitutional barriers to voting. The fund was set up by NEO Philanthropy, a US-incorporated 501(c)(3) public charity committed to building strong social justice movements. To date, the fund has supported a number of nonpartisan organisations in litigation to promote voting rights throughout the United States and has been involved in multiple pieces of litigation through its grants.47

Immigration litigation 8.51 Borealis Philanthropy, a philanthropy intermediary, serves as a further example through its management of the Immigration Litigation Fund (ILF). The ILF operates throughout the United States to ensure fairness in the immigration enforcement system through litigation and to protect the civil and human rights of those vulnerable to deportation. In line with other philanthropic funders, ILF believes ‘that litigation is an essential tool in achieving public policy and social change on immigration issues’.48 The Fund focuses support on impact litigation that challenges discriminatory, unlawful, and overly punitive immigration enforcement policies. The ILF has awarded US $8.8 million to 128 grantees since 2017 for litigation challenging the Muslim Ban and the termination of the Deferred Action for Childhood Arrivals, ending Immigration and Customs 45 See Campaign for Tobacco-Free Kids – the Anti-Tobacco Litigation Fund. Available online: https://www.tobaccofreekids.org/what-we-do/global/legal/trade-litigation-fund 46 Ibid. 47 See NEO Philanthropy’s State Infrastructure Fund Supports Seven Litigation Wins for Voter Rights. Available online: https://neophilanthropy.org/neo-philanthropys-state-infrastructurefund-supports-seven-litigation-wins-for-voter-rights/ 48 See Background on Immigration Litigation Fund. Available online: https://borealisphilanthropy. org/grantmaking/immigration-legal-strategy-support-fund/ (last accessed: 10 April 2020)

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‘Revenge’ funding 8.52

Enforcement arrests near courthouses, preventing abusive conditions in immigrant detention facilities, and defending asylum protections for survivors of domestic violence.49 The ILF is also an example of a fund backed by multiple charitable organisations and philanthropists.50

‘REVENGE’ FUNDING 8.52 In contrast, there has been a ‘growing discontent’ with established doctrines of champerty and maintenance in recent years, which have been practical bars to the expansion of litigation funding.51 As one author has described, jurisdictions strictly enforcing these doctrines agree that courts should not uphold funding agreements that permit funders to meddle in the management and strategy of litigation.52 That is allied with rules applicable to lawyers that demand the exercising of professional and independent thought that is free from any consideration other than the best interests of the client.53 The two accepted motivations for funding litigation are to (i) seek investment returns or (ii) promote access to justice. However a third ‘revenge’ form of funding, exhibited in Bollea v Gawker Media,54 disrupts the accepted spectrum of funders’ motivations and renews considerations of these legal doctrines and ethics. In short, revenge funding describes a party’s personal interest to inflict damage on a defendant by funding a litigant who has a legitimate claim against the same defendant.

49 See Immigration Litigation Fund seeks applications from organisations challenging injustices in immigration enforcement. Available online: https://borealisphilanthropy.org/immigrationlitigation-fund-seeks-applications-from-organizations-challenging-injustices-in-immigrationenforcement/ 50 The ILF is a collaborative effort of the Ford Foundation, JPB Foundation, NoVo Foundation, Open Society Foundations, Reis Foundation, and anonymous donors. 51 Steinitz (2011) Whose Claim Is this Anyway? Third-Party Litigation Funding 95  MINN. L. REV. 1268, 1275–76. 52 Chipi (2017) Eat Your Vitamins and Say Your Prayers: Bollea v. Gawker, Revenge Litigation Funding, and the Fate of the Fourth Estate 72  U. Miami L. Rev. 269. Available at: http:// repository.law.miami.edu/umlr/vol72/iss1/7 53 See, Model Rules of Professional Conduct (American Bar Association), r. 5.4(c) (‘A lawyer shall not permit a person who recommends, employs, or pays the lawyer to render legal services for another to direct or regulate the lawyer’s professional judgment in rendering such legal services.’); see also ibid. at r. 1.8(f) (‘A lawyer shall not accept compensation for representing a client from one other than the client unless: (1) the client gives informed consent; (2) there is no interference with the lawyer’s independence of professional judgment or with the client-lawyer relationship…’). See also Solicitors Regulation Authority Code of Conduct R.3.1 (‘You only act for clients on instructions from the client, or from someone properly authorised to provide instructions on their behalf. If you have reason to suspect that the instructions do not represent your client’s wishes, you do not act unless you have satisfied yourself that they do. However, in circumstances where you have legal authority to act notwithstanding that it is not possible to obtain or ascertain the instructions of your client, then you are subject to the overriding obligation to protect your client’s best interests’). 54 129 So.3d 1196.

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8.53  Other methods of financing litigation

Bollea v Gawker Media 8.53 In December 2012, Terry Gene Bollea (professionally known as the wrestler Hulk Hogan) sued Gawker Media for invasion of privacy, violation of the Florida common law right of publicity and emotional distress following the publication of a sex tape.55 In March 2016, Bollea was awarded US $115 million in compensatory damages and a further US $25 million in punitive damages.56 The decision and the financial toll of litigation led to Gawker Media filing for bankruptcy protection under chapter 11 of the US Bankruptcy Code in August 2016.57 8.54 In May 2016, the New York Times published an interview with Peter Thiel, a well-known entrepreneur and venture capitalist, who acknowledged paying US $10 million in legal expenses to fund lawsuits against Gawker Media (including Bollea’s claim). Thiel’s reason for funding Bollea and others stemmed from a 2007 article published by Gawker Media entitled ‘Peter Thiel is totally gay, people.’58 Thiel expanded on his motivations, stating: I saw Gawker pioneer a unique and incredibly damaging way of getting attention by bullying people even when there was no connection with the public interest. I can defend myself. Most of the people they attack are not people in my category. They usually attack less prominent, far less wealthy people that simply can’t defend themselves … even someone like Terry Bollea who is a millionaire and famous and a successful person didn’t quite have the resources to do this alone. [It is] one of my greater philanthropic things that I’ve done. I think of it in those terms.59

The courts as a weapon 8.55 The Bollea case indicates that litigation and courts can be used as a weapon to settle vendettas by causing financial or irreparable harm to a party. 55 See Bollea v Gawker Media, LLC  913  F. Supp. 2d 1325, 1327 (M.D. Fla. 2012). See also https://assets.documentcloud.org/documents/2111332/hogans-amended-complaint.pdf 56 See Hulk Hogan Awarded $115 Million in Privacy Suit Against Gawker New York Times, March 2016. Available online: https://www.nytimes.com/2016/03/19/business/media/gawkerhulk-hogan-verdict.html. See also Jury Tacks On $25 Million to Gawker’s Bill in Hulk Hogan Case New York Times, August 2016. Available online: https://www.nytimes.com/2016/03/22/ business/media/hulk-hogan-damages-25-million-gawker-case.html 57 See Gawker files for Chapter 11 bankruptcy Financier Worldwide, August 2016. Available online: https://www.financierworldwide.com/gawker-files-for-chapter-11-bankruptcy#.XpXPzP1Kipo 58 See Peter Thiel Is Totally Gay, People Gawker, December 2007. Available online: http:// gawker.com/335894/peter-thiel-is-totally-gay-people See also, Nick Denton, An Open Letter to Peter Thiel, Gawker, May 2016. Available online: http://gawker.com/an-open-letter-to-peterthiel-1778991227 59 See Sorkin Peter Thiel, Tech Billionaire, Reveals Secret War With Gawker New York Times, 2016. Available online: https://www.nytimes.com/2016/05/26/business/dealbook/peter-thieltech-billionaire-reveals-secret-war-with-gawker.html

224

‘Revenge’ funding 8.57

On one view, litigation funding cannot cause that harm in and of itself. A court must find a party liable for the damage alleged to have been caused by it, award damages and have the decision upheld in any appeal.60 Consequently there is a view that revenge funding is only effective where the underlying claim has sufficient merit, the absence of which would cause dismissal and potential sanctions for claimants and their advisers should the claim be categorised as frivolous.61 These views, in concert with existing ethical rules governing legal practice, arguably serve to negate any contravention of (or need for) champerty and maintenance laws.62 8.56 Revenge funding need not be limited to one piece of litigation – a funder can also employ a strategy of ‘death by a thousand cuts’ by funding any party with a claim against the funder’s target.63 Thiel’s approach to Gawker was comparable with the latter; though Thiel’s backing of any particular case is unconfirmed, the firm he paid to represent Hogan has sued Gawker at least five times since 2013 and Thiel has admitted that Bollea was not the sole beneficiary.64 In jurisdictions where parties must pay their own legal costs (such as the United States) this tactic can cripple a defendant. Similarly, even in jurisdictions where the unsuccessful party pays, the risk of financial ruin remains for targeted defendants given that: (i) cost recovery only occurs at the conclusion of the claim (unless settled) and can contribute towards cash flow insolvency; and (ii) costs are never entirely recovered and hence the aggregate shortfalls in cost recoveries may have a material impact on a defendant’s financial position. In the period after the May 2016 article uncovering Thiel’s involvement in the Bollea case, commentators stated that as long as Thiel was willing to leverage the legal system as a means of bleeding Gawker’s finances, his eventual victory through revenge funding was certain.65 8.57 Revenge funding is likely to face resistance where a funder stirs litigation or has control of the strategy and has, as a result, likely breached the doctrines of champerty and maintenance.66 In practice, this argument is likely to arise where

60 See Peter Thiel’s Funding of Hulk Hogan Gawker Litigation Should Not Raise Concerns Wall Street Journal, May 2016. Available online: www.washingtonpost.com/news/volokhconspiracy/wp/2016/05/26/peter-thiels-funding-of-hulk-hogan-gawker-litigationshould-notraise-concerns/?utm_term=.1c3319353f24 61 The firm Thiel paid to represent Hogan has sued Gawker at least five times since 2013. See Sorkin Ibid. 62 See Burford Capital Litigation Finance Is Not Champerty, Maintenance or Barratry 30 July 2013. 63 Lili Levi (2017) The Weaponized Lawsuit Against the Media: Litigation Funding as a New Threat to Journalism 66 AM. U. L. REV. 761, 785. 64 Mac and Drange Hulk Hogan’s Lawyers Have Made Suing Gawker Their ‘Bread and Butter’’ Forbes, May 2016.Available online: www.forbes.com/sites/mattdrange/2016/05/30/peter-thielhulk-hogan-lawyers-charles-harder 65 See Chipi (2017). Eat Your Vitamins and Say Your Prayers: Bollea v. Gawker, Revenge Litigation Funding, and the Fate of the Fourth Estate. 72 U. Miami L. Rev. 269 at p 299. 66 See Charge Injection Techs., Inc. v E.I. Dupont De Nemours & Co., C.A. No. 07C-12-134-JRJ, (Del. Super. Ct. Mar. 31, 2015).

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8.58  Other methods of financing litigation

the funder has approached the litigant, as opposed to the more orthodox situation in litigation funding where the litigant approaches the funder. 8.58 Revenge funding undoubtedly disrupts the current model of litigation funding. On one view, it is a means for vindictive individuals to weaponise torts and drive targets to financial hardship. It may also be used as a method by predatory corporates to weaken potential acquisition targets, particularly if capital or reputation is not of concern to the revenge funder. Theoretically, a company that holds valuable intangible assets (such as intellectual property or real estate) may be a target for revenge funding. The aim of revenge funding could also be to divert customers and revenue away from a party to influence market share and prospects for other market participants. Such funding, while not borne out of revenge, exhibits many similar traits to revenge funding. 8.59 Consequently, litigation funding can no longer be seen as only limited to where ‘access to justice’ demands it or where input capital is an issue. Revenge funding in the future is likely to follow the framework of Peter Thiel – an individual (as opposed to a company) using their wealth to attack a target by funding a litigant’s claims. Media companies, as in this case, are likely targets of abusive litigation tactics. Other wealthy individuals may also be targets and hence, left unchecked, this form of funding could result in further headlines and a reassessment of funding rules and regulations.

226

PART C

Insurance Christian Toms Partner, Brown Rudnick LLP, London

BTE insurance ATE insurance Other uses of insurance

8.64 8.72 8.83

8.60 The role that insurance can and does play in the sphere of litigation financing manifests in a variety of different forms. Set out below is a discussion of the most common examples currently seen in the market. 8.61 First, there is the support and protection that may be afforded to a party by the different kinds of legal expenses insurance (LEI) policies that individuals and organisations may choose to invest in as a precautionary measure. These are sometimes referred to collectively as before-the-event (BTE) insurance, as these policies will have been taken out ‘just in case’ and usually long before legal proceedings were ever in contemplation. These can cover some or all of an insured party’s potential cost liability in a legal dispute. 8.62 Second, other types of LEI policies can be taken out by litigating parties specifically in order to provide protection against adverse costs orders, ie  the costs incurred by a successful party in bringing, and in some circumstances defending, litigation which at the end of a matter the losing party (the insured) is ordered by a court/tribunal to reimburse to the successful party. These types of LEI policies are frequently used in conjunction with litigation financing arrangements that litigating parties may enter into with other, third parties for the provision of direct funding of litigation and arbitration claims (ie  finance sourced from those without a direct interest in, and often with no connection at all to the immediate dispute or any of the parties). These types of LEI insurance policies are perhaps predictably labelled after-the-event (ATE) insurance, being as they are purchased after the inception of a legal dispute. Naturally, given the issue they are designed to address, ie adverse costs, the use of ATE insurance is most prevalent in jurisdictions such as England and Wales which operate on a ‘loser pays’ model of court litigation, as opposed to US jurisdictions like New York where it is more typical that each party will bear their own costs, win or lose. ATE is, however, also increasingly becoming a feature of international arbitrations. 227

8.63  Other methods of financing litigation

8.63 Third, either alongside or independent of a bespoke third-party financing arrangement, insurance also can be leveraged directly by law firms and lawyers to insure and therefore protect some or all of their own WIP (work-in-progress hours that subsequently would be billed to a client). In basic terms the strategy enables lawyers: (i) to offer clients significantly reduced or effectively a ‘no win no fee’ deal on the one hand, while at the same time (ii) ensuring that a significant proportion of the lawyer’s fees that are otherwise expected to be incurred are insured, and therefore will be recouped even in the event that the underlying litigation is unsuccessful.

BTE INSURANCE 8.64 BTE insurance is understood to have been available for purchase in England and Wales for almost 50 years.67 Typically it takes the form of an arrangement whereby in return for an insured party paying an annual (or monthly) premium, BTE provides cover for the cost of legal advice and any other related fees and costs likely to arise should the insured party find themselves in need of legal representation at some point in the future, whether as claimant or defendant.68 Such cover may extend both to the legal costs of the insured policy holder and an element of the other side’s costs if these are also required to be paid by the insured party. 8.65 There are, however, usually limitations placed on the scope of a BTE policy as well as specific requirements that are imposed on the insured in the event of a claim. For example, aside from obvious express limits on the amount and nature of any cover afforded, insurers will often impose a minimum claim threshold, and will reserve the right to scrutinise the chances of success as well as the ratio of potential recoveries proportionate to the likely financial outlay. In practice, this allows for cover in financially unfavourable scenarios to be refused. Similarly, if an insured allows too much time to pass before seeking cover this too can be a basis for cover being denied. Additionally, insurers are often specific in which lawyers are to be appointed to act, as their pre-negotiated panel rates will usually be the most economic for the insurer; this latter issue sometimes finds itself butting up hard against what is argued to be a litigant’s freedom to otherwise choose their representation.69 8.66 BTE protection can sometimes be found bundled with business insurance policies, and it is often included as an optional or even ‘free’ add-on to specific retail and domestic insurance policies such as car, home, credit card and travel insurance products. These latter types of policy accordingly would be called 67 R Lewis (2011) Litigation Costs and Before-the-event Insurance: The Key to Access to Justice? 74 MLR 272, 278. 68 PM Law Ltd v Motorplus Ltd [2016] EWHC 193 (QB), para 6. 69 This issue is discussed at some length in Section I, The Law and Practicalities of Beforethe-Event (BTE) Insurance, Civil Justice Council, November 2017 (the ‘CJC  Report on BTE 2017’).

228

BTE insurance 8.68

upon to fund legal costs in the context of matters such as property disputes; car accidents, which depending on the severity might involve not only issues of vehicle damage but also contested personal injury claims; and smaller claims arising from alleged defects in purchased goods and/or a specific supply of goods and services. 8.67 However, while BTE insurance might consequently be deemed more readily accessible and available to individual consumers because of the variety of domestic and consumer policies that are taken out each year it is in reality far from widespread, and relatively speaking the uptake of BTE policies remains even less prevalent amongst companies, and particularly so amongst what are typically labelled SMEs (small and medium-sized enterprises). In 2009 the take up of BTE by SMEs and consumers in England and Wales was identified as warranting specific attention by (then) Lord Justice Rupert Jackson as part of his comprehensive and wide-ranging review of the costs of civil litigation.70 One of his findings was that greater access to BTE was likely something that could practically assist in the promotion of access to justice.71 The point made in reply by the Federation of Small Businesses was that they did not disagree, but often the issue for SMEs and even some larger businesses was the expense of acquiring such policies. This position remained largely unchanged some eight years later when the uptake of BTE was again examined, this time by the Civil Justice Council: Stand-alone BTE policies for businesses (whether for big business, SMEs or micro-businesses) are still less common in this evolving market. No doubt there are several reasons for this: (1) some businesses will have ‘in-house’ legal departments; (2) some businesses may prefer to pay for legal costs and disbursements as and when they arise, for which they have budgeted a certain legal expenses budget, rather than lay off those expenses to a BTE  Insurer; or (3) BTE insurance policies may be perceived as being quite expensive by small business enterprises.72

8.68 Notwithstanding, it is increasingly becoming a key plank of many companies’ risk management strategies for them to invest in specific insurance cover for the potential legal costs of claims that might arise from the actions of their directors and officers, ie Director and Officers Insurance (commonly abbreviated to ‘D&O insurance’ or a ‘D&O policy’). Unlike other policies of insurance that might be taken out by a business in order to cover specific losses that might be foreseen could arise in the course of a business (eg as a consequence of business interruption; the value of a lost ship or other key transport vehicle; and/or theft/ fraud of business assets by an employee), a D&O policy is more akin to BTE insurance. However, D&O insurance is not necessarily a standalone protection, being primarily designed to sit alongside existing protections and indemnities 70 Lord Justice Rupert Jackson, Review of Civil Litigation Costs: Final Report, December 2009 (the ‘Jackson Report 2009’). 71 Ibid. paras 4.6 and 7.1. 72 CJC Report on BTE 2017 p 106.

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8.69  Other methods of financing litigation

provided to directors and officers by a company. It is there to provide a source of external funding in the event that claims are made because of decisions and actions taken by company directors and senior officers/managers. 8.69 D&O insurance can cover a variety of different claims made by third parties, including creditors and shareholders (both in and outside an insolvency context), as well as those pursued by regulators (eg the UK Financial Conduct Authority, the US Securities and Exchange Commission) and crime enforcement agencies (e.g. Serious Fraud Office, Department of Justice). Not only are the legal fees and related costs of defending such proceedings covered under the insurance, but compensation costs may also be covered in the event that the company/director loses the insured claim. As to who or what may benefit, in addition to safeguarding the personal liability of the directors and/or officers who might be the subject of an action, a D&O  policy may also extend to the reimbursement of the insured company itself in the event that: (a) it needs its own legal representation and advice in the context of any action; (b) it too is targeted as a party to a third-party claim, which often will be the case; and/or (c) is itself required to pay out damages in the context of a claim. 8.70 Unsurprisingly, in relation to cover under a D&O policy here too there are often stringent limits and requirements that need to be met for an insured party to be able to call upon a policy. For example, first, cover is typically granted on a ‘claims made’ basis. In other words, claims will only be eligible for cover under a policy if they are made while the D&O policy is in effect, or still within a contractually agreed, extended reporting period after a policy comes to an end, ie what is sometimes termed ‘tail’ coverage, or a ‘run-off’ period in a mergers and acquisitions context. Second, claims are often required to be notified to an insurer within a specified window following the claim coming to the attention of the insured party. A failure to comply with this requirement again risks the loss of insurance protection. Third, there is typically a minimum level of claim to trigger the policy, as well as a finite amount of cover ultimately made available. Once this pot is exhausted there is then no further recourse to the insurer. Fourth, cover is typically only valid where the complained of decisions or actions are within the scope of the insured director’s regular duties. Accordingly, any matters arising from fraudulent or criminal acts will not usually qualify for funding by an insurer. Additionally, in the event that a funded defence results in findings of criminal wrongdoing on the part of an insured party, an insurance policy may then provide for any fees paid out under the policy to be reimbursed by (or ‘clawed back’ from) the insured party. This is on the basis that if the true position had been known at the outset, then that party would not have been entitled to benefit from any cover. 8.71 Finally, just as with other BTE policies already discussed, another key factor to be aware of in the case of D&O insurance is that as the insurance company will in effect be paying any funding and losses itself, it will often be subrogated to the claim. This means that in effect it will take over conduct of the claim, or at the very least will play a significant role in its conduct, including the approval of legal teams or at least their rates (again potentially with specific ‘panel’ lawyers that an insurer will prefer to use), case budgets, and any settlement offers. 230

ATE insurance 8.75

ATE INSURANCE 8.72 Another form of LEI which is frequently used in the context of funded litigation and arbitration is ATE insurance. Like BTE, in return for payment of a premium ATE also provides cover for costs incurred in bringing, and in some circumstances defending, claims. The key difference is that ATE is purchased after the inception of a legal dispute, and generally only protects the claimant from potential exposure to adverse costs (ie those of the other party) associated with litigation and arbitration;73 it does not cover a party’s ‘own’ costs liability (although in some instances it might be possible to pay additional premiums to secure such cover). The whole concept of ATE is that the risk of having to pay the other side’s legal fees in the event of a loss is reduced or removed entirely. 8.73 ATE first rose to prominence in England and Wales in 1995,74 when alongside the introduction of lawful conditional fee agreements,75 ATE was recognised as the mechanism whereby claimants could insure themselves against adverse costs risk. Initially ATE premiums were financed by the claimant through a reduction in damages, but the rules were changed in 199976 to make the ATE premium recoverable from the losing defendant. 8.74 However, this did not remain the norm for too long, and following implementation of the civil litigation reforms proposed by (then) Lord Justice Rupert Jackson,77 the current position is that ATE premiums are now no longer recoverable from the opposing party in the case of policies entered into (a) on or after 1 April 201378 in mainstream litigation, and (b) in the case of policies entered into on or after 6  April 201679 for insolvency-related litigation. As a result, insured parties now have to bear the cost of any ATE premium themselves in some form, though in some circumstances a litigation funder may agree to cover this element and bundle it with their finance package or a solicitor’s firm may agree to pay and then charge this back to the client as a disbursement. 8.75 The key role that insurance (and ATE in particular) often plays in disputes is underlined by the enhanced duties increasingly seen to be placed on lawyers to ensure that appropriate and timely advice on such matters is given to clients. For example, in England and Wales,80 lawyers must ensure they take care to advise all 73 PM Law Ltd v Motorplus Ltd [2016] EWHC 193 (QB) at para 6. 74 The Conditional Fee Agreements Order 1995, SI 1995/1674; the Courts and Legal Services Act 1990. 75 Whereby a lawyer was now able to agree a success fee or uplift over and above their usual hourly rates, payable in the event of a successful outcome, in exchange for placing a percentage of their usual rates ‘at risk’ during a matter. Should the litigation be unsuccessful, the ‘at risk’ percentage would never be paid. 76 The Access to Justice Act 1999. 77 The Jackson Report 2009. 78 Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO) s 46. 79 Legal Aid, Sentencing and Punishment of Offenders Act 2012 (Commencement No. 12) Order 2016, SI 2016/345 art 2. 80 The updated SRA Handbook, incorporating the EU Insurance Distribution Directive (EU) 2016/97.

231

8.76  Other methods of financing litigation

clients on the available funding options available to them for their disputes, and these can include not only third-party litigation financing arrangements and ATE insurance, but also the extent of cover under any existing BTE policies the client may have the benefit of. The duty also extends to advising where in fact no cover is in place, thereby leaving potential exposure to adverse costs unprotected. The guiding principle that governs these and related duties is that a lawyer must ensure they have discharged their duty to put a client in as informed a position as possible so as to enable that client to make informed decisions about how most effectively to manage their fee liabilities, particularly in contentious matters. Should a lawyer fail to advise a client as to the existence or availability of ATE, this has been found to amount to a ‘gross breach’ of that duty, leading the relevant client to be deemed unable to take effective decisions, and accordingly the solicitor to be acting without instructions.81 Aside from what one must assume to be a quite considerable risk of lability in negligence to the client, the lawyer also runs the risk of being landed with liability for any cost orders made against the client. 8.76 As things stand, however, an ATE premium can be a relatively high cost item when bringing a claim. There are, though, several different approaches that parties may adopt, some of which can help to soften any financial impact. Naturally the traditional and potentially most expensive option is likely to be paying a one-off premium upfront. This though is not so attractive where a case is viewed as being prime for an early or even mid-way settlement. Alternatively, in some circumstances ATE cover can be staggered, ie payable at certain agreed phases of a dispute, or indeed a premium can be deferred altogether until the conclusion of a dispute. It is also worth noting that ATE also does not necessarily need to be bought straight away, and technically can be arranged at any stage of the litigation, though perhaps unsurprisingly the level of costs and difficulty in obtaining cover is likely to increase the later the stage of any litigation. Finally, another possibility is for a premium not just to be deferred but also to be made contingent on the outcome of a matter, ie it is effectively agreed that a premium is payable only in the event of success. However, some forms of deferred or contingent deals can see the ATE insurer becoming much more involved in a matter, potentially even as a party to and having wider input into the broader litigation financing arrangements, including any risk-sharing arrangements as between the various parties, including the lawyers. As part of such an arrangement an insurer may also seek a right not only to participate in any recovery on a successful outcome, but also to play a broader role in the litigation; for example, in the approval of any settlement figure. 8.77 Other issues to bear in mind in the context of ATE is that at the outset insurers will often require their own, independent assessment of the merits of a case before agreeing cover. While this exercise can have its advantages, as it represents another pair of eyes which has reviewed and approved the merits, typically the exercise will be funded by the party applying for the policy, thereby further increasing the initial cost burden. Based on this merits analysis there may 81 Adris v Royal Bank of Scotland plc [2010] EWHC 941(QB).

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ATE insurance 8.81

then be a merits threshold built into the policy (eg 60 per cent), the purpose and effect of this being that should the merits of a case be considered to fall below this prescribed threshold level at any point, the ATE will be vulnerable to withdrawal. 8.78 While ATE insurance may be available to both claimants and defendants, it is not necessarily always appropriate, and not just given its perceived cost. For example, given the issue it is designed to address it is most typical in highvalue English court litigation and domestic arbitrations where the cost-shifting ‘loser pays’ model is applied, although it is increasingly becoming a feature of international arbitration in the wake of cost awards being made against some unsuccessful parties, and particularly the prospect of awards including the costs of litigation financing.82 However, while the use of ATE tends to be most prevalent in the larger and more complex matters, as already noted above, ATE insurance will in almost every instance necessarily be limited to an estimated, specific amount, and for economic reasons (both as to the insurer’s balance sheet capacity and the economics of premiums) the level of cover may have a necessary ceiling. This, therefore, may limit its practical usefulness in the largest and heaviest disputes where there are multiple defendants and/or costs have been seen to run into the tens to hundreds of millions. 8.79 ATE insurance can be particularly useful, if not sometimes essential, to support claims being pursued in an insolvency context. While on the one hand officeholders (administrators, liquidators, etc.) have a duty to explore all potentially meritorious claims, typically they will also be faced with an empty war chest and a need to limit any downside cost risk for both themselves and on behalf of the insolvent estate. In some circumstances the absence of creditors willing and able to fund proceedings and/or to indemnify the officeholder, may mean that third-party funding is the only prospect for successfully mounting any kind of claim, and therefore ATE may also form an essential part of any package in order to provide protection against the risks of adverse costs. 8.80 There are also other potential benefits that can sometimes be obtained from a policy of ATE, ie in addition to the obvious cost protections. For example, where there is disclosure of the existence of ATE insurance to the other side in a dispute, this can sometimes encourage that other party to be more inclined to come to the table and discuss settlement. This effect is attributed to the commonly understood cost and time commitment involved in arranging ATE cover, and the independent scrutiny that insurers tend to want to apply before agreeing cover. All of this, therefore, tends to indicate to the other party: (a) that the insured are themselves fully committed to pursuing the litigation to completion; and (b) that a third-party insurer has analysed the merits for itself and agreed to provide insurance against an unsuccessful outcome. 8.81 Another advantage of ATE can also arise in the context of security for costs. While security for costs is dealt with in detail elsewhere in this publication, 82 Essar Oilfields Services Ltd v Norscot Management Pvt Ltd [2016] EWHC 2361 (Comm).

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8.82  Other methods of financing litigation

it is perhaps relevant just to note that here too ATE can play a useful and potentially essential role in the support of financed litigation, and again particularly so in the context of litigation in an insolvency context. 8.82 While there is no absolute rule as to when ATE will or will not be sufficient to satisfy an order for security for costs, and such an order must be complied with if proceedings are to be allowed to proceed any further, the Court of Appeal has previously confirmed that an appropriately framed ATE insurance policy can in theory satisfy an application for security.83 The substantive question though is whether the insurance gives ‘sufficient protection’ to a defendant for the claimant failing to meet a future adverse costs order. Accordingly: (a) where a policy contains specific provisions, or there are other issues that could or might entitle an insurer to avoid or cancel a policy; and/or (b) there may be a risk that any proceeds of an ATE policy might not ultimately become available to the insured, eg if the claimant became insolvent,84 such factors will likely mean that a policy is not going to be deemed to provide sufficient protection for a defendant, and therefore will not satisfy an order for security for costs. On the other side of this argument, however, where there is adjudged to be only a low risk of ATE cover being avoided or similar, then while the ATE policy alone may still be deemed insufficient overall, the amount of any additional security may very well be set at a lower level commensurate to the ATE policy coverage in recognition of the potentially limited risk.85 On the same basis, where ATE insurance can be said to be accompanied by a deed of indemnity from an insurer, an ATE policy may be deemed to be adequate security.86 The point has also been made, albeit in a group litigation context,87 that given their very nature and purpose, ATE policies will rarely be designed to provide sufficient protection to defendants against the risk that costs orders would go unpaid. It therefore remains an open question as to whether such matters might be considered and potentially rectified by funders and insurers in the future, thereby making ATE a far more effective tool in the context of security for cost applications.

OTHER USES OF INSURANCE 8.83 In recent years, options have been developed which have seen lawyers and some third-party funders seek to directly leverage insurance as a tool to further facilitate finance for otherwise meritorious claims. 8.84 While there may be various permutations of the possible arrangements, in basic terms the strategy is designed to protect a significant portion (typically around 50 per cent) of a lawyer’s investment in a client’s litigation claim (ie their 83 Premier Motorauctions Ltd (in liquidation) and another v Pricewaterhousecoopers LLP [2017] EWCA Civ 1872. 84 Catalyst Managerial Services v Libya Africa Investment Portfolio [2017] EWHC 1236 (Comm). 85 Bailey and others v Glaxosmithkline UK Ltd [2017] EWHC 3195 (QB). 86 Recovery Partners GB Ltd and another v Rukhadze and others [2018] EWHC 95 (Comm). 87 Rowe and others v Ingenious Media and others [2020] EWHC 235 (Ch) (10 February).

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Other uses of insurance 8.88

fees), thereby enabling a lawyer to offer potentially more advantageous terms to their clients, particularly those clients who may have less immediate access to funds to regularly pay a lawyer their full fees through to the end of a case. This is in some instances referred to as WIP insurance. 8.85 In practice, this type of arrangement allows a lawyer to offer their client either: (a) a significantly reduced fee rate in exchange for a success fee/uplift; or (b) an effectively one hundred per cent contingent fee deal (ie  no win, no fee) in return for the lawyers obtaining an entitlement to share in a percentage of the client’s eventual proceeds of a success (eg 1 to 50 per cent of the total amount recovered). In either scenario the client is clear that they will bear a capped or zero liability to the lawyer unless there is a win, with their maximum upside exposure to the lawyer on the no win, no fee arrangement always being proportionate to the total amount recovered. 8.86 At the same time, the lawyer agrees a policy of insurance with an insurer/ third-party funder so that a significant proportion of the lawyer’s fees that are expected to be incurred are protected. An insurer/funder may do this in exchange for a premium and/or in return for a share of the lawyer’s contingent payment from the client on a win. Accordingly: in the event of a success the client receives its damages and pays its lawyer its uplift/share, with the lawyer and the funder/ insurer receiving payment from any amounts paid to the lawyer; and in the event of a loss the client pays nothing, the funder/insurer may be entitled only to any agreed premium (although in some instances the premium can also be agreed as contingent), but the law firm receives a payment from the funder/insurer equal to that element of its fees it had agreed to insure. 8.87 However, depending on the case there may still remain key facets of any litigation finance relationship that would need to be addressed. For example: (i) ATE insurance may need to be considered in arbitration proceedings, and will probably be needed where proceedings are in a jurisdiction such as England and Wales. Given that any ATE policy would ultimately be for the benefit of the client, its specific terms and the responsibility for funding it would therefore require some thought; and (ii) the fees of experts and other parties unwilling or unable to agree a partially or fully contingent fee would also need to be funded. Such matters of course might be taken on by the lawyers, and then included in any insurance coverage strategy, perhaps under an additional element of any policy of insurance, but this necessarily increases a lawyer’s cost exposure and potentially also the complexity of the insurance arrangements. Alternatively, such expenses could be paid for out of a separate funding pot agreed with a third-party funder, but certainly in this latter instance there is then a risk of blurring the lines between client liabilities to the lawyer, the funder and any expert parties, etc. 8.88 Nonetheless, such developments are clearly an indication that as litigation finance markets mature and develop, parties will seek to deploy insurance in increasingly novel ways, both in support of and as a way of directly facilitating litigation financing arrangements. 235

PART D

Contingency and conditional fee agreements Ben Summerfield Partner, Reed Smith LLP, London

Emma Shafton Associate, Reed Smith LLP, London

Introduction 8.89 Conditional fee agreements in England and Wales 8.91 Damages-based agreements in England and Wales 8.99 Conditional and contingent fee arrangements in other jurisdictions 8.116 Conditional and contingent fee agreements and the funding market 8.125

INTRODUCTION 8.89 Colloquially known as ‘no win, no fee’ agreements, like thirdparty litigation funding, alternative fee arrangements such as conditional and contingent fee agreements provide financing for legal fees that allow litigants to fund litigation they would not otherwise have been able or willing to pursue. Such agreements are entered into between litigants and their lawyers and over the past two decades have become commonplace in numerous jurisdictions. 8.90 This section primarily focuses on alternative fee arrangements available in commercial cases88 in England and Wales with reference also to the United States, Australia and Canada (in most continental European countries pure conditional/contingency fees are generally prohibited).89

88 Alternative fee arrangements are widely used in personal injury and employment law claims. Specific rules apply in respect of personal injury claims in particular which are beyond the scope of this chapter. 89 Contingency fees are prohibited in Italy. They are permitted in Spain and Lithuania. Section 4a of the German Law on the Remuneration of Attorneys (RVG) permits a lawyer to work for a success-based fee but only if the client could not otherwise pursue the litigation due to their financial circumstances. In France, Austria and Switzerland it is possible to engage a lawyer on a contingency or success-fee basis combined with usual hourly rates or task-based fees.

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8.91  Other methods of financing litigation

CONDITIONAL FEE AGREEMENTS IN ENGLAND AND WALES 8.91 A conditional fee agreement (CFA) requires a client, whether claimant or defendant, to enter into a formal agreement with the lawyer providing for no or limited legal fees to be payable unless there is a defined successful outcome.90 If successful, an additional success fee may be paid to the lawyer out of the client’s damages, though the success fee is not recoverable from the other side.91 A success fee is an additional amount payable for the legal services which must be expressed as a percentage uplift on the amount that would be payable if there was no CFA in place (ie the usual contractual hourly rate). The maximum success fee cannot exceed 100 per cent of base rates, ie the ordinary cost of legal fees but for the agreement.92 8.92 There are a myriad of ethical issues lawyers must navigate when entering into such agreements, including potential conflicts between the client’s and lawyer’s interests where a law firm’s remuneration is conditional (or contingent) on the outcome of a case. Indeed, such arrangements were historically regarded as immoral and offending principles of champerty and maintenance; however, there was a change in attitude in the late 1980s prompted by a decreasing amount of government-funded legal aid for civil proceedings and resulting concerns about the impact on access to justice. CFAs have been permitted in England and Wales since 1995.93 8.93 A client will pay a different amount for legal services depending on the outcome of the case. If successful, all fees and expenses are payable as well as the optional success fee. Generally, no fees will be due to the lawyer in the event of a loss. As costs ‘follow the event’ under English law, prior to 1 April 2013 it was possible to recover the success fee from an unsuccessful opponent as part of the cost of litigation.94 8.94 CFAs are available to both claimants and defendants, irrespective of means, across English litigation and seated arbitration.95 There are three main types of CFA:

90 Statutory provision for CFAs was first made in the Courts and Legal Services Act (CLSA) 1990 s 58. 91 CLSA 1990 s 58(2)(b) and (c) (as amended by LASPO 2012 s 44. 92 Under the Conditional Fee Agreements Order 2013, SI 2013/689, the maximum uplift is 100% (art 3). In personal injury cases the maximum uplift is 25% at first instance (art 4). 93 CLSA  1990 s  58 was not implemented until the Conditional Fee Agreements Order 1995, SI 1995/1674, which permitted three particular types of proceedings, namely personal injury claims, insolvency matters and applications under the European Convention on Human Rights to be conducted under CFAs. The maximum permitted increase on fees would be 100%. 94 Sir Rupert Jackson (then Lord Justice Jackson) conducted a review of funding and procedure of civil litigation between 2008 and 2010, prompted by the ever-increasing costs of litigation. A number of reforms followed which became known as ‘the Jackson Reforms’. 95 CFAs are also available for employment tribunal and adjudication enforcement cases.

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Conditional fee agreements in England and Wales 8.97

(i) Classic CFA ‘no win, no fee’ – the lawyer receives nothing in the event of a loss, and fees plus any success fee in the event of a win; (ii) Discounted CFA – the lawyer receives a discounted percentage of their usual fees (eg 50 per cent) if the client loses, but full rate if it wins; and (iii) ‘CFA  Lite’ – ‘no win, no fee’ or discounted rates but the success fee is capped at the amount of the costs awarded or agreed as part of a settlement. 8.95 Generally, disclosure of the existence of a CFA is not required to the other party but matters relating to the agreement may be become relevant and disclosable in certain circumstances. Success fees, while optional, commonly form part of CFAs, and the level of the success fee is calculated by considering two elements: (i) The risk of losing the litigation (the risk element); and (ii) The cost of funding the litigation (the postponement element). 8.96 The payment of disbursements (expenses a solicitor has to pay out for services provided on behalf of a client) can also be made conditional on the outcome of the case. However, many law firms have a policy of never making disbursements conditional under a CFA because they do not want to run the risk of not being reimbursed for disbursements (which may include counsel and expert witness fees) if the client should lose. Law firms will usually make an exception for counsel’s fees if counsel has agreed that their fees will be subject to a separate CFA. A barrister may enter into a CFA with a solicitor or directly with a lay client under the public access scheme. The barrister and the solicitor will not necessarily seek the same level of success fee. When the solicitor bills the client that bill will include an amount in respect of counsel’s fees and any success fee due to counsel. Where not directly instructed by the lay client, counsel is only able to recover fees from the solicitor who is personally liable for them.96 8.97 Sir Rupert Jackson (then Lord Justice Jackson) conducted a review of funding and procedure of civil litigation between 2008 and 2010, prompted by the ever-increasing costs of litigation.97 A  number of reforms followed which brought about widespread changes to the funding regime for civil litigation (‘the Jackson Reforms’). A key change to CFAs entered into on or after 1 April 2013 was that the success fee was no longer recoverable between the parties, ie from an unsuccessful opponent (subject to a few exceptions).98 A similar reform was implemented as regards the recovery of ATE insurance premiums where the ATE premium was no longer recoverable from the other side, subject to the same few 96 Vos, White Book 2020, Part 2 Sweet & Maxwell, p 2365. 97 Review of civil litigation costs: Final report by Lord Justice Jackson December 2009. 98 Changes to the recoverability of success fees were brought into force by LASPO 2012 s 44, which came into force on 1 April 2013. Section 44 amended ss 58 and 58A of CLSA 1990. The exceptions are (i) claims for damages in respect of diffuse mesothelioma; (ii) publication and privacy proceedings before 6 April 2019; and (iii) insolvency proceedings (provided CFA entered into before 6 April 2016).

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8.98  Other methods of financing litigation

exceptions.99 The rationale behind the reforms was to curb disproportionate costs orders, whereby the losing party was subject to enormous liabilities to reimburse the winning party for these – thus ensuring fairness. 8.98 While most lawyers in England accept that ending the recoverability of success fees has reduced the costs of civil litigation and rebalanced the costs liabilities between claimants and defendants, some are of the view that an access to justice deficit had developed as some claimant lawyers now look for and require higher prospects of success before taking on a case under a CFA.100 Some claimant lawyers called for an overturn of the reform in order to protect claimants’ damages as the success fee is now payable out of the proceeds of the principal amount recovered in damages.101 The overarching conclusion of a 2019 implementation review was that the reforms had been successful in achieving their purpose and at the time of writing there are no plans to reverse them.102

DAMAGES-BASED AGREEMENTS IN ENGLAND AND WALES 8.99 A  more recently introduced concept is the damages-based agreement (DBA), akin to what most people understand as US-style plaintiff bar ‘contingency fee’ arrangements, whereby the lawyers’ agreed fee is contingent upon the success of the case and is determined as a fixed percentage of the damages received by the claimant client if successful.103 A lawyer assumes all of the risk of the client’s legal fees in the event of a loss. However, funding and insurance institutions have created products to enable the law firm to lay off the risk under a DBA (ie  of losing the case). This arrangement enables the law firm to recover some fees during the life of the case through a DBA insurance policy product obtained from the insurance market or by a separate funding agreement entered into between the law firm and a third-party litigation funder, in return for giving up a proportion of the success fee.104 A lawyer’s success fee under a DBA cannot exceed 50 per cent of the damages recovered by the client in commercial cases.105

99 LASPO s 46 repealed s 29 of the Access to Justice Act 1999 which provided for the recoverability of insurance premiums by way of costs. 100 Ministry of Justice (2019) Post-implementation review of Part 2 of LASPO: civil litigation funding and costs, p 4. 101 Ibid. p 17. 102 Ibid. 103 Following a Government consultation in 2009, the Coroners and Justice Act 2009 s 154 inserted a new s 58AA into CLSA 1990. This made statutory provision for the use of contingency fee agreements in employment matters and made provision for regulations to provide further detail. That detail was provided in the Damages-based Agreements Regulations 2010, SI 2010/1206. The 2010 Regulations were later replaced by the Damages-based Agreements Regulations 2013, SI 2013/609. 104 The insurance premium payable to the insurer is deferred and contingent upon recovery of the DBA payment by the law firm and is only payable from the DBA payment. This aligns the insurer with the law firm. Such policies are a relatively new innovation not believed to be widely taken up as yet. 105 A lesser cap applies in personal injury cases.

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Damages-based agreements in England and Wales 8.103

8.100 The key distinction between the two types of funding arrangements is that in a CFA a lawyer’s payment is linked to the costs incurred by the law firm representing the client (where the base cost element should be recovered from the losing party under a costs award if the matter proceeds to trial), whereas in a DBA the lawyer’s payment is linked to the damages awarded. This means that DBAs are thought to be a simpler and clearer concept for many clients to understand; if they win their lawyer will simply take a percentage of their damages as their fee versus the base fees and success fees used in CFAs.106 Further, in a contingency fee agreement, much more lucrative returns can be earned for the law firm. The success fee can be earned very early in the case before serious expenditure of legal fees. Paradoxically, in a CFA arrangement, law firm returns will depend on the number of hours worked on the case. Some clients would naturally prefer to incentivise the law firm to deliver a quick win, rather than being incentivised to deliver an outcome calculated on the basis of the fees incurred, even if the returns for the law firm are greater. 8.101 Like third-party litigation funding agreements, CFAs and DBAs are a risk-transfer mechanism, based upon an assessment of the merits of a case by the lawyer, where the interests of client and lawyer are aligned in the expectation of a profitable return. 8.102 Following the Jackson Reforms, DBAs were expanded to all civil litigation cases (subject to a few minor exceptions) as an alternative method of funding; in particular, following the removal of most legal aid for civil proceedings by the Access to Justice Act 1999.107 While DBAs can facilitate access to justice for prospective litigants who would otherwise be unable to afford to pay their legal fees, even where a client does have the means to pay hourly rates, DBAs can be a commercially attractive option where a client seeks to minimise the risk that flows from an unsuccessful outcome or for those that wish to reduce their expenditure while the case is ongoing. Generally, there is no requirement for a party entering into a DBA to disclose that fact to the other side.108 8.103 Limitations imposed by the Damages-based Agreements Regulations 2013109 (the 2013 Regulations) which have been widely criticised, have led to a disappointingly low uptake of DBAs in practice. We highlight two key concerns. One key concern relates to the limit on costs that can be recovered from an unsuccessful defendant. In light of the cost recovery rules in England, if the contingency fee agreed with the lawyer is higher than the recoverable costs, it is 106 Ministry of Justice (2019) Post-implementation review of Part 2 of LASPO: civil litigation funding and costs p 27. 107 Review of civil litigation costs – Final report by Lord Justice Jackson (December 2009) Chapter 12, p 131. 108 The court may order such disclosure as the High Court did in In Jalla & Ors v Royal Dutch Shell Plc & Ors [2020] EWHC 738 (TCC). The High Court ordered claimants in a major group action to disclose details of both DBA and third-party funding arrangements. The defendants requested details of the DBA and the role of the claimant’s solicitors’ agents who were to be paid from the DBA payment in the event of success. 109 SI 2013/609.

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8.104  Other methods of financing litigation

the claimant who will have to pay the shortfall out of the damages. Accordingly, under the current regulations the existence of a contingency fee arrangement will not increase the amount of the defendant’s costs liability but does potentially reduce successful claimants’ damages.110 8.104 Another key concern relates to whether so-called ‘hybrid DBAs’ are permitted by the 2013 Regulations. A hybrid DBA is a term that has developed amongst practitioners and refers to a DBA where the lawyer takes only some risk under a contingent fee style arrangement by charging a discounted hourly rate (paid by the client or third-party funding) while the case proceeds, regardless of the outcome (similar to a discounted CFA). The full hourly rate is recoverable from the losing opponent in addition to an agreed percentage of the damages payable by the client. Such an arrangement allows a lawyer to mitigate the risk of losing. The current unavailability of hybrid DBAs means that a law firm can only operate on a ‘no win, no fee’ basis and must take on the risk of incurring significant expenditure to take a case to trial without payment, unless it involves a third-party funder or insurer. 8.105 In complex high-value commercial litigation where cases can take several years to conclude, a hybrid DBA would enable the law firm to receive some income on an ongoing basis.111 This would assist with the payment of disbursements throughout the litigation, which includes barristers’ fees.112 Some practitioners have stated that international clients, ‘who preferred to settle their disputes in this jurisdiction, were left feeling frustrated that they were unable to negotiate flexible funding arrangements with their lawyers, which they could do in other jurisdictions’.113 Some practitioners regard this limitation as putting England and Wales at a competitive disadvantage as an international centre for dispute resolution.114 8.106 As already explained, the insurance and third-party litigation funding market have sought to create products which have plugged the gap. Those opposed to the introduction of hybrid DBAs have cited the fact that a vibrant, sophisticated third-party litigation funding market has developed which provides 110 In English Law, the indemnity principle states that a party is only entitled to recover costs it has incurred and applies to DBAs. As a result, if the claimant’s solicitor is entitled to a contingency fee under the DBA that is less than the amount of recoverable costs, the recoverable costs from the losing defendant will be limited to the amount of the contingency fee. 111 Ministry of Justice (2019) Post-implementation review of Part 2 of LASPO: civil litigation funding and costs p 28. 112 In England and Wales, the legal profession is split into two branches: solicitors and barristers. Generally, solicitors work together in private practice, whereas most barristers are independent and self-employed. Solicitors traditionally have conduct of the litigation whereas barristers provide specialist advice and advocacy before the courts (although the boundaries have become blurred over time). Generally, most barristers are prohibited from conducting litigation and can only receive instructions through a solicitor. Solicitors are liable for an instructed barrister’s fees. 113 Ministry of Justice (2019) Post-implementation review of Part 2 of LASPO: civil litigation funding and costs p 28. 114 Ibid. p 28.

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Damages-based agreements in England and Wales 8.110

direct funding to both clients and lawyers as a reason to challenge the necessity of their introduction and argue that they are in the interests of the lawyer and not the client. The majority of practitioners welcome hybrid DBAs, however, as in their absence, law firms will generally only work on a contingency basis in cases with very high prospects of success (given the ‘all or nothing’ position they are compelled to adopt) which is counterproductive to promoting greater access to justice. 8.107 There is also uncertainty regarding the impact of early termination of a DBA and the lack of clear provisions in the 2013 Regulations for payment on termination if, for example, the client has acted unreasonably. These concerns, among others, need to be addressed before DBAs are seen as being more attractive.115 The consequences of non-compliance with the 2013 Regulations are severe and could render a DBA unenforceable. In all the circumstances, it is understandable why few law firms have been willing to take the risk and why uptake so far has been so low. 8.108 Talk of reform began soon after the 2013 Regulations were implemented. In December 2018, the Ministry of Justice commissioned Professor Rachael Mulheron and Nicholas Bacon QC to carry out an independent review of the 2013 Regulations with a view to redrafting them so as to resolve some of the difficulties which have arisen. The Damages-based Agreements Reform Project (the Reform Project) published their proposals at the end of 2019.116 The currently proposed reforms relax the 2013 Regulations and have been largely welcomed by the profession with several proposals endorsed by the Law Society and an endorsement by Sir Rupert Jackson himself.117 8.109 Five key changes to the Regulations proposed are set out below and will apply to all civil litigation (other than employment matters, which will continue to be governed by the 2013 Regulations).

(i) Hybrid DBAs will be permitted 8.110 If expressly agreed by the client and law firm in the DBA, then law firms can potentially still recover up to 30 per cent of their irrecoverable costs and counsel’s fees from the client in the event of a loss, allowing those costs to be charged on an ongoing basis.118

115 Ibid. p 27. 116 The Reform Project published the Redrafted Damages-based Agreements Regulations 2019 together with an explanatory note, worked spreadsheets and a quick fact sheet. 117 Sir Rupert Jackson wrote a letter dated 1  March 2020 to Professor Rachael Mulheron and Nicholas Bacon QC expressing his approval. 118 Carson (2020) Time for change: Proposals to reform the UK DBA Regulations Competition Law Insight.

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8.111  Other methods of financing litigation

(ii) Allowing fees to be charged on termination 8.111 It is proposed to allow fees to be charged on quantum meruit basis in the event of termination of the DBA, provided the grounds for payment are clearly set out in the DBA. Reasons for termination might include a client deciding not to proceed with litigation when their lawyer has advised them to proceed, the death of a client, the instruction of a new law firm, a breach of the agreement by a client or a rejection of reasonable advice about settlement. All such scenarios are contemplated by the CFA regime, but not by the 2013 Regulations.119

(iii) Recoverable costs will fall outside of the DBA payment 8.112 It is proposed that in the event of the client obtaining a financial benefit that triggers a DBA payment, all recoverable expenses (with the exception of counsel’s fees) would lie outside of the DBA payment and would be paid by the client in addition to the DBA payment and recovered costs (whereas under the 2013 Regulations they could not be separately recovered).

(iv) Reduction to the maximum percentage recovery 8.113 It is suggested, subject to consultation, that the percentage cap on the DBA payment might be reduced from 50 to 40 per cent of the sums recovered.120

(v) DBAs can be used by both claimants and defendants 8.114 The definition of a financial benefit, to which the DBA payment must relate, extends to an amount that a defendant may have been spared from paying in the event that a claim is successfully defended. It remains to be seen how desirable these sorts of arrangements will be for a defendant to have to pay out a large amount of a claimed liability to its lawyers, where the defendant has claimed and prevailed in establishing there was no right to those amounts. 8.115 At the time of writing, it is unknown what form the final revised regulations will take or when such reform will be implemented. There is still work to do. That being said, it is likely that the regulations will be relaxed in the near future, which will likely increase their viability for law firms to consider them for commercial claims.

119 The Law Society Response of the Law Society to the Damages-Based Agreements Reform Project (November 2019) p 3. 120 The 2019 DBA reform project, Explanatory memorandum (October 2019).

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Conditional and contingent fee arrangements in other jurisdictions 8.120

CONDITIONAL AND CONTINGENT FEE ARRANGEMENTS IN OTHER JURISDICTIONS 8.116 As for the position elsewhere outside of England and Wales, contingent fee agreements are widely offered by lawyers in the United States and Canada. Australia has long used conditional fee agreements but recent moves to legislate contingent fee agreements have been met with fierce opposition by the legal profession. Even in the United States, where there has been a long-standing tradition of law firms entering into contingency fee agreements, ethical issues such as the prohibition on unethical fee splitting continue to be debated by the legal profession. The legal and regulatory landscape in the alternative fee arrangements arena continues to evolve across multiple jurisdictions.

United States 8.117 In the United States, contingency fee agreements are well-established and widely used by plaintiffs and by some defendants. The prevalence of such agreements within the plaintiff bar is due to the lack of costs-shifting provisions in the United States (in contrast to England and Wales), thereby limiting an unsuccessful litigant’s financial risk; if the plaintiff loses they pay neither their lawyer nor the other party. The fee paid to the attorney is typically a percentage of the amount recovered by the client. There are no definitive rules on how to determine a reasonable fee, although the fee must comply with state ethics requirements (including the prohibition against charging unreasonable fees). 8.118 Holdbacks and success-based fees are also frequently used in the United States in conjunction with traditional hourly billing arrangements, enabling the client and the law firm to share in the risk. A holdback is a portion of the law firm’s fee that the client retains until pre-determined conditions are met or milestones achieved.121 Success fees or bonuses are often used with holdbacks, but may also be used independently. A success fee typically awards the law firm a premium for certain results, such as: (i) successfully resolving a matter significantly ahead of schedule; (ii) successfully resolving a matter significantly under budget; and (iii) achieving results dramatically better than anticipated.122 8.119 Alternative fee arrangements are commonly used by litigants in connection with third-party funding. A litigant can enter into a partial funding agreement where the funder funds only a portion of the litigation and the litigant (or the litigant’s attorneys on a contingent basis) agrees to pay the rest of the costs and fees for the litigation. 8.120 One ethical issue relating to alternative fee arrangements that has been the topic of recent debate in the United States is the prohibition on fee splitting.

121 A common holdback amount is 20 per cent but the parties often negotiate the exact amount. 122 Practical Law Company (2020) Alternative fee arrangements Thomson Reuters.

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8.121  Other methods of financing litigation

Rule 5.4(a) of the American Bar Association Model Rules of Professional Conduct provides that a lawyer or law firm shall not share legal fees with a nonlawyer, ie a funder.123 The New York City Bar Association (NYCBA) issued a recent advisory opinion that called into question the appropriateness of a law firm obtaining a non-recourse loan from a funder to be repaid from the law firm’s future legal fees.124 The NYCBA concluded that such an arrangement is impermissible fee splitting. The NYCBA’s non-binding advisory opinion is inconsistent with settled New York case law on this point and has been widely criticised. 125 In a recent paper the NYCBA, in an apparent volte-face, have stated that it would be beneficial for rule 5.4(a) to be revised and various proposals have been made to do so. The consensus of the NYCBA Working Group is that lawyers and the clients they serve will benefit if lawyers have less restricted access to funding, which will be welcome news to law firms and funders alike and is likely to increase the prevalence of alternative fee arrangements further in the United States.126

Australia 8.121 In Australia ‘no win, no fee’ conditional fee agreements are permitted. Lawyers can charge an uplift of up to 25 per cent of ‘at risk’ fees based on standard hourly rates. The permissible percentage uplift may vary from state to state. There has been an ongoing debate for many years, however, about whether lawyers should be able to charge contingency fees. Historically, lawyers have been prohibited from entering into contingency fee arrangements based on a percentage of a client’s net recovery.127 However, the State of Victoria introduced legislation in November 2019 that enabled law firms to charge contingency fees in class actions.128 One rationale behind the reforms was to mitigate perceived issues with third-party litigation funding, which has historically financed the majority of all class actions in Australia. It was argued that lifting the ban on lawyers being able to charge contingency fees would reduce costs for plaintiffs (no longer having to pay both an uplift and funding fee if successful), expand the 123 The American Bar Association Model Rules serve as models for the ethics rules of all US states. They are a set of rules and commentaries on the ethical and professional responsibilities of members of the legal profession in the United States. 124 NYCBA Formal Opinion 2018–5. 125 In Hamilton Capital VII LLC I v Khorrami LLP, 48 Misc 3d (1223(A), 9 (NY Sup Ct 015) the New York Supreme Court held that law firm financing is not impermissible fee splitting, and commented that it ‘promotes the sound public policy of making justice accessible to all, regardless of wealth’; Friel and Barnes (2019) Getting the Deal through: Litigation Funding 2020 Law Business Research Ltd, p 93. 126 NYCBA Working paper Report to the President by the New York City Bar Association Working Group on Litigation Funding 2 March 2020, p 23. 127 Entering into contingent fee arrangements is currently in breach of the Legal Profession Uniform Law. 128 The Justice Legislation Miscellaneous Amendments Bill 2019 was tabled in the Victorian Parliament on 27  November 2019. The Bill proposes amendments to the Supreme Court Act 1986 which, if passed, will allow plaintiff lawyers to claim a percentage of the amount recovered in a successful group claim as their costs payable in the proceedings.

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Conditional and contingent fee arrangements in other jurisdictions 8.124

availability of funding to cases deemed uneconomic for funders to support and ensure that clients’ interests are not side-lined in favour of a funder’s financial interest. 8.122 Interestingly, there was strong opposition from the Australian legal profession to the introduction of contingent fee agreements, the primary grounds for objection being that they may encourage unethical practices and compromise the independence of the legal profession, a debate which was overcome in England with the advent of DBAs for commercial cases. In March 2020, the Law Council of Australia indicated strong opposition to the proposals.129 Notwithstanding that opposition, the proposed reforms were enacted and from 1 July 2020 it is permissible for class action lawyers to apply to the Supreme Court of Victoria for permission to charge costs using a contingency fee model.130 The Act does not set a limit on the percentage of the recovered sum that can be charged as a contingency fee; however, the Court will play a determinative role in controlling the percentage.

Canada 8.123 In Canada, contingency fee agreements were introduced in the early 2000s in Ontario. They are now legal in all provinces, with only a few types of civil action excepted.131 The country shifted away from the existing CFA model thereafter. Fees can vary greatly, anywhere from 10 to 45 per cent of the total award. Some provinces allow certain maximum percentages according to the type of case, the length of the case, and whether it goes to trial or appeal. In Ontario, Ontario Regulation 195/04 states that a contingency fee cannot exceed damages recoverable by the client (ie 50 per cent) with a lower cap in personal injury cases.132 8.124 Over time, lawyers found that contingency fees were becoming increasingly insufficient to meet the costs of litigating a matter and law firms became increasingly concerned with the risk involved in such arrangements. Law firms have increasingly looked to third-party funders for assistance.133 There is a gap growing between the capacity of law firms to take on contingent fee work and the appetite of plaintiffs for such arrangements.134 This gap is likely to be 129 Victoria Law Reform Commission (2018) Access to Justice: Litigation funding and group proceedings: Report, Chapter 3: Litigation funding and contingency fees. 130 The Justice Legislation Miscellaneous Amendments Act 2020 (Vic) amends the Supreme Court Act 1986 to make provisions about costs in group proceedings. A new section 33ZDA has been inserted. 131 In 2004, Ontario passed Regulation 195/04 – Contingency Fee Agreements which set out the requirements of a valid contingency fee agreement between lawyers and their clients. 132 Ontario Regulation. 195/04, s 7. 133 Third-Party Litigation Funding Canadian Lawyer Magazine (3  January 2017); ThirdParty Litigation Funding approval a win for class action bar Canadian Lawyer Magazine (27 February 2019). 134 Woodsford (2020) Litigation Funding in Ontario Canada Woodsford litigation funding insight.

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8.125  Other methods of financing litigation

further increased as a result of the economic downturn caused by the Covid-19 pandemic as cash-strapped litigants in Canada, as well as in other jurisdictions, look to innovative and alternative methods of funding litigation.

CONDITIONAL AND CONTINGENT FEE AGREEMENTS AND THE FUNDING MARKET 8.125 Lawyers entering into a DBA effectively become litigation funders in a similar way to third-party funders and may therefore be regarded as market competitors. While it is generally accepted that funders have a higher appetite for risk, being in a position to mitigate downside risk by spreading it over their entire portfolio (unlike most law firms), law firms do have certain advantages over funders such as having no need to meet capital adequacy requirements and no exposure to adverse costs as a result of a loss. However, funders currently have the advantage over lawyers. Their business is the assessment of risk and return in making investment decisions, the risk of conflict between client and law firm is eliminated with the interposition of a third-party professional funder, and funders can elect to fund only part of the fees and therefore share in only some of the risk (the current DBA Regulations do not permit lawyers to do this). 8.126 However, in practice there has been a great deal of collaboration between funders and lawyers. CFAs are ubiquitous in the litigation funding market in large part due to the fact that funders generally prefer to fund only part of a lawyer’s fees and that the existence of a CFA demonstrates the firm’s risk alignment with the funder, which can increase the funder’s confidence in the case. Even clients who can afford to pay legal fees may, for commercial reasons, prefer to finance litigation by entering into an alternative fee arrangement with their lawyer and a financing agreement with a funder. Financing litigation in such a way enables clients to hedge their risk of losing a case and preserve working capital, and gives them the option of immediate liquidity during litigation that may take several years to yield an outcome. Given the global economic downturn caused by the Covid-19 pandemic of 2020 it is anticipated that parties will increasingly look or need to save money on litigation to bring strong claims, meaning that law firms will increasingly have to explore their own approach to winning business.

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CHAPTER 9

Types of litigation and arbitration that attract and are attractive to litigation finance A Patent litigation B Insolvency C Treaty arbitration D Class actions

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PART A

Patent litigation Robin M. Davis, Esq. Senior Investment Officer, Woodsford, Philadelphia

What is patent infringement litigation? 9.1 Patent litigation is highly amenable to funding 9.4 Key funding-related issues in US patent cases 9.10 Patent litigation strategies especially amenable to litigation funding 9.33

9.1 Patent infringement litigators were among the early adopters of litigation finance in the United States and, over time, patent infringement matters have become one of the most common types of financed litigation. This is due, in large part, to the combination of high litigation costs and substantial available damages creating a perfect storm for litigation finance successes, especially in the United States. Indeed, many patent litigation strategies cross borders and include multiple components in key jurisdictions where an alleged infringer either manufacturers or sells accused products. Such multifaceted campaigns most often employ litigation in the United States, to exploit its potential to yield a large damages award, alongside parallel litigation in other jurisdictions where expected damages are lower but injunctive relief is more readily obtained, such as Germany, Japan, China, or the United Kingdom. Whatever the particulars of a single or multi-jurisdictional patent litigation strategy, the specialty is well suited to litigation finance –such cases typically entail expensive and extensive expert witness involvement, regardless of the jurisdiction.

WHAT IS PATENT INFRINGEMENT LITIGATION? 9.2 Patent infringement litigation typically involves the owner of exclusive rights in a patent claiming that another party has infringed upon the patent claims by making, using, selling, offering to sell, or importing a product or performing a process.1 A claim is the legally operative portion of a patent – it is typically a sentence that sets forth the legal boundary of the new invention that is protected from infringement.2 Indeed, a patent grant is often considered as a short-term monopoly granted by the government to an inventor who has advanced science 1 2

35 U.S.C. §154(a); 35 U.S.C. § 271. Annotated Patent Digest (Matthews), § 1:24 Introduction—Claims.

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9.3  Types of litigation and arbitration that attract and are attractive to litigation finance

and technology through their work – in exchange for making their invention public, inventors are granted a time-limited right to exclude others from practising their invention as defined by the issued patent claims.3 9.3 In litigation or arbitration regarding patent infringement, the most typical responses to an infringement claim include arguments that the asserted patent claims are either not infringed or that the claims themselves are invalid.4 Infringement and non-infringement typically turn on a detailed analysis of what the claims themselves mean, often called ‘claim construction’ or ‘Markman’ among American lawyers,5 and whether the specific accused products or methods actually meet every limitation of the properly-construed claim. Invalidity may take a different form in different jurisdictions – sometimes it is raised in a separate proceeding, as in Germany or Japan, and sometimes it may be raised in the same forum as the infringement claims, as in the United States. Regardless of forum, invalidity claims typically entail either an argument that the claimed invention was known or obvious in view of the prior art or that the claims otherwise fail to meet statutory requirements.6 Prior art includes other patents, publications, and publicly available systems or products that were accessible to the public before the priority date of the patent claim at issue.7 There are many jurisdictional variations concerning the contours of patent infringement and validity; all litigants and litigation funders should be mindful that different jurisdictions may reach differing conclusions on infringement and/or validity of the same claims and be sure to consult properly qualified counsel to obtain appropriate legal advice.

PATENT LITIGATION IS HIGHLY AMENABLE TO FUNDING 9.4 The cost of patent litigation varies widely from jurisdiction to jurisdiction, but is most expensive in the United States.8 Indeed, the costs associated with employing specialised and highly qualified technical expert witnesses, in addition to damages experts, caused patent litigators to be vanguards in incorporating litigation funding into the US market. For example, 3

4 5

6 7 8

See U.S. v Univis Lens Co., 316 U.S. 241 (1942) (‘The declared purpose of the patent law is to promote the progress of science and the useful arts by granting to the inventor a limited monopoly, the exercise of which will enable him to secure the financial rewards for his invention.’) (citing Constitution of the United States, Art. 1, §8, Cl. 8; 35 U.S.C. §§ 31, 40). Annotated Patent Digest (Matthews), §11.1 Introduction. Pall Corp. v Hemasure Inc., 181  F.3d 1305, 1308 (Fed. Cir. 1999) (‘Analysis of patent infringement starts with “construction” of the claim, whereby the court establishes the scope and limits of the claim, interprets any technical or other terms whose meaning is at issue, and thereby defines the claim with greater precision than had the patentee.’). 5 U.S.C. §§ 101, 102, 103, 282. An early and enduring general description of the test for invalidity due to anticipation is ‘that which infringes if later, anticipates if earlier.’ Peters v Active Mfg. Co., 129 U.S. 530, 537 (1889). Special Theme: An overview of patent litigation systems across jurisdictions World Intellectual Property Indicators 2018, at 13. Available online: https://www.wipo.int/edocs/pubdocs/en/ wipo_pub_941_2018-chapter1.pdf

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Patent litigation is highly amenable to funding 9.6

IMF Bentham (now OmniBridgeway) shared in 2011 that an average investment in an early stage patent case would be in the region of US $2–5 million, with expected returns three- to fivefold (US $6–25 million) in two to four years – with expenses, necessary returns and timelines only increasing since then due to the introduction of inter partes reviews (IPRs) and other Patent Trial and Appeal Board (PTAB) proceedings, discussed further below.9 Patent litigation in the United States has long been a vehicle for seeking financial returns by nonpractising entities (NPEs) that own but do not practice their patents and typically seek to monetise their patents through litigation, licensing, or a combination of both.10 However, litigation funding is used to support patent infringement assertions by many types of inventive entities that do practice their own patents, especially as long timelines to financial recovery and steep expenses for both costs and counsel afflict patent owners of all sorts. 9.5 Typical funding arrangements for US patent cases involve a commitment to cover at least the costs of litigation. Such costs tend to include much more than just potentially hefty expert witness fees – technology-specific costs associated with retaining laboratories for product testing, consultants for source code analysis, and graphic specialists to simplify complex technical subject matter are common, alongside the usual litigation costs such as filing fees, court reporters and videographers for depositions, and document hosting and production charges. Additionally, while it is generally permissible for US lawyers to act on a fully contingent basis as to their fees,11 it is common for at least some portion of the attorneys’ fees to be paid by a litigation funder over the course of a patent infringement case. Costs and attorneys’ fees associated with defending any invalidity challenges brought before the US Patent and Trademark Office, such as IPRs, covered business method reviews (CBMs), and post-grant reviews (PGRs) are often included within a funding arrangement as well. Less frequently, an additional funding commitment may be provided to support ongoing patent prosecution efforts or the operational expenses of the patent owner as part of a single litigation financing arrangement. 9.6 For example, Burford has described a successful patent investment to support a small, innovative company, ShaveLogic, in a lawsuit where it was initially sued by the razor blade behemoth Gillette over claims that former Gillette employees now at ShaveLogic had misappropriated Gillette’s trade secrets and engaged in unfair competition. With the funding support of Burford, ShaveLogic was not only able to defend itself against these claims, but it sued 9

Bentham Capital Overview of IMF Expansion Strategy for US Market: Presentation to Investors, Dec. 9, 2011, at *12. Available online: https://www.imf.com.au/docs/default-source/investorpresentations/imf20111209fb6b04010281659d9b61ff00006a85af.pdf? sfvrsn=6ea6133_0 10 There has been and continues to be significant debate over the proper definition of NPEs and further complications arise when one seeks to further refine and distinguish between types of NPEs. For the purpose of this discussion, this broad definition is utilized. However, many others have attempted to refine and advance the discussion of various types of NPEs. See, eg, Sara Jeruss, et al. (2012) The America Invents Act 500: Effects of Patent Monetization Entities on US Litigation 11 Duke L. & Tech. Rev. 357, 369–372. 11 Model Rules of Prof’l Conduct (2018) R 1.5; cmt.

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9.7  Types of litigation and arbitration that attract and are attractive to litigation finance

Gillette for infringement of ShaveLogic’s innovative patents advancing razor blade technology. After duelling motions for summary judgment were filed, the Massachusetts court ruled in favour of ShaveLogic and the parties were able to reach a favourable, confidential settlement.12 9.7 A  unique and popular forum for patent infringement litigation in the United States is the International Trade Commission (ITC). The ITC is responsible for instituting investigations pursuant to Section 337 of the Tariff Act of 1930 (‘Section 337’) to bar importation of products that infringe a US patent that is practised by a domestic industry.13 Section 337 investigations are statutorily mandated to be concluded ‘at the earliest practicable time after the date of publication of notice of such investigation’14 and, consequently, the typical phases of litigation such as fact and expert discovery occur on a highly expedited timetable. Additionally, the ITC permits a single investigation to target the infringement of many unrelated respondents in a single action, which allows for efficiencies over infringement litigation in a federal district court where, since the implementation of the America Invents Act (AIA) in 2012, this has been prohibited.15 Thus, while litigation in the ITC creates a fast timeline for a patent owner to get access to an exclusion order, attorneys’ fees and costs are compressed into a shorter timeframe, thereby increasing the financial pressure on complainants as they aim to exert settlement pressure through the threat of an exclusion order against alleged infringers.16 Thus, the high cost of patent litigation is magnified in ITC proceedings, even while the ITC facilitates stopping infringement and reaching settlements expeditiously. Patent infringement practitioners in the ITC were therefore enticed by litigation funding, as these cases have both adequate funding needs to entice serious investors and the capacity to generate substantial settlements capable of providing generous returns to the patent owner, funder, and contingency counsel.

12 Burford Case Study: Financing the defense: Company challenge. Available online: https://www.burfordcapital.com/how-we-work/case-studies/case-studies-container/casestudy-financing-the-defense/ 13 Section 337 investigations at the ITC are a powerful tool for enjoining the importation of infringing products that are manufactured outside the United States. However, the ambit of an ITC litigation is limited – first, the infringing products must be imported from outside the United States, rather than manufactured domestically, and, second, a complainant at the ITC must demonstrate that it has an established domestic industry whereby it has invested labour, capital, or other resources in support of articles that are protected by the patent in the United States. See 19 U.S.C. § 1337(a)(3). This ‘domestic industry’ requirement is often a limitation that restricts NPEs’ access to the speedy resolutions of the ITC. 14 19 U.S.C. §1337(b)(1). 15 Pursuant to 35  U.S.C. § 299, an allegation that multiple accused infringers all infringe the same patent(s) in suit is insufficient to justify joinder in a single district court case. In contrast, the ITC permits multiple accused infringers to be respondents in a single Section 337 investigation as its jurisdiction is in rem over the alleged infringing products. See 19 U.S.C. § 1337(a)(1). 16 See Matt Rizzolo & Hyun-Joong (Daniel) Kim (2019) Opportunities Abound in Patent Litigation Funding at the ITC  Law360, 6  November 2019. Available online: https://www. law360.com/articles/1217276/opportunities-abound-in-patent-litigation-funding-at-the-itc

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Key funding-related issues in US patent cases 9.11

9.8 Litigation funding is popular in patent-related litigation beyond infringement claims. Valuable patent-related litigation often arises alongside licence disputes, inventorship disputes, ownership disputes, and trade secret misappropriation claims. Thus, patent-related cases beyond infringement claims are also regularly considered and financed when they can achieve a healthy balance between the required investment and likely return for a litigation funder. 9.9 Other types of intellectual property-related claims may also provide good investment opportunities for litigation funders, such as copyright infringement, trademark infringement, and trade secret misappropriation. While these other types of litigation are beyond the scope of this discussion regarding patent infringement, sometimes they arise in conjunction with a patent claim and provide a complementary avenue to obtain a return on investment. Other times these claims arise on their own and may present an attractive investment. However, none of these other areas of intellectual property litigation has achieved the ubiquity of patent infringement litigation among litigation funders, in large part because one aspect or the other of the ‘high costs and high damages’ formula is less regularly satisfied. Of course, good claims can be found and funded in a variety of areas, but the unique characteristics of patent litigation increase the prevalence of litigation funding for this specialty.

KEY FUNDING-RELATED ISSUES IN US PATENT CASES 9.10 As the most popular global jurisdiction for patent infringement cases, the peculiarities of US law sometimes lead to complications for litigation funders.17 While US law is constantly evolving, there are several key issues that are likely to impact litigation funding strategies and agreements.

Standing to sue 9.11 There is an extensive body of law in the United States surrounding the rights that a party must hold to have standing to sue for patent infringement as a plaintiff. Generally speaking, all patent assignments must be both written and recorded at the US Patent and Trademark Office,18 and checking to confirm that all proper assignments and recordations are in place prior to bringing any kind of patent-related litigation is good practice. Moreover, if a patent is assigned to a new owner, it is critical for the written assignment document to state clearly

17 When investing in patent infringement litigation outside the United States, it is always advisable to consider the impact of potential adverse costs. Adverse costs and their relationship to funding are discussed in chapter 7 x. In the United States, there are no automatic adverse costs awards to the winning party and, while costs and attorneys’ fees (in exceptional cases only) may be awarded to the prevailing party in US patent litigation, there are no precedents requiring funders to pay such expenditures. 18 35 U.S.C. § 261.

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9.12  Types of litigation and arbitration that attract and are attractive to litigation finance

that all rights in and title to the patents are being transferred with the assignment, including the right to sue and recover damages for any past infringement.19 9.12 One need not always be the current assignee of a patent to bring an infringement lawsuit – an exclusive licensee who holds all substantial rights in the patent may also have proper standing.20 Courts have a history of carefully analysing the particular agreements granting rights to exclusive licensees to determine whether ‘all substantial rights’ have been transferred to an exclusive licensee, such as the rights to make, use, and sell articles practising the patent, sue for infringement, grant a licence, and collect infringement damages.21 If an exclusive licensee holds less than all substantial rights in a patent, then the patent assignee who owns title and any remaining rights must also be joined as a coplaintiff, either willingly or unwillingly.22 Furthermore, while it is possible to rectify any standing deficiency with a corrective assignment or exclusive licence agreement, the US Court of Appeals for the Federal Circuit has held that standing deficiencies cannot be corrected in the midst of litigation with a nunc pro tunc assignment.23 Consequently, cases where a court finds a plaintiff to have deficient standing are often dismissed and re-filed after proper ameliorative documents are executed. Such delays can often result in the loss of significant past damages exposure because plaintiffs are restricted to recovering patent infringement damages accruing in the six years before filing.24 Thus, a funder should be sure that all agreements that could impact standing are understood and in order before investing in a patent litigation strategy. 9.13 The addition of a litigation funder to the mix has the potential to complicate the typical standing inquiry if the funding agreement is not properly prepared. For example, defendants may try to allege that certain rights given to a litigation funder deprive the plaintiff of the substantial rights required to sue. Accordingly, a well-drafted litigation funding agreement should be careful to memorialise its intention not to transfer such rights away from the intended plaintiff. While US courts have not issued substantial guidance on the interaction between typical funding agreement provisions and proper standing for a patent infringement plaintiff, a recent case in the District of New Jersey funded by Woodsford Litigation Funding, WAG  Acqusition, LLC  v Multi Media LLC,25

19 See Minco, Inc. v Combustion Eng’g, Inc., 95 F.3d 1109, 1117 (Fed. Cir. 1996) (‘the right to sue for prior infringement is not transferred unless the assignment agreement manifests an intent to transfer this right … bare reference to all right, title, and interest does not normally transfer the right to sue for past infringement’). 20 See, eg, Morrow v Microsoft Corp. 499 F.3d 1332, 1340 (Fed. Cir. 2007); Ortho Pharma. Corp. v Genetics Inst., Inc. 52 F.3d 1026, 1034 (Fed. Cir. 1995). 21 See, eg, Vaupel Textilmaschinen KG v Mecanica Euro Italia SPA, 944 F.2d 870,874-75 (Fed. Cir. 1991). 22 See Aspex Eyewear, Inc. v Miracle Optics, Inc. 34 F.3d 1336, 1344 (Fed. Cir. 2006). 23 Enzo APA & Son, Inc. v Geapag A.G., 134 F.3d 1090, 1093-94 (Fed. Cir. 1998). 24 35  U.S.C. § 286 (‘Except as otherwise provided by law, no recovery shall be had for any infringement committed more than six years prior to the filing of the complaint or counterclaim for infringement in the action.’). 25 WAG Acquisition, LLC v Multi Media LLC, D. N. J. Civil Action No. 2-14-cv-02340.

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Key funding-related issues in US patent cases 9.15

clarified that certain rights for a funder did not interfere with the plaintiff’s standing, including: (1) a requirement to obtain funder’s consent, which could not be unreasonably withheld, prior to assigning, transferring, selling, or licensing the patents; (2) a funder’s right of first refusal to fund further litigations filed by the plaintiff on the patents; (3) a funder’s right to refuse settlement offers where the funder had no right to settle on its own and a third party would make a binding resolution of any settlement-related disputes; (4) a funder’s first priority return from any settlement or damages; (5) a funder’s security interest in the patents as collateral; and (6) a funder’s contingent rights to discontinue the litigation if it terminated funding and replacement funding could not be sought or if litigation counsel withdrew and could not be replaced.26 While this case presents only one guidepost for just a few issues common to litigation funding arrangements, it should be useful guidance to funders, funded parties, and those considering utilising litigation funding.

Risk and delay from PTAB proceedings 9.14 The implementation of the AIA in 2012 created several new procedures for challenging the validity of patents before the US  Patent and Trademark Office’s PTAB, including IPRs, CBMs and PGRs.27 Generally, a petition seeking institution of any of these three types of review may be filed by a defendant sued for patent infringement any time within one year of service of the patent infringement complaint on that defendant or its privies.28 IPRs are by far the most commonly filed, as they can be brought against any issued US patent once it is outside the time window when PGRs are permitted.29 9.15 When first introduced, petitions for IPR proceedings were very commonly instituted and, following institution, some or all claims challenged were often

26 Nana Liu, et. al. (2019) Recent Decision Holds that Litigation Funding Does Not Harm Standing and Provides Tips for Negotiating Funding Agreements JDSupra, Aug. 27. Available online: https://www.jdsupra.com/legalnews/recent-decision-holds-that-litigation-65237/ 27 IPRs are PTAB proceedings that evaluate the validity of a challenged patent over specific allegations based on printed patents or publications on grounds of either anticipation (35 U.S.C. § 102) or obviousness (35  U.S.C. § 103). CBMs seek to determine whether patent claims are improperly directed to covered business methods, which are invalid. The CBM procedure will sunset on 15 September 2020. 37 C.F.R. § 42.300(d); 37 C.F.R. § 42.301(a). PGRs must be brought within nine months of a patent’s grant or reissuance and may raise any invalidity ground except for best mode. 35 U.S.C. § 321; 37 C.F.R. § 42.202. 28 Other, unrelated parties may also file IPRs and are not subject to any time restriction for filing. However, the Federal Circuit recently clarified and expanded the standard for determining whether petitioners in IPRs are sufficiently closely related that they should be subjected to the statutory time bar for filing and adopted the broader, common law interpretation of ‘real party in interest’ as opposed to the PTAB’s own interpretation. See Applications in Internet Time, LLC v RPX Corp. 897 F.3d 1336, 1351 (Fed. Cir. 2018). 29 Mark J. Feldstein, et al. (2019) Where Are All the PGRs? Finnegan AIA Blog, Dec. 6. Available online: https://www.finnegan.com/en/insights/blogs/america-invents-act/where-are-all-the-pgrs.html

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9.16  Types of litigation and arbitration that attract and are attractive to litigation finance

invalidated.30 Thus, the panels of administrative patent judges at the PTAB were facetiously referred to as ‘death panels’ by some frustrated patent owners and attorneys.31 However, over time, the harsh results from IPRs have moderated somewhat. Indeed, IPR institution rates have declined from a high of 87 per cent in 2013 to 63 per cent in 2019.32 Nevertheless, the introduction of IPRs and other post-grant procedures for challenging the validity of issued patents dramatically changed the risk profile of investments in patent litigation. In addition to the risk that such PTAB proceedings may ultimately invalidate the asserted patents, the time to settlement or judicial resolution has been significantly extended as some district courts will stay their proceedings pending the outcome of any IPRs filed against the asserted patents. Such stays may extend the timeline by 18 months if the court grants a stay from the time an IPR petition is filed through to a final written decision,33 or longer if the court elects to continue the stay while IPR results are appealed. As noted by Burford’s Katharine Wolanyk, the delay created by the introduction of IPRs and other PTAB procedures is far from ‘the picture of efficiency or economy’ and forces litigation funders to assume a much longer timeline to recovery in US patent investments.34 9.16 Some of the moderation in IPR institution rates was likely due to the SAS v Iancu case,35 where the US Supreme Court held that the PTAB may not selectively institute portions of the invalidity challenges asserted in a single IPR petition – either none or all of the alleged grounds for invalidity must be instituted for review.36 Accordingly, the SAS v Iancu decision created pressure for weaker petitions to be more often denied at the institution stage.37 Other challenges brought by patent owners to the Supreme Court, such as Oil States Energy Services, LLC v Greene’s Energy Group, LLC,38 have attempted to show that IPR proceedings are unconstitutional on the whole, but these efforts have so far failed.39

30 Trial Statistics: IPR, PGR CBM Patent Trial and Appeal Board, January 2020, p 6. Available online: https://www.uspto.gov/sites/default/files/documents/trial_statistics_20200131.pdf 31 Rob Sterne & Gene Quinn (2014) PTAB Death Squads: Are all Commercially Viable Patents Invalid? IP  Watchdog, Mar. 24. Available online: https://www.ipwatchdog.com/2014/03/24/ ptab-death-squads-are-all-commercially-viable-patents-invalid/id=48642/ 32 Trial Statistics: IPR, PGR CBM Patent Trial and Appeal Board, January 2020, p 6. Available online: https://www.uspto.gov/sites/default/files/documents/trial_statistics_20200131.pdf 33 35 U.S.C. § 316. 34 Katherine Wolanyk (2017) The PTAB’s dramatic effect on patent value and corresponding disincentives to capital allocation Sept. 15. Available online: https://www.burfordcapital.com/ insights/insights-container/the-ptab-s-dramatic-effect-on-patent-value-and-correspondingdisincentives-to-capital-allocation/ 35 138 S.Ct. 1348 (2018). 36 138 S.Ct. 1348(2018) at 1354. 37 Trial Statistics: IPR, PGR CBM Patent Trial and Appeal Board, January 2020, p 6. Available online: https://www.uspto.gov/sites/default/files/documents/trial_statistics_20200131.pdf 38 138 S.Ct. 1365 (2018) 39 Oil States Energy Svcs., LLC v Greene’s Energy Group, LLC 138 S.Ct. 1365, 1373–75 (2018) (holding that IPRs do not violate Article III of the US Constitution because patents are public rights that the government may both issue and reconsider).

258

Key funding-related issues in US patent cases 9.20

9.17 IPRs and other post-issuance review proceedings at the PTAB are now a regular facet of all kinds of US patent litigation. Accordingly, savvy litigation funders both predict and plan for PTAB proceedings in their investment strategy. For instance, in cases where both costs and attorneys’ fees are funded in whole or in part by a financier, strict caps may be applied to the expenditures that will be made on the IPR portion of the case, in an effort to limit the risk and exposure inherent in PTAB proceedings. Alternatively, funders may structure their investment such that a payment is made to compensate litigation counsel for fees only after achieving success in the PTAB phase. Carefully defining success is important for a payment keyed off of IPR results to create proper incentives – indeed, factors such as which original or amended claims are most critical to the success of the overall investment and the possibility of different results on an appeal of the PTAB’s final written decision must be carefully considered and defined in the litigation funding agreement to ensure that a success payment is, ultimately, only paid in the event of success. 9.18 Moreover, the prevalence of IPRs has caused savvy litigation counsel and investors alike to carefully consider which venue the underlying litigation should be brought in – some district courts and the ITC move so quickly to trial or final hearing that it is highly unlikely that any stay of litigation will be implemented to accommodate the parallel IPR proceedings. Thus, for suitable cases, such a venue may be advantageous for neutering the impact of IPRs. On the other hand, certain cases may have a risk profile better suited to bringing suit in a district court venue where a stay is likely either upon the filing of an IPR petition or upon institution of an IPR, thereby allowing the financier to reduce the outlay associated with that investment during the risky IPR period. 9.19 Some litigation financiers prefer to invest in patent litigation strategies with open families in large part to diminish the impact of an adverse IPR result. ‘Open’ patent families have one or more applications pending at the US Patent and Trademark Office and, consequently, any prior art identified by defendants either in litigation or in PTAB proceedings may be submitted for consideration during prosecution of the still-pending patent applications. Thus, when those patents are issued, they will already have been examined and found valid over the prior art and thereby be strengthened against any anticipated prior art-based invalidity attack, including an IPR or PGR. 9.20 Of course, once a patent has successfully survived an IPR proceeding and emerged with valid claims, it is typically a much more appealing candidate for a funded campaign. Therefore, selecting one or more alleged infringers to be sued and timing the filing of those suits must be done carefully to maximise the value of any assertions. If an open family exists, a popular strategy is often to sue a single defendant first so that any prior art relevant to the family may be identified in that first case and/or IPR, as discussed above. However, when a patent is closer to expiration, it may be preferable to sue multiple alleged infringers simultaneously to ensure the availability of as many pre-suit damages as possible from each while planning to deal with multiple, simultaneous IPRs. There are many considerations to be evaluated in support of the timing of bringing 259

9.21  Types of litigation and arbitration that attract and are attractive to litigation finance

different infringement lawsuits, which litigation counsel can and should advise on to ensure the best decisions are made to maximise the likely recovery from any given funded patent enforcement programme.

Frequent fluctuations in damages precedents 9.21 A  frequent lament among US patent litigators regardless of whether their practices are focused on representing plaintiffs or defendants is that the US Court of Appeals for the Federal Circuit regularly shifts the legal contours for proper calculation of compensatory damages for patent infringement. Reasonable royalty damages, which are the most common compensatory damages awarded in district court infringement cases, have long been based on an analysis of the 15 factors set forth in Georgia-Pacific.40 However, the contours for calculating both the royalty rate dictated by the Georgia-Pacific factors and the appropriate royalty base for application of the rate have shifted significantly over the years. In particular, the rules surrounding how the royalty base should be apportioned, the appropriate occasions for applying the Entire Market Value Rule rather than apportioning, and how to value inventions that are directed to one feature of a multifaceted product have been in flux.41 With regard to the calculation of the royalty rate, many large damages awards have been cut back by the Federal Circuit in recent years for various reasons relating to the definition of what sales are properly considered infringement within the United States and how damages should be calculated for social media and other software inventions that are not directly associated with revenue generation.42 9.22 While it is beyond the purview of this text to delve deeply into the fluctuating world of US patent damages calculations, the changing nature of this space is a complicating factor for ascertaining the best structure and strategy for many patent infringement litigation investments. To mitigate this uncertainty, it is advisable for a funder or the patent owner to obtain early, pre-investment and pre-litigation input from an experienced and well credentialed damages expert who may be able to provide all parties to a funding transaction with a clear, realistic view of likely infringement damages.

40 Georgia-Pacific Corp. v. U.S. Plywood Corp. 318 F. Supp. 1116, 1120 (S.D.N.Y. 1970). 41 For one illustration of the complex rules requiring when apportionment is required and how it is to be conducted, compare the holding in Finjan v Blue Coat, where the Federal Circuit rejected the use of a smallest saleable patent practicing unit (SSPPU) in determining the royalty base because the SSPPU contained non-infringing features to the result in Exmark v Briggs & Stratton, where the Federal Circuit permitted the revenue from lawnmower sales to form the royalty base even though the patent was directed to just one component, a baffle, that was part of the lawnmower. See Finjan, Inc. v Blue Coat Sys. 879 F.3d 1299 (Fed. Cir. 2018); Exmark Mfg. Co. v Briggs & Stratton Power Prods. Grp., LLC 879 F.3d 1332 (Fed. Cir. 2018). 42 See, eg, Carnegie Mellon University v Marvell Tech. Group, Ltd. 807 F.3d 1283, 1308-11 (2015) (vacating part of jury’s royalty award and awarding new trial regarding whether certain accused chips were properly considered US sales); Virnetx, Inc. v Cisco Systems, Inc. 767 F.3d 1308, 1325–34 (Fed. Cir. 2014) (rejecting damages expert testimony attempting to value features of software offered for free with purchase of smartphones).

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Key funding-related issues in US patent cases 9.25

Patent eligibility 9.23 Following the US Supreme Court’s decision in Alice Corp. v CLS Bank Int’l,43 courts have applied a new, enhanced scrutiny to determine whether claims are patent eligible pursuant to the statutory requirements of 35 USC §101. In the Alice decision, which was subsequently elaborated on by further Supreme Court and Federal Circuit guidance, a two-part test was set forth to determine if a patent claim is directed to patent eligible subject matter. The first inquiry seeks to identify whether the patent claim’s ‘character as a whole is directed to excluded subject matter,’ such as laws of nature, natural phenomena, and abstract ideas.44 If the first inquiry is satisfied, then one need not look further. However, if not, then the second step of the inquiry requires analysis of ‘the elements of each claim both individually and as an ordered combination to determine whether the additional elements transform the nature of the claim into a patent eligible invention.’45 To meet step two, the court must consider whether the ‘claim limitations involve more than performance of well-understood, routine, and conventional activities previously known to the industry.’46 9.24 Immediately following the Alice decision, motions for a determination that a patent is invalid for lack of eligible subject matter became very popular in US patent litigation. Indeed, many such motions were made at the pleading stage, pursuant to either Federal Rule of Civil Procedure 12(b)(6) or 12(c), and were met with success in quickly terminating an infringement case. However, such motions were and continue to be popular at summary judgment and posttrial as well.47 In particular, inventions in the software and biological space have been adversely impacted by courts’ application of the Alice decision and, in 2015 and 2016, claims were found invalid under Alice in 71 per cent and 53 per cent of decisions, respectively.48 9.25 Fortunately for patent owners, the pendulum has begun to swing in the other direction and the grant rate for §101 motions is decreasing.49 Indeed, 43 44 45 46

Alice Corp. v CLS Bank Int’l 573 U.S. 508 (2014). Internet Patents Corp. v Active Network, Inc. 790 F.3d 1343, 1346 (Fed. Cir. 2015). Alice, 134 S.Ct. at 2355. Berkheimer v HP Inc. 881 F.3d 1360, 1367 (Fed. Cir. 2018) (quoting Content Extraction & Transmission LLC v Wells Fargo Bank, Nat. Ass’n 776 F.3d 1343, 1347–48 (Fed. Cir. 2014)) (internal quotations omitted). 47 Robert Sachs (2019) Alice: Benevolent Despot or Tyrant? Analyzing Five Years of Case Law Since Alice v. CLS Bank: Part 1 IP Watchdog, Aug. 29. Available online: https://www. ipwatchdog.com/2019/08/29/alice-benevolent-despot-or-tyrant-analyzing-five-years-of-caselaw-since-alice-v-cls-bank-part-i/id=112722/ 48 Douglas R. Nemec, et al. (2017) Strategies for Litigants in Patent Infringement Cases Using Motions to Dismiss Post-Alice Skadden, Arps, Slate, Meagher & Flom LLP, Apr. 19. Available online: https://www.skadden.com/insights/publications/2017/04/strategies-for-litigants-inpatent-infringement 49 Robert Sachs (2019) Alice: Benevolent Despot or Tyrant? Analyzing Five Years of Case Law Since Alice v CLS  Bank: Part 1  IP  Watchdog, Aug. 29. Available online: https://www. ipwatchdog.com/2019/08/29/alice-benevolent-despot-or-tyrant-analyzing-five-years-of-caselaw-since-alice-v-cls-bank-part-i/id=112722/

261

9.26  Types of litigation and arbitration that attract and are attractive to litigation finance

USPTO Director Andrei Iancu has made public remarks seeking to reform the application of §101 and improve the guidelines for patent examiners regarding these issues.50 Nevertheless, and especially given the prevalence of software related patents presented to funders for investment, patent eligibility and the uncertainty in this space creates significant risks that all litigation financiers must monitor. For example, although there was a high grant rate of §101 motions to dismiss or motions for judgment on the pleadings and these motions presented a significant risk, they were a risk that was typically surmounted (or not) early in a case. Consequently, litigation funders had relatively little money invested by the time such a decision was issued. However, more recent Federal Circuit precedents, such as MyMail Ltd. v ooVoo, LLC,51 suggest district courts are well advised to resolve any pertinent claim construction disputes prior to issuing a §101 decision. Because claim construction typically occurs midway through the fact discovery period, this requires a longer time and increased investment by a funder to reach the point where a §101 motion may be resolved. Additionally, some district judges, such as Judge Rodney Gilstrap sitting in the US District Court for the Eastern District of Texas, have instituted unique procedures for presenting §101 motions to ensure that the parties properly consider and certify the presence or absence of any claim construction issues that might impact such a motion.52 If this trend expands, it is likely to create increased predictability about the timing for resolution of §101 motions, but may not speed them along in a manner that allows funders to reduce their investment size prior to knowing if this risk has manifested to cause their investment to fail. 9.26 The jurisprudence and procedures surrounding §101 are surely areas to monitor closely for all patent litigation practitioners and litigation funders, as they are rapidly evolving and changes in the success rates and timing of resolutions of these motions can have a significant impact on how certain types of software and other types of patents should be valued. Given that changes in patent eligibility law may change the risk profile of an investment, those who invest in software patents in particular are well advised to keep abreast of changes, trends and new precedents.

Discoverability of litigation funding agreements and communications with funders 9.27 The trial stage of US patent litigation proceeds in federal district courts, which are governed by the fact discovery rules set forth in the Federal Rules of Civil Procedure. Whether funding agreements and communications between a 50 Iancu, Andrei (2019) The Current State of Innovation within the U.S. Legal System Speech, New York City, March 22, 2019. Journal of the Patent and Trademark Office Society 101, no. 1 (2019): 11–18. Available online: https://www.uspto.gov/about-us/news-updates/remarksdirector-iancu-new-york-intellectual-property-law-association 51 943 F.3d 1371 (Fed. Cir. 2019). 52 Standing Order Regarding Motions under 35 U.S.C. § 101 and Accompanying Certifications in Cases Assigned to United States District Judge Rodney Gilstrap, dated Nov. 10, 2015. Available online: http://www.txed.uscourts.gov/sites/default/files/judgeFiles/Standing_Order_ Regarding_Motions_Under_35_USC_101.pdf

262

Key funding-related issues in US patent cases 9.29

claimholder, their attorneys, and a litigation funder are discoverable in federal litigation is a significant, developing issue that impacts both patent infringement and other federal claims. Because the use of litigation funding is increasingly popular in patent cases, some recent decisions from federal district judges resolving discovery disputes have shed some helpful light on the considerations and best practices that litigants, counsel, and funders may consider when seeking to ensure confidentiality of their agreements and communications. 9.28 For example, in Lambeth Magnetic Structures v Seagate,53 defendants moved to compel production of certain documents that the plaintiff had withheld as subject to both attorney–client privilege and work-product protection. The plaintiff had identified these withheld documents on a timely-served privilege log, and they included the plaintiff’s communications with litigation funders (including funders who did not ultimately fund the litigation) and an unredacted version of the actual funding agreement in place.54 The judge elected to analyse whether the funder-related documents were protected based on the workproduct immunity, which provides that ‘documents and tangible things that are prepared in anticipation of litigation or for trial by and for another party or its representative (including the other party’s attorney, consultant, surety, indemnitor, insurer, or agent)’ is protected from discovery as work product.55 Further, the court noted that the work-product immunity applies ‘when in light of the nature of the document and the factual situation in the particular case, the document can fairly be said to have been prepared or obtained because of the prospect of litigation,’ and further assessing whether the state of mind of the party preparing the document was an objectively reasonable belief that litigation was forthcoming.56 The court further noted that work-product privilege may be overcome if the party seeking discovery can show ‘a substantial need for the materials to prepare its case and cannot, without undue hardship, obtain their substantial equivalent by other means.’57 9.29 The Seagate defendants argued that the communications with litigation funders prior to entering a funding agreement were commercial in nature and, accordingly, not subject to work-product protection.58 However, the judge held otherwise, and found such communications to be the subject of work-product immunity ‘because they were communications with Plaintiff’s agents and in anticipation of litigation.’59 Additionally, the judge explicitly considered and found that the redacted segments of the litigation funding agreement was properly entitled to work-product immunity because it was ‘undisputedly prepared in anticipation of the instant litigation and for the purpose of pursing 53 Lambeth Magnetic Structures, LLC  v Seagate Tech. (US) Holdings, Inc. No. 16-538, 2018 WL 466045, at *1 (W.D. Pa. Jan. 18, 2018). 54 Ibid. 55 Ibid. at *2 (quoting Fed. R. Civ. P. 26(b)(3)(A)). 56 Ibid. (quoting Martin v Bally’s Park Place Hotel & Casino, 983  F.2d 1252, 1264 (3d Cir. 1993)). 57 Ibid. (quoting Fed. R. Civ. P. 26(b)(3)(A)(ii)). 58 See ibid. at *5. 59 Ibid. (citing Fed. R. Civ. P. 26(b)(3)(A)).

263

9.30  Types of litigation and arbitration that attract and are attractive to litigation finance

the litigation.’60 Notably, the defendants did not even attempt to argue that the privilege should be waived due to a substantial need for their production.61 Accordingly, the defendants’ motion to compel production was denied. 9.30 Similarly, in MLC  Intellectual Property v Micron, the defendant moved to compel production of the plaintiff’s litigation funding agreement and identification of the plaintiff’s litigation funder on the grounds that such discovery was necessary ‘to uncover possible bias issues.’62 The defendant opposed the plaintiff’s request by noting that it had properly completed all required disclosures regarding entities with a financial interest in the controversy, which did not mandate disclosure of a litigation funder or litigation funding agreement in a patent infringement litigation, and certified that no third-party fact witnesses were funding the litigation.63 Ultimately, the judge concluded that the defendant was not entitled to this discovery because it was not relevant and all assertions of potential bias or conflicts of interest were speculative.64 Indeed, the court distinguished the defendant’s authorities that ordered production of fee or funding agreements ‘when there is a specific, articulated reason to suspect bias or conflicts of interest,’ and stated that, if the case reached trial, ‘the Court can question potential jurors in camera regarding relationships to third-party funders and potential conflicts of interest.’65 Thus, without even considering the propriety of work product or any other privilege, the court concluded that pure speculation about bias and conflicts was insufficient to make litigation fundingrelated discovery relevant and appropriate.66

Funding for university-owned patents 9.31 Universities, colleges, and research-focused institutions around the world hold leading roles in advancing science and technology in every field. For many, research yields exciting and valuable new innovations that the university is keen to protect by filing for a patent, but ultimately ill-positioned to convert into an ongoing, profit-generating business. Thus, many such institutions have technology transfer offices (TTOs) or similar internal organisations that are dedicated to helping universities and other research institutions license their valuable inventions to third parties that are able to commercialise them and make these advancements available to the public. 9.32 Universities and their TTOs are increasingly turning to litigation funding to help them support their licensing programmes by intelligently enforcing

60 Ibid. at *6. 61 Ibid. at *6, n.8. 62 MLC Intellectual Prop., LLC v Micron Tech., Inc. No. 14-cv-03657-SI, 2019 WL 118595, at *1 (N.D. Cal. Jan. 7, 2019). 63 See Ibid. at *2. 64 See Ibid. 65 Ibid. 66 See Ibid.

264

Patent litigation strategies especially amenable to litigation funding 9.34

patents to ensure full and fair value is paid for any inventions commercially used.67 Indeed, many large universities and research centres generate far more valuable patents than the TTO is able to efficiently license out to existing industry or startup companies. By enlisting the support of a litigation funder, TTOs can take the expense of litigating against infringers and thereby developing an enforcement component to their licensing campaigns off their financial balance sheets. The use of non-recourse financing to expand a TTO’s toolkit to incorporate strategic assertion of patent assets creates a win–win scenario for both TTOs and litigation funders – TTOs can abide their budget while generating useful revenue for the university from litigation and related settlements, while funders can invest in the assertion of innovative patents that may otherwise not generate revenue for anyone. The increasing trend for TTOs and litigation funders to partner up to bring meritorious patent infringement litigation is a growing trend.68

PATENT LITIGATION STRATEGIES ESPECIALLY AMENABLE TO LITIGATION FUNDING 9.33 In sum, patent litigation presents an enticing investment opportunity that appeals to many litigation financiers in general. Financiers seeking to invest in patent litigation may find themselves spoiled for choice among many different proposals. However, there are certain attributes that are often the hallmarks of especially good opportunities. First and foremost, patent infringement cases that involve ‘battle-tested’ patents that already have been successfully asserted in litigation that concluded with an infringement verdict and damages award are appealing, as are patents that have been the lead attributes in successful licensing programmes. Once a patent or patent portfolio has proven to be valid and infringed by one party, it is quite likely that competitors in the same space may need a licence. Similarly, when many competitors in the same industry have already taken a licence to certain patents, it becomes easier to convince others to do the same. Thus, battle-tested patents and portfolios are usually the first choice for investors. 9.34 Many investors also prefer to fund patent litigation strategies where the patent owner has a large portfolio with many patents and patent families under common ownership and where the individual patent families are directed to the same or similar types of technology. In such a situation, it is possible to bring suit simultaneously on multiple patents that protect different aspects of the same accused products, thereby increasing the risk to a defendant that it will ultimately owe damages for infringing a valid, enforceable claim. If such a portfolio incorporates counterpart patents in more than one international jurisdiction, this is even better in a financier’s eyes – it opens the door to the multi-jurisdictional

67 Longford Capital Litigation Finance (2019) Longford Capital Funds Patent Enforcement Campaign for University of California, Santa Barbara July 30. Available online: https://www.longfordcapital.com/media/longford-capital-funds-patent-enforcement-campaign 68 Katherine Wolanyk & Emily Hostage (2020) Legal finance trends: IP & patent Apr. 9. Available online: https://www.burfordcapital.com/insights/insights-container/legal-finance-trends-ip-patent/

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9.35  Types of litigation and arbitration that attract and are attractive to litigation finance

strategic possibilities discussed earlier in this section and provides alternative pressure points for securing a settlement. 9.35 The best patent portfolios have more than patents for diverse aspects of an accused product and international counterparts, but also include pending applications. Having open patent families adds tremendous value to a patent litigation strategy. Once issued patents are involved in litigation, the accused infringers will search for and identify the most pertinent prior art they can locate – prior art which can then be submitted to the patent office for consideration by the examiner reviewing the still-pending patents. Then, the patent applicant will have the opportunity to have their claims issued over that prior art, including making any amendments that may be necessary to clarify the inventions’ novelty and obviousness despite this art. Also, patent applicants often learn more about the operation of the accused products either through litigation or the close study of the accused products required to prepare to bring a lawsuit on the related, already-issued patents. Knowledge properly gained through such exercises can then be incorporated into highly tailored claims in the pending applications. The resultant narrowly tailored claims, prosecuted in view of the best prior art known to defendants, are strong ammunition in patent infringement campaigns – the threat of asserting these new claims in related proceedings upon issuance can often drive positive resolutions in litigation after the first few patents asserted fall victim to prior art or infringement issues. In sum, it is very valuable to have open patent families and maintain pending continuation or continuation-in-part applications during the pendency of any funded patent litigation. 9.36 A word should also be said about the benefits of investing in patents that are infringed by all players in a certain industry. In many computer, electronics, and communications-related fields, there exist standard essential patents that have been so-designated because they must be practised by any product that conforms to certain industrial standards, such as 802.11g or 5G wireless technology. Standard essential patents are subject to fair, reasonable, and non-discriminatory (FRAND) licensing requirements; however, this merely operates as a limitation on the rate that may be charged in a real or hypothetical licensing negotiation and does not prohibit asserting such patents in infringement litigation. Indeed, standard essential patents tend to make for attractive investments because infringement is often nearly a foregone conclusion, where the case then centres on only validity, damages, and other defences. 9.37 Finally, many litigation funders prefer patent infringement investments because they present true ‘David v Goliath’-type opportunities. Frequently, a small start-up company or an individual inventor has a terrific idea that is patented and then promptly usurped by one or more larger companies that become aware of the invention. Without the financial support of a litigation funder, just compensation for the these brilliant ‘Davids’ who have materially advanced technology through their patents would be denied by the fiscal and legal muscle of multinational ‘Goliaths’. Litigation finance is truly at its best when it can both enable a patent owner to make a great recovery and correct an injustice by supporting an innovative underdog. 266

PART B

Insolvency Christian Toms Partner, Brown Rudnick LLP, London

Evolution of funding insolvency matters Key considerations for insolvency practitioners Availability of legal expenses insurance Creditor financial support Other forms of external finance Assignment options Other considerations: contingent fees and ATE insurance

9.39 9.44 9.48 9.49 9.50 9.51 9.60

9.38 While certainly in the context of mainstream commercial litigation and arbitration the benefits and opportunities afforded by litigation finance have in recent years become far more commonly understood, and the options for parties have become far more readily accessible, it is sometimes overlooked that to some extent the role of third parties in financing and pursuing bankruptcy- and insolvency-related claims is not a new phenomenon.

EVOLUTION OF FUNDING INSOLVENCY MATTERS 9.39 It was only as ‘recently’ as 1880 that the English Court of Appeal expressly confirmed and approved the concept of third-party involvement in claims in an insolvency context. In the case of Seear v Lawson,69 Sir George Jessel MR said: If the trustee gets a right of action, why is he not to realise it? The proper office of the trustee is to realise the property for the sake of distributing the proceeds among the creditors. Why should we hold as a matter of policy that it is necessary for him to sue in his own name? He may have no funds, or he may be disinclined to run the risk of having to pay costs, or he may consider it undesirable to delay the winding up of the bankruptcy until the end of the litigation.

69 [1880] 15 Ch.D. 426 at 433.

267

9.40  Types of litigation and arbitration that attract and are attractive to litigation finance

9.40 The primary logic behind this approach appears to have been twofold. First, trustees and liquidators ultimately act on behalf of creditors, and therefore are possessed of an express duty and purpose to seek to realise value for the parties who are primarily at risk of loss in an insolvency context; and second, these same trustees and liquidators derive their powers, duties and obligations from statute. 9.41 That said, the ratio in Seear v Lawson was not necessarily about what we now would regard to be third-party funding; rather, it was at that time primarily focused on the issue of assignments, ie  the ability of a trustee to assign to a third party, for value, a claim otherwise owned by an insolvent estate, on the understanding that the third party may then pursue that claim in their own name in order to recoup the original investment made to acquire the claim. In England and Wales, what we now regard as more mainstream financing arrangements largely remained unlawful until the passage of the Criminal Law Act 1967 (the 1967 Act), although even this was arguably the final crashing of a wave that had been building for some time. Already in 1949 England had seen the introduction of State funding of litigation through the Legal Aid and Advice Act, and in 1955 the Court of Appeal had considered and expressly disapproved of the rationale for prohibitions on maintenance and litigation funding.70 That said, it was still not until the passage of the 1967 Act71 that it actually could no longer be said to be a crime or a civil tort for anyone to obtain funding from a third party in support of litigation, even if such funding was provided freely and not in return for a share of the proceeds. 9.42 However, even while the 1967 Act did formally abolish criminal and tortious liability for maintenance and champerty, it nevertheless preserved a public policy exception72 and therefore a power to strike down any arrangement which was deemed to be contrary to such public policy. Indeed, it remains the position in several jurisdictions that have embraced the concept of litigation finance that such funding agreements will be upheld so long as they do not offend issues of public policy. In England and Wales this has been explained as including undesirable features which might inflame damages, suppress evidence, suborn witnesses or otherwise undermine the ends of justice.73 Most typically though, the key concern is to ensure adherence to the prohibition on undue influence or excessive control being exercised over a matter by parties with merely a commercial rather than a substantive interest in any dispute. 9.43 Several decades on from the changes wrought by the 1967 Act, the profile of litigation finance is now far more developed in the public consciousness, and in a growing number of jurisdictions around the world is increasingly being seen as an acceptable and in some instances indispensable option to support the provision of access to justice to a much wider base of potential claimants. A key constituency of such potential claimants can be found amongst the ranks of the impecunious in insolvency. 70 71 72 73

Martell v Consett Iron Company Ltd [1955] 1 Ch 363. Specifically, Criminal Law Act 1967 ss 13 and 14. Criminal Law Act 1967 s 14(2). R (Factortame) v Secretary of State for Transport (No. 8) [2003] QB 381.

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Availability of legal expenses insurance 9.48

KEY CONSIDERATIONS FOR INSOLVENCY PRACTITIONERS 9.44 When an insolvency practitioner (the IP) first takes office, whether as an Administrator, Liquidator, Trustee or in some other such capacity, amongst their various duties they will urgently seek to ascertain if and where any value may still lie in the insolvent estate. This may include the existence of potentially valuable claims (prospective or already ongoing). For example, relatively straightforward debt claims arising from unpaid invoices, and/or potentially far more complex and fact-sensitive claims that might arise against directors for breaches of duty, or creditors/shareholders and other third parties for the return of certain recent payments and dividends. 9.45 If an IP identifies a potential claim they will then need to consider a number of factors, such as: what further work might be required fully to explore and investigate a claim, and to gather any necessary evidence; what is the realistic value of the claim versus the likely cost to pursue it; does the prospective target of any claim even have sufficient and easily accessible assets to be worth pursuing; and of course the likely prospects of success of the substantive claim itself. 9.46 That said, even if a consideration of all of those issues still returns a green light, the ultimate question must still be whether there are sufficient assets left to meet the likely expense of the exercise in the worst case, ie is there sufficient left to cover the costs of not only pursuing the action to its conclusion but also (in jurisdictions where this issue may arise) paying the legal costs and expenses of the other side in the event that the action is lost, ie the risk of an adverse costs order being made by a court/tribunal. 9.47 If there may be inadequate assets within the estate itself to fund what may be regarded to be potentially valuable and meritorious claims, then the IP will need to have regard to other potential funding options that may be available, and to weigh up the cost–benefit of the same. These options may include any or all of the following.

AVAILABILITY OF LEGAL EXPENSES INSURANCE 9.48 Depending upon the nature of the dispute it may be possible to draw upon existing legal expenses insurance policies to cover the costs of proceedings. These policies (usually called before-the-event or BTE insurance) sometimes come bundled with other business insurance policies, and typically will have been taken out long before legal proceedings were ever in contemplation. The benefit of such polices is that they can cover some or all of the potential cost liability in a legal dispute, but they are also likely to be fairly specific as to the kind of cover offered and therefore the types of disputes they can be applied to. 269

9.49  Types of litigation and arbitration that attract and are attractive to litigation finance

CREDITOR FINANCIAL SUPPORT 9.49 Alternatively, there is of course the possibility of seeking funding from one or more creditors in the insolvency, as it is obviously in their interest if there is a route to boosting the recoveries or value of the insolvent estate. However, it is often the case that unless success is assured, which is rare, creditors may be reluctant to commit yet further money where they may already be looking at significant losses arising out of the original insolvency. That said, even when an IP may have willing creditors, tensions may still arise where there are multiple creditors whose interests need to be managed. For example, in discussing potential financing there may arise questions as to: who may be able to contribute; if and how should all creditors be offered the opportunity to take part; how would any process be managed; and perhaps most crucially of all, how will any eventual recoveries be distributed, particularly if only some and not all creditors have provided funding?

OTHER FORMS OF EXTERNAL FINANCE 9.50 It is also possible that an IP may introduce its own firm to fund pursuit of a particularly meritorious claim, but this does of course present some additional issues for the IP. First, there is the obvious risk of allegations of conflicts of interest given the dual role the IP and its firm would arguably now be fulfilling. However, provided a transparent and robust process was pursued when exploring and then determining the best available funding options for the estate, it is assumed that any such risk could be substantially mitigated. Second, there is now the very real risk of an IP firm being affixed with liability for adverse costs in the event that it funds an action in return for a promised benefit, but the claim is unsuccessful and the underlying claimant is unable to satisfy an adverse costs order,74 which in an insolvency scenario is a very likely outcome if a claim is unsuccessful. That said, this risk is less likely to eventuate where an IP is merely facilitating support by relatively ‘low-level’ funding, and/or funding which is limited in nature. Similarly, where the remuneration of an IP may be linked to realisations, this too would not in and of itself render an IP anything more than a ‘pure funder’.

ASSIGNMENT OPTIONS 9.51 Where other external sources of primary finance might be unavailable or unfeasible, the other options open to an IP involve effectively monetising any claims through commercial arrangements with third parties. This might be achieved by assigning all or part of a claim in exchange for an immediate or future realisation of cash for the benefit and use of the estate; and/or agreeing 74 Burnden Holdings UK and another v Fielding [2019] EWHC 2995 (Ch).

270

Assignment options 9.56

a commercial funding deal with a third-party funder to support the pursuit of a claim in exchange for a contractually binding entitlement in favour of the funder allowing them to recoup the initial funding as well as to share in any proceeds. 9.52 Sometimes these two options can be somewhat interchangeable, as in the current market place third-party funders can often offer traditional litigation funding arrangements to IPs to support them in their own pursuit of claims, and in other instances are willing and interested to effectively acquire claims as an assignee in return for an initial cash payment to the estate and sometimes also a subsequent share in any proceeds. 9.53 As already noted above, prior to the formal recognition of the lawfulness of what are now increasingly common third-party finance arrangements, assignments were often the more common route for IPs to ‘sell’ claims and thereby to realise value for an estate. Indeed, this remains a popular approach, with an increasingly competitive market for the commercial purchase of claims, as well as judgments and awards. 9.54 There are various ways in which an assignment may be effected to a ‘funder’ and the route taken will impact the level of risk to which an IP and the insolvent estate may remain exposed. 9.55 If a claim is assigned outright, ie  sold in exchange for an immediate, total cash payment or transfer of another asset, the connection with the insolvent estate will be severed. Accordingly, no liability will arise on the part of either the IP or the estate in relation to what the assignee may then subsequently proceed to do, and this includes liability for any adverse costs that ultimately might be awarded against an assignee should they bring a claim and be unsuccessful. However, while this may represent the least troublesome option, and arguably gives the greatest protection for an IP and an estate, this is not always going to be the way to achieve the most value as the acquiring party will obviously price their offer accordingly, to reflect the various risks, and the costs and time they will still need to invest in order to see a return. 9.56 Another option, already touched on above, may be to not sell the action in return for an outright payment, but rather to assign it in return for a share of any proceeds. This is obviously riskier on a few levels. First, while the estate may remain interested in the claim, control is again no longer with the IP. Second, while it may be a benefit for the responsibilities and costs of pursuing the claim to be shifted to the assignee, if the claim is unsuccessful the estate would receive nothing. Third, and again in the event that the claim is unsuccessful, there remains a risk that the estate may still be deemed liable for some or all of the legal costs of the other (successful) party to the action by reason of an adverse costs order made by the court or tribunal. Some third-party funders that pursue this option will seek to mitigate this risk through after-the-event (ATE) insurance and/or provision of an indemnity, but in reality the level of protection when pursing this form of assignment will typically be dictated by the ultimate credit worthiness of the assignee, ie their ability to meet any adverse costs order in the first instance. 271

9.57  Types of litigation and arbitration that attract and are attractive to litigation finance

9.57 A yet further option may be for the insolvent estate to retain the cause of action but to assign a share of its proceeds in return for a payment. It might then use this payment to replenish its war chest and fund the proceedings. This option has the clear benefit of complete control remaining with the IP, but it may also be the costlier and far riskier option in terms of running costs, adverse costs exposure and related liabilities. 9.58 It should also be noted here that it may be possible, where an IP has taken the view that a claim has insufficient merit and/or refuses to assign a particular claim, for that IP to be compelled by the court to assign the claim. However, such an application would appear most likely to succeed where the demand being made is to assign the claim to a creditor, and even then the court would first need to be persuaded that a failure to assign the claim would result in the creditors suffering unfair harm, and for the court to be comfortable that any assignment would not be likely to result in matters likely to impede the effective conduct of the administration, and for it to be the case that a full indemnity was to be made available by the assignee.75 Unsurprisingly, these are not necessarily straightforward matters to satisfy. 9.59 Of course there are some claims that as a matter of law are not assignable by an IP. These are typically confined to specific officeholder claims, ie matters that arise separately from, and therefore are not deemed to form part of, the assets, rights, and entitlements of an insolvent estate. They arise in the personal capacity of the IP as derived from their statutory rights and powers. For example, an IP is not generally permitted to assign its right to conduct proceedings in the name of the company,76 and prior to October 2015 such non-assignable matters also included claims for fraudulent trading,77 transactions at an undervalue78 and unlawful preferences.79 However, from 1 October 2015 and the implementation of s 246ZD of the Insolvency Act 1986,80 the scope of claims that IPs are able to assign (including the proceeds of such actions) was extended to include the above matters, along with a number of other claims81 that office holders had long held solely in their personal capacity in the context of their statutory authority.

OTHER CONSIDERATIONS: CONTINGENT FEES AND ATE INSURANCE 9.60 Where, though, an IP retains control of any litigation, whether funded by existing assets, a third party or the proceeds of an assignment, an additional 75 Hocking v Marsden [2014] EWHC 763 (Ch); LF2 Ltd v Supperstone and Shiners [2018] EWHC] 1776 (Ch). 76 Ruttle Plant Ltd v Secretary of State for Environment (No 3) [2008] EWHC 238 (TCC). 77 Insolvency Act 1986 (IA 1986) s 213 or 246ZA. 78 IA 1986 s 238. 79 IA 1986 s 239. 80 Small Business Enterprise and Employment Act 2015 (SBEEA) s 118. 81 Eg wrongful trading pursuant to IA 1986 s 214 or s 246ZB, and extortionate credit transactions pursuant to IA 1986 s 244.

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Other considerations: contingent fees and ATE insurance 9.62

aspect of any financing arrangement may be the need to strike some form of deal with the lawyers who will be instructed to prosecute the matter. This may be by way of: (a) a partial or significant reduction on their fees during the life of a dispute, in return for the prospect of a success fee or uplift82 that will fall to be paid on a successful outcome; or (b) a 100 per cent fully contingent fee,83 ie a no-win-no-fee deal, in return for a promise to pay the lawyer a significant percentage of any amounts received on a successful outcome. Accordingly, in the event that a claim is unsuccessful, the IP’s own side’s cost liability may be significantly lowered or even eliminated. While then taking advantage of these options ultimately will reduce the maximum amount that may eventually be received into the estate on a successful outcome, they nevertheless may assist an IP to streamline the cost profile of any litigation during its life, thus enabling it to be run far more cost-effectively and potentially in situations where it might not otherwise have been possible to run the claim at all. 9.61 That said, in the case of conditional and contingent fee arrangements IPs do need to be careful to ensure that the trigger for any lawyer’s success fee is suitably constrained and linked to actual enforcement of a judgment and receipt of funds. A failure to do so might result in an IP becoming personally liable for payment of a lawyer’s success fee when despite a win on paper no funds are actually recovered.84 Additionally, and specifically as to damages-based agreements, aside from the current anecdotal understanding as to their limited take-up across all forms of financed litigation, it has also been posited that there could potentially arise an ‘insuperable conflict of interest’ where a lawyer wishes to benefit from a percentage of any proceeds of an action. This in turn raises the question as to whether an IP could be acting in the best interests of the creditors by agreeing to such an agreement rather than a more conventional conditional fee agreement.85 9.62 Of course, even reduced or contingent fee arrangements with lawyers cannot eliminate the adverse cost risk that may arise in arbitration claims and court litigation undertaken in cost-shifting jurisdictions like England and Wales. In such situations another form of insurance will often be essential to an IP if the pursuit of any claims is to be feasible, ie  ATE insurance. This type of policy, as its name suggests, is purchased after the inception of a legal dispute in order to protect a claimant from exposure to any adverse costs associated with litigation and arbitration (ie those of the other party). When ATE was first introduced in England and Wales in 199586 its insurance premiums were financed by the claimant, but the rules were then subsequently changed in 199987 to make 82 a Conditional Fee Agreement or CFA initially introduced pursuant to the Courts and Legal Services Act 1990 83 a Damages Based Agreement or DBA initially introduced pursuant to the Legal Aid, Sentencing and Punishment of Offenders Act 2012 84 Stevensdrake Ltd (t/a Stevensdrake Solicitors) v Hunt [2017] EWCA Civ 1173 85 Professor Peter Walton (2020) Insolvency Litigation Funding – in the best interests of creditors? April 2020, Wolverhampton University, para 5.4.6. 86 The Conditional Fee Agreements Order 1995, SI 1995/1674; the Courts and Legal Services Act 1990. 87 The Access to Justice Act 1999.

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9.63  Types of litigation and arbitration that attract and are attractive to litigation finance

ATE premiums recoverable from the losing defendant. The rules, however, then changed once again following a wide-ranging review undertaken by (then) Lord Justice Rupert Jackson into the costs of civil litigation,88 and in the case of insolvency litigation in England & Wales ATE premiums are now no longer recoverable from the opposing party for policies entered into on or after 6 April 201689. ATE premiums are now, therefore, once more something an IP may need to factor into any calculation of the costs of pursuing an action. 9.63 Finally, ATE insurance can also play another potentially essential role in the support of insolvency litigation, specifically in the context of applications for security for costs. As explained in more detail elsewhere in this publication, security for costs is a remedy that can be sought by a defendant where there is a reasonable concern that should a claimant lose its claim it would be unable to meet any adverse costs order that then may be made against it. This issue is therefore most likely to arise in court litigation in jurisdictions such as England and Wales and increasingly in international arbitration matters, and of course is highly likely to arise in matters where the claimant is insolvent. Therefore, because an inability to meet the demands of a security for costs order will usually be fatal to the pursuit of a claim, it is critically important that there be some ability to satisfy such an order available to insolvent claimants. It is of course fair to say that in many cases the predicament of insolvent claimants will be given careful consideration when a court or tribunal seeks to determine an application for security for costs, and a defendant will not win its application simply because a claimant is insolvent, particularly if the making of an order might effectively stifle an otherwise meritorious claim against a party whose very conduct may have played a part in the advent of the claimant’s insolvency in the first place. However, ATE can also in such instances be a useful tool in an IP’s armoury. As to the specific utility of ATE, the English Court of Appeal has previously confirmed that in its view an appropriately framed ATE insurance policy can in theory satisfy an application for security for costs,90 with the key question being whether the relevant ATE policy gives ‘sufficient protection’ to a defendant. Accordingly, where a policy is worded such that there is a risk an insurer might be able to avoid or cancel the policy and/or there may be a lack of certainty as to which party ultimately might have control of any proceeds of an ATE policy,91 then it is unlikely that this alone would satisfy an order for security for costs. That said, depending on the level of uncertainty or risk, it might simply be that some limited, additional security would be all that was required on top,92 or an additional element such as an indemnity93 might be acceptable.

88 Lord Justice Rupert Jackson (2009) Review of Civil Litigation Costs: Final Report, December 2009 (the ‘Jackson Report 2009’). 89 The Legal Aid, Sentencing and Punishment of Offenders Act 2012 (Commencement No. 12) Order 2016, SI 2016/345, art 2. 90 Premier Motorauctions Ltd (in liquidation) and another v Pricewaterhousecoopers LLP [2017] EWCA Civ 1872. 91 Catalyst Managerial Services v Libya Africa Investment Portfolio [2017] EWHC 1236 (Comm). 92 Bailey and others v Glaxosmithkline UK Ltd [2017] EWHC 3195 (QB). 93 Recovery Partners GB Ltd and another v Rukhadze and others [2018] EWHC 95 (Comm).

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Other considerations: contingent fees and ATE insurance 9.64

9.64 Overall, it certainly appears that third-party finance and assignments of actions are an integral part of the insolvency system and can be key weapons in the toolbox of IPs when considering the efficient and cost-effective pursuit of potentially meritorious causes of action. Indeed, while it may still be the case that the commercial funding and assignment market is still developing, it clearly has increased significantly in the past few years, including in terms of growth of the insolvency funding market, with a 2020 study noting that in England and Wales the overall value of insolvency claims being pursued using different forms of support (whether CFAs, ATE, third-party funding or assignment) is likely to have increased since 2015 from approximately £1 billion to nearer £1.5 billion per annum.94 Not only is it to be expected that this pattern is being replicated in other key insolvency jurisdictions such as Australia and the United States, but it is currently difficult to see that this growth will do anything but continue, and potentially even accelerate as markets mature and more developed and flexible commercial funding and finance offerings are offered to the market.

94 Professor Peter Walton (2020) Insolvency Litigation Funding – in the best interests of creditors? April 2020, Wolverhampton University.

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PART C

Treaty arbitration Neill Shrimpton Partner, Brown Rudnick LLP, London

Imogen Winfield Associate, Brown Rudnick LLP, London

The parties 9.73 Value 9.78 Costs 9.82 Conclusions 9.85

9.65 Investment treaties and the arbitration proceedings which may flow from them are now familiar in the modern legal landscape. In the absence of a relevant treaty, under public international law, only a State can sue another State; an investor in a foreign State has no right of direct recourse against that State. Rather, in the absence of a relevant treaty, it would be required to approach its own State’s authorities to seek recourse at the State level. Any compensation recovered would be for the benefit of the State rather than the investor and it would be at the discretion of the State as to whether any compensation was passed to the investor. 9.66 This historical lack of a direct remedy for investors in foreign States has been largely addressed by the introduction of investment treaties between States. They are, in effect, agreements between States as to the treatment by each State of investments made by individuals or companies from the other State(s). Relevant treaties take one of two forms. They can be either standalone treaties between two State parties (bilateral investment treaties) or they can be part of broader free trade agreements involving a number of States (multilateral investment treaties). Their intention is to promote cross-border investment by providing protections for international investments and protection against political risk. 9.67 Most investment treaties provide that disputes between member States and investors are to be resolved through international arbitration, pursuant to either the rules of the International Centre for the Settlement of Investment Disputes (ICSID) or pursuant to the rules of the United Nations Commission on International Trade Law (UNCITRAL). 277

9.68  Types of litigation and arbitration that attract and are attractive to litigation finance

9.68 The protections afforded by investment treaties to foreign investors vary from case to case. They can include: a requirement that foreign investors be treated no less favourably than investors from the home State, a commitment to afford foreign investors fair and equitable treatment; and protection against expropriation without due process and adequate compensation. 9.69 There is no general presumption in funded investment treaty arbitrations that claimants should disclose information about third-party funding or that they or their funder provide security for the respondent’s costs, although these issues attract regular debate. Neither the ICSID nor the UNCITRAL rules historically required either. 9.70 ICSID, which is currently consulting on proposed updates to its rules and regulations, has to date chosen not to mandate disclosure of information relating to funding other than to require disclosure of the existence of thirdparty funding and the name and address of the funder (consistent with many investment treaties),95 noting that tribunals may order appropriate disclosure of relevant documents or information in any event. It also declined calls from some States for the existence of third-party funding alone to justify ordering security for costs, ‘consistent with case law on third-party funding and security for costs and with the comments of most States’, and confirmed the tribunal’s duty to consider all relevant evidence adduced by the parties when considering applications for security for costs, which may include third-party funding.96 As concluded in the April 2018 Report of the ICCA–Queen Mary Task Force on Third-Party Funding in International Arbitration (the ICCA/QMUL Report), while respondent States are free to seek security for their costs on a case-by-case basis, a systemic security for costs regime for funded cases would likely push up the cost of funding and ultimately penalise a party for not having resources, even where that was caused by the other party’s conduct (for example, wrongful expropriation by the State).97 9.71 An UNCITRAL working group is similarly in the process of considering reforms related to third-party funding but has indicated that tribunals should retain discretion to determine the extent of disclosure beyond a funder’s existence and identity based on the circumstances of the case, and that the existence of third-party funding alone would not be sufficient to justify an order for security for costs.98 95 United Nations Commission on International Trade Law (2019) Possible reform of investorState dispute settlement (ISDS) Third-party funding – Possible solutions. Footnote 7. Available online: https://uncitral.un.org/sites/uncitral.un.org/files/wp_172_21_aug.pdf. 96 ICSID  Working Paper #3, August 2019, pp 295–296. Available online: https://icsid. worldbank.org/sites/default/files/amendments/WP_3_VOLUME_1_ENGLISH.pdf. See also ICSID  Working Paper #4, February 2020, pp 295, 322–325. Available online: https://icsid. worldbank.org/sites/default/files/documents/WP_4_Vol_1_En.pdf. 97 Report of the ICCA-Queen Mary Task Force on Third-Party Funding in International Arbitration, April 2018, Chapter 9, pp 221–226. 98 United Nations Commission on International Trade Law (2019) Report of Working Group III (Investor-State Dispute Settlement Reform) on the work of its thirty-eighth session paras 90 and 94. Available onlne: https://undocs.org/en/A/CN.9/1004

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The parties 9.74

9.72 Some commentators have voiced concern that third-party funding of investment treaty claims amounts to an exploitation of taxpayer funds where wealth is transferred from respondent States to funders and their investors.99 The ICCA/QMUL Report observes that those who criticise third-party funding of investment treaty claims tend to have a negative view of investment treaty arbitration more broadly. The social value of investment treaty arbitration has been questioned by those who only regard it as a legitimate process to the extent that it facilitates and promotes investment which contributes to sustainable economic and social development, as opposed to more opportunistic claims that might constrain government objectives. Some worry that third-party funding could encourage speculative, marginal or frivolous investor claims, although it is also possible to argue the opposite – the merits of a funded case are assessed by an independent funder long before the tribunal does so and the involvement of funders may therefore weed out unmeritorious claims at an early stage. There is also the concern that investment treaty arbitration provides an unfair advantage to foreign investors where the same damages are not available under domestic law or to investors outside the investment treaty regime.100 Nonetheless, there are a number of features of investment treaty arbitration which make this field of dispute resolution particularly suitable for, and amenable to, the involvement of litigation funding. These are principally: (1) the identities of the parties and their relative (in)equality of arms; (2) the typical value of investment treaty disputes; and (3) the costs typically involved in bringing or defending an investment treaty dispute.

THE PARTIES 9.73 By definition, every investment treaty arbitration involves an individual or corporate investor in a foreign State as claimant and the foreign State itself as respondent. The potential for an extreme inequality of arms requires no further explanation. On the one hand, the claimant’s business may have been significantly impaired by the actions of the State and the claimant may therefore have very little source of income (or none at all) from which to fund its claims. Meanwhile the respondent has at its disposal the full resources of the State both in terms of finance and personnel. 9.74 The costs of investment treaty arbitrations are addressed below but tend to be very significant in any event. In Tenaris S.A. and Talta v Venezuela,101 total costs amounted to more than US $8 million for the claimant and US $6.9 million 99 Frank J. Garcia (2018) Third-Party Funding as Exploitation of the Investment Treaty System, Boston College Law Review, Volume 59, Issue 8, Article 15, page 2919. 100 Report of the ICCA–Queen Mary Task Force on Third-Party Funding in International Arbitration, April 2018, Chapter 9, pp 200–203. 101 Tenaris S.A. and Talta – Trading e Marketing Sociedade Unipessoal Lda. v Bolivarian Republic of Venezuela (ICSID Case No. ARB/11/26). Available online: http://icsidfiles.worldbank.org/ icsid/ICSIDBLOBS/OnlineAwards/C1820/DC7492_En.pdf

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9.75  Types of litigation and arbitration that attract and are attractive to litigation finance

for the respondent State. In Adel A Hamadi Al Tamimi v Oman,102 the claimant’s total costs came to more than US $15.5  million, while the respondent State claimed total costs of US $7.6  million, of which the claimant was ordered to pay US $5.7  million (a 75 per cent share). In each case, total costs included fees and disbursements of lawyers, witnesses, consultants, the tribunal and ICSID (save for Venezuela, which did not make any payments to the tribunal or ICSID in Tenaris S.A. and Talta v Venezuela). In the largest of cases, costs can be significantly greater. In the Yukos claims against Russia, the claimants’ costs were US $81.4 million and the respondent’s costs were US $31.5 million.103 9.75 In addition, a respondent State may be incentivised to exaggerate the impact of the inequality of arms by dragging out the arbitration, making it as complex and expensive as possible in an attempt to exhaust the finances and other resources of the claimant such that it is no longer able to continue its pursuit of the claims. The very survival of a corporate claimant may be jeopardised in circumstances where its main asset has been significantly impacted and it is faced with multimillion pound legal fees to seek redress against a foreign State in proceedings which may take many years to be resolved. 9.76 In addition, many investment treaty claims arise in circumstances where a foreign company has invested in a major project in the host State. The funding for the project will have been provided by banks and other funders with an interest and expertise in such projects. If the project fails (due to State intervention or otherwise) such that arbitration is the only solution, new funding for the arbitration will be required and probably from a new source, ie a litigation funder with the necessary expertise in arbitration. 9.77 Funders will be interested in the opposing party and the prospect of any recovery (in particular, whether the respondent is solvent and could be easily enforced against). Clearly, respondent States are less likely to become insolvent than corporate respondents to commercial arbitration. Enforcement may also be simpler under investment treaties: Article 54(1) of the ICSID Convention requires all contracting States to enforce an ICSID award as if it were a final judgment of their own courts, without any review by domestic courts. Nonetheless, some States will be easier to enforce against than others: in Crystallex v Venezuela104 a US court acknowledged ‘there is some likelihood that Venezuela will be either unwilling or unable to satisfy the full judgment at the end of this case’ as the funded claimant sought to enforce a US $1.2 billion award.105 102 Adel A Hamadi Al Tamimi v Sultanate of Oman (ICSID Case No. ARB/11/33). Available online: http://icsidfiles.worldbank.org/icsid/ICSIDBLOBS/OnlineAwards/C1960/DC6932_En.pdf 103 Matthew Hodgson and Alastair Campbell (2017) Damages and costs in investment treaty arbitration revisited Global Arb. Rev. (Dec. 14, 2017). Available online: https:// globalarbitrationreview.com/article/1151755/damages-and-costs-in-investment-treatyarbitration-revisited 104 Order of the US District Court for the District of Colombia, Case 1:16-cv-00661-RC, page 3 (ICSID Case No. ARB(AF)/11/2). 105 Legal Analysis: Crystallex’s chances of collecting USD 1.2bn arbitration award from Venezuela not crystal clear Debtwire, 31 August 2017, p 2.

280

Value 9.80

VALUE 9.78 Investment treaty claims arise in circumstances where a foreign national’s investment has been subject to some form of governmental action in the host State. A brief review of the cases currently pending under the ICSID rules106 reveals that the industries involved are often some of the most high-value and profitable but also those which require significant up-front investment to get a project up and running before it starts to turn a profit, eg mining, oil and gas, telecommunications and other infrastructure projects. 9.79 A  December 2017 study107 found that the mean amount claimed in investment treaty arbitrations from 2013 to 2017 was US $2,376 million and the mean amount awarded in the same period was US $1,080 million. Both of these figures are distorted significantly by the sums involved in the Yukos claims against Russia but even when those claims are excluded, the figures are US $1,133 million and US $171 million, respectively. The difference between the sums claimed and the sums awarded demonstrates that there is an element of claim inflation and that some of the higher value claims tend to be the least successful. A potentially more reliable indicator of the sums at stake in investment treaty arbitration claims is that the average amount claimed where the claimant was ultimately successful was US $794 million. On any measure, these figures confirm that the sums at stake in investment treaty arbitrations can be very significant. 9.80 The obvious benefit to funders backing investment arbitration claims is the potential return, as the value of claims and the compensation awarded tend to far outweigh the equivalents available in commercial litigation or arbitration, and counterclaims from respondent States are not generally facilitated by investment treaties.108 In December 2019, it was reported that Burford Capital, having invested US $18.4 million in the Petersen Group’s claims against Argentina, had already made US $236 million by selling parts of its stake in the potential recovery.109 Similarly, Burford Capital made a 722 per cent return on a US $13 million investment when it sold its stake in Teinver v Argentina, which was ultimately successful.110 106 ICSID. Pending cases. Available online: https://icsid.worldbank.org/en/pages/cases/ pendingCases.aspx?status=p 107 Matthew Hodgson and Alastair Campbell (2017) Damages and costs in investment treaty arbitration revisited Global Arb. Rev. (Dec. 14, 2017). Available online: https://globalarbitrationreview.com/ article/1151755/damages-and-costs-in-investment-treaty-arbitration-revisited 108 Frank J. Garcia (2018) Third-Party Funding as Exploitation of the Investment Treaty System Boston College Law Review, Volume 59, Issue 8, Article 15, p 2915. 109 Tabby Kinder and Benedict Mander (2019) Burford chief executive fears Argentine reprisals Financial Times, 9  December. Available online: https://www.ft.com/content/bf17f624-1aa311ea-97df-cc63de1d73f4 110 Tienver S.A., Transportes de Cercanias S.A. and Autobuses Urbanos del Sur S.A. v The Argentine Republic, Award, ICSID Case No. ARB/09/1 (29 July 2019); see also Hancock (2017) Burford claims almost half of $324M Argentina arbitration win ISDS Platform. Available online: https:// isds.bilaterals.org/?burford-claims-almost-half-of-324m; Burford Capital (2019) Burford Capital announces successful conclusion to Teinver annulment applications. Available online: https://burfordcapital.com/media-room/media-room-container/burford-capital-announcessuccessful-conclusion-to-teinver-annulment-applications/

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9.81  Types of litigation and arbitration that attract and are attractive to litigation finance

9.81 Equally, though, there is scope for losses, as Vannin demonstrated when it made a loss of US $6.6 million backing an investor in arbitration against Costa Rica,111 after the claimants’ claims for c. US $100 million were denied and they were ordered to pay more than US $1 million in adverse costs (this was limited to the respondent’s advances to ICSID).112 In that case the claimant’s own costs exceeded US $8.9  million while the respondent had spent US $2.5  million (each comprising fees and disbursements of lawyers, witnesses, consultants, the tribunal and ICSID). Funders may opt to mitigate their risk by arranging portfolio funding, where a funder invests in a number of claims and provides a finance package, either to claimants with multiple disputes or to law firms running matters under conditional fee arrangements. This spreads the funder’s risk across several claims as the funder’s return will depend on the portfolio’s overall performance rather than the outcome of a single case. While the potential returns on a given claim will be lower in portfolio funding to reflect the reduced risk, funders may also be attracted to the potential securitisation of such claims.113 Portfolio financing may appeal to claimants or law firms looking to fund defences or non-monetary disputes as these can form part of an overall collateralised package of funded disputes. As the ICCA/QMUL  Report suggests, corporate claimants and law firms may also find they are able to draw down capital secured against their disputes and use this for other purposes.114

COSTS 9.82 The magnitude of the sums at stake in investment treaty arbitrations is reflected in the costs of bringing and defending such claims. The Hodgson and Campbell December 2017 study115 found that mean party costs are in the realm of US $6 million for claimants and US $4.9 million for respondents, while mean tribunal costs are around US $1 million in total. On any basis these are extremely substantial sums for the parties to fund, especially for the claimant whose business has potentially been significantly impacted by the action of the respondent State government which forms the basis of the claims. The reality is that some claimants may have no choice but to incur expensive funding to bring their claims, as has been recognised by tribunals in commercial arbitrations

111 Vannin delays IPO after defeat in Costa Rica case Global Arbitration Review, 19 October 2018. Available online: https://globalarbitrationreview.com/article/1175804/vannin-delays-ipo-afterdefeat-in-costa-rica-case#:~:text=Third%2Dparty%20funder%20Vannin%20Capital,state%20 arbitration%20against%20Costa%20Rica 112 David Aven et al. v The Republic of Costa Rica (Case No. UNCT/15/3). 113 Brooke Guven and Lise Johnson (2019) The Policy Implications of Third Party Funding in Investor State Dispute Settlement CCSI Working Paper May 2019, p 8. 114 Report of the ICCA-Queen Mary Task Force on Third-Party Funding in International Arbitration, April 2018, Chapter 9, p 38. 115 Matthew Hodgson and Alastair Campbell (2017) Damages and costs in investment treaty arbitration revisited Global Arb. Rev. (Dec. 14, 2017). Available online: https:// globalarbitrationreview.com/article/1151755/damages-and-costs-in-investment-treatyarbitration-revisited

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Conclusions 9.86

where costs are typically lower: the tribunal in Essar v Norscot116 found for Norscot and awarded them their funding costs (including the success fee payable to Woodsford) on the basis that Norscot’s impecuniosity had resulted from Essar’s conduct. 9.83 Nonetheless, third-party funding is not reserved for claimants who cannot pay; as Burford Capital observe: ‘Often, it is simply a more efficient way to address legal cost and risk. Companies that finance arbitration rather than paying out of pocket can model potential outcomes with greater certainty, given that downside risk is assumed by the financier. Additionally, financing provides a means of avoiding the often quite negative impact of legal fees and costs on accounting and reporting outcomes.’117 9.84 From a funder’s perspective, the substantial costs associated with investment treaty arbitration increase the prospect of a significant recovery as the funder takes on greater risk in exchange for greater potential reward.

CONCLUSIONS 9.85 In light of the above, the case for litigation funding for the claimant in an investment treaty arbitration is clear. In most cases, it is a classic David v Goliath situation. Investor David has potentially had his entire business and source of income expropriated by the State Goliath. He is massively out-financed and outnumbered by his opponent. If his claim is unsuccessful, he will almost certainly be ruined. But his very survival may depend on bringing lengthy, complex and expensive arbitration proceedings, regardless of the risks. In the right case, a litigation funder can remove much of the financial risk from his shoulders. The funder bears the cost of bringing the proceedings and is also likely to address the risk of an adverse costs award through after-the-event insurance or similar. 9.86 The attractiveness of litigation funding to a claimant in these circumstances seems to be borne out in practice. An article by IMF concludes: …the financial benefits and risks associated with [international commercial and treaty arbitration] claims mean that they are likely to provide attractive opportunities for third party funders into the future and accordingly be a valuable resource for claimants.118

116 [2016] EWHC 2361 (Comm) (ICC Case No. 15790//VRO). 117 Burford Capital (2018) For mining companies, international dispute resolution can be an expensive necessity—but arbitration finance offers a solution. Available online: https://www. burfordcapital.com/insights/insights-container/for-mining-companies-international-disputeresolution-can-be-an-expensive-necessity-but-arbitration-finance-offers-a-solution/ 118 S. Khouri, K. Hurford and C. Bowman (2011) Third party funding in international commercial and treaty arbitration – a panacea or a plague? A discussion of the risks and benefits of third party funding Transnational Dispute Management Vol. 8, issue 4. Available online: https://www. imf.com.au/docs/default-source/site-documents/tdm_tpf_oct2011.pdf?sfvrsn=1af810eb_7

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9.87  Types of litigation and arbitration that attract and are attractive to litigation finance

9.87 The involvement of a litigation funder on the claimant side also has a potential impact on the psychological level. For the claimant, a litigation funder’s agreement to fund confirms that independent, experienced litigators regard the claim as sufficiently strong to be worthy of their investment; from the perspective of the respondent, the presence of a litigation funder (if disclosed) will confirm that the claim is well resourced and must be taken seriously and addressed on the merits rather than by delay and prevarication. Prairie Mining, an Australian mining company, secured funding of AU $18  million from Litigation Capital Management in June 2020 for an investment treaty claim against Poland over the obstruction of two coal projects, to cover its full legal budget and some operating expenses. The company’s CEO described the funding as ‘testament to the strength of Prairie’s claims’.119 Having a funder on board may increase a claimant’s bargaining power and incentivise a respondent to settle.120 9.88 In short, the availability of funding for claimants in investment treaty arbitration levels the playing field, at least in terms of funding between the investor David and the State Goliath. 9.89 Given the sums claimed in many investment treaty arbitrations, even taking account of the significant sums involved in bringing the claims, there is sufficient value to ensure that the funder can achieve a reasonable level of return on its investment while still leaving significant sums available to the successful claimant. Illustrating this by reference to some of the figures from the December 2017 study referred to above, an average claimant’s costs of $6 million represents 3.5 per cent of the average recovery of US $171 million.121 A return of several times the funder’s investment is therefore possible without taking more than 10–15 per cent of the claimant’s damages. In Veolia v Vilnius,122 the published funding agreement provided for the funder to collect five per cent of damages between €0 and €50 million, four per cent between €50 million and €100 million, three per cent between €100 million and €200 million and two per cent between €200 million and €400 million, with further remuneration payable in certain circumstances, but the funder’s overall remuneration was capped at €20 million after the recovery of its funding investment.123 9.90 There can also be a case for litigation funding for the respondent in investment treaty claims. While the classic example of an investor–State arbitration is akin to the David v Goliath example referred to above, the balance of power can be reversed in certain situations and there is some evidence of 119 Sanderson (2020) Funder in place for mining claim against Poland Global Arbitration Review, 30 June 2020. Available online: https://globalarbitrationreview.com/article/1228368/funder-inplace-for-mining-claim-against-poland 120 Third Party Funding and the Objectives of Investment Treaties – Friends or foes? Investment Treaty News, 27 June 2019, p 4. 121 Excluding the impact of Yukos. 122 ICSID Case No. ARB/16/3 (pending). 123 Sanderson and Perry (2020) Funding of SCC claim draws scrutiny in Lithuania Global Arbitration Review 10  March 2020. Available online: https://globalarbitrationreview.com/ article/1216052/funding-of-scc-claim-draws-scrutiny-in-lithuania

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Conclusions 9.93

litigation funding (albeit not commercial litigation funding) playing a part in one such situation. In the case of Philip Morris Brands Sàrl, Philip Morris Products S.A. and Abal Hermanos S.A. v. Oriental Republic of Uruguay,124 Philip Morris challenged Uruguay’s introduction of regulations imposing anti-smoking policy measures on the marketing and sale of cigarettes in Uruguay. 9.91 Uruguay’s successful defence of the proceedings was funded by the Anti-Tobacco Trade Litigation Fund created by Bloomberg Philanthropies and the Bill and Melinda Gates Foundation to help low- and middle-income countries finance their defences against tobacco companies’ claims under investment treaties. Former New York City Mayor Michael Bloomberg also appeared in person at the January 2016 Annual Meeting of the Association of American Law Schools and pledged in his remarks that his foundation would support countries that did not have the financial means to defend against arbitrations brought by tobacco companies like Philip Morris. 9.92 The Veolia v Vilnius case125 referred to above is another example of this. Vilnius, a Lithuanian city with limited resources, obtained third-party funding from Profile Investment budgeted at up to €5 million in February 2019 for its €560 million counterclaim against Veolia, a private investor and multinational corporation with almost unlimited resources. However, Vilnius maintained it was the true claimant, Veolia having commenced arbitration pre-emptively.126 9.93 It is also possible to foresee a situation in which litigation funding may be made available for less altruistic reasons. For example, a competitor of a claimant company may wish to assist the State’s defence of claims which, if unsuccessful, will see the claimant go out of business, at least in the State concerned. This type of ‘misanthropic’ litigation funding is dealt with elsewhere.127 It is currently difficult to foresee circumstances in which a commercial litigation funder would fund the defence of an investment treaty arbitration.

124 ICSID Case No. ARB/10/7. Formerly FTR Holding SA, Philip Morris Products S.A. and Abal Hermanos S.A. v Oriental Republic of Uruguay. 125 ICSID Case No. ARB/16/3 (pending). 126 Sanderson and Perry (2020) Funding of SCC claim draws scrutiny in Lithuania Global Arbitration Review 10  March 2020. Available online: https://globalarbitrationreview.com/ article/1216052/funding-of-scc-claim-draws-scrutiny-in-lithuania 127 Chapter 8, para 8.52.

285

PART D

Class actions Charlie Morris Chief Investment Officer, Woodsford

Andrew Hill Partner, Fox Williams

Anisha Patel Associate, Fox Williams

Opt-out class actions Opt-in class actions Conclusion and the future

9.98 9.182 9.192

9.94 The term ‘class action’ is commonly used to describe claims brought by or on behalf of multiple claimants against one or more defendants.128 In numerous jurisdictions, the number of class actions supported by litigation funding are on the rise. In Australia, the United States, Canada, and England and Wales, this may be driven by the evolving regulatory landscape relating to class actions. From a nascent area governed by strict rules on champerty and maintenance, litigation funding has emerged or is developing in such jurisdictions as a mature, competitive market routinely considered by class action lawyers and their clients as a legitimate funding option. In many cases, the involvement of litigation funders (and insurers) has established an alternative route for collective redress, enabling claims to proceed that would not, on their own, have been considered economically viable. Indeed, in many instances, class actions cannot proceed without litigation funding, and lawmakers and judiciaries continue to recognise and endorse it as a vital component of class action regimes and ‘access to justice’ more generally. 9.95 Investigatory or regulatory findings into large public companies’ misleading accounting,129 money-laundering, bribery and corruption, breaches

128 Note that the terms ‘collective proceedings’ and ‘group litigation’ may be preferred depending on the jurisdiction and applicable procedure. 129 SL Claimants v Tesco FL-2017-000001 [2019] EWHC 2858 (Ch).

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9.96  Types of litigation and arbitration that attract and are attractive to litigation finance

of data protection legislation130 and infringements of competition law131 represent another driver behind the growth of class actions and related funding opportunities. Decisions by regulators that establish liability often provide a springboard for ‘follow-on’ class actions, permitting claimants and funders to devote their efforts to certain aligned interests; for example, establishing causation, quantum and the recovery of damages. Whether prior findings of liability have been made by regulators or otherwise, class actions form an important part of the infrastructure designed to ‘privately regulate’ industry participants and afford victims compensation for the losses they have suffered. This is particularly the case where the losses caused, on an individual level, are too small to justify expensive legal action. Pooling many victims’ causes of action together can render an action sufficiently economically viable to pursue where it would not have been previously. 9.96 Litigation funding also neatly dovetails with a multitude of fee structures available to, and commonly used by, lawyers and their clients in class action contexts. In the United States, Canada, and England and Wales, contingency fee or ‘no win, no fee’ arrangements, conditional fee arrangements132 and damagesbased agreements (with one key exception133) are permitted to fund such cases. In Australia, lawyers are permitted to act on conditional fee agreements and, more recently, the state of Victoria has for the first time introduced legislation expressly permitting lawyers to act on a contingency fee basis, where the law firm’s fee may be a percentage of the damages recovered by the claimant in the proceedings. Other Australian states are doubtless watching closely and may, in due course, follow suit. 9.97 The following sections consider several common law jurisdictions with established or developing class action regimes and explore the drivers and limitations associated with litigation funding in this area. From a procedural and case management perspective, class actions can be loosely categorised into two types: opt-out and opt-in class actions. The sections below will consider the differences between the two and how they may impact litigation funders and other industry participants.

OPT-OUT CLASS ACTIONS 9.98 ‘Opt-out’ class actions refer to claims brought by a class representative on behalf of members of a defined group, whether individuals or commercial entities. Unless members of the class are formally joined to the proceedings as parties, it is not necessary to obtain the consent of each individual class member. 130 Lloyd v Google LLC [2019] EWCA Civ 1599. 131 Merricks v Mastercard Incorporated & Ors [2018] EWCA Civ 2527 (13 November 2018). 132 An arrangement where the lawyers receive a specified uplift depending on the outcome of the case. 133 Damages-based agreements are not permitted in opt-out collective proceedings before the UK Competition Appeals Tribunal.

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Opt-out class actions 9.101

Such members are automatically included in the class unless and until they take specific steps to opt out. If they do not opt out, they will be treated as members of the class and be bound by any judgments or orders made in the action. There is therefore a risk in opt-out actions of some members of the class being unaware of proceedings being brought on their behalf. However, group member notifications and/or publicity are often requirements of such actions to minimise that risk, and claimant law firms, claims management teams and other service providers have developed increasingly sophisticated marketing and communication tools to reduce the number of potential unidentified claimants. 9.99 There are clear benefits of opt-out class actions for lawyers, funders and class members. They seek to establish quantum for the entire represented class, with the exception of those who elect to opt out of the process. With only one or a few representatives joined to proceedings, the costs associated with claimant book-building and related administration, a common feature of opt-in litigation, are avoided, which often results in a higher net return to claimants if the class action is successful. In turn, the risk of irrecoverable costs associated with a failed book-building exercise, particularly for funders and lawyers that put their fees at risk, is avoided. Indeed, where an expensive book-build is required, funders and lawyers may decline to advance the action at all, which often leaves the potential claimants without a viable means of exercising their right to compensation. This enables claimants, lawyers and funders involved in the proceedings to remain focused on establishing quantum and recovering damages. 9.100 Opt-out actions also bring other efficiencies. For example, unlike where multiple opt-in class actions may proceed in parallel, only one opt-out action is required to cover the entire class of claimants. While this may occasionally result in a ‘carriage dispute’134 between different class representatives and their lawyers purporting to represent the same class of claimants, such carriage disputes are relatively rare and the opt-out regime may be regarded as an efficient way to achieve redress for multiple class members while ensuring costs remain proportionate to damages claimed. Where carriage disputes do arise, a common outcome is that the funding and legal costs are lower as a result of the increased competition so the class members ultimately benefit. 9.101 The US, Australian and Canadian courts are known for their opt-out regimes for class actions. The situation differs in England and Wales where the opt-in procedure is more commonly used, although there are some exceptions. Opt-out procedures apply to collective proceedings before the UK Competition Appeals Tribunal (CAT) and representative proceedings under Part 19 of the Civil Procedure Rules, although both of these regimes are relatively nascent and/or untested. The approach in England and Wales to opt-out class actions is still therefore evolving, although recent judgments in England and Wales, for example the Court of Appeal’s judgments in Merricks v Mastercard135 and in 134 Also commonly known, depending on the jurisdiction, as ‘beauty parades’, carriage motions or situations of ‘multiplicity’. 135 Merricks v Mastercard Incorporated & Ors [2018] EWCA Civ 2527 (13 November 2018).

289

9.102  Types of litigation and arbitration that attract and are attractive to litigation finance

Lloyd v Google136 suggest that the direction of travel is to further embrace opt-out class actions (although both judgments are subject to appeals to the UK Supreme Court). 9.102 The actual and perceived advantages and disadvantages of these optout regimes for litigation funders, class action lawyers and other industry professionals are considered in further depth below.

The United States 9.103 Third-party funded class actions in the United States represent a growing market. In comparison to class actions in England and Wales, where claimants risk paying adverse costs, and in Australia, where contingency fees are largely prohibited, the US courts require parties to cover their own costs, and rarely those of opposing parties. US law firms specialising in class actions also typically represent clients on a ‘no win, no fee’ basis in return for a share of any damages and often fund disbursements as well. Together, these factors have arguably militated against the need for litigation funding. 9.104 Changes in the legislative landscape have also arguably prevented certain types of class action being brought. The Private Securities Litigation Reform Act of 1995 increased the threshold requirements for class representatives at the federal level with the Securities Litigation Uniform Standards Act (1998) preventing claimant lawyers from bringing such cases before the state courts. The Class Action Fairness Act (1995) (CAFA) increased the number of state court class actions transferred to the federal courts where they faced a narrower approach to the application of certification criteria. Furthermore, the Supreme Court judgments in Morrison v National Australia Bank Ltd137 and Kiobel v Royal Dutch Petroleum Co.138 served to restrict securities class actions and class actions brought under the Alien Tort Statute, respectively. 9.105 However, the US class action landscape undoubtedly contains features which remain attractive to litigation funders. The governance of the class action regime is not considered as stringent as in other jurisdictions. Rules on champerty, maintenance and usury still exist in common law, but have rarely been applied to prevent litigation funding arrangements.139 The class action regime also includes a court-led certification and settlement approval process, which arguably increases funders’ visibility at two key stages of proceedings. Claimants may 136 Lloyd v Google LLC [2019] EWCA Civ 1599 (02 October 2019). 137 Morrison v National Australia Bank Ltd 561 U.S. 247 (2010). 138 Kiobel v Royal Dutch Petroleum Co 133 S. Ct. 1659 (2013). 139 Under common law in the United States, litigation funding is unlikely to be regarded as champertous unless the funder (i) promotes clearly frivolous litigation, (ii) interferes or seeks to control litigation strategy, or supports the litigation solely on the basis of its malevolence towards the defendant. The application of the rule on champerty and maintenance is currently limited, with attorneys’ codes of ethics (federal and state) being deemed sufficient to guard against the undue control and influence of funders.

290

Opt-out class actions 9.107

also recover punitive or multiplied damages in certain types of case, such as those involving breaches of competition or anti-trust law,140 which typically increases the damages that may be awarded and therefore potentially the funder’s return. Further circumstantial drivers include claimants’ tight budgets for legal disputes and their need to avoid the inclusion of further liabilities on their balance sheets, both of which are particularly pertinent during periods of economic stagnation or instability. Importantly, courts have also expressed their support for litigation funding, noting that it: …promotes the sound public policy of making justice accessible to all, regardless of wealth. Modern litigation is expensive, and deep pocketed wrongdoers can deter lawsuits from being filed if a plaintiff has no means of financing her or his case. Permitting investors to fund firms by lending money secured by the firm’s accounts receivable helps provide victims their day in court.141

9.106 Procedural rules for class actions at the federal level are outlined under Rule 23 of the US Federal Rules of Civil Procedure, with analogous rules also being introduced at the state level. The intention of the rule is to ensure that class-wide proceedings are the most appropriate mechanism and to protect the interests of absent class members who are represented in, but not joined to, the proceedings. As most large-scale third-party funded class actions are brought before federal courts, particularly since the introduction of the CAFA, this section will focus on Federal Rules of Civil Procedure. Rule 23(a) states that: …one or more members of a class may sue or be sued as representative parties on behalf of all only if: 1)

the class is so numerous that joinder of all members is impracticable;

2)

there are questions of law or fact common to the class;

3)

the claims or defenses of the representative parties are typical of the claims or defenses of the class; and

4)

the representative parties will fairly and adequately protect the interests of the class.

9.107 Beyond these basic criteria, to proceed as a class action, claimants must satisfy the following criteria. (1) The prosecution of separate actions could potentially establish inconsistent standards of conduct or substantially impair other class members’ ability to protect their interests; (2) Final injunctive or declarative relief is appropriate because the party opposing the class acted on grounds generally applicable to the entire class; 140 Claimants are permitted to claim three times their total compensatory or actual damages (‘treble damages’) under s 4 of the Clayton Act (1914) (as amended). 141 Hamilton Capital VII, LLC v Khorrami, LLP. NY Slip Op 51199(U) Decided on August 17, 2015 Supreme Court, New York County Kornreich, J.

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9.108  Types of litigation and arbitration that attract and are attractive to litigation finance

(3) Common issues of law and fact predominate over individual issues and a class action is the superior mechanism for resolving the claimant’s claims. In actions for monetary damages, this is the most important requirement in the decision regarding whether a class can proceed as a class action.142 (4) At the certification stage, the court must appoint counsel for the class who must fairly and adequately represent the interests of the class.143 9.108 The ‘lead plaintiff’ or class representative must also demonstrate that they are a member of the class they seek to represent, and that they have standing to bring the claim. Standing typically requires the claimant to demonstrate it has suffered concrete and particularised harm as a result of the defendant’s actions or omissions.144 However, certain claims are barred at the federal level; for example, claims brought by indirect purchasers of goods or services against remote sellers for alleged breaches under US competition or anti-trust law.145 9.109 Under US procedural rules, class actions are considered ‘putative’ proceedings until they obtain certification from the court to proceed as class actions. The certification process provides an opportunity for the court to scrutinise whether the threshold criteria have been satisfied. Although it is not intended to be a rigorous analysis of the case merits, certification has increasingly involved extensive disclosure or discovery, as well as expert testimony in antitrust matters. The court’s application of certification criteria is elaborated in two cases where certification of the class action was rejected. 9.110 The first case, Wal-Mart Stores, Inc v Duke146 involved a lead claimant who sought to represent 1.5 million female employees who had allegedly been discriminated against by the defendant in breach of its discrimination policy. The court refused to certify the proceedings as a class action on the basis that it related to individuals impacted to varying extents under different policies and that a common defence to the claimant’s common claim was not feasible.147 9.111 The second case, Comcast Corp v Behrend148 involved the court reversing a prior court decision to certify proceedings as a class action. It related to a group of cable television customers who claimed that their provider unlawfully monopolised a local market for cable services causing them to suffer loss. The court held that the lead claimant’s expert evidence failed to demonstrate that damages applied to the entire class. Individual issues predominated over common questions; the claim therefore failed the threshold test under rule 23(b). 142 US Federal Rules of Civil Procedure rule 23(b). 143 US Federal Rules of Civil Procedure rule 23(g)(1)(C)(iii). 144 Spokeo, Inc v Robins 136 S Ct 1540, 1548 (2016). 145 Illinois Brick Co v Illinois 431 US 720 (1977). 146 Wal-Mart Stores, Inc v Duke 131 S Ct 2541 (2011). 147 This appears to be akin to one of the decisive factors for the interpretation of the ‘same interest’ test under Civil Procedure Rule 19.6 in England and Wales (whether the defendant will have distinct defences to different members of the represented class). 148 Comcast Corps v Behrend 133 Ct 1426 (2013).

292

Opt-out class actions 9.114

9.112 Where a certified class action reaches settlement,149 court approval is required. A hearing will take place at which the court will consider whether the settlement agreement is fair, reasonable and adequate. In doing so, the court will consider factors including:150 (1) whether the class representatives and class counsel adequately represented the entire class; (2) whether the settlement was negotiated at arm’s length; (3) whether the relief provided is adequate for the class, taking into account the costs and risks of trial and appeal; (4) whether the proposal for the distribution of relief to the class members and processing of class members’ claims is adequate; and (5) the defendant’s financial viability and whether the value of an immediate recovery outweighs the possibility of future relief after protracted and expensive litigation.151 9.113 The court will typically approve a class action settlement on a preliminary basis before issuing a schedule of all class members not already party to the proceedings who will be bound by the settlement. This schedule will then be released as a notice to publicise the proceedings and related settlement. This provides class members with the opportunity to opt out of the class or raise objections regarding the proposed settlement terms. Crucially, the court approval process affords class action lawyers, litigation funders and insurers the opportunity to remain apprised of settlement terms; in particular, the agreed aggregate settlement sum.152 However, this transparency does not necessarily address a key concern for litigation funders: without a contractual relationship between the funder and each and every member of the class, the funder lacks contractual certainty and faces a risk of not receiving its expected return on investment (for example, because the court fixes the funder’s return at a lower rate than expected). 9.114 Litigation funders may also be concerned by evolving discussions within the US legislature regarding the disclosure of litigation funding arrangements in class actions. There is currently no doctrine or rule at the state or federal level for litigation funding agreements to be disclosed in class action proceedings. In fact, communications and documents passing between litigation funders and class action lawyers will often be protected from disclosure via the application of 149 This rule applies to a certified class action where approval of a settlement, a voluntary dismissal or a compromise of claims, issues or defences is sought from the court. 150 Where a defendant seeks to settle a putative class action (i.e. an uncertified class action), the court must first approve certification of the class before proceeding to apply Rule 23. When certifying a putative class action in the knowledge it will not proceed to trial, the court will not consider the manageability of the proceedings at trial as a key criterion for certification. 151 US Federal Rules of Civil Procedure rule 23(e)(3). 152 Note that a US attorney is under an ethical obligation to abide by a client’s settlement of a matter and not permit anyone to direct or influence litigation strategy, including settlement.

293

9.115  Types of litigation and arbitration that attract and are attractive to litigation finance

the work product doctrine.153 In February 2019, to address what was considered a lacuna in the governance of litigation funding, four Republican Senators, including Senator Grassley, re-introduced legislation154 requiring the disclosure of all third-party litigation financing agreements to the court and named parties to any class action filed in Federal Court.155 The intention of the bill in the view of Senator Grassley, is to enable a ‘healthy dose of transparency … [and] ensure that profiteers aren’t distorting [the] civil justice system for their own benefit’.156 The bill is yet to pass through the Senate or Congress. Nevertheless, as discussed in more detail in chapter 5 (para 5.174), some US courts have positively required disclosure of funding in class action or group litigation context. 9.115 In principle, increased transparency is likely to benefit potential parties to proceedings and provide assurance that lawyers are avoiding conflict with their clients and acting in accordance with rules on professional ethics.157 However, for class action claimants, their lawyers and third-party funders, it carries certain risks. The disclosure of a confidential litigation funding agreement would not only reveal potentially sensitive commercial terms agreed by the third-party funder,158 but may also serve to lengthen proceedings, encourage satellite disputes (for example, where defendants seek to attack funding arrangements rather than defending a case on the merits) and increase costs. Defendants have, in certain cases, used disclosed funding arrangements to challenge a claimant’s credibility or the adequacy of the claimant’s counsel.159 Although such challenges are not always successful, they nonetheless increase costs and prolong timelines for proceedings.

Canada 9.116 The current opt-out class action regime in Canada was introduced with a threefold purpose; judicial economy, access to justice and behaviour modification.160 Further to this threefold aim, from the perspective of class action 153 Carlyle Inv. Mgmt v Moonmouth Co. C.A. No. 7841-VCP, 2015 WL 778846, at *8-9 (Del. Ch. Feb. 24, 2015) and Charge Injection Techs., Inc. v E.I. DuPont De Nemours & Co. No. 07C-12134-JRJ, 2015 WL 1540520, at *4 (Del. Super. Ct. Mar. 31, 2015). 154 The bill had been initially introduced in 2018. 155 It would also require such disclosure to the court and named parties in respect of any claim that is aggregated into a Federal multi-district litigation proceeding. 156 See Press Release dated 13 February 2019 Grassley Leads Lawmakers in Introducing Bill to Improve Transparency of Third Party Financing in Civil Litigation. Available online: https:// www.grassley.senate.gov/news/news-releases/grassley-leads-lawmakers-introducing-billimprove-transparency-third-party 157 See rule 1.7 of the American Bar Association Model Rules of Professional Conduct: Conflict of Interest: Current Clients. 158 Which may give the defendant the unfair advantage of knowing (or being able to work out) where potential pressure points exist for the claimants, the funder and the lawyers, such as the agreed waterfall for distribution of any proceeds. 159 Conlon v Rosa, Nos. 295907, 295932, 2004 WL 1627337, at *2 (Mass. Land Ct. July 21, 2004). 160 See the Ontario Law Report Commission Report (1982). See also Western Canadian Shopping Centres Inc. v Dutton 2001 SCC 46, [2001] 2 S.C.R. 534 at paras 27–29, Hollick v Toronto (City), 2001 SCC 68, and IC Limited v Fischer [2013] 3 SCR 949.

294

Opt-out class actions 9.120

claimants, lawyers and litigation funders, the Canadian class action regime, which constitutes a multitude of federal and provincial procedures, has also developed a reputation for relatively less onerous certification criteria and clear benefits for litigation funders, such as the possibility of claiming punitive damages.161 9.117 As in other jurisdictions such as England and Wales, the rules of champerty and maintenance still exist under common law in Canada and occasionally impact the position of litigation funding for class actions. Canadian common law regarding champerty and maintenance excludes ‘strangers’ to proceedings purchasing a cause of action pertaining to class members. Litigation funding has rarely fallen foul of this rule, however, with courts expressly approving thirdparty funding arrangements which seek a percentage of damages recovered.162 9.118 Class action procedures exist in multiple forms across Canada. Either the 1992 Federal Court Rules or provincial procedural rules apply, depending on the whether the claim’s subject matter falls within the scope of federal or provincial law. Where no provincial procedure exists, the Canadian Supreme Court judgment in Western Canadian Shopping Centres Inc. v Dutton163 will serve as the common law basis for bringing class action claims. Although the federal class action regime has the benefit of avoiding the duplicative effect of multiple provincial class actions of the same kind against the same defendants, many still prefer to bring class actions before provincial courts, particularly for claims relating to personal injury, consumer issues and commercial matters. 9.119 This has led to the emergence of ‘carriage motions’, where the court, in the case of overlapping class actions, will decide which claimant and lawyers should have ‘carriage’ or take the lead on the action (based on a broad range of criteria) and which claims should be stayed either temporarily or permanently. Such motions have been regarded as a risk for litigation funders who may invest in class actions which are later stayed, potentially permanently, with no potential to recover the sums invested up to that point. 9.120 Recent amendments to the Class Proceedings Act 1992 may help limit ‘carriage motions’ in Ontario by requiring class actions in the province to be filed within 60 days following the commencement of the first proceeding on the same subject. It also requires Ontario courts, at the certification stage, to consider which of the pending actions on the same subject best meet the certification criteria and permits them to stay instant proceedings in favour or those in other provinces.164

161 Although punitive damages do not often reach the figures seen in the United States, the provincial courts of Quebec are known to award very large sums in specific circumstances (eg Biondi c. Syndicat des cols bleus regroupés de Montréal (SCFP-301)). 162 Québec inc. v Callidus Capital Corp 2020 SCC 10 (the Bluberi case). 163 Western Canadian Shopping Centres Inc. v Dutton 2001 SCC 46, [2001] 2 S.C.R. 534. 164 This is the first time Ontarian courts have been afforded this discretion, which is already available to courts in British Columbia.

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9.121  Types of litigation and arbitration that attract and are attractive to litigation finance

9.121 Given the risks associated with ‘carriage motions’, particularly for litigation funders, it is vital for the class representative to satisfy the certification threshold. The threshold criteria for class actions is broadly similar across the provinces and at the national level. In summary, claimants must file a statement of claim or complaint, which must then be certified by the court on the condition that: (1) there is sufficient commonality between the claims; and (2) proceeding via a class action would be preferable and further the threefold purpose of the class action regime.165 9.122 Particular criteria also must be met before the named claimant may qualify as the class representative or ‘representative plaintiff’. As per US qualifying criteria, Canadian class representatives must demonstrate to the court that they: (1) will fairly and adequately represent the interest of the class; (2) have prepared a workable litigation plan; and (3) have no conflict of interest with class members with regards to the common issues of the class.166 9.123 The class itself will also need to be defined objectively and not too broadly. The relationship between class members and the common issues in the statement of claim must be clear. Under certain provincial rules, foreign residents or those resident outside the relevant province may be included in the class if they specifically opt in.167 9.124 As with US class action proceedings, the settlement of class actions in Canada requires court approval, although in some provinces, this rule does not apply at the pre-certification stage.168 The class representative will need to demonstrate the proposed settlement is fair, reasonable and in the best interests of the class. The party seeking court approval of the settlement must prepare a motion and file evidence in support of the settlement. Once approved, the class representative will be expected to distribute a notice to the class describing the settlement terms; class members may then opt out or object to the terms. Typically, the settlement will address how undistributed amounts from the aggregate 165 Western Canadian Shopping Centres Inc. v Dutton 2001 SCC 46, [2001] 2 S.C.R. 534 at paras 27–29. 166 The rules in Quebec are far less onerous. The representative only needs to demonstrate that it is in a position to represent members of the class adequately. Rules across the provinces where the class action regime is governed by common law also vary. For example, in Ontario, the representative need only demonstrate a cause of action against the named defendants. In British Columbia, a similar test applies but a cause of action only needs to be demonstrated with respect to one defendant. 167 This is the case in the provinces of British Columbia, Newfoundland and New Brunswick. 168 Eg in British Columbia.

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Opt-out class actions 9.127

settlement sum should be distributed. As in the United States, a litigation funder of opt-out class actions in Canada lacks a contractual relationship with each class member and therefore faces a risk that the court will not approve the full amount of its return on investment. 9.125 The rules on parties’ exposure to costs in class action proceedings also vary among the provinces. The adverse costs rule applies in Ontario courts, which requires the losing parties to cover a portion of the winning parties’ costs. The rule may be adjusted for cases involving a key point of public interest or novel point of law, however. In several provinces such as British Columbia and Newfoundland, the court is prohibited from awarding costs against a party during certification or at any point during the proceedings, unless exceptional circumstances apply (eg a party has been vexatious or has unnecessarily delayed proceedings). 9.126 Fee arrangements for class representatives in class actions require court approval in most provinces.169 Fee arrangements with lawyers and any funding agreements will therefore need to be disclosed to the court to enable it to check for abuses or interferences with the administration of justice, the potential impairment of the relevant lawyer’s judgment and the conduct of the litigation in the interests of the represented class. Such details are also deemed to be relevant to the certification process and assessing whether the class representative is appropriate. In a recent case before the Ontario court, key factors contributing to the court’s decision to approve litigation funding were discussed in detail. They include: (1) the claimant’s rights to instruct lawyers and direct the litigation not being fettered; (2) the claimant receiving independent legal advice on the terms of the funding; (3) the funding agreement only being possible to terminate by the funder with the leave of the court (with the funder paying costs up to the date of termination); (4) the funder’s obligations being sufficient to cover any adverse costs orders; and (5) there being no contractual provision permitting the parties to assign the funding agreement without court approval and notice to all parties.170 9.127 Third-party funding of class actions is a relatively nascent area with the Ontario Superior Court and the Supreme Court of British Columbia approving third-party funding for class actions for the first time relatively recently in 2011 and 2014, respectively. However, cases such as David v Loblaw171 provide much169 Quebec is the exception where approval for counsel fees and other disbursements is typically sought at the settlement stage. 170 David v Loblaw 2018 ONSC 198 171 Ibid.

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9.128  Types of litigation and arbitration that attract and are attractive to litigation finance

needed clarity on certain courts’ criteria for approving litigation funding for class actions. Together with increasing claimant demand for financial support (given the increasing costs of class actions versus the decreasing appetite for incurring costs liabilities), the Canadian litigation funding market is expected to continue to grow.

Australia 9.128 In Australia, the opt-out or ‘open class’ approach has dominated the class action landscape, particularly since the federal class action regime was introduced via Part IVA of the Federal Court of Australia Act (FCA Act) in March of 1992172 (referred to below as the 1992 rules) and Division 9.3 of the Federal Court Rules 2011. The rules aimed to ensure that appropriate procedures were in place to enable groups of people who had suffered loss to pursue redress more efficiently and at a lower cost than via individual claims.173 In reality, however, due to litigation funders’ concerns with the lack of a contractual arrangement with all class members, funders sought to limit the class size through bookbuilding to control their return on investment. Furthermore, in order to bring optout proceedings, claimants had to define the class they represented, which they often failed to do.174 It was not until the 2007 judgment in the case of Multiplex Funds Management Limited v P Dawson Nominees Pty Limited175 that a class defined by reference to a funding agreement, or similar criteria, was allowed by the court to proceed. 9.129 The types of opt-out cases commenced since the introduction of the 1992 rules include securities litigation and claims relating to the environment, consumer law, mass torts as well as banking and finance. A  2019 report by the Royal Commission into Misconduct in the Banking Superannuation and Financial Services Industry highlighted numerous instances of wrongdoing in the banking and financial services industry and has resulted in a raft of ‘followon’ class actions in the sector, with investors and others seeking compensation for that wrongdoing. 9.130 The 1992 rules failed to address two key issues, however. These include the claimants’ exposure to adverse costs orders from the court and contingency fee arrangements for class action lawyers, which were and remain prohibited save in the state of Victoria where legislation was recently passed to allow them. This arguably contributed to the emergence of a sophisticated litigation funding

172 The majority of open class action cases in Australia within the last 20 years have been brought under federal rules. As such, this section will focus on the statutory regime for representative proceedings under the FCA Act and not the state court regimes in Victoria (which are identical to the federal rules), New South Wales and Queensland or the regime for representative proceedings prior to 1992. 173 ALRC Report 2018, para 1.23, page 12. 174 Dorajay Pty Ltd v Aristocrat Leisure Ltd (2005) 147 FCR 394. 175 (2007) 164 FCR 275.

298

Opt-out class actions 9.133

market, with the involvement of private equity funds taking equity positions in funding agreements, special purpose vehicles established to facilitate jointventure funding and funders leveraging their funding via securitisation. With increasingly innovative litigation finance, including for opt-out class actions, it is unsurprising that between September 2013 and September 2016 approximately half of all class actions filed in the Federal Court of Australia were funded by third-party litigation funders and as at 2018 the percentage of funded class actions proceedings stood at 78 per cent.176 9.131 The 1992 rules enable class actions to be commenced on an opt-out basis where the following criteria are met: (i) seven or more people have claims against the same person;177 (ii) those claims arise out of or in respect of the same or similar circumstances; and (iii) the claims give rise to a substantial common issue of law or fact.178 9.132 There is no requirement for the class to hold numerous members or for common issues of law and fact to be greater than the issues pertinent to individual class members. Furthermore, unlike the opt-out regimes in the US, Canada, and, to a certain extent, England and Wales,179 opt-out class actions in Australia do not require certification. It was not considered necessary given (i) the details provided to the court during the originating process180 being deemed sufficient, and (ii) the case management powers of the Federal Court of Australia to oversee and control open class actions.181 Its discretionary powers include, for example, preventing the claim proceeding where it does not meet the threshold criteria or is not in the interests of justice. 9.133 The Australian opt-out class action regime is therefore considered more flexible than the regimes in the United States, Canada and England and Wales. For example, opt-out class actions in Australia often involve claims relating to separate contracts between groups of claimants and the respondent or involve separate acts or omissions of the respondent in respect of such groups. As with representative proceedings or collective proceedings before the CAT in England

176 ALRC report para 2.66 177 If there is only one respondent, the applicant and group members must all have claims against it. However, where the applicant has satisfied the requirement for ‘seven or more persons [to] have claims against the same person’, then the applicant can join other respondents even where some group members have claims against it and others do not (Cash Converters International Limited v Gray (2014) 223 FCR 139). 178 Federal Court of Australia Act 1976 s 33C. 179 See paras 9.162–9.178 regarding opt-out collective proceedings before the CAT (which is the exception). 180 Federal Court of Australia Act 1976 s 33H. 181 Federal Court of Australia Act 1976 ss 33C and 33N.

299

9.134  Types of litigation and arbitration that attract and are attractive to litigation finance

and Wales, consent of class members is not required, meaning some group members may remain unaware of the proceedings.182 9.134 However, litigation funders continued to remain cautious when investing in opt-out actions under the opt-out class action regime. The lack of contractual relationship between the funder and all class action members (many of whom remained unknown in opt-out proceedings) resulted in a risk that the funder would never obtain the fullest possible return on its investment. This uncertainty motivated funders to book-build with the intention of entering ‘closed class’ arrangements to fund specific sub-groups of claimants, a process which sometimes failed where insufficient claimants signed up to the closed group. This quasi-opt-in regime is also arguably inconsistent with the policy motivations behind Australia’s opt-out regime (ie efficient, low cost, collective redress for groups of claimants suffering loss183). 9.135 However, the opt-out class action regime reached a turning point in 2016 with the Money Max184 judgment which saw an uptick in litigation funders’ investment. In response to an application under ss 23 and 33ZF of the FCA Act, the court in Money Max made a ‘common fund order’ (CFO), which entitled the litigation funder to take a percentage fixed by the court from a fund established following a successful class action judgment or settlement, regardless of whether or not the funder had in place a funding agreement with the class members and irrespective of the terms of any funding agreement that had been entered into. 9.136 The arrival of the CFO incentivised litigation funders to shift their focus to opt-out class actions which offered relatively high financial rewards, as it effectively allowed funders to receive a return from recoveries made for unfunded group members (as well as funded group members). The existence of the CFO was relatively short-lived, however. In 2019, the High Court issued its judgment in respect of two appeal cases relating to the validity of CFOs; BMW Australia Ltd v Brewster185 and Westpac Banking Corporation v Lenthall.186 In both cases, CFOs had been granted which required all class members to reimburse the funder their legal fees plus a certain percentage of the net proceeds from the judgment or settlement. BMW and Westpac had both appealed the granting of a CFO on the following grounds: (1) In the absence of clear words, the power to grant a CFO could not be implied into the relevant statutory provisions (ie FCA Act s 33ZF and the equivalent provision of the New South Wales state procedure).

182 In Multiplex Ltd v P Dawson Nominees Pty Ltd (2007) 164 FCR 275, a new form of ‘closed’ class emerged within the open class regime. In the Multiplex case, this class referred to parties to a funding agreement with a litigation funder. 183 ALRC Report 2018, para 1.23, page 12. 184 Money Max Int Pty Ltd (Trustee) v QBE Insurance Group Limited [2016] FCAFC 148. 185 Matter No. S152/2019; [2019] HCA 45. 186 Matter No. S154/2019; [2019] HCA 45.

300

Opt-out class actions 9.140

(2) It was inconsistent with the exercise of judicial power under Chapter III of the Australian Constitution. (3) Again, contrary to the Australian Constitution (s 51), the power involved the acquisition of property without providing ‘just terms’. 9.137 The High Court allowed the appeal on the first ground only; the grounds relating to the CFO’s consistency with the Australian Constitution therefore remain undecided. In its judgment, the court suggested that a funding equalisation order would constitute a more appropriate alternative to CFOs on the basis that it would avoid class members benefiting from the litigation without being party to the funding agreement (ie  prevent ‘freeriding’), and it would permit the redistribution of amounts received by unfunded class members without them facing additional obligations. 9.138 The High Court was not asked to determine and left open the question of whether a CFO could still be made at the resolution of a matter; for example, under the FCA Act s 33V(2). Since the judgment, certain Federal Court judges have indicated a willingness to make CFOs under this provision and the Federal Court practice note on class actions was updated in December 2019 to clarify that: 15.4 Particularly in an open class action, the parties, class members, litigation funders and lawyers may expect that unless a judge indicates to the contrary the Court will, if application is made and if in all the circumstances it is fair, just, equitable and in accordance with principle, make an appropriately framed order to prevent unjust enrichment and equitably and fairly to distribute the burden of reasonable legal costs, fees and other expenses, including reasonable litigation funding charges or commission, amongst all persons who have benefited from the action. The notices provided to class members should bring this to their attention as early in the proceeding as practicable. [Emphasis added.]

9.139 It therefore remains possible that the Federal Court has the power and will continue to make CFOs at the time of resolution and/or distribution. Some Federal Court judges have since concluded that they do have the power and others have taken a contrary position.187 The position is sufficiently uncertain for one of those Federal Court judges – Mr Justice Beach – to expressly permit the court to make CFOs on the basis that they provide the courts flexibility in setting commission rates and the authority to impose them on the litigation funder. 9.140 Until resolved by legislation, the lack of clarity around what is and is not permissible or possible presents significant risks for litigation funders. Should funders decide that those risks are too great for them to continue funding class actions in the same volumes, potential class members which need litigation 187 For example, Murphy J in Pearson v State of Queensland (No 2) [2020] FCA 619 and Uren v RMBL Investments Ltd & Anor (No 2) [2020] FCA 647, Beach J in McKay Super Solutions Pty Ltd (Trustee) v Bellamy’s Australia Ltd (No 3) [2020] FCA 461 and Moshinsky J in Vocus all formed the view that they did have the power, but Foster J in Cantor v Audi Australia Pty Limited (No 5) [2020] FCA 637) disagreed.

301

9.141  Types of litigation and arbitration that attract and are attractive to litigation finance

funding to pursue their claims will likely suffer a reduction in their access to justice and find it harder to receive any compensation for the wrongs they have suffered. 9.141 For many litigation funders, without an amendment to the FCA  Act expressly permitting courts to grant CFOs, the federal regime for opt-out class actions has now effectively returned to the era prior to Money Max188 where significant book-building efforts were required. In some respects the High Court judgment in the BMW and Westpac cases addresses prior risks under the CFO regime (eg (i) class members unintentionally committing an abuse of process by being represented by multiple lawyers, and (ii) the increase in court-led ‘beautyparades’ between law firms competing to represent class members189). However, it does mean that to ensure claims are economically viable, funders may again need to invest significant upfront costs and time to book-build to form a closed class of claimants; something that may not appeal to all funders. 9.142 Even if legislation to expressly permit CFOs is ultimately passed, litigation funders investing in opt-out class actions in Australia may also be wary of investing in matters where the court has full discretion to set the level of the funder’s commission as part of a settlement. If the commission is set at a level much lower than that which is anticipated in the litigation funding agreement, the reduced return on investment for the funder may make the investment economically unviable. This breeds uncertainty and renders a straightforward calculation of return on investment challenging to the point where some funders may decide not to fund some cases, leaving class members without a viable remedy. 9.143 The litigation funding market in Australia is also facing another recent challenge. From 22  August 2020, litigation funders operating in Australia are no longer exempt from the requirement to hold an Australian Financial Services Licence (AFSL). 9.144 AFSL holders are required to satisfy a number of requirements including the need to: (i) act honestly, efficiently and fairly; (ii) maintain an appropriate level of competence to provide financial services; and (iii) have adequate organisational resources to provide the financial services covered by the licence. For professional funders, this is unlikely to present a significant challenge. 9.145 Under the new regime, class actions are also considered to be regulated Managed Investment Schemes (MIS), which has the effect of treating class members seeking to recover compensation for losses as though they are investors in an investment scheme. Operating each class action in Australia as an MIS, because of the framework of obligations which that imposes, is likely to be burdensome and costly, even for a professional litigation funder.

188 Money Max Int Pty Ltd (Trustee) v QBE Insurance Group Limited [2016] FCAFC 148. 189 These are similar to ‘carriage motions’ in Canada.

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Opt-out class actions 9.149

9.146 Together with the uncertainty surrounding the availability or otherwise of CFOs, this new regulatory regime may represent a further barrier to entry and persuade funders who entered the Australian funding market at the advent of the CFO to leave the jurisdiction. This may, in turn, decrease competition in the market, increase the price of funding for claimants and possibly result in some class actions not being brought at all. This appears to run contrary to the purpose of the 1992 Rules as discussed in (and endorsed by) the 2018 report of the Australian Law Reform Commission (ALRC) on class action proceedings and third-party litigation funders190; and it also diverges from the Commission’s recommendations for regulating litigation funders.191 9.147 These regulatory changes have been criticised by many as inappropriate, contrary to the recommendations in the ALRC’s  2018 report and politically motivated – a transparent attempt by the conservative Morrison Government in Australia to protect the interests of big business by seeking to reduce the number of class actions. Indeed, to date, the Australian Government has failed to respond at all to the ALRC’s report prior to implementing these changes. By way of counter, the Australian Labor Party, the main opposition party, is bringing a disallowance motion to be voted on in the Senate (the upper house of the Australian Federal Parliament). These regulatory changes may yet, therefore, be unwound.

England and Wales 9.148 While the opt-in procedure for group actions in England and Wales is the most common route to launching group litigation, there are two opt-out procedures available for class actions in England and Wales: representative proceedings under Civil Procedure Rule (CPR) 19 and collective proceedings before the CAT. Representative proceedings 9.149 Representative proceedings have been available to claimants in England and Wales for centuries, with the first procedural rule enacted in the 19th century. The current applicable civil procedure rule can be found under CPR  19.6. It states that: (1)

Where more than one person has the same interest in a claim– (a)

the claim may be begun; or

(b)

the court may order that the claim be continued,

by or against one or more of the persons who have the same interest as representatives of any other persons who have that interest. 190 Integrity, Fairness and Efficiency – An Inquiry into Class Action Proceedings and Third-Party Litigation Funders (Final Report), ALRC, December 2018. 191 ALRC Report 2018 – Recommendations 15 and 16.

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9.150  Types of litigation and arbitration that attract and are attractive to litigation finance

(2)

The court may direct that a person may not act as a representative.

(3)

Any party may apply to the court for an order under paragraph (2).

(4)

Unless the court otherwise directs, any judgment or order given in a claim in which a party is acting as a representative under this rule– (a)

is binding on all persons represented in the claim; but

(b)

may only be enforced by or against a person who is not a party to the claim with the permission of the court.

9.150 Although comparisons have been drawn between CPR  19.6 and the certification procedure for class actions in the United States, the threshold criteria for each regime differ significantly. The US regime requires that ‘common issues of law and fact predominate over any questions affecting only individual members’ such that ‘a class action is superior to other methods for fairly and efficiently adjudicating the [claims]’.192 US courts are also required before trial to certify that a claim satisfies this threshold criteria. In contrast, in England and Wales the threshold criteria for representative proceedings under CPR 19.6 require courts to conduct a narrower assessment; representative parties must have the ‘same interest’ as the others they seek to represent in the claim. There is no requirement for courts to certify the threshold has been met or for the claimant to file an application seeking the court’s permission on the subject. In reality, however, such a claim is highly likely to be scrutinised by the court in response to a defendant’s strike-out application regarding the representative elements of the claim193 or an application for the court to disallow a person acting as a representative.194 9.151 Historically, the ‘same interest’ test has been strictly applied by English courts, however. The court’s rationale is set out in Emerald Supplies Ltd v British Airways Plc.195 In this case, the claimants were importers of flowers and had purchased British Airways Plc’s global air freight services. In 2007, investigations conducted by the US Department of Justice196 established that the defendant’s cargo charges had been inflated due to its involvement in cartel arrangements. On this basis, the claimants sought to recover the consequential losses to their businesses. They also sought an order under CPR 19.6 to represent others who had paid inflated charges and had incurred consequential losses. 9.152 The High Court rejected the application, which was then appealed by the claimants. The Court of Appeal agreed with the High Court’s judgment on several grounds. It stated that at all stages of the proceedings, it must be possible 192 US Federal Rule of Civil Procedure 23(b)(3). 193 [2009] EWHC 741 (Ch). 194 CPR 19.6 (3). 195 [2010] EWCA Civ 1284; [2011] Ch. 345. 196 US Department of Justice (2007) British Airways plc and Korean Air Lines co. ltd. agree to plead guilty and pay criminal fines totaling $600 million for fixing prices on passenger and cargo flights. Press release, 1 August 2007. Available online: https://www.justice.gov/archive/ atr/public/press_releases/2007/224928.htm

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Opt-out class actions 9.155

to establish whether a person or entity has the same interest as others in the class and therefore qualified as a member of the class or not.197 Given that the claimants had sought to represent a class of indirect and direct purchasers of the defendant’s air freight services, establishing that every member of the class had the ‘same interest’ in the claim would be a challenge. The defence available in response to different members’ claims would also vary. Again, this suggests that members of the class did not share the ‘same interest’ in the claim. 9.153 Nevertheless, representative proceedings present an attractive funding opportunity for litigation funders where the merits of the case are favourable and the ‘same interest’ threshold test under CPR 19.6 can be satisifed. In comparison to opt-in proceedings, a small number of claimants representing a larger class means upfront expenditure relating to book-building is not required and general administration costs are minimal. Depending on the estimated size of the class, the ratio of damages to upfront costs can be significant, resulting in a healthy return on investment for funders. 9.154 In contrast to collective proceedings before the CAT, save in certain limited circumstances,198 CPR19.6 representative proceedings can be settled without the court’s approval. This may be viewed as advantageous by litigation funders, as they would likely be able to rely on, and take advantage of the certainty of, the contractual terms that have been put in place between the litigation funder and the representative, and not face the risk of the court reducing the amount of the funder’s return.199 9.155 In addition to such limitations of the procedure, the strict application of the ‘same interest’ test may have reduced the number of representative proceedings before the courts. The perception that representative proceedings under CPR  19.6 apply to certain limited categories of case may also be a contributory factor. In Emerald Supplies,200 for instance, Mummery LJ, quoting from an academic text, referred to two types of collective interest case appropriate for representative proceedings under CPR 19.6. These included the ‘true collective interest’ cases involving pollution and anti-discrimination, for example, and cases where substantive rights happen to be shared by several people, such as personal injury claims and product liability claims.201 Although Mummery LJ’s comments were obiter, it nonetheless may have reflected the perceptions of representative proceedings at the time and may have discouraged litigation funders from backing other types of case under this rule. 197 [2010] EWCA Civ 1284, para 62. 198 Court approval of a settlement under Part 19 is required where the proceedings relate to claims about: (a) the estate of a deceased person; (b) property subject to a trust; or (c) the meaning of a document, including a statute (CPR 19.7). 199 Note the Code of Conduct for Litigation Funders (2018) published by the Association of Litigation Funders and supported by the Civil Justice Council after the Jackson Report. It states at section 9.3 that ‘[a funder will] not seek to influence the Funded Party’s solicitor or barrister to cede control or conduct of the dispute to the Funder’. 200 Emerald Supplies Limited et al v British Airways plc [2010] EWCA Civ 1284. 201 Ibid. at para [3].

305

9.156  Types of litigation and arbitration that attract and are attractive to litigation finance

9.156 However, since the Emerald Supplies judgment in 2011, new categories of case potentially eligible for representative proceedings have emerged. For instance, the legislative landscape in England and Wales has evolved to protect the increasing collection and use of individuals’ data online via the introduction of the Data Protection Act 2018. The UK’s Information Commissioner’s Office has actively investigated numerous companies’ data breaches and issued significant fines. The arrival of the Lloyd v Google202 case is therefore, in many ways, unsurprising. 9.157 The case is brought by a representative, Richard Lloyd, the former Chief Executive Officer of a well-known UK consumer magazine, on behalf of over 4 million iPhone users affected by Google allegedly harvesting iPhone users’ browser-generated information via Apple’s Safari browser (the Safari Workaround). This is claimed to have enabled the defendant to identify and harvest information regarding users’ web-browsing habits, IP addresses and advertisements viewed. Such information could be used to glean information about users’ identity, including their social class and ethnicity. The issue affected iPhone users for just under a year. Damages sought reflect the ‘loss of control’ of each iPhone user’s personal data and are limited to a uniform per capita amount for each iPhone user within the qualifying class. This approach of claiming uniform loss for each member of the group significantly reduces the claimant’s expenditure on legal and expert costs, and the funder’s investment exposure. 9.158 The claimant’s ‘characterisation of the class members’ loss as the loss of control or loss of autonomy over their personal data’203 contributed to the recent Court of Appeal judgment204 in the claimant’s favour. Although the judgment related to an application to serve a claim form out of the jurisdiction, it nonetheless confirmed that the ‘same interest’ test under CPR 19.6 could be met, as it was ‘impossible to imagine that Google could raise any defence to one represented claimant that did not apply to all others’.205 In addition, the court held that the damages claimed, albeit not necessarily resulting in emotional distress or harm, were deemed to relate to the loss of something of a quasi-proprietary nature with economic value.

202 Richard Lloyd v Google LLC [2018] EWHC 2599 (QB). 203 Richard Lloyd v Google LLC [2018] EWHC 2599 (QB), [45]. 204 The Court of Appeal judgment ([2019]  EWCA  Civ 1599) relates a first-instance decision regarding an application to serve Lloyd’s claim form out of the jurisdiction on the US entity, Google LLC. The application was rejected at first instance on the basis of the claim not having reasonable prospects of success (as it would (i) fail the 19.6 ‘same interest’ test and (ii) there would be significant issues in verifying whether individuals fell within the class or not. The Court of Appeal overturned the first-instance decision, and, in the process, underlined that the loss of control over personal data can be characterised as damage, the same interest test should not be applied too stringently (in this case, it was satisfied), and in exercising his discretion not to permit the claim to continue, the first instance judge should not have taken into account the alleged inability to identify members of the class or the fact the class members had not authorised the claim. 205 Richard Lloyd v Google LLC [2018] EWHC 2599 (QB), [75].

306

Opt-out class actions 9.161

9.159 Within a year, the ‘same interest’ test under CPR 19.6 as interpreted by the Court of Appeal in Lloyd v Google206 and other cases207 was restated by the High Court in Jalla v Shell.208 This case relates to serious damage suffered by local communities in Nigeria following an oil spill off the Nigerian coast. In its judgment, the High Court emphasised in particular that: (a) there need not be congruity of causes of action as between the represented and representing parties, though they will need to be ‘in effect’ the same for all practical purposes;209 (b) the question of whether representative proceedings are inapplicable or inappropriate will take into account whether individual claims (beyond the claim for relief for the represented parties with the same interest), can be regarded as subsidiary matters or whether they effectively constitute a series of individual claims which raise some common issues of law or fact;210 (c) the existence of individual defences calls into question whether the action really is a claim for relief that is beneficial for all or is a collection of individual claims sharing some common issues of fact or law.211 9.160 The Court of Appeal decision in Lloyd v Google212 has now been appealed to the UK Supreme Court, with a judgment expected in early 2021. In the meantime, the Court of Appeal judgment in the case, together with the High Court’s useful restatement of the ‘same interest’ test in Jalla v Shell213 confirm that represented parties’ claims in proceedings brought under CPR 19.6 need not be wholly congruous and that damages may be awarded without proving monetary loss or emotional distress or harm for each member of the represented class. This inevitably reduces upfront legal and expert costs relative to recoverable damages; an attractive prospect for litigation funders. 9.161 Although Lloyd v Google illustrates how the ‘same interest’ test under CPR 19.6 can be satisfied in a data breach scenario, other categories of case, if structured in a similar manner, are also likely to pique litigation funders’ interest. Securities litigation relating to, among other things, untrue or misleading information published by public companies in certain circumstances (such 206 [2019] EWCA Civ 1599. 207 Such other cases include Millharbour Management Ltd and others v Weston Homes and another [2011] EWHC 661 (TCC) and Emerald Supplies v British Airways Plc [2011] EWCA Civ 1284. 208 [2020] EWHC 2211 (TCC). Note that this judgment relates to so-called ‘protective proceedings’ which followed (i) an initial judgment ([2020] EWHC 459 (TCC)) which was critical of several aspects of how the claimants’ case had been put, and (ii) the defendant’s subsequent strike-out application on grounds including that the claims were not representative proceedings within the meaning of CPR 19.6. 209 Jalla v Shell [2020] EWHC 2211 (TCC), [50] and [60]. 210 Ibid. at [60]. 211 Jalla v Shell [2020]  EWHC  2211 (TCC), [60]. Although note that in Millharbour v Weston Homes and another [2011]  EWHC  661 (TCC) representative proceedings were permitted under CPR 19.6 in spite of the possibility that individualised defences could be raised. 212 [2019] EWCA Civ 1599. 213 Jalla v Shell [2020] EWHC 2211 (TCC).

307

9.162  Types of litigation and arbitration that attract and are attractive to litigation finance

as pursuant to a prospectus or listing particulars), may also be appropriate to proceed via this route. Securities litigation is discussed in further detail below. Collective proceedings before the CAT 9.162 Collective proceedings before the CAT were traditionally only permitted on an opt-in basis. In October 2015, new rules214 introduced an opt-out procedure for collective claims relating to competition law breaches, seeking to enable collective redress for larger classes of affected individuals.215 The legislation sought to balance this intention with the need to prevent an increase in vexatious or trivial claims. The collective proceedings certification regime therefore contains multiple qualifying criteria. From the procedural perspective, to be granted a collective proceedings order (CPO) by the court, the claimant(s) need to file a claim form including the following extensive details: Rule 75(3): (a)

description of the proposed class;

(b)

a description of any possible sub-class and how it is proposed that their interests may be represented;

(c)

an estimate of the number of class members and any sub-class members and the basis for that estimate;

(d)

a summary of the basis on which the proposed class representative seeks to be authorised to act in that capacity in accordance with rule 78;

(e) a summary of the basis on which it is contended that the criteria for certification and approval in rule 79 are satisfied; (f)

a statement as to whether the claims are in respect of an infringement decision, and if so whether that decision has become final within the meaning of section 58A of the 1998 Act (infringement decisions);

(g)

a concise statement of the relevant facts, identifying, where applicable, any relevant findings in an infringement decision;

(h)

a concise statement of any contentions of law which are relied on;

(i)

the relief sought in the proceedings including— (i)

where applicable, an estimate of the amount claimed in damages including whether an aggregate award of damages is sought, supported by an explanation of how that amount has been calculated;

(ii)

details of any other claim for a sum of money;

(iii) in proceedings in England and Wales or Northern Ireland, whether the proposed class representative is making an application for an injunction; (j)

observations on the question in which part of the United Kingdom the proceedings are to be treated as taking place under rule 18; and such other matters as may be specified by practice direction.

214 See the Consumer Rights Act (2015) and the Competition Appeal Tribunal Rules 2015 (CAT Rules 2015), which apply to proceedings in England, Wales and Northern Ireland. 215 Note that any affected individuals domiciled outside the UK will have to expressly opt in to the proceedings in order to benefit from any judgments in their favour.

308

Opt-out class actions 9.166

9.163 Before granting certification, the CAT will need to assess whether a CPO should be made. It will consider among other things, how claimants would opt in or opt out of the proceedings, how fees and costs should be allocated and how the claim will be managed by the class representative such that the interests of the class will be effectively and efficiently pursued. A  sufficiently detailed plan must be prepared to evidence this. It must outline how the representative plans to cover its own costs, meet an adverse costs order, and refer to relevant fee arrangements, funding, insurance and a costs budget. 9.164 The CAT will also consider the eligibility of claims under the CAT Rules 2015, by assessing whether they are suitable for collective proceedings216 and whether the claims concern the same, similar or related issues of fact (common issues). Assessing the suitability of the claims involves considering matters that include the costs and the benefits of continuing the collective proceedings and whether any separate proceedings making claims of the same or a similar nature have already been commenced by members of the class.217 Assessing whether the claims concern common issues relies on whether the claims are brought on behalf of an identifiable class of persons.218 This is similar to (but not the same as) the ‘same interest’ test for representative proceedings under CPR 19.6, where ‘[a]t all stages of the proceedings, and not just at the date of judgment at the end, it must be possible to say of any particular person whether or not they qualify for membership of the represented class of persons by virtue of having “the same interest” as [the class representative]’.219 9.165 The suitability of the relevant class representative220 must also be established. The CAT will consider whether it is just and reasonable for the representative to act on behalf of the class.221 Where the representative is a member of the class, this involves an assessment to consider, for example, whether the representative is likely to exert sufficient control over the legal work and costs incurred. The CAT may also require the representative to demonstrate at least a basic understanding of the facts and nature of the claim to ensure they are capable of instructing lawyers. The legal team’s suitability may also be assessed. Where the representative is not a member of the class, the assessment will consider whether there is any conflict between the law firm or litigation funder, and the interests of the class member. If a representative is a special purpose vehicle, details of its constitution and management will need to be provided to the CAT.222 9.166 Given the extensive criteria to achieve CPO certification, it is crucial for lawyers and funders to conduct detailed analysis and due diligence of the

216 CAT Rules 2015 rule 79(2). 217 CAT Rules 2015 rule 79(2). 218 The CAT Guide, para 6.37. 219 Emerald Supplies Limited, Southern Glass House Produce Limited v British Airways Plc [2010] EWCA Civ 1284, [65]. 220 CAT Rules 2015 rules 78(1)(b), 79(1) and CAT Guide para 6.37. 221 Competition Act (1998) s 47B(8)(b). 222 CAT Rules 2015 rules 78(1)(b), 78(2) and CAT Guide para 6.30.

309

9.167  Types of litigation and arbitration that attract and are attractive to litigation finance

claims and the class representative and their eligibility to ensure costly errors are avoided. Differences or inconsistences among claims within the class may jeopardise proceedings or render it uneconomic to continue the litigation. 9.167 Opt-out collective proceedings before the CAT, as with representative proceedings under CPR  19.6, typically require a significant initial investment of time and upfront costs to establish whether claims are economically viable and procedural hurdles can be met. An additional potential hindrance is the prohibition of damages-based agreements to fund such collective proceedings before the CAT. However, cases considered viable on the merits continue to secure funding, ATE insurance and legal representation via flexible fee structures, such as conditional fee arrangements. Given typical class sizes and potentially large returns, such opt-out proceedings are likely to remain an attractive funding opportunity for litigation funders. 9.168 The need for the CAT’s approval223 before settling collective proceedings may, however, give some litigation funders pause for thought. Arguably, the CAT  Rules allow a litigation funder to receive a return on its investment other than from undistributed proceeds,224 but the CAT retains full discretion over the amount to be paid to a funder as part of any settlement (irrespective of what may have been agreed between the parties in that regard). The CAT will closely scrutinise a joint settlement application from the settling parties, which is expected to include details of how the sum will be distributed, how relevant members of the class will be notified and the parties’ agreement on how to deal with undistributed funds. The possibility for undistributed damages from a settlement to be returned to the defendant225 also motivates the defendant to seek to resolve collective actions before trial; a positive aspect of the CAT collective action regime for the representative, class members and litigation funders alike. 9.169 Where the CAT makes an award of damages to be made available for distribution to the class members, there is a tension, arguably a conflict, between the best interests of the class (to maximise the rate of distribution) and the interests of stakeholders (including the class representative’s own lawyers when they are acting on a conditional fee basis) who only stand to gain if distribution rates are sufficiently low to leave undistributed sums to cover fees, costs and expenses. No collective action in the CAT has yet reached this stage so it remains 223 CAT Rules 2015 rule 94. 224 CAT  Rule 93(4) provides that ‘where the Tribunal is notified that there are undistributed damages [following an award of damages]…it may make an order directing that all or part of any undistributed damages is paid to the class representative in respect of all or part of any costs, fees or disbursements incurred by the class representative in connection with the collective proceedings [with litigation funding fees included in those costs, fees or disbursements]’. In contrast, CAT Rule 94(4), which addresses collective settlements, provides that an application for collective settlement approval should set out the terms of the proposed collective settlement, including any related provisions as to the payment of costs, fees and disbursements. Rule 94 makes no mention of undistributed damages, which suggests that such costs, fees and expenses may be paid otherwise than from undistributed damages. 225 CAT Rule 94(9)(g).

310

Opt-out class actions 9.174

to be seen whether such a conflict will affect distribution. The risk for a funder, and arguably a very unattractive element of the regime, is that if distribution is carried out very effectively, there may be no damages left to provide it with a return (or a return of the size required to make the investment viable). 9.170 Various obstacles have been faced in the only two CPO applications that have been heard by the CAT to date and no CPO application has yet been certified in the five years since the collection action regime in the CAT was implemented. 9.171 The first application for a CPO heard by the CAT, Dorothy Gibson v Pride,226 related to a claim against a US manufacturer of mobility scooters for the elderly. Dorothy Gibson, the representative, was the general secretary of the National Pensioners Convention, which represents pensioners across the UK. In 2014, the Office of Fair Trading (OFT) published its decision following an investigation into Pride. It found that for a period of two years Pride had prevented eight retailers from advertising products online and in store below the recommended retail price. 9.172 The claim before the CAT argued that between 27,000 and 32,000 class members were deemed to have been affected and damages were estimated at between £2.7 million and £3.2 million before interest).227 However, at the CPO hearing, the CAT indicated it was dissatisfied with the representative’s failure to distinguish between the prices of scooters sold by the eight retailers considered in the OFT decision and the prices of scooters sold by all other retailers advertising via Pride. As this was a ‘follow-on’ claim relating to the OFT decision, its scope had to be restricted accordingly. As the OFT decision related to a group of eight, not all retailers advertising on the Pride website, it was not feasible for all retailers to be included in the class. The representative’s expert evidence, filed with the CPO claim form, conflated the two categories in error. 9.173 The representative in Dorothy Gibson v Pride had entered into a nowin-no-fee agreement with her solicitors and arranged for disbursements to be funded by her solicitors. She also obtained an amount of ATE insurance, which fell short of the defendant’s estimated costs. However, in its judgment, the CAT commented that it did not, at least at that stage, consider that the question of the representative’s ability to pay Pride’s recoverable costs was a basis for refusing to authorise her to act as class representative. The Tribunal adjourned the hearing of the CPO Application and granted the representative permission to file and serve a draft amended claim form and further expert evidence. However, the representative then voluntarily withdrew her CPO so it was never finally determined. 9.174 The second application for a CPO heard by the CAT, Merricks v Mastercard,228 related to a 2007 decision from the European Commission which found that Mastercard, between 1992 and 2007, set fees that effectively created 226 Dorothy Gibson v Pride Mobility Products Limited 1257/7/7/16. 227 Ibid. para 93. 228 Walter Merricks v Mastercard Inc. et al [2017] CAT 16.

311

9.175  Types of litigation and arbitration that attract and are attractive to litigation finance

an inflated price which merchants had to pay to their bank to accept Mastercard credit and debit cards. The European Commission found that Mastercard had breached EU competition law and negatively affected merchants and subsequent purchasers. Merricks v Mastercard was another ‘follow-on’ case where the representative, Mr Merricks, applied to be certified to represent approximately 46.2 million individuals who had purchased goods or services from businesses in the UK which accepted Mastercard.229 9.175 Mastercard challenged the suitability of the class representative on two counts. First, it argued that his adverse costs protection from a litigation funder (£10 million) was insufficient to cover adverse costs, particularly given the representative’s own-side costs budget of £19.5 million (excluding VAT) and the scale and complexity of the proceedings.230 The CAT rejected the challenge on the basis that the defendant failed to file its own costs budget and had not therefore established that £10 million of cover would be insufficient. The CAT also found that £10 million was a large sum, and costs should, in any event, be proportionate and reasonable. Secondly, the defendant argued that the funding agreement was at risk of being terminated by the funder if the CAT made any ‘negative commentary’ on the transactions agreed under the funding arrangement. The defendant argued that this ‘negative commentary’ could include the CAT failing to order all or part of any unclaimed damages to be paid to the class representative in respect of the costs or expenses it had incurred in connection with the proceedings (the funder’s return was reliant on such an order being made by the CAT). 9.176 Ultimately, the CAT decided not to grant a CPO on the basis that the representative failed to satisfy the criteria requiring claims to: (i) raise the same, similar or related issues of fact or law; and (ii) be suitable to be brought in collective proceedings. The CAT’s reasons were twofold: the representative failed to provide evidence that consumers making purchases with Mastercard had paid the same inflated price passed on by merchants (if such charges were passed on at all). These ‘pass-on’ costs differed, with consumers being overcharged by varying amounts. This led to a divergence between the detriment suffered by each consumer. Secondly, the CAT did not find the claim for aggregate damages to be viable, as loss varied from one consumer to the next and would be difficult to distribute on a compensatory basis. 9.177 In 2019, the Court of Appeal overturned the CAT’s decision on the basis that it did not properly apply the legal test for CPO applications. It held that, with respect to the ‘pass-on’ costs, instead of assessing whether the claim had a real prospect of success (which is the correct test for CPO certification),231 the 229 Ibid. See judgment dated 21 July 2017. 230 Ibid. paras 128–129. 231 Walter Merricks v Mastercard Inc. et al [2019] EWCA Civ 674, [44]. This standard is akin to that required in a defendant’s application for summary judgment under Civil Procedure Rule 24.2(a)(i) where a defendant must prove the inverse, namely that a claimant’s claim has no real prospect of success.

312

Opt-out class actions 9.180

court’s assessment ‘exposed the claim to a more vigorous process of examination than would have taken place at a strike-out application’, and therefore went beyond what was required at the CPO certification stage.232 With regards to the distribution of aggregate damages, the Court of Appeal also held that the CAT wrongly directed itself to consider the distribution (on a compensatory basis) of aggregate damages claimed. The Court of Appeal held that, first, this was a matter for the trial judge’s consideration and, second, there are no requirements under the competition law of England and Wales for damages to be distributed on a compensatory basis. 9.178 The Court of Appeal’s judgment in Mastercard v Merricks was appealed to the UK  Supreme Court and the appeal was heard in May 2020, with the judgment expected in late 2020. Litigation funders and competition lawyers alike will be closely following the outcome of that appeal, particularly those that are involved in the numerous other collective actions233 currently ongoing in the CAT that have been stayed pending the Supreme Court’s judgment. It is expected that the judgment will clarify several aspects of the CAT collective proceedings regime, including the standard required to be met to achieve class certification and the extent to which expert evidence should be interrogated at the certification stage. Should the Supreme Court uphold the decision of the Court of Appeal, it is likely that the collective action regime in the CAT will become even more attractive to litigation funders.

Other jurisdictions: the Netherlands and the EU 9.179 The focus of this chapter is on class action regimes in common law jurisdictions, but it is worth briefly discussing the notable changes in civil law jurisdictions such as the Netherlands and across the EU. On 1  January 2020, a new law on class actions entered into force in the Netherlands. Although representative proceedings were possible to bring before Dutch courts prior to the new rules, the new legislation permits monetary damages to be sought for the first time. The legislation enables associations or foundations to bring claims on behalf of a class of people with a similar interest. 9.180 Much like the US and Canadian class action regimes, a certification phase takes place which enables the Dutch court to check all admissibility requirements have been met. It will consider, among other things, that the class action route is more efficient and effective than adjudicating each claim individually and that the class representative is sufficiently funded to bear the 232 Walter Merricks v Mastercard Inc. et al [2019] EWCA Civ 674, [53]. 233 These include the following cases: Justin Gutmann v London & South Eastern Railway Limited (Case No. 1305/7/7/19), Justin Gutmann v First MTR South Western Trains Limited and Another (Case No. 1304/7/7/19) and Mark McLaren Class Representative Limited v MOL (Europe) Africa Ltd & Others) (Case No. 1339/7/7/20), Road Haulage Association Limited v Man SE and Others (Case No.1289/7/7/18) and UK Trucks Claim Limited et al v Iveco et al (Case No. 1282/7/7/18).

313

9.181  Types of litigation and arbitration that attract and are attractive to litigation finance

potential costs of the proceedings. Litigation funding is not prohibited, but Dutch courts must be satisfied that any third-party funding of class actions would not result in the class representative losing control over how the collective claims will be argued or managed in the proceedings. Following certification, parties have at least a month to opt out of proceedings or, in the case of non-domiciled or non-resident parties, opt in. Settlement is also subject to court approval, with the court mandating a period to allow the parties to attempt to settle following certification. 9.181 The new class action regime in the Netherlands is reflective of wider changes across the EU. The text of the EU Collective Proceedings Directive234 was published on 30 June 2020 and is expected to be finalised by the European Parliament and Council shortly. It applies to breaches of law in specific areas, including data protection, travel and tourism and energy and telecommunications, and only relates to consumer-led actions and will require EU Member States to adopt class action regimes for these areas and such claimants if they have not already done so. In many areas, such as certification and the management of undistributed funds, the Directive gives Member States complete discretion. It does, however, make clear that the Directive should not enable punitive damages to be awarded against defendants.

OPT-IN CLASS ACTIONS 9.182 Unlike the opt-out regimes discussed above, opt-in claims are brought on behalf of a specific set of claimants which have consented to their inclusion in the group action. Any judgment in such class actions will typically only relate to the specified parties to the claim. 9.183 Given the availability of opt-out class actions in the United States, Australia and Canada, opt-in or ‘closed class’ funded actions, in comparison to England and Wales, have been historically less frequent in those jurisdictions (although recent developments in Australia have witnessed a return to bookbuilding ‘closed classes’ within its opt-out action regime, as litigation funders perceive that contractual relationships with group members provide them with more certainty of an acceptable return on investment). Of the four jurisdictions considered in this chapter, the opt-in regime is more commonly associated with group litigation in England and Wales, where the majority of such cases are managed via Group Litigation Orders (GLOs) (although some are not).

234 Proposal for a Directive of the European Parliament and of the Council on representative actions for the protection of the collective interests of consumers, and repealing Directive 2009/22/EC. Available online: https://eur-lex.europa.eu/legal-content/EN/TXT/ PDF/?uri=CONSIL:ST_9223_2020_INIT&from=EN

314

Opt-in class actions 9.186

England and Wales Group Litigation Orders 9.184 Currently, a significant number of class actions in England and Wales proceed via a GLO. Since the procedure was introduced via the Civil Procedure (Amendment) Rules 2000,235 over 100 proceedings have been issued as GLOs.236 The applicable procedural rule defines GLOs as an order providing for the case management of claims giving rise to common or related issues of fact or law.237 This is particularly important as judgments in the group litigation will bind those on the GLO register. In considering whether to exercise its discretion to grant a GLO, the court will also consider the number of claims giving rise to the common or related issues of fact or law.238 Typically, GLOs will list numerous common issues, but the rules do not mandate this.239 The court, in its discretion, will also consider whether granting a GLO would enable the court to achieve its overriding objective240 to deal with cases justly and proportionately. Among other matters, it will assess the costs associated with the GLO against damages sought and consider whether adverse costs orders would be met by funding arrangements and ATE insurance. 9.185 Popular types of claim proceeding via GLOs include those relating to data breaches,241 product liability, environmental damage242, industrial disease243 and securities.244 Given that the GLO procedure was introduced in 2000 in response to, among other things, recommendations in Lord Wolf’s Access to Justice Final Report245 for a more streamlined and thereby less costly procedure, the number of GLO proceedings is still relatively low. 9.186 Costs may be a factor. Although liability for common costs relating to the GLO will typically be several and split equally between claimants on the GLO register, individual claimants must cover the costs of their individual claims separately. They also run the risk of becoming liable for adverse costs (see chapter 7). This costs regime differs from the regime applicable to opt-out representative proceedings under CPR 19.6, which allows those within a defined

235 SI 2000/221. 236 See HM Courts & Tribunals Service data. 237 CPR 19.10. 238 CPR 19.11. 239 Tew v BoS (Shared Appreciation Mortgages) No.1 Plc [2010]  EWHC  203 (Ch) proceeded with a limited number of common issues. Note that Lord Wolf’s Access to Justice report recommended a minimum of 10. Chap.17, para 20. 240 Saunderson v Sonae [2015] EWHC 2264 (QB). 241 Various Claimants v WM Morrison Supermarkets plc [2018] EWHC 1123 (QB). 242 Lungowe and others v Vedanta Resources plc and another company [2020] EWHC 749 (TCC). 243 Hutson & Anor, The Personal Representatives of v Tata Steel UK Ltd [2019] EWHC 143 (QB). 244 The RBS Rights Issue Litigation [2016] EWHC 3161 (Ch). 245 Chapter  17 of Lord Woolf’s Access to Justice Final Report (1996) stated that ‘[i]t is now generally recognised, by judges, practitioners, and consumer representatives that there is a need for a new approach both in relation to court procedures and legal aid’ (p 223, para 2).

315

9.187  Types of litigation and arbitration that attract and are attractive to litigation finance

class to benefit from a favourable judgment without incurring the costs associated with bringing a substantive claim.246 9.187 The availability of litigation funding and ATE insurance, as well as flexible conditional or contingency fee arrangements or damages-based agreements with a claimant’s lawyers, helps to mitigate such risks. However, the availability of funding options and flexibility of fee arrangements may suffer if the risks associated with the case outweigh potential returns. A recent judgment in Lloyds/HBOS,247 a case managed via a GLO, may cause funders, lawyers and potential GLO claimants concern. It indicates that adverse costs may surpass the extent of agreed ATE insurance and litigation funding. For those seeking to bring proceedings under GLOs, this imports uncertainty into an otherwise straightforward calculation of return on investment based on thorough due diligence and an analysis of case merits. 9.188 An attractive feature of GLOs for litigation funders is the certainty of return from any settlement. Unlike representative proceedings under CPR  19.6, collective opt-out proceedings before the CAT,248 and applicable class action procedures in the US and Australian courts, a litigation funder in GLO proceedings has contractual certainty with group members and there is no requirement for the court to approve a settlement. Settlements in GLOs may, however, be complicated by the involvement of numerous litigation funders and law firms (if the members of the GLO are funded and represented by various different parties). 9.189 Group litigation via GLOs also appeals to litigation funders because the claims often involve significant damages. Securities litigation relating to, for example, untrue or misleading statements in information published by public companies is one such area, with several well-reported cases being commenced by shareholders in recent years.249 Common law claims, for example, negligent misstatement, deceit and claims under the Misrepresentation Act 1967 may be brought as well as statutory claims under ss 90 and 90A of the Financial Services and Markets Act (FSMA) 2000. 9.190 Section 90 enables shareholders to claim compensation if they have acquired shares in a public company250 and suffered loss as a result of any untrue

246 Members in the class who wish to enforce the legal judgment will still need to cover the cost of such related proceedings. 247 Sharp & Other Claimants Listed in the GLO Register v Blank & Ors [2019] EWHC 3078 (Ch). 248 CAT Rules 2015, rule 94. 249 Note, however, that a securities litigation case brought by shareholders of Tesco plc did not succeed in obtaining a GLO in 2017 largely because (following Tesco plc’s objection to the GLO application) the court believed that an insufficient number of claimants (other than the two groups who had commenced proceedings in late 2016) had come forward or were likely to come forward to issue claims. It was therefore unclear that case management by any other method within the court’s discretion would be so difficult such as to make a GLO necessary. 250 See FSMA 2000 Sch 10A(1).

316

Conclusion and the future 9.192

or misleading statement251 or omission of required information252 in the company’s listing particulars or prospectus. In the case of a misleading or untrue statement, there is no requirement to prove the shareholder relied on it. Shareholders may bring the claim against the relevant issuer, directors (at the relevant time) and other responsible persons.253 Recent case law confirms that both initial ‘placees’ acquiring shares via a public company’s primary offering and those acquiring shares in the aftermarket are covered by the statutory provision.254 9.191 Section 90A similarly enables shareholders to bring claims for compensation if they acquired, continue to hold or disposed of securities in a public company and suffered loss as a result of any untrue or misleading statement or dishonest omission255 in or from certain information256 published via a recognised information source by the company; or as a result of a delay in publishing such information.257 Shareholders can only bring their claims against the issuer. Unlike under s  90, each claimant must prove that they reasonably relied on the statement or omission, although it is not yet clear what is required in this regard as no case brought under s 90A has yet proceeded to trial or judgment. The requirements under s 90A are yet to be tested before the courts, although a case management conference on 31 July 2020 in relation to the claim brought by Manning & Napier against Tesco did serve to highlight the importance of attributing reliance on published information pursuant to s  90A to the correct claimant. It is hoped that any future ‘test’ case in relation to s 90A, will bring clarity on what is required to make good a claim under s 90A. A positive result for claimants may lead to a significant uptick in litigation funding in this area, particularly in the case of ‘follow-on’ litigation where decisions from regulatory investigations into a company’s wrongdoing mean liability is straightforward to establish and lawyers and funders can focus on book-building, meeting statutory tests (eg proving reliance under s 90A) and calculating quantum.

CONCLUSION AND THE FUTURE 9.192 In recent years, the litigation funding market has grown significantly on a global level, both in terms of the funds available and its sophistication as a financial product. Importantly, it has enabled collective redress and access to justice for many individuals and small businesses that have suffered loss at the hands of banks and other large businesses. Absent such collective action regimes and the availability of litigation funding, such redress could not have been 251 See FSMA 2000 s 90(4). 252 FSMA 2000 ss 80 and 81. 253 See FSMA 2000 s 90(1). 254 This applies to FSMA 2000 ss 90 and 90A . See SL Claimants v Tesco [2019] EWHC 2858 (Ch), para 86. Note that this judgment has been appealed to the Court of Appeal. 255 See FSMA 2000 Sch 10A(3). 256 The information must be published via a recognised information service (see FSMA  2000 Sch 10A(2)). 257 See FSMA 2000 Sch 10A(5).

317

9.193  Types of litigation and arbitration that attract and are attractive to litigation finance

effectively sought and the victims of wrongdoing would go uncompensated. Collective actions also play an important role in privately regulating the conduct of banks and big business and, in that way, help to drive better corporate behaviour. 9.193 Recent developments in class action regimes and judgments in collective actions and across various common law and European jurisdictions suggest that courts and legislatures are broadly supportive of collective redress mechanisms and litigation funding. 9.194 The number of funded class actions is also likely to continue to increase, as different types of corporate wrongdoing continue to emerge (for example, the recent uptick in breaches by big business of data protection legislation) where damages per claimant are often small and collective redress backed by litigation funders is appropriate. 9.195 Going forward, as collective action regimes develop and courts provide more clarity on how such regimes work in practice, the increased certainty and precedent is likely to further encourage litigation funders to support collective actions to help consumers and small businesses level the playing field and achieve the compensation to which they are entitled.

318

CHAPTER 10

The users of litigation finance – who, where, when and why? Philippa Beasley Associate, Reed Smith LLP, London

Ben Summerfield* Partner, Reed Smith LLP, London

Introduction 10.1 The litigation funders 10.7 Where do funders seek opportunities? 10.13 When does funding become a prospect for litigants? 10.45 Why would clients seek litigation funding? 10.55 Conclusion 10.60

INTRODUCTION 10.1 While 2020 sees litigation finance as a mainstream force in the legal market, just 15 years ago it was an obscure feature that the legal community treated with suspicion. This short time has proven that this market can rapidly adapt and grow, developing through policy and law to serve the evolving needs of litigants. 10.2 Any case that has a potential damages or money claim may be a suitable case for funding. A funder’s involvement is based on the merits of a claim, as well as the opponent’s ability to pay. What underlines this enigmatic arena is access to justice. Litigation funding enables parties to enforce their legal rights where they would otherwise lack the ability to do so, or do have the ability but the commercial imperative is to hedge the risk of self-funding. 10.3 The litigation funding market is responding to the ever increasing sophistication of clients’ in-house counsel teams, and the ever increasing costs of legal disputes. Modern litigation is a patchwork of complex and nuanced cases, particularly given the opportunities and challenges brought about by technology. * With thanks to Kerri Bridges for her help in preparing this chapter.

319

10.4  The users of litigation finance – who, where, when and why?

Technological innovations to streamline the disputes process are making a lot of headway, but the burdens of evidence gathering remain very broad. With most business being conducted electronically over hundreds of thousands of emails, it is regularly the case that the most expensive part of the dispute resolution process is gathering and processing this unfathomably vast volume of data. The much debated 2019 changes to the disclosure rules in England and Wales arose when the General Counsels of the FTSE 100 companies came together to contest the huge costs associated with documentary evidence. In fact, in a recent survey, 68 per cent of in-house respondents said that they had chosen to forgo a claim due to the impact on bottom line.1 If more than two thirds of potential claims are not followed through due to the costs risk alone, this signifies a tremendous gulf in the efficacy of justice systems. The costs of litigation are ultimately unsustainable for even major corporate clients, and it is proving very difficult within the existing dispute resolution framework to make changes that effectively resolve this. 10.4 In parallel, competition between law firms continues to intensify, with hourly rates taking a hit to secure new business or retain existing clients, and law firms being expected to be bolder and smarter in pricing the management of a case from start to finish. This is on top of firms’ need to innovate to support clients’ needs, requiring considerable financial investment, and court requirements that technology be used where possible to keep costs down.2 This costs crucible provides the circumstances for litigation funding to flourish. Funders can step in to provide breathing room for those responsible for the pressures of the day-to-day handling of disputes, both within firms and within the client, where in-house teams are under constant budgetary pressure from their boards. Law firms can deploy litigation funding as an innovative tool in their arsenal to continue to equip case teams with adequate resource to ensure best-in-class client service. Funders are the solution to the access to justice problem that exists even amongst the top clients and firms. 10.5 Litigation funding is a multibillion dollar market: established funders continue to deepen their financial pools, and new entrants to the market are a noticeable upward trend. While equities are assessed on their potential for growth, the funding market measures litigation on its legal merits and prospect of success. Funders develop portfolios of cases, leveraging partnerships with law firms for investment variety. Every dispute will be different upon its own specific facts and circumstances, and the level of resource required for proper analysis of the relevant law will vary widely from case to case. This requires careful qualitative assessment of risk with the legal team on each case. An agreement is then struck, long before the final outcome, which can be a trial that is two, three or four years away, absent an early settlement. 10.6 This does not deter funders from raising funds where alternatives are not as attractive or non-existent.

1 2

Burford Capital, (2018) Litigation Finance Survey p 29. Civil Procedure Rules, Practice Direction 51U, 3.2(3).

320

The litigation funders 10.10

THE LITIGATION FUNDERS 10.7 There are a number of different organisations acting as litigation funders. The traditional litigation funder is typically an investment fund formed exclusively for the purpose of funding litigation.3 The market in the UK has a number of larger dedicated funders, who are mostly members of the Association of Litigation Funders and smaller funders who are mostly not. 10.8 The 16 main funders operating in the UK have assets worth over £1.5  billion, according to publicly available figures. The actual figures are believed to be much higher.4 Since the publication of Lord Justice Jackson’s review of civil litigation costs in 2009, the figures have grown by 743 per cent.5 The lucrative nature of the industry and the blessing given to funding by the Jackson Report and case law, has resulted in a growing market that has evolved in the UK, allowing other types of funder to participate, including hedge funds, family offices and funders with overseas operations, all mostly on an ad hoc basis.6 10.9 The industry is appealing to managers and investors alike, mostly because it is not subject to the same limitations as the stock market, as it is non-correlated. The industry is considered to have investments that do not perform in accordance with the health of the overall economy. It also offers an alternative class of investments that offer high returns at a time when other types of investments are underperforming.7 Accordingly, many hedge funds are keen to invest in litigation.8 10.10 The scene has become more complex as the market has grown. It now includes brokers who specialise in structuring dispute finance arrangements and liaise between clients, lawyers and funders.9 There are also unregulated financial entities willing to lend directly to clients or lawyers to support litigation and solicitors who might also source funds and promote this in their marketing material.10

3

Pierce and Burnett (2020) ‘The Emerging Market for Litigation Funding’ The Hedge Fund Journal, issue 86. 4 See further at chapter 11. 5 Wells B (2018) ‘Regulation of third party litigation funding in England and Wales’, Out-law Analysis, 19  July 2018. Available online: https://www.pinsentmasons.com/out-law/analysis/ third-party-litigation-funding-england-wales 6 Perrin (2019) The Third Party Litigation Funding Law Review Law Business Research Ltd p. 55. 7 Pierce and Burnett, (2020) ‘The Emerging Market for Litigation Funding’ The Hedge Fund Journal, issue 86 8 Beisner, Miller, Schwartz, (2020) Selling more lawsuits, buying more trouble U.S. Chamber Institute for Legal Reform p. 8 9 Ells (2019) Third Party Funding: Self-Regulation in the UK Volume 5 Issue 2, University of West London, p. 16. 10 Ibid.

321

10.11  The users of litigation finance – who, where, when and why?

10.11 In the US market, funders are classified into three types: dedicated, multi-strategy and ad hoc. (1) Dedicated funders are entities that specialise in litigation financing. Two of the funders in this category are publicly listed entities, while the vast majority are privately held. (2) Multi-strategy funders are entities (usually hedge funds) that employ a variety of investment approaches in various markets and assets classes, and have an established litigation finance area. (3) Ad hoc funders are entities such as hedge funds and asset managers with an appetite for litigation finance.11 10.12 Another funding model employed by funders is crowdfunding. One company, LexShares Inc. in the United States, is attracting investors, commercial claimants and law firms to its online marketplace by applying a crowdfunding strategy to litigation funding.12 Accredited investors are able to shop among individual cases and contribute as little as $2,500 in the hope that, when a matter settles or is successful, the funder will make a profit. Unlike traditional litigation funding firms, LexShares uses the crowdfunding model to attract investment, which allows ordinary accredited investors to choose among cases that LexShares has approved through their own due diligence process.13

WHERE DO FUNDERS SEEK OPPORTUNITIES? 10.13 Within the last two decades, the third-party disputes funding market has moved from relative obscurity to a thriving market in many jurisdictions. Litigation funding offers bespoke products tailored to the needs of each legal jurisdiction. While litigation funding is most established in England and Wales, Australia and the United States, it exists as different conceptions in Canada, the Netherlands, Germany, and Singapore.

England and Wales 10.14 The third-party funding landscape has become increasingly complex as the market has grown. One such complexity is the public listing of several funders on the alternative investment market (AIM) in London. It has been argued that there are clear benefits to funders in being publicly listed, including the fact that listing ‘ensures a level of regulation and transparency that the private markets 11 Agee and Lowe (2020) ‘Litigation Finance Buyer’s Guide’,Westfleet Advisors, p. 6. Available online: https://westfleetadvisors.com/publications/#:~:text=Westfleet’s%20Litigation%20Finance%20 Buyer’s%20Guide,financing%20sources%20available%20to%20them. 12 Beisner, Miller, Schwartz (2020) Selling more lawsuits, buying more trouble U.S. Chamber Institute for Legal Reform p. 10. 13 Ibid.

322

Where do funders seek opportunities? 10.16

do not have’. One funder, Litigation Capital Management, moved from the Australian Securities Exchange to the AIM in December 2018, both to broaden its shareholder base and tap into the maturing London market.14 It is important to note that while London is a major base for litigation funders, the market is very much global. Many London-based funders have offices in multiple jurisdictions to diversify their investment portfolios across other major disputes centres. 10.15 In a much reported controversy in 2019, a short seller, Muddy Waters, released a surprise report against one of the most established funders, Burford Capital.15 Burford Capital had been AIM-listed since 2009 with a positive track record, yet the report argued that Burford’s cash position rendered it virtually insolvent. Burford published a rebuttal firmly denying the allegations, maintaining that ‘Burford has shown its capacity to access capital as needed, raising more than $2 billion in new capital in the last two years. Burford has no current intention of raising equity capital; it has raised equity only once since 2010 and has no plan to become a serial equity issuer.’16 The report led to an immediate drop in Burford Capital’s share price from a high of 1669p in July 2019 to 605p when the Muddy Waters report was published on 7  August 2019.17 At the time of writing, notwithstanding the economic slowdown associated with the COVID-19 pandemic, Burford Capital’s share price has not since risen above 960p.18 This has led commentators to speculate that the litigation funding market is not suitable for the public markets as the underlying asset, litigation, is inherently unpredictable.19 10.16 It is clear that litigation funding is one of the more complex businesses on the public markets, and is not immune to setbacks. It is also clear that the market is resilient. In September 2019, Augusta, based in the United Kingdom, announced that it had raised a further US $115 million from a US-based investment manager.20 On 17 March 2020, Litigation Capital Management announced a first close of a new fund at $140 million. Then, on 26 March, London-based funder Balance Legal Capital LLP announced it had raised a further $100 million from eight institutional investors in a new fund, for deployment in the UK, Australia and other common law jurisdictions. It is clear that investors still have a strong appetite for the litigation funding sector, and the sector as a whole looks as strong as ever.21 14 Rothwell (2019) Muddying the waters Law Society Gazette 7 October 2019. Available online: https://www.lawgazette.co.uk/features/muddying-the-waters/5101669.article 15 Muddy Waters Capital LLC MW is Short Burford Capital Ltd. (BUR LN) 7 August 2019. Available online: http://d.muddywatersresearch.com/content/uploads/2019/08/MW_BUR_08072019.pdf 16 Burford Capital Limited Response to Short Attack 8 August 2019. Available online: https://www. burfordcapital.com/media/1585/20190808-burford-capital-response-to-muddy-waters-final-1.pdf 17 BUR:LN, Bloomberg (2020). 18 Ibid. 19 Rothwell (2019) Muddying the waters Law Society Gazette 7 October 2019. Available online: https://www.lawgazette.co.uk/features/muddying-the-waters/5101669.article 20 Freund (2019) Augusta raises additional $115m for litigation and dispute funding Litigation Funding Journal, 12  September 2019. Available online: https://litigationfinancejournal.com/ augusta-raises-additional-115m-litigation-dispute-funding/ 21 Rothwell (2020) Cap catch no bar to a good investment Law Society Gazette 6 April 2020. Available online: https://www.lawgazette.co.uk/commentary-and-opinion/cap-catch-no-barto-a-good-investment/5103765.article

323

10.17  The users of litigation finance – who, where, when and why?

10.17 London is a key jurisdiction for litigation and arbitration. The civil court system is thorough, efficient, reliable and renowned for its fair and proportionate procedures. English judgments also have a worldwide reputation for quality and are often highly persuasive in courts in other jurisdictions.22 London’s established legislative framework, world class arbitrators, legal advisers and arbitration organisations lead many parties to choose London as the seat of arbitration. This is often helpful for disputes between parties of different nationalities because it is perceived as being a neutral forum within which to resolve international disputes.23 Driving the growth for litigation funding in this market are antitrust class actions, insolvency litigation, patent disputes, securities actions, and insurance disputes, as funding is becoming more and more prominent in each of these sectors.

Australia 10.18 Modern litigation funding migrated to the UK in the early 2000s after early success in Australia.24 In Australia, the litigation funding market evolved mainly to help claimants finance class action claims brought within the domestic courts system.25 The Australian third-party litigation funding market is sophisticated, but the picture is not uniform across Australian states, and it appears that litigation funding is used cautiously. As the market for litigation in Australia is small in general, there is also not a great deal of room for growth.26 That being said, litigation funding supports almost all Australian class actions and is worth over AU $3  billion (nearly 15 per cent of the total value of the litigation market in Australia).27 The number of class actions supported by litigation funding in Australia has increased markedly within the last eight years, and this number is growing.28 Overall, the remit of most funding is carefully balanced between improving access to justice and bringing commercial gain, without inciting vexatious or unmeritorious claims. 10.19 Until 2006, encouraging litigation or funding a claim for profit were prohibited in Australia by the common law doctrines of maintenance and champerty. In a watershed moment for funders, the High Court of Australia ruled that profiting from assisting in litigation and encouraging litigation could only be 22 The Law Society(2019) England and Wales: A  world jurisdiction of choice. p.15. Available online: https://www.lawsociety.org.uk/campaigns/england-and-wales-global-legal-centre 23 Ibid. p 26. 24 Brekoulakis et al (2018) Report of the ICCA – Queen Mary Task Force on Third-Party Funding in International Arbitration International Council for Commercial Arbitration (ICCA) R No. 4 p.30 Available online: www.arbitration-icca.org 25 Woodsford Litigation Funding (2017) Global Trends in Litigation Funding. Available online: https://woodsfordlitigationfunding.com/wp-content/uploads/2017/05/Woodford-Globaltrends-in-litigation-funding-White-Paper-web.pdf 26 Ibid. 27 Geisker and Luff (2019) ‘Australia’. in Perrin (ed.) The Third Party Litigation Funding Law Review p.1. 28 Ibid.

324

Where do funders seek opportunities? 10.22

contrary to public policy if there was a statutory rule against maintaining actions.29 In Queensland, Western Australia, Tasmania and the Northern Territory, however, the torts of maintenance and champerty have not been abolished. This means that a third-party funding agreement could be set aside by an Australian court if it were found to be inconsistent with common law public policy considerations. 10.20 With regard to practical considerations, funders and lawyers have no direct contractual relationship, but clients can instruct lawyers to report directly to the funders. Funders may have day-to-day administrative control over the litigation provided the lawyers do not fully abdicate their duties to the funder. The funder can agree to provide for all the client’s legal costs and disbursements in return for receiving a percentage of any damages recovered. This percentage typically ranges between 20 per cent and 45 per cent of the settlement proceeds, depending on the risks and time involved and the type of funding required.30

United States 10.21 While the US litigation culture is an ocean apart from the UK and Europe, the litigation funding market has developed robustly on both sides of the Atlantic. While the market developed in the UK first, the US market has caught up quickly – litigation funding is squarely in the mainstream. When the US litigation finance market began, capital was easier to source than in the UK or Australia. As litigation generally increased through the 1980s and 1990s, more and more civil cases won funding.31 Given the difference in litigation cultures, where after-the-event insurance is a necessary requirement for disputing parties in English and Australian disputes to cover the risk of adverse costs, the established availability of contingency fee representation in the US has meant that litigation insurance is largely unnecessary. 10.22 The law around litigation funding varies between states. New York maintains traditional prohibitions on champerty, maintenance, and barratry, but provides an exemption for any transaction in excess of $500,000.32 Some states do not recognise champerty and maintenance, but do have statutory or common law rules in relation to litigation funding. California, for example, never adopted the English common law doctrines of champerty and maintenance, and no Californian court requires disclosure of the details of the funding arrangement. Pennsylvania, by contrast, recognises the doctrines of champerty, maintenance,

29 Campbell’s Cash & Carry Pty Ltd v Fostif Pty Ltd (2006) HCA 41. 30 Friel and Barnes (2020) ‘Getting the Deal Through’ Litigation Funding 2020, Lexology; Geisker and Luff (2019) ‘Australia’ in Perrin (ed.), The Third Party Litigation Funding Law Review. 31 Harbour Litigation (2020) The coming of age of litigation funding Legal Business 27 March 2020.Available online: https://www.legalbusiness.co.uk/ analysis/disputes-yearbook-2020/ sponsored-briefing-the-coming-of-age-of-litigation-funding/ 32 N.Y. Judiciary Law § 489.

325

10.23  The users of litigation finance – who, where, when and why?

and barratry, and at least one court has invalidated a relatively complex financing agreement on the grounds that it was champertous.33 10.23 Most states have issued bar ethics opinions that permit litigation finance transactions, provided disclosure requirements are met and conflicts of interest are avoided. In particular, the New York City Bar Association, in recognition of the growth of litigation funding, has commented that it is a ‘valuable means for paying the costs of pursuing a legal claim’.34 The degree of control the funder may exercise over a litigation dispute is limited by the Rules of Professional Conduct, which require that lawyers retain independence of judgement, and also set out certain privilege considerations. Clients are free to consult with funders regarding general strategy and settlement proposals. A  funder may even be entitled to veto power over a proposed settlement, but even with such power, lawyers are ethically obligated under Rule 1.2(a) to abide by the client’s decision with respect to settlement. A client, notwithstanding the funder’s objection, can therefore direct the lawyer to accept a settlement proposal, and the lawyer must follow those instructions regardless of what the funder wanted to do. 10.24 No New York court has found traditional litigation funding to be champertous.35 However, in a relatively recent decision by the Court of Appeals, the court struck down an agreement as champertous, where it was determined that the sole purpose of the transaction was to enable a third party to bring suit in its own name.36 While the court said that this unconventional arrangement may have been acceptable in principle, the requisite investment was not above $500,000, as required by s 49 of the New York Judiciary Laws, so the plaintiff’s case failed. 10.25 As early as April 2013, a report to an ethics committee of the New York State Bar Association noted a growing number of court decisions and bar opinions condoning the use of litigation funding. The report found that third-party financing of commercial litigation was a growing trend in commercial lawsuits in the US.37 In more recent developments, the New York City Bar Association Litigation Funding Working Group published a report in favour of modernising the rules around litigation funding. The February 2020 report concludes that the New York Rules of Professional Conduct should be modified to accommodate the reality of litigation funding.38 In reaching this conclusion, the Litigation Funding 33 WFIC LLC v LaBarre, 148 A.3d 812, 818 (Pa. Super. Ct. 2016). 34 The Association of the Bar of the City of New York Committee on Professional Ethics (2011) Formal Opinion 2011–2: Third Party Litigation Financing New York City Bar. Available online: https://www.nycbar.org/member-and-career-services/committees/reports-listing/reports/detail/ formal-opinion-2011-2-third-party-litigation-financing 35 Echeverria v Estate of Lindner, No. 018666/2002, 2005 WL 1083704, at [5] (Sup Ct, Mar. 02, 2005). 36 Justinian Capital SPC v WestLB AG, N.Y. Branch, 28 N.Y.3d 160 (2016). 37 Ethics Committee of the Commercial and Federal Litigation Section Of the New York State Bar Association, Report on the Ethical Implications Of Third-Party Litigation Funding (16 April 2013). 38 The New York City Bar Association Working Group on Litigation Funding, ‘Report To The President’ (28 February 2020).

326

Where do funders seek opportunities? 10.28

Working Group carried out a comprehensive study and review of the issues and practices surrounding litigation funding, seeking input from practitioners, scholars and experts in the fields of commercial and consumer finance.39 The US market looks set for continued growth, expansion and modernisation.

Canada 10.26 Canadian law has also developed favourably for litigation funders. Commentators have recently noted that contingency fees are becoming increasingly insufficient to meet the costs of litigating a matter, which is driving firms to seek funding to cover litigation risks.40 With increased opportunities for funding, given the growth of the presence of funders, the Canadian courts have had a number of opportunities to scrutinise funding agreements.41 Case law suggests that third-party funding agreements do not require court approval at the outset of litigation, with the exception of class action proceedings. There are examples of funding agreements approved by the courts in such proceedings.42 10.27 The courts have different approaches for commercial or single-party litigation and class actions. For the latter, the court has a supervisory role and parties have further obligations as to disclosure, but in commercial litigation the courts tend not to interfere. 43 10.28 Maintenance and champerty still feature in the Canadian litigation funding landscape. In the commercial case of Schenk v Valeant Pharmaceuticals, the Ontario Supreme Court found that ‘the statutory and common law prohibition on champerty and maintenance in the Province of Ontario must be considered’ and then declined to approve a funding agreement, finding that it constituted maintenance and champerty.44 This conclusion was based on the fact that, in the absence of a cap, the agreement could result in the funder recovering over 50 per cent of the proceeds, and could allow open-ended exposure that could result in the funder retaining the lion’s share of any proceeds. It was held that ‘such an agreement … does not provide access to justice to Schenk in a true sense, but rather provides an attractive business opportunity to Redress, who suffered no alleged wrong’.45 This ruling does not, however, include an express discussion of the proper or improper motive behind the funding, which has previously appeared in Canadian jurisprudence regarding champerty and maintenance.

39 Ibid. 40 Kari (2017) ‘Third-Party Litigation Funding’ Canadian Lawyer Magazine 3 January 2017 41 Meighen (2019) ‘Canada’ in Perrin (ed.) The Third Party Litigation Funding Law Review 3rd ed. p 39. 42 See, for example, Dugal v Manulife Financial Corp, 2011 ONSC 3147 and Houle v St. Jude Medical Inc., 2017 ONSC 5129. 43 Meighen (2019) ‘Canada’ in Perrin (ed) The Third Party Litigation Funding Law Review 3rd ed. 44 Schenk v Valeant Pharmaceuticals International Inc (2015) ONSC 3215. 45 (2015) ONSC 3215 [17].

327

10.29  The users of litigation finance – who, where, when and why?

10.29 In 2004, Ontario passed regulations which set out the requirements of valid contingency fee arrangements between lawyers and their clients.46 However, there is no regulation which governs third-party funding agreements that transfer the litigation risk to third parties rather than to lawyers. In arbitration, the Comprehensive Economic and Trade Agreement between Canada and the European Union provides that, where third-party funding exists, the party benefiting from funding must disclose the funder’s name and address to the other side and the tribunal. The disclosure must be made as soon as the claim is submitted, or, if the funding is agreed after a claim is submitted, without delay after the funding agreement is concluded.47 10.30 Although the common law position is developing, there is no formal set of rules for litigation funders in Canada. The most significant progress towards codification of applicable rules can be found in the Final Report of the Law Commission of Ontario released in July 2019 (the LCO  Report).48 The LCO  Report recommends certain amendments of the Class Proceedings Act to permit third-party funding subject to certain rules, including: (i) that the representative plaintiff must bring a motion seeking court approval of a funding agreement; (ii) that the court retains jurisdiction to oversee the matter even after the agreement is approved; and (iii) the court is entitled to see the full agreement, with the extent of disclosure of the agreement to the defendant to be at the discretion of the judge. Many of these rules are already reflected in common law, but legislators may progress these recommendations going forward. 49

Europe 10.31 While this chapter does not seek to cover all of Europe, no picture of the current litigation funding market is complete without reference to the position in some civilian legal systems in other European States outside of the UK. 10.32 In the Netherlands, third-party litigation funding is not yet common in individual claims, but a market is emerging for both litigation and arbitration. Funding has already featured in Dutch class actions. On 19 March 2019, the Dutch Senate approved long-awaited legislation that introduced collective damages actions in the Netherlands. This will provide opportunities for groups of claimants who are primarily based in the Netherlands to seek redress. It is likely that there will be a growing market for funders if the number of class actions increases.50

46 Contingency Fee Agreements, O. Reg 195/04. 47 Comprehensive Economic and Trade Agreement between Canada, of the one part, and the European Union and its Member States, of the other part, Official Journal of the European Union L 11, (14 January 2017). 48 Final Report of the Law Commission of Ontario (July 2019). 49 Meighen (2019) ‘Canada’ in Perrin (ed.) The Third Party Litigation Funding Law Review 3rd ed. p 52. 50 Knigge (2019) Class/Collective actions in The Netherlands: overview Thomson Reuters, p. 3

328

Where do funders seek opportunities? 10.35

10.33 In contrast, class actions in Germany are still developing. In 2018, the ‘model declaratory action’ was introduced to the German Code of Civil Procedure to allow the much reported litigation against Volkswagen to commence. Commentators on this new legal instrument have noted some weaknesses, particularly the fact that only certain consumer organisations can file such a claim, and that only declaratory relief can be sought.51 Bentham Europe funded this litigation on behalf of the consumer organisation VZBV, and proceedings settled in February 2020 with Volkswagen paying out €830 million.52 The litigation funding market in Germany is otherwise well-developed.53 The regulatory framework regarding third-party funding agreements in German law is relatively non-restrictive. In German state court litigation, legal fees recoverable from the other side are capped in the event of a successful action.54 Therefore, legal fees of the funded party that exceed the statutory stipulated fees cannot be recovered from the other side, even if a claim is successful. In arbitration proceedings, however, the situation is different: the funded party’s legal fees may be recovered from the other side, provided the fees were deemed reasonable by an arbitral tribunal.55 German funders see themselves as active partners in a team that includes the claimant and the lawyer.56 They look at and check all communication and writs, and tend to assist in analysing the best strategy and tactics both before the case is officially pursued and throughout the litigation process. The German courts’ attitude to funding ranges from neutral to positive, with no negative decisions against professional funders being known. 10.34 While France is a prominent disputes centre, litigation funding has not yet made a significant impact on disputes in the State courts. Third-party funding is present in arbitrations, however, which are significantly more expensive than French State court proceedings.

Asia 10.35 There have been notable recent disputes funding developments in Singapore and Hong Kong. Funding Hong Kong litigation, however, is still an infringement of the doctrines of champerty and maintenance, which are both still torts under Hong Kong law.57 There have been Hong Kong court decisions confirming that the doctrines of maintenance and champerty do not prohibit third51 Sharma (2019) ‘Germany’ in Perrin (ed.) The Third Party Litigation Funding Law Review 3rd ed. p 77. 52 Attwood (2020) ‘Volkswagen’s diesel emissions scandal bill runs to €30bn’ Autocar 2 May 2019. Available online: https://www.autocar.co.uk/car-news/industry/volkswagen%E2%80%99sdiesel-emissions-scandal-bill-runs-%E2%82%AC30bn 53 Sharma (2019) ‘Germany’ in Perrin (ed.) The Third Party Litigation Funding Law Review 3rd ed. p 63. 54 Act on the Remuneration of Lawyers of 5 May 2004 (Federal Law Gazette I, p. 718, 788), last amended by Article 6 of the Act of 19 June 2019 (Federal Law Gazette I, p. 840). 55 Sharma (2019) ‘Germany’ in Perrin (ed.) The Third Party Litigation Funding Law Review 3rd ed. p 75. 56 Friel and Barnes (2020) Getting the Deal Through Litigation Funding 2020, Lexology. 57 Ibid.

329

10.36  The users of litigation finance – who, where, when and why?

party funding in circumstances where there is a legitimate interest in the outcome of the litigation, to enable the litigant to have access to justice, or if the litigation falls within a defined category of proceedings, such as insolvency.58 Given these limitations, funding is not yet commonly used for Hong Kong disputes. Funding has been used for insolvency proceedings as this is permitted, but commentators anticipate that funding activity will increase significantly in coming years. 10.36 The Singapore High Court confirmed in the recent decision of Re Vanguard Energy Pte Ltd59 that litigation funding for insolvency proceedings may be permitted. This decision was welcome news for liquidators, as it has enabled them to partner with funders on valuable claims to enable them to proceed. Commentators have noted welcome guidance for litigation funders in subsequent insolvency judgments; namely, that third-party funding of court and mediation proceedings may also be permissible. The potential grounds on which a funding agreement may be deemed contrary to public policy are very limited in scope, and the court retains the power to sanction such conduct.60 Singapore is certainly seeing a policy shift in favour of the funding market.

International arbitration 10.37 Aside from its robust position in the UK, the US and Australia, the litigation funding market continues on a path of global growth. One stage where this is seen most prominently is the international arbitration market. Arbitration has been the gateway for funding markets to emerge in Singapore, Hong Kong, China and Latin America.61 10.38 At least according to some definitions, third-party funding has long existed in maritime arbitration through membership of mutual insurance associations that provide Protection and Indemnity (P&I) insurance and Freight, Demurrage and Defence cover.62 In the P&I  landscape, third-party funding in arbitration has been defined as follows: Where clubs take part in the defence of claims on behalf of impecunious members and take over the defence without being joined as a party but such as to satisfy the Chapman guidelines, unless an appropriate proviso or exclusion is applicable, they would be prima facie liable for the costs of a successful opposing party. This

58 Koh and Tiong (2018) ‘Development of third-party litigation funding in Asia’ Financier Worldwide August 2018. Available online: https://www.financierworldwide.com/developmentof-third-party-litigation-funding-in-asia 59 [2015] SGHC 156. 60 Lee and Manoosegaran (2019) ‘Third-Party Funding: Is Funding of Commercial Litigation Permissible in Singapore?’ Law Gazette June 201.) Available online: https://lawgazette.com. sg/feature/third-party-funding-is-funding-of-commercial-litigation-permissible-in-singapore/ 61 Brekoulakis et al. (2018) Report of the ICCA – Queen Mary Task Force on Third-Party Funding in International Arbitration International Council for Commercial Arbitration (ICCA) R No 4 (2018) p 18. 62 ICCA-Queen Mary (2018).

330

Where do funders seek opportunities? 10.42

would be the case particularly where the club has issued a letter of indemnity and it seeks to defend its own exposure under that security.63

10.39 P&I  funding is a mature and well-developed feature in the maritime industry. There is transparency around how such funding arrangements work in practice, and the impacts on matters such as disclosure, conflicts, and security for costs are known and understood.64 10.40 The recent International Council for Commercial Arbitration (ICCA)– Queen Mary Report on third-party funding reveals a steadily growing market for funders in international arbitration. In particular, the number of funded cases has increased significantly, as has the number and geographic diversity of third-party funders. It is noted in the report that, as the report was underway, new third-party funders emerged in Latin America and China. This growth is beneficial for the jurisdictions that litigation funding can now service, not least as new entrants to the market add to the aggregate funds available for disputes.65 10.41 The costs of arbitration are significant due to the legal fees, and also the fees of the tribunal members; a significant proportion of which are usually paid as soon as the arbitral tribunal has been constituted. The resulting cost position can be many multiples of proceedings in open court, but the privacy and confidentiality of arbitration affords the parties the priceless option of protection against reputational damage. There is a drive within the international arbitration market toward finding solutions to the high cost of arbitration for parties. Funding is increasingly regarded as one potential solution to this problem.66 10.42 Arbitration for commercial disputes lends itself to funding in much the same way as civil or commercial litigation, but the position is more complicated for investor–State disputes. As damages can be many hundreds of millions, these disputes can be very attractive opportunities for funders acting for claimants against unlawful State action. Many investor claimants will claim that their resources and ability to bring an action have been thwarted by the conduct of the State. States’ perspective of funding, however, is much the opposite. The Queen MaryR noted as follows: On the other hand, in the investment context, economic and market-based analysis of claims as ‘assets’ is regarded by some as improperly diminishing the national policy interests and sovereign prerogatives implicated in investment treaty claims. Under this view, a business model that profits by suing governments, even if in good faith, is simply problematic as it seeks to transfer wealth from the public to the private sector.67 63 Steven J. Hazelwood, David Semark (2013), P & I Clubs: law and practice (4th ed.) Informa Law, Routlege, Lloyds List. [13.42]. 64 Brekoulakis et al. (2018) Report of the ICCA – Queen Mary Task Force on Third-Party Funding in International Arbitration International Council for Commercial Arbitration (ICCA) R No 4 (2018) p 55. 65 Ibid. 66 Ibid. 67 Ibid. p 9.

331

10.43  The users of litigation finance – who, where, when and why?

10.43 Furthermore, as respondent States have to pay for the costs of their own defence, this opens up public funds to legal risk, and costs are often not awarded to States in such cases, even if their defence prevails. As increased availability of funding may increase the overall number of cases brought, commentators are concerned that investment arbitration cases will put a unique burden on States, particularly in respect of small States and those facing domestic economic challenges.68 10.44 With appreciation of the risks, and taking into account the experiences in the more experienced jurisdictions, emerging funding markets have made quick progress in recent years. In Singapore, the Civil Law Act was amended in 2017 to abolish maintenance and champerty, and this amendment expressly permits the use of funding for international arbitration.69 Welcoming the amendment to the Civil Law Act, the Singapore Institute of Arbitrators has issued non-binding guidelines for third-party funders to promote best practice among funders for Singapore-seated international arbitrations.70 The Singapore International Arbitration Centre has also produced a practice note that addresses conflicts of interest between arbitrators and external funders.71 As of 1  February 2019, third-party funding has also been permitted for arbitration proceedings in Hong Kong, which marks a significant development for the market there.72

WHEN DOES FUNDING BECOME A PROSPECT FOR LITIGANTS? 10.45 Litigation funding can be structured in many ways and can accommodate a range of financial needs and clients. It can also be applied at any stage of a claim, from pre-action correspondence to post-judgment and appeal.73 Funders can therefore begin to fund a case at any phase. If a legal budget is depleted for good or bad reason but a case is ongoing, funding could be considered to cover the legal fees for the remainder of the dispute, by agreeing terms with the existing funder or arranging new funding, which will involve negotiation and agreement on how this impacts the existing arrangements. 10.46 Any litigation funding agreement will be supported by a priorities agreement. This agreement will set out the ‘waterfall’ for how recovery of 68 Ibid. p 223. 69 Civil Law Act (Cap 43, 1999 Rev Ed) s 5B(2) ‘A contract under which a qualifying ThirdParty Funder provides funds to any party for the purpose of funding all or part of the costs of that party in prescribed dispute resolution proceedings is not contrary to public policy or otherwise illegal by reason that it is a contract for maintenance or champerty.’ 70 Singapore Institute of Arbitrators (2017)  SIARB  Guidelines for Third Party Funders 18 May 2017. 71 Singapore International Arbitration Centre (2017) Singapore International Arbitration Centre Practice Note PN – 01/17 31 March 2017. 72 Arbitration Ordinance (Chapter 609) (7 December 2018) G.N.9048. 73 Pierce and Burnett (2020) ‘The Emerging Market for Litigation Funding’ The Hedge Fund Journal Issue 86 p 5.

332

When does funding become a prospect for litigants? 10.50

damages will be split between the litigant, legal team, insurers (if applicable) and the funder or co-funders. It will also set out the priority and timing of how these payments will be made. Ordinarily, the funder receives the amount of their contribution first. The next step in the waterfall is usually a minimum level of return on investment to the funder, and then the remaining sums are divided among the claimant and legal team.74 10.47 Enforcing judgments can be expensive, sometimes as costly as obtaining the judgment. Given the high costs of enforcement, funding of enforcement actions is a product on the rise.75 A  claimant holding an enforceable judgment or award may not want to incur further legal costs by seeking to enforce, or it may want to explore monetising the award immediately. In this instance the funder could cover the legal and other costs associated with enforcement, in return for a proportion of the damages recovered. The claimant will not pay the funder until the damages are recovered, or the funder may be prepared to monetise the award immediately, remove all further risk from the client’s books, and enable the client to realise value from the judgment or award immediately. Considering the risk that only a portion of the value of a judgment might be secured through enforcement, coupled with the substantial costs involved in enforcing judgments, it is no surprise that funding of enforcement actions is growing.76 10.48 If a client is interested in obtaining funding, the client’s solicitor will need to explain to the client how funding works, so the client can decide whether to instruct the solicitor to approach some funders about funding its claim. Many disputes lawyers have existing relationships with an array of funders who may look at funding claims at specific ends of the market, and may be interested in funding a case. Alternatively, many will approach a broker, as opposed to funders directly, to source a suitable funding package, given the specialist nature of the product.77 10.49 The funder will ordinarily have an initial discussion (on a nonconfidential basis) with the claimant and/or the claimant’s legal representative to determine whether the matter potentially fits with the funder’s model of funding. The main focus is on the size of the claim, expected funding budget and size of potential recovery.78 Often the funder will immediately be able to say whether it is worth looking at or not, simply based on key metrics. 10.50 In order for the solicitor to submit an application for funding, they are likely to include some or all of the following documents to the potential funder:

74 Woodsford Litigation Funding Insight (2019) A Practical Guide to Litigation Funding, p. 10. 75 Sturge (2016) ‘Judgment Enforcement: Can’t pay, won’t pay’ The Lawyer. 5 September 2016. 76 Ibid. 77 Amey (2020) Third Party litigation funding in England and Wales: an overview Thomson Reuters, p.17. 78 Woodsford Litigation Funding (2019) A Practical Guide to Litigation Funding p 6.

333

10.51  The users of litigation finance – who, where, when and why?

(i) A proposal form.79 (ii) A  detailed summary of the case. This is vital and should be prepared carefully, and including as many details as possible about the facts, merits, quantum and enforcement strategy. (iii) Any relevant contemporaneous documents. (iv) Pleadings and relevant correspondence. (v) Counsel’s opinion or a solicitor’s letter of advice on the merits and likelihood of success of the claim. (vi) A detailed costs budget and timetable.80 10.51 It is clear, therefore, that even in funding a case from inception, significant amounts of work on the case will need to have been undertaken by the client and its existing advisers to enable a funder to assess the opportunity. A  funder will not want to commit to a claim if the substance of the claim is still largely speculative and needs significant investigation. In some instances, where a case requires ‘seed funding’ to carry out initial investigations, some funders may consider providing this. The level of return they will require will then be higher, to match the increased risk.81 On receiving the application from the solicitor, the funder will carry out some initial due diligence. The funder will focus on six criteria when performing due diligence on a claim: the merits of the claim; the claimant; the claimant’s legal representation; litigation budget; expected damages and potential return on investment; and lastly, the identity of the respondents and likelihood of recovery.82 10.52 Some funders will make an offer following one single due diligence process, whereas others will take the application forward in two stages. Firstly, indicative terms are provided following the initial due diligence process. If those terms are acceptable to the client, the funder will conduct a full due diligence process in order to produce a formal offer.83 10.53 Funders that only conduct the initial due diligence can produce offers in three to four weeks. Those funders who operate a two-stage due diligence approach can usually assess a case fully in approximately four to six weeks, provided all the information required is supplied on demand. 10.54 If a client requests a formal offer following a funder providing indicative terms, the funder may insist on an exclusivity period with the client during the due diligence stage, especially if the funder is incurring costs in order to complete 79 Provided by the funder. 80 Amey (2020) Third Party litigation funding in England and Wales: an overview Thomson Reuters, p 17. 81 Ibid. p 16. 82 Ibid. p 6. 83 Amey (2020) Third Party litigation funding in England and Wales: an overview Thomson Reuters, p 17.

334

Why would clients seek litigation funding? 10.57

their due diligence. A  solicitor should therefore try to obtain indicative terms from a number of funders at the same time before entering into an exclusivity period, so that there is clear rationale as to why the advice to the client is to enter exclusivity with a particular funder.84 Once a funder has completed its due diligence process, it will either reject or accept the application for funding. If accepted, the funder will make a formal offer of terms. If these are acceptable to the client, they will enter into a litigation funding agreement.85

WHY WOULD CLIENTS SEEK LITIGATION FUNDING? 10.55 There are very many reasons why funding may be the answer for claimants. Funding transactions are non-recourse, meaning that if there is no recovery made from the dispute by the claimant, then there is no obligation to repay the funder or pay any return on its investment. As these transactions are non-recourse, claimants in ‘David and Goliath’ positions are able to access justice. Without the benefit of funding, these claimants may not embark on litigation at all against well-resourced respondents.86 Of course, once well-resourced respondents realise that a ‘David’ claimant has funding, the claimant’s bargaining power is strengthened, which can change the leverage in settlement discussions. Therefore, funding can serve to level the playing field between parties.87 10.56 Defendants are aware that funders operate on a commercial basis, and therefore the claim has been assessed as having good prospects of success by a group of legal professionals. As a consequence, a defendant may consider that settlement at a figure higher than otherwise is more sensible than fighting a claimant who has the means to go all the way to trial.88 This has become known by some as the less than complementary ‘protection racket’ principle. 10.57 An interesting feature of litigation funding, from an economic analysis standpoint, is that it allows risk-averse claimants to act more like they would act if they were risk-neutral, allowing them to pursue claims with merit that they would otherwise forgo simply because of risk aversion. This suggests that, although litigation funding may expand the pursuit of less meritorious cases, it may provide a significant benefit, even for claimants that are not necessarily budget-constrained, by allowing those risk-adverse claimants to pursue meritorious litigation that defendants might otherwise escape or settle on terms that do not reflect the merits of the case.89 84 Ibid. 85 Ibid. 86 Woodsford Litigation Funding (2019) A Practical Guide to Litigation Funding p 3. 87 Ibid. 88 Ells (2019) Third Party Funding: Self-Regulation in the UK  University of West London, Volume 5 Issue 2 p. 17. 89 Heaton (2019) ‘Litigation funding: An economic analysis’ 42 Am J Trial Advoc 307 p 24.

335

10.58  The users of litigation finance – who, where, when and why?

10.58 Therefore, litigation funding is no longer only used by ‘David’ claimants, but by other litigants who are able to pay their legal costs but choose to use a funder for various reasons.90 This may be because legal budgets are limited and litigation funding allows a company with multiple claims to finance more actions than their limited budget would otherwise allow. The litigant may not have the appetite for risk, even if it means paying some of the damages to the funder. It may make commercial sense for a litigant to remove the cost of funding litigation from the company balance sheet completely, if they do not have the cash flow. This may be achieved through a combination of funding, a conditional fee agreement and after-the-event insurance.91 10.59 Another benefit of litigation funding to a claimant is that the claim is assessed again by experts at no extra cost through the claim going through the due diligence process with a funder. A  ‘reality check’ from the funder at the developmental stage of the case, with their input on tap along the way, can enrich the strategy of the case, and potentially the outcome.92

CONCLUSION 10.60 Litigation funding has proven its dynamism in just a few years, establishing international prominence across major dispute centres. Lawyers are increasingly appreciative of funding for its numerous tactical advantages for both clients and firms. Clients’ needs to preserve cash flow tie neatly with the commercial imperative of funders to seek out high value cases that are strong on the merits. This results in a partnership that allows significant cases to be brought when they otherwise, due to costs, could not have been run, maintaining balance and efficacy within the legal system. The involvement of funders, given the high threshold of the merits risk assessment they undertake before financing a case, can also have the effect of pushing adverse parties toward early settlement. As such, litigation funding has filled an access to justice gap. 10.61 There is no doubt that the market is expanding. As the innovations continue, market growth can be exponential. New entrants to the market can expand the reach of the sector from the core group of funders to small and medium-sized enterprises and smaller claims, creating new pathways to justice. Competition in the market driven by new players and new jurisdictions will develop the offering to clients even further. 10.62 As of early 2020, the world has been engulfed by one of the greatest crises of our time. The shape of the economy is uncertain as countries await safe signals to rebuild into a ‘new normal’. Lessons can be learned from the 90 Amey (2020) Third Party litigation funding in England and Wales: an overview Thomson Reuters, p 4. 91 Ibid. p 4. 92 Woodsford Litigation Funding (2019) A Practical Guide to Litigation Funding p 3.

336

Conclusion 10.63

global financial crisis only a decade ago, and the outlook can be hopeful. The COVID-19 outbreak has already shown an increase of legal questions around frustration and force majeure, exposing an area of the law that is likely to develop as ‘pandemic’ becomes a relevant proviso in legal contracts across the world. 10.63 Litigation funders, litigators and insolvency practitioners will see an uptick in their cases in these uncertain times. Funders in particular have a unique role to play in enabling access to justice as the legal landscape post-COVID-19 takes shape. There is a wealth of opportunity here, both for existing models, and for innovations. The next few years will likely prove a watershed moment for an industry that has already experienced unfathomable growth.

337

CHAPTER 11

The investors in litigation finance Mark Spiteri Commercial and Finance Director, Woodsford, London

Litigation finance as an asset class Investment structures Types of investors in litigation finance

11.1 11.7 11.28

LITIGATION FINANCE AS AN ASSET CLASS 11.1 For claimants in litigation, and for their law firms, litigation finance is a financial service. For investors, litigation finance is a potentially attractive asset class. Who are these investors, and why is litigation finance attractive to them? 11.2 Perhaps a good way to measure the attractiveness of litigation finance as an asset class is to compare it to another asset class which is familiar to many, central London real estate.

Litigation finance v London city offices 11.3

Value

London city offices USD 8.1 billion of transactions in 2019 alone1

Geography

London

Currency

GBP

1 2

Litigation finance It is estimated that USD 15 billion2 has been raised globally by litigation funders between 2009 and 2020 Global potential, but subject to local rules USD, GBP, EUR, AUD

Market Beat, Central London, Q4 2019, Cushman & Wakefield. Proprietary research of Woodsford Litigation Funding.

339

11.3  The investors in litigation finance

Key investment features

London city offices Asset-backed Generates a predictable income Can be significantly geared

Correlated to interest rates and the fortunes of the global finance sector Not particularly liquid, but deep market Relatively long term due to high transaction costs and the nature of property cycles Easy to value, based on comparable local transactions Relatively easy to realise through sale Key drivers of supply

Land availability (limited)

Strength of financial and legal services in London Local planning Macro drivers UK interest rates of investor Capital flows into GBP interest (e.g. strength/weakness of currency) More access, eg through real estate funds

Litigation finance Contingent asset Unpredictable income Gearing options limited unless significant portfolio can be secured ‘Uncorrelated’ to many other assets, if not counter-cyclical (many disputes arise from global financial crises) Not liquid at all, shallow market Two to seven years depending on case type. Portfolio average duration of around 2.5 to 3 years3 ‘Difficult to value asset’, considered a level 3 asset according to IFRS4 Realisation difficult due to the contingent nature of the asset and difficulty of valuation Regulatory/development of law in key markets around funding Development of legal services markets Growth of ‘alternatives’ Uncorrelated nature of asset class Increasing awareness, more access to litigation funders

3 Based on experience of author. 4 International Financial Reporting Standards: companies that use IFRS accounting consider litigation finance assets to be level 3 assets which require level 3 inputs to value them, which are unobservable inputs. ‘Unobservable inputs are used to measure fair value to the extent that relevant observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.’ (IFRS 13).

340

Litigation finance as an asset class 11.3

Key risks

London city offices Currency

Litigation finance Currency eg claims against Argentina

Interest rate Political eg Brexit

Regulatory: local regulations on legality, enforceability of litigation finance

London economy Credit risk of tenant over duration of lease Climate change (floods) Illiquidity Socio-economic, eg COVID-19 impact

Valuation

Based on comparable transactions and quality of lease/income. Return profile Four per cent prime yield.5 Highly dependent on gearing and growth of rents.

5 6

Credit risk of defendant over duration of litigation Dependent on defendants Illiquidity Socio-economic, eg COVID-19 impact Legal merits Complex factual matrix Performance of litigators/ attorneys Key person risks (eg death of arbitrator) Volatility of damages Lack of control (passive nature of most investments and uncertain duration) Claimant default Difficult to value asset

For an individual case it can be a total loss of initial investment (or more than a total loss if adverse costs6 are awarded) to a multiple of the original investment. At the portfolio level one should expect a well-selected portfolio to return between 1.5x to 2.0x return on invested capital and an internal rate of return in excess of 40 per cent.

Market Beat, Central London, Q4 2019, Cushman & Wakefield. See chapter 7.

341

11.4  The investors in litigation finance

11.4 It will not have gone unnoticed that the list of risks for litigation funding is long. A number of these risks are discussed in more detail elsewhere, including in chapter 12. 11.5 Leaving aside the risks, other interesting conclusions that might be drawn from the above comparison include:

•

The litigation finance market is relatively small, when compared with the City of London office market.

•

The litigation finance market is potentially global; there are legal disputes in every country and, subject to a supportive judiciary, there are global opportunities. For a number of reasons most investors have focused on the English-speaking, common law markets, but there are certainly opportunities in Europe, Japan and other developed economies as well as emerging markets such as Brazil.

•

The key features which are relatively unique to litigation finance when taken together include: (a) the fact that this is a contingent asset, requiring a not known (as yet) outcome before its value can be realised or accurately appraised; (b) the uncorrelated, or even counter-cyclical nature of the asset class, which is often identified as an attractive feature (a lot of litigation was generated during the global financial crisis, particularly levelled against financial institutions); (c) the assets are extremely difficult to value, until they are realised, which also makes it difficult to assess the skill of the underwriter until many years after the original investment decisions were made; and (d) there is a ‘tail’ nature to the asset class, by which I mean that in every portfolio there will be some old vintage cases which have yet to be realised, and once they do, they could have either a seriously negative or exceptionally positive impact on the portfolio.

11.6 In a study of the correlation of the equity of each of Burford Capital and Omni Bridgeway, two listed litigation finance companies, to their respective indexes (Alternative Investment Market (AIM) and Australian Securities Exchange (ASX) 300), Burford Capital has a correlation of 0.797 to AIM and Omni Bridgeway a correlation of 0.708 to ASX 300. These figures suggest a high degree of correlation which indicates that capital market risks and other risks associated with being a company are perhaps more prominent than the underlying assets in which they invest, which are perceived to be uncorrelated to equity markets.

INVESTMENT STRUCTURES 11.7 Before going too deeply into the types of investors that have shown an interest in investing in litigation finance and exploring their motivation for buying 7 8

Research by Woodsford Consulting Limited based on analysis since the Company’s IPO on LSE’s AIM, May 2020. Research by Woodsford Consulting Limited based on analysis since the Company’s IPO on Australia’s ASX, May 2020.

342

Investment structures 11.10

exposure to this asset class, it is worth spending a little time considering the type of investment structures which are currently available to access litigation finance.

Funds 11.8 Funds are best described as vehicles which collect and pool the financial commitments of many investors in a common vehicle or fund. These funds are often established offshore, in jurisdictions such as Cayman or Jersey, allowing investors from all over the world to invest in a tax-efficient manner. Funds are best known in the context of hedge funds, which largely invest in more liquid capital market assets, although many hedge fund managers have discretion to invest in all sorts of less liquid assets such as private debt or private companies, while many have also provided capital for specific litigation finance situations. The other big asset classes which tend to use funds to attract, pool and manage capital are private equity and real estate. Both these asset classes are illiquid, as is litigation finance, although arguably, given the significant size and broad general interest that exists in the real estate sector, real estate is more liquid than litigation finance (it is likely to be easier to sell an office building with a relatively fixed yield than it is to sell a single investment in a litigation finance matter), while the private equity market has also become more liquid over the last few decades, particularly as the trend for secondary transactions has become established as one limited partner sells their interest in a fund to another limited partner. 11.9 The fund management sector is huge. It has been estimated that fund managers managed some $909 billion of real estate assets globally in 2018,9 while hedge funds manage some $3.194 trillion (Backstop, BarclayHedge) as of Q4 2019 and private equity some $3,411 billion (McKinsey) as of 2018. Data on the size of the litigation finance industry is harder to come by as it is not a large enough asset class to attract an industry data analyst in the same way that the hedge fund industry (Backstop, BarclayHedge), real estate sector (Cushman & Wakefield, CBRE, etc.) or private equity sectors (Preqin) are. The best-known litigation finance managers have raised up to US $15 billion of capital since 2009. They will have significantly fewer assets under management than this in 2020, given that a lot of this capital will already have been invested and realised. Litigation finance is rightly viewed as a niche asset class. 11.10 In the UK, a number of funds were set up in London at around the same time in the mid-2000s. These included Harbour, Therium and Calunius, which have collectively raised around US $2.2 billion since their formation. In the United States, Gerchen Keller, founded in Chicago in 2013, raised around US $1.3 billion prior to being acquired by Burford Capital in 2016, in what was the first major consolidation in the litigation funding sector.

9

2019 Eisner Amper Private Equity Real Estate Market Outlook.

343

11.11  The investors in litigation finance

11.11 Litigation funds are generally structured like any other hedge or private equity fund, with a manager and limited partner investors. The manager generally earns a fee on investment commitments10 (not one that is based on cash deployed or case commitments) of anywhere between one and two per cent per annum during the investment period,11 which often reverts to a percentage of deployed capital (cash invested in cases) after a number of years. The rationale is that the manager requires a steady income stream during the investment period when most of the heavy lifting is done to source, underwrite and contract cases with claimants, but after the investment period is over and the manager reverts to a monitoring role it is more appropriate to determine the manager’s fee income with reference to how much has actually been invested or possibly the level of case investment commitments.12 In addition, the manager will charge a carry which is calculated as a percentage of profits, with the most common being around 20 per cent. Some managers may invest some of their own capital into the fund to demonstrate that they have ‘skin in the game’ and to align their interests with investors. Clearly, savvy investors look to ensure that there is this kind of alignment with their managers and that they are not simply benefitting from a certain flow of management income with free upside.

Public companies 11.12 The public markets provide the easiest way to access litigation finance, both for retail and institutional investors. Listed litigation finance companies include Omni Bridgeway (formerly IMF  Bentham), LCM  Finance, Manolete Partners and Burford Capital. 11.13 Omni Bridgeway is the longest established of the listed group, having become listed in Australia (ASX) in 2001, initially raising around AU $10 million, followed by further share issuance in 2004, 2018 and 2019. Their total share capital at 30 June 2019 was around AU $205 million (ca. US $131 million). It held the mantle as the only listed litigation funder until Juridica Investments Limited was admitted onto the AIM in London in December 2007, raising £80 million, followed by a further £35 million in 2009. Juridica was delisted in December 2018 after it was placed into voluntary liquidation following a string of investment write-offs. 11.14 Burford Capital was listed in 2009, also choosing the AIM, and raised £8  million followed by further placements in 2010 and 2018, which took its

10 An investment commitment is the amount of capital that the limited partners have pledged to the fund. 11 A fund might have a three- or four-year investment period followed by a four-year realization period. 12 Case investment commitments is the aggregate of all legal fees and costs of all cases which the fund has contractually agreed to fund. Typically this should be equal to or less than the aggregate of investment commitments so that the fund can be certain that it does not overcommit itself to investments.

344

Investment structures 11.18

total share capital to around US $596 million by 30 June 2019. LCM Finance was listed on the ASX in 2016 and raised AU $15 million, followed by AU $10 million in 2018, after which it switched its ASX listing for the AIM in London (at 30  June 2019 its share capital stood at around AU $68 million). Manolete Partners raised £15 million in 2018, again on the AIM. 11.15 The above outline of equity raised on the public markets provides a number of insights into the litigation finance sector and its stage of development. Firstly, the amount is relatively small. This reflects the fact the litigation finance sector is both niche and underdeveloped. It also tells us that, to date at least, the public markets have not been the forum of choice to raise capital for the sector. In the main, initial public offerings (IPOs) have been well received. The share registers of each of Burford and Omni Bridgway reveal a list of respected institutional investors that include pension and equity funds. 11.16 However, some have argued that the litigation finance sector is not well suited to the public markets. The main arguments put forward have been that:

•

the underlying asset class is highly illiquid, which does not fit well with listed equity markets;

• the underlying asset class is too long-term for equity markets whose investors seek short-term profits; and

• the nature of the asset class, combined with International Financial

Reporting Standards (IFRS), makes it extremely difficult for investors and equity analysts to assess the underlying performance of the business.

Private companies 11.17 All the public companies mentioned in the preceding section started life as private limited companies in various jurisdictions, supported by individual investors. Such companies are normally closely held so there are limited opportunities for investors to enter the litigation finance market via these companies. Businesses such as Woodsford, Vannin and Augusta, some of the most well-established privately held litigation funders, have mostly been backed, at least initially, by entrepreneurially inclined family offices, acting as cornerstone investors, with mandates to invest in start-ups and explore emerging business models. None of Woodsford, Vannin or Augusta have yet to open themselves up to public markets, albeit Vannin Capital, founded in 2010, did announce its intention to list in September 2018 on the London Stock Exchange, only for the IPO to be pulled a month later, with the company citing ‘volatility experienced in the equity market’ as the main reason. 11.18 Private companies will invest on their account to build up the infrastructure to enable effective deployment of capital into litigation opportunities. The major costs for such businesses are staff with required areas of expertise being marketing and origination, legal underwriting, financial and commercial. Private companies 345

11.19  The investors in litigation finance

fund their investments from their own balance sheet with capital typically raised in the form of equity and debt. The major focus of private companies, other than finding good cases in which to invest, is to make appropriate investment decisions in order to strike a balance between preserving capital and growing capital which means taking appropriate risk to grow their capital base through successful investment decisions. Robust governance structures are important to ensure appropriate checks and balances during the investment process. Woodsford, for example, employs the services of a number of seasoned lawyers including retired judges, litigators and arbitrators who sit as a panel to opine on the strengths and weaknesses of various cases presented to them. All reputable litigation funders, regardless of whether they are set up as companies (private or public) or funds, should deploy a similar decision-making process involving an investment committee or advisory panel.

Platforms and direct investing 11.19 Platforms, ‘peer to peer’ or ‘P2P’, however they are labelled, are generally intermediaries which put sellers of litigation risk (claimants and the lawyers that represent them) in touch with buyers of litigation risk (investors). The main skill sets required by a successful platform are case origination skills in order to source the maximum number of cases, coupled with sales, marketing and investor origination skills in order to attract investors to the platform. The platform might also depend on an element of technological skill to enable the listing of cases and the sharing of relevant information about the case to allow investors to make investment decisions. The most reputable platforms should also employ some litigators to filter out the obviously bad cases, while they will also need access to commercial and transactional skills in order to put in place the litigation funding agreement with the claimant. Cases will also typically be assigned to a special purpose vehicle (SPV), which will act as the contractual counterparty to the claimant. This structure allows any number of investors to invest directly in the case through the provision of capital to the SPV. At a minimum, investors in platforms require an ‘oven ready’ product and the appropriate documentation which will allow them and/or their advisers to decide whether they want to fund the case. 11.20 Litigation finance is a complex asset class. A very high level of skill is required to assess whether a case offers a reasonable prospect of delivering a positive outcome, and even then, it is impossible to determine at the point of investment what further facts might emerge which may undermine the original investment decision. Most cases settle, which means that commercial cases that reach trial may have problems – the defendant might have a stronger case than initially assessed; settlement opportunities may not have been handled well; the incentives of the claimant and litigation funder may be poorly aligned, incentivising the claimant to run undue risks. Any investment structure, in order to be successful, has to deploy the requisite skills both to make the right investment decision in the first place and to monitor the case thereafter; for example, in order to decide whether to make follow-on investments if the original commitment is exhausted. 346

Investment structures 11.25

11.21 An investor who is considering investing through a platform should investigate whether the platforms are adequately resourced and incentivised to both analyse the strengths and weaknesses of the potential investments appropriately as well as whether they are resourced to monitor the cases during their lives. The investor should also ask whether they have the skills or access to the skills to determine whether a case listed on the platform is likely to make a good investment. 11.22 Most well-established funders will consider several hundred cases every year, investing in less than three per cent of them. In other words, while there are many claimants seeking funding, and therefore many potential investment opportunities for litigation funders, the proportion of cases that a sophisticated underwriter would consider ‘investable’ is very low. This is just one area where the litigation finance asset class diverges from private equity or real estate. Arguably the vast majority of office buildings or shopping centres are ‘investable’ at the right price. Some real estate is of better quality than others, hence the prime and subprime tags with which property investors are familiar, but the fact that something is sub-prime does not mean that it cannot be a successful investment. The same could be said with private equity. Some companies have a better competitive position than others and/or better growth prospects, but these differences are generally reflected in the price that a seasoned private equity investor is willing to pay for a company. Although companies go bankrupt, wiping out the equity holders, in any one year in aggregate a very small proportion of established businesses fail. The statistics for start-ups are quite different given the higher uncertainty associated with investing in new businesses with little market share, often unproven business models and even unproven management teams. Like litigation cases, there are no doubt many venture opportunities promoted by enthusiastic entrepreneurs. 11.23 Given that there is no shortage of cases, although perhaps a shortage of good ones, it is of no surprise that a whole industry of intermediaries/platforms has sprung up to put buyers and sellers of litigation risk together. In the world of venture capital you have platforms such as Seedrs that put entrepreneurs (the sellers of equity) in touch with investors (the buyers of equity). There are also many platforms serving all kinds of property and real estate, while others have been established to trade private debt (both corporate and consumer), so it is of no surprise that platforms covering litigation finance as an asset class have also been founded in recent years, for example Lex Shares, Yield Street and AxiaFunder. 11.24 Investors should query whether P2P platforms have sufficient incentive to underwrite opportunities sufficiently. They might consider whether these intermediaries (or those who own and run them) are putting a meaningful amount of their own capital into each deal. If not, the lack of alignment between the investor and the intermediary could give rise to issues. If the platform earns a percentage of every dollar invested on the platform, query whether there could actually be perverse incentives. 11.25 Investors should look closely at how P2P platforms are staffed, understand their investment process, and research how the platforms are remunerated and whether this aligns the platform’s interests with those of the 347

11.26  The investors in litigation finance

investor. A number of very smart investment managers, who have mandates in the alternative fund management space have invested in specific opportunities in litigation finance. Some investors, for example, with a background in distressed debt have used their skill-set to acquire such assets which may carry litigation opportunities, to enforce the rights of creditors; for such opportunities, knowledge of the capital structure and the insolvency process can be equally as important as knowledge of the legal system in which the investor hopes to enforce those rights. Other quantitative-centric investors have used statistical analysis to study the probability that legal judgments could be overturned on appeal and have used this insight to both price and purchase such judgments. Given that the judiciary has already considered these matters in depth to reach a judgment, much of the legal risk – the ‘unknown unknowns’ and ‘known unknowns’ have dissipated, so it becomes more about trusting in the stats and investing accordingly at the right price. Although studying portfolio statistics can also be useful when considering pre-judgment opportunities, for particular classes of cases, such as ‘securities class actions in Australia’, where very few filed have ever reached trial, litigation funders still need to underwrite each opportunity on both the facts and the law to satisfy themselves that the case under consideration has the appropriate features which are consistent with the historical population which have previously been successful. To put it another way, just because a case is Australian and is a securities class action does not mean that it is a guaranteed winner. 11.26 There will always be opportunities for entrepreneurial litigators to persuade investors to invest in a specific case, and there will always be some investors who will be enticed by the potential to make attractive returns, but serious investors recognise both the need to ensure that they have sufficient diversification to maximise their chance of making an attractive return as well as ensuring that they are appropriately aligned with the promotor of the opportunity. 11.27 An interesting model which may gain more traction is one where an experienced litigation financier and sophisticated investors, albeit not investors with any seasoned underwriting skills or edge in litigation finance, will invest alongside each other. The litigation financier has both the network to originate the opportunity and the capability to decide if they themselves want to invest, while the investor can gain some comfort from the fact that the litigation financier has skin in the game. Where the relationship results in serial deals the investor can also satisfy themselves that they have diversification. Where the primary incentive of the litigation financier is more about syndication of risk than the generation of fees, so much the better. Syndication is a common theme in the banking sector where a lead bank, well, takes the lead, and other banks co-lend where the deal is too large for the lead bank’s own balance sheet.

TYPES OF INVESTORS IN LITIGATION FINANCE 11.28 The roll call of investors in litigation finance is perhaps not that different from those investing in capital markets, real estate or any other alternative asset 348

Types of investors in litigation finance 11.32

classes, including family offices, endowment funds, sovereign wealth funds, retail investors and alternative funds/hedge funds. As already discussed above, there is also the opportunity for mass affluent investors to invest in litigation through P2P platforms and gain direct access, as well as opportunities for any kind of investor to access litigation finance by purchasing the stock of one of the few listed litigation funders.

Family offices 11.29 Family offices come in many shapes and sizes, including multi-family offices (MFOs) and single-family offices (SFOs). MFOs tend to pool assets from a number of high-net-worth and/or ultra-high-net-worth individuals or families into a common management structure, often run by professional advisers, usually from a private wealth background. SFOs manage the wealth and affairs of a single ultra-high-net-worth individual or family. Campden Research believes there are about 7,300 SFOs worldwide, managing US $5.9 trillion in assets. 11.30 MFOs tend to prefer, particularly when considering a niche asset class such as litigation finance, to invest in established funds, which are themselves pooled investment schemes, managed by discretionary managers, who promote themselves as experts in that asset class. Many of the MFO managers, because of their private wealth backgrounds, tend to be familiar with assessing and investing in fund structures, which are the main products many of their former employers promoted. Investment banks like Goldman Sachs, UBS and JP  Morgan have private wealth businesses as well as established asset management businesses, while even the smaller Swiss specialist wealth businesses, such as Pictet, who host the assets of many high-net-worth individuals, also have established fund management businesses. Given that MFOs are looking to achieve diversification for their clients, and given that administratively they may want to put many clients into the same asset class, or even the same asset, coupled with the fact that they are familiar with funds, there is certainly a bias amongst MFOs for fund structures. 11.31 A common theme amongst most SFOs is that they are generally formed through a liquidity event, normally through the sale of a business or a stake in a sizeable business, which was the main family asset at one time. The resulting pot of money would then be invested over time, generally in a diversified manner (certainly more diversified than being a large holding in a single business) and then passed from generation to generation. As the wealth passes through more generations, assuming this wealth is managed by the same office, it will become more like an MFO as the different needs of the various subsequent generations of family members will have to be taken into consideration. Often, over time, the mandate of the office moves away from the spirit of entrepreneurial wealth creation as practised by the founding principal towards a more conservative mandate of wealth preservation. 11.32 SFOs have been behind the launch and growth of some of the bestknown litigation finance businesses and funds in the market. Yves Bonavero’s 349

11.33  The investors in litigation finance

family office founded Woodsford, while Dan Craddock’s Bramden Investments, which is the private investment vehicle of Mr Craddock’s family office, was behind the formation of Vannin. SFOs, in contrast to MFOs, are more likely to have the expertise and appetite to start up their own vehicle or invest directly in cases, whereas MFOs are most likely to have a mandate to invest in funds, where a discretionary manager with expertise in litigation finance will ultimately make the investment decisions regarding which cases to back. 11.33 Litigation finance has proved to be attractive as an asset class for family offices, for a number of reasons, set out below. Family offices have a long-term outlook 11.34 Family offices often have a relatively long-term investment horizon looking to preserve and grow wealth over generations. Some types of cases, such as investment treaty arbitrations against States can last for many years. 11.35 The well-publicised case Rusoro Mining Ltd v the Bolivarian Republic of Venezuela13 involved a Canadian mining company, Rusoro Mining Ltd (Rusoro), which had acquired gold mining concessions in Venezuela between 2006 and 2008. On 16 September 2011, then-President Hugo Chávez issued a nationalisation decree that provided for State control of the property and mining rights of all gold-producing companies and ordered the transfer of all existing concessions or contracts to mixed companies controlled by the State. On 17 July 2012, Rusoro initiated arbitration proceedings under the Venezuela–Canada bilateral investment treaty. In an award dated 22 August 2016, a tribunal at the Additional Facility of the International Centre for Settlement of Investment Disputes (ICSID) ordered Venezuela to pay US $966.5 million plus interest to Rusoro for unlawfully expropriating its mining investment. The litigation funder Calunius entered into a litigation funding agreement with Rusoro Mining on 15  June 2012, according to a press release published by the company on the same date. It took Rusoro and Calunius just over four years to obtain a positive award for a very significant sum but Rusoro then had to initiate enforcement proceedings. It appointed the US law firm King and Spalding LLP in September 2017, specifically for this purpose, and Calunius entered into a second litigation funding agreement to provide Rusoro with additional funding of up to US $7 million to fund these enforcement actions, which involved proceedings in New York and Washington, DC, Houston and Calgary, and culminated in a settlement agreement with Venezuela in October 2018 whereby Venezuela agreed to pay US $100 million followed by US $1.18 billion over five years. Unfortunately for Rusoro and Calunius this was not the end of the saga with a Paris Court of Appeals partially annulling the arbitral award issued in favour of Rusoro in August 2016. While the Paris Court of Appeals upheld the tribunal’s finding on the merits that Venezuela was liable for the unlawful expropriation of Rusoro’s investments, it annulled the award’s finding on damages, although it did not 13 ICSID Case No. ARB(AF)/12/5.

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Types of investors in litigation finance 11.39

impact on Venezuela’s obligation to pay the initial US $100 million promised as part of the October 2018 settlement agreement. By March 2020, Rusoro had still not received the initial US $100 million and clearly new proceedings would be required to determine the damages payable. 11.36 Investor–State cases are generally outliers in terms of case duration but the Rusuro case, which would have been eight years old in June 2020 absent a realisation, does make the point that some types of litigation finance assets are for patient investors with long-term investment horizons. The very high potential awards available from these high-stakes cases do suggest that excellent returns are available for those who can wait. 11.37 Burford’s well-publicised Peterson case against the Argentine Republic also offers an insight into the potentially long and complex fight involved with cases against States. However, the case into which Burford first invested in 2015 has generated both liquidity and attractive returns along the way as Burford has sold various shares to investors after the claimant was victorious at key legal milestones. As the asset class becomes mainstream and attracts ever more capital, there are likely to be more opportunities to create some shorter-term liquidity for what otherwise would be long-duration cases. Private equity, also a popular asset class with family offices, is also considered a relatively long-duration asset class although a strong secondary market has blossomed, allowing limited partners in private equity funds to sell their holdings on the secondary market at discounts to net asset values. Family offices like the uncorrelated nature of litigation finance 11.38 It is obvious, but true, that litigation finance is an uncorrelated asset class. Any rational investor, not just family offices, seeks to allocate a portion of their capital, where possible, to uncorrelated or even counter-cyclical assets. So just how uncorrelated is litigation finance? 11.39 Looking at the listed equities of litigation funders, namely Omni Bridgeway and Burford Capital would suggest that litigation finance is anything but uncorrelated. In the midst of the coronavirus crisis, in the period from 17  January 2020 to 31  March 2020, the FTSE  100 fell by 26 per cent. Over the same period, shares in Burford fell 37 per cent from 671p to 420p, those of Litigation Capital Management fell by 2.4 per cent from 67p to 65p, those of Manolete Partners PLC by 19 per cent from 416p to 335p and those of Omni Bridgeway (IMF Bentham) fell by 22 per cent from AU $4.85 to AU $3.80. The average fall of this small group of listed litigation funders was some 20 per cent compared with the FTSE 100’s 26 per cent, the FTSE 250’s 31 per cent (midsized UK companies) and the FTSE AIM all-share index’s  30 per cent (small companies listed on London’s AIM of which Burford is a constituent) fall. This is hardly a technical study of correlations, but it does suggest that the markets at least, in times of crisis, do not view these businesses as being particularly ‘uncorrelated’. Arguably it is the listed wrapper that is the problem here. All 351

11.40  The investors in litigation finance

companies in the midst of a developing credit crunch face the same challenges, whether the underlying assets in which they invest are generally perceived as being uncorrelated or not. Will the company be able to refinance its debt? Will investors sell the stock in the quest for liquidity? 11.40 As mentioned earlier in this chapter, a longer-term correlation study found that both the equity of Burford Capital and Omni Bridgeway demonstrated a relatively high degree of correlation to their respective indexes since their listing (AIM and ASX 300), with Burford Capital’s correlation of 0.7914 to the all-share AIM index and Omni Bridgeway‘s 0.7015 to the ASX 300, which gives weight to my argument that the markets view litigation funders in the same way as many other companies; they are not immune to the vagaries of financial markets or issues that other companies have to tackle, such as liquidity, debt service, recruiting and retaining key management, etc. 11.41 But, in the context of the COVID-19 pandemic, how robust is litigation finance as an asset class? Throughout 2020, litigation funders will have experienced the following: (1) Court systems around the world slowed down, leading to delays in case resolutions. One likely impact will be lower margins over the next couple of years, assuming the same level of overheads. (2) Disruption to operations is likely to have been relatively limited. Like many business in legal and financial services, remote working is viable. (3) Insolvency risks permeate the litigation funding business model. By definition, claimants who use litigation funding are likely to already be in some financial distress, which is exacerbated in recession. (4) Of more concern to litigation funders will be the financial position of defendants. Financially distressed defendants will be slow to enter highvalue settlement agreements, and there is little point securing a significant judgment against a defendant that becomes insolvent. (5) The major suppliers to litigation funders are law firms, who themselves will have financial concerns in a recession. The failure of the firm of litigators itself is not terminal; the individuals working on the case are more important than the firm itself and cases frequently move firms as leading lawyers move from one firm to another and take their key assets (the cases) with them. 11.42 While litigation finance is certainly not entirely immune from the immediate economic effects of the coronavirus pandemic, the well-established funders, particularly those with a diversified portfolio, should more than adequately be able to weather the storm better than most businesses. 14 Research by Woodsford Consulting Limited based on analysis since the Company’s IPO on LSE’s AIM. 15 Research by Woodsford Consulting Limited based on analysis since the Company’s IPO on Australia’s ASX.

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Types of investors in litigation finance 11.47

11.43 In the longer term, the global pandemic should actually create some significant opportunities for litigation financiers, just as the global financial crisis, which started in 2008, created a plethora of litigation, including against government bailed-out financial institutions, not only for their deeds that helped cause the crisis, but also for the way they handled themselves during and in the aftermath of the crisis. In conclusion, the underlying asset class should be relatively uncorrelated to other capital market assets and in the longer-term counter-cyclical due to the large number of disputes which arise during tough financial times. However, when you put the asset class into a company wrapper and list the company, the market will correctly judge that company, including its capital structure, management and the quality of its portfolio, like any other company, while in times of financial stress, when liquidity is the major concern of stock market participants and panic is widespread, one should not expect litigation finance businesses to escape unscathed. Family offices have the resources and flexibility to invest in the asset class 11.44 Most family offices are comfortable investing in funds. They are generally well-resourced and used to conducting due diligence on discretionary fund managers. This is one of the reasons why litigation finance funds have targeted family offices when funds were initially launched. The other key reason is that they tend to be very receptive to new investment ideas. The organisations are relatively small, so it’s easy for fund managers to get access to key decision makers and educate them about something that’s new. 11.45 Larger institutions such as sovereign wealth funds have also shown an interest in litigation finance, but it has tended to capture their imagination only more recently as it has become a more accepted asset class.

Endowment funds 11.46 Endowments funds, which are typically funded by donations, are particularly prevalent in the universities sector, although many schools, churches, hospitals, museums and other non-profit organisations are fortunate enough to benefit from endowments. Most endowments are made with the stipulation that the capital amount has to be kept intact while the investment income can be used to support the operations of the benefitting institution or organisation. Such an approach protects the legacy of the donor and encourages beneficiaries and those that manage the funds to plan projects and expenditure longer-term based on the forecast income that the fund can generate. 11.47 Every endowment will be bespoke based on the conditions under which it was made, although it is possible to organise them into broad categories. Unrestricted endowments’ assets can be spent, saved and invested entirely at the 353

11.48  The investors in litigation finance

discretion of the institution receiving the gift. Term endowments stipulate that only after a fixed period of time can the principal be expended, while so-called quasi-endowments are tied to a specific project or for a specific purpose, such as to pay the fees for disadvantaged students studying law. At the other end of the scale, restricted endowments have their principal held in perpetuity, while the donor specifies how the income arising from the donation is to be spent. 11.48 Some of the largest and most celebrated endowments are associated with the US Ivy League Universities. The top 25 endowments by value in the United States, based on data sourced from the 2019 NACUBO-TIAA Study of Endowments,16 topped US $339 billion in 2019, although of the 774 US colleges, universities and related foundations which took part in the NACUBO study, the aggregate of endowment assets totalled US $630 billion as of 30  June 2019 with the median endowment size calculated at US $144.4 million. The largest endowment in the UK higher education sector is the Cambridge University Endowment Fund which at July 2018 had a £3.25 billion17 net asset value although funds managed separately by constituent colleges of the university boosted the total to £6.4 billion. 11.49 To give a sense of the size of the largest endowment funds relative to other major investors, the largest pension fund in the US, the California Public Employees’ Retirement System, is around nine times larger than Harvard and about as big as the top 25 US University endowments combined. 11.50 Yale and Harvard have been leaders in diversified multi-asset class investing for over two decades. In 2019, Harvard allocated around 67 per cent of its capital to asset classes other than public equity, bonds or cash, including 20 per cent to private equity, 33 per cent to hedge funds and 8 per cent to real estate.18 Harvard is possibly the leader in investing in so-called alternatives, key features of which are often either their perceived lack of correlation to equities (some types of hedge fund) as well as their potential illiquidity (private equity). The 2018  NACUBO study of 802 institutions, representing over US $600 billion of endowment assets, found that 53 per cent of endowment assets were invested in alternatives (hedge funds, private equity, venture, real estate, energy, commodities, distressed debt) of which some 38 per cent was in hedge funds and 13 per cent in venture capital. Given the large allocation to alternatives, litigation finance should be an asset class which captures the attention of endowment funds. Which endowment fund alternatives are most like litigation finance? 11.51 Litigation finance might be considered to be somewhere between venture capital and unsecured lending, for the following reasons: 16 National Association of College and University Business Officers, with the primary contributor TIAA Kaspick. 17 Reports and Financial Statements, University of Cambridge 2018. 18 Message From The CEO, Harvard Management Company, October 2019.

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Types of investors in litigation finance 11.51

(1) Venture capital and litigation finance both have similar cash flow profiles – cash is fed into both venture and litigation over a number of years followed by a lump sum exit, if successful. (2) Both are inherently risky with a relatively high probability of going to zero. Studies on the true proportion of start-up failures are difficult to come by although one such report on venture conducted by Shikhar Ghosh, a senior lecturer at Harvard Business School, looking at more than 2,000 companies from 2004 to 2010 which had received venture capital funding, found that 75 per cent of VC-backed start-ups in the United States did not return investors’ capital. Data on the proportion of cases in the litigation finance sector which result in a positive return are equally difficult to come by. Most funds are private and guard their performance secretly to anyone except current or prospective investors, while this data, even if it were available, would not be entirely complete because the sector is relatively young and so very few funds have entirely realised their portfolio of claims. If one was able to collect this data from the leading litigation financiers there would also be an element of bias because you would be leaving out the performance of all the ‘below-the-radar’ investors that might dip their toe in the sector by investing in just a single case. These investors come and go so their performance would naturally be left out of the whole. (3) Of the 1,343,560 District Court cases filed in the United States since 1 January 2009, and which have been resolved, some 48 per cent resulted in a ‘likely settlement’ and of the 11 per cent of all cases that resulted in a trial, some 54 per cent (6 per cent of the total) resulted in a claimant win and 46 per cent (5 per cent of the total) ended with a defendant win19. This gives an idea of the riskiness of litigation as a sector, which appears to have a 54 per cent success rate in favour of litigants. It is not possible to invest in the market as a whole, which evidently has a better success rate than venture capital. Litigation funders have to appraise what is presented to them and typically there is a degree of adverse selection in what is shown to them. The strongest cases will settle early either before significant funding is required or soon after a law firm takes the case on a fully contingent basis. In the United States where it is permissible for law firms to offer fully contingent engagements and where there is a healthy population of risktaking law firms, many of the best cases are often snapped up by law firms. (4) Finally, both venture and litigation finance have the potential to generate stellar returns on single investments. The best litigation funding investments tend to be those which settle before trial but after a meaningful amount of capital has been expended, thus increasing the absolute return; many funding returns are structured on a multiple of cash outlay basis, so in order to generate a significant absolute return a significant amount of capital has to be expended. Put another way, spending $2 million over two years and generating income of $5 million (2.5x return on invested capital) is better than spending $50,000 over six months and generating a return of $300,000 19 Statistics taken from Lex Machina.

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11.52  The investors in litigation finance

(6.0x return on invested capital at an almost incalculable internal rate of return). The latter will not contribute hugely to defray overheads while the former will more than contribute to overheads as well as generate a high absolute cash return which can then be effectively re-invested. 11.52 Litigation finance also has certain similarities with unsecured lending because ultimately the investment depends on the credit worthiness of a defendant to obtain any kind of cash proceeds. A claim, however meritorious, is nothing but a contingent asset to the claimant and a contingent liability to the defendant (the contingent part being the rendering of an award or agreement of a settlement), which at its ultimate conclusion is transformed from a contingent asset to an unsecured claim against the defendant. Were the defendant to become insolvent directly after the rendering of an award, the claim would rank behind secured creditors and on a par with ordinary trade creditors. This is just one reason why it is essential to monitor the financial standing of the defendant throughout the case, which can last many years. 11.53 Many endowments are familiar with alternatives including venture and private equity as asset classes which both fit their investment mandate and cashflow requirements. On the face of it, litigation finance is not an asset class which looks like it will return a regular amount of cash annually, although, as explained below, this is more a perception than reality, as a well-diversified portfolio of litigation should at least become cash neutral within two to three years. However, endowments, like any other investor, will consider litigation finance as a relatively long-term investment and associate it with lumpy cashflows at best. As such, those that invest in venture, private equity or indeed litigation finance will generally have ‘over-sized’ endowments which are more than able to meet the annual requirements of the institutions which depend on them, either for general expenditure or to support the obligations of a specific endowment, enabling them to free up capital for longer-term investments. There is ample evidence of endowments investing in funds, although rarely are the identities of investors in funds announced. AIM-listed LCM Capital Management, in March 2020, announced the launch of a US $150 million fund supported by eight investors of whom seven were institutional investors and one was a university endowment fund.20 Does the cashflow profile of litigation finance meet the needs of endowment funds? 11.54 A  diversified portfolio can become cashflow positive relatively early. Take the example of an investor who wants to commit US $100 million to litigation. It could take between two and three years for the US $100 million to become fully committed, because it takes time to find and fund good cases. The average duration of the case might be, say, two years, with some cases resolving within six months, and some cases still ongoing after six years. The spend on many cases will be back-loaded, with a lot of expenditure concentrated 20 Lcmfinance.com

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Types of investors in litigation finance 11.59

immediately before and during the trial. Of the US $100 million commitment, only around, say, $80 million will ultimately be deployed because (assuming good underwriting) many cases will settle early, prior to spending the whole case commitment. 11.55 Taking these factors into account, by the time the full $100 million has been committed in, say, year 3, there will hopefully be settlements and awards from the cases invested in year 1, possibly even to the extent that spend in year 3 will be offset by returns from year 1. 11.56 In contrast, it is unlikely that a venture or even private equity portfolio would become cash flow positive from year 3. Private equity funds have a similar investment period in which to source and purchase companies, but these investee companies ideally require a few years of revenue and profit growth (sometimes coupled with cost reductions) to increase their likely exit values. Private equity funds sometimes strike it lucky by buying companies at low valuations in or after recessions and selling at or close to the top of the market. Timing is of far less consequence to litigation financiers.

Sovereign wealth funds 11.57 A sovereign wealth fund (SWF) is a State-owned investment fund. SWFs managed by central banks, which typically invest in short-term assets given their mandate to stabilise currencies and ensure short-term liquidity to the financial system, are unlikely to be interested in litigation finance. In contrast, SWFs established to maximise the long-term return of surplus government revenue, for example that generated through the export of oil and gas or commodities, are becoming increasingly interested in litigation finance. 11.58 SWFs have been established for a number of reasons, including to: (i) reduce the volatility of government revenues and to counter the boom–bust cycles’ adverse effect on government spending and the national economy (so-called stabilisation funds); or (ii) to invest in key strategic national assets (strategic funds); or (iii) simply to save for the nation (savings funds). The funds, spanning about 50 nations, have over US $8 trillion in assets, according to the Sovereign Wealth Fund Institute, with more than 90 per cent of this wealth attributed to just nine nations: China, UAE, Norway, Singapore, Saudi Arabia, Kuwait, Qatar, Kazakhstan and the United States. 11.59 The Norwegian Government Pension Fund Global, also known as the Oil Fund, was established in 1990 to invest the surplus revenues of the Norwegian petroleum sector. At the end of 2019 the Oil Fund was valued at US $1.148 trillion.21

21 Norges Bank Investment Management, nbim.no

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11.60  The investors in litigation finance

11.60 Of the members of the International Forum of Sovereign Wealth Funds, around half generate their capital from commodity revenue, with the largest and most well-known, other than the Oil Fund, being the Abu Dhabi Investment Authority (US $696 billion22), the Kuwait Investment Authority (US $592 billion23) and the Qatar Investment Authority (US $328 billion24). The largest non-commodity SWFs, who are also members of the International Forum of Sovereign Wealth Funds, are the China Investment Corporation (China, US $940 billion25), GIC  Private Limited (Singapore, US $440 billion26) and the Turkey Wealth Fund (Turkey, US $222 billion). 11.61 Clearly SWFs have a political as well as an investment mandate which does add an additional layer of complexity when considering investment in litigation, given that some funders litigate against other States, although generally the identity of investors is a closely guarded secret. 11.62 In December 2018, AIM-listed Burford announced that it had secured a commitment of up to US $667 million from an undisclosed SWF, which was able to invest in 33.5 per cent of each new litigation finance investment sourced by Burford for the next four years or until the capital is fully committed.27

Retail investors 11.63 Retail investors have been able to invest in litigation funding since January 2000 when IMF  Australia (now renamed to Omni Bridgeway) was listed on the ASX. The IPO share price was AU $0.30 on 28 January 2000. By mid-February 2000, the price had reached AU $8.27, falling back to AU $0.15 in June 2001. This is quite a rollercoaster, which is not easy to explain. 11.64 Omni Bridgeway’s net asset value has grown steadily from negative AU $6.7 million at 30 June 2000 to AU $218.9 million at 30 June 2019. Its market cap has grown from AU $6.314 million to AU $654 million over the same period. An investor who purchased shares at the IPO and held them to mid-2019 would have made an annual return, including dividends, of over 13  per  cent per year. This is an outstanding performance compared with the general ASX market, which, including dividends, would have provided an annual return of 3.69 per cent28 per year. 11.65 Since IMF’s IPO, there have been further listings of Australian litigation finance companies. LawFinance Limited had a market capitalisation of AU $24.1 22 Sovereign Wealth Fund Institute, swfinstitute.org 23 Ibid. 24 Ibid. 25 Ibid. 26 Ibid. 27 Burfordcapital.com 28 Bloomberg total return index for ASX 30 June 2000 to 28 June 2019.

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Types of investors in litigation finance 11.70

million at the end of March 2020. LCM  Capital Management was originally listed on the ASX in December 2016 and transferred to the London AIM market in December 2018. At the end of March 2020, LCM’s market capitalisation was £78 million. 11.66 In the UK, in addition to LCM’s transfer from the ASX to AIM, there have been Juridica Investments Limited, Burford Capital Limited and Manolete Partners. 11.67 Juridica raised £80 million on its debut in December 2007, and a further £35 million in 2009. The company paid out significant dividends before its 2016 decision to go into run-off, a process that culminated in an announcement in November 2018 of its intention to de-list from the market and appoint a liquidator. What happened? It would appear that some bad investments resulted in a write-off of approximately US $37.8 million, equivalent to 30 per cent of its net asset value, in the year ended 30 December 2016. Some US $20.3 million (53 per cent) of this loss was the result of a ‘net unrealized loss … generated in the change in valuation of the Company’s investments’. This likely means that previous unrealised fair value uplifts were wrong and needed to be reversed. The remaining US $10.4 million was a direct write-off as a result of realised losses in cases. Juridica’s demise caused some to query whether it was appropriate to use general fair value accounting for litigation finance assets.29 11.68 Despite the abrupt end of Juridica, an investor who purchased a share for £1.00 at the IPO would have received back £1.12 in dividends resulting in a profit of £0.12. This represents an annualised return of 1 per cent per year between its IPO date in December 2007 and its de-listing in November 2018. 11.69 Burford, in comparison, by 30  June 2019 had share capital of almost US $600 million, having raised US $130 million on its debut in October 2009.30 Burford raised another £193 million in October 2018 via a share placement with existing and institutional investors. Burford for many years was a stellar performer on the LSE AIM with the share listing at 100p, closing at 108p on its first day of trading on 22 October 2009, and reaching a peak of 1998p in August 2018. This represents a near 20-fold increase in the share price over a less than nine-year period. For an investor who timed the market perfectly, including the dividends which were paid out between the IPO and the end of August 2018, Burford returned some 42 per cent per year. Burford v Muddy Waters 11.70 Since its August 2018 peak at 1998p, Burford’s shares have been under considerable pressure, sliding to 420p by 31  March 2020. This represents a

29 Questions which resurfaced when Muddy Waters attacked Burford in 2019 – see further below. 30 Burford Capital raises £80m in new listing Financial Times, 16 October 16 2009.

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11.71  The investors in litigation finance

decrease of almost 80 per cent. Some of this fall likely relates to critical coverage of Burford’s accounting policies. 11.71 On 30 April 2019, analysts at Canaccord Genuity published a research note, which, although positive about the litigation finance sector generally, and about Burford in particular, questioned the accuracy of Burford’s performance reporting in relation to their claimed return on invested capital (ROIC) and highlighted a number of other risks which they believed investors had not fully appreciated and which in their view had led to the stock being over-valued by investors. 11.72 Cannacord criticised the way that Burford reported its ROIC number of 0.85x, stating that Burford had included cash received from all investments (both realised and partially realised) in the numerator but only included cash invested in realised cases in the denominator. Canaccord also raised questions relating to: (1) whether Burford had access to sufficient capital to meet its ‘ever-growing annual commitments’, particularly in a tightening macro-environment where defendants more readily play for time, thus delaying income from settlements; (2) Burford’s over-reliance on two big cases (Teinver and Petersen) to generate returns; (3) corporate governance; and (4) accounting rules, reminiscent of those previously faced by Juridica. 11.73 Around 548p was wiped off the Burford share price between 24  July 2019 and 6 August 2019 in the thirteen-day period leading up to the release of a research report by Muddy Waters, an activist short seller, on 7 August 2019. On the day of release itself a further 516p was shed, with shares closing the day at 605p, some 46 per cent less than the closing price on 6 August and 63 per cent less than the close of business on 24 July, some 13 days previously. 11.74 Muddy Waters raised a number of issues, in a somewhat sensationalist style, starting with a Tweet on the day prior to the publication of their 7 August 2019 report: ‘Muddy Waters is now in a blackout period until tomorrow 8 am London time when we will announce a new short position on an accounting fiasco that’s potentially insolvent and possibly facing a liquidity crunch. Investors are bulled up about this company. We’re not.’31 11.75 Muddy Waters’ criticisms included an allegation that Burford’s reports to the market conflated two distinct concepts: realised gains and net realised gains, the latter said to ‘include previously recognized Fair Value Gains. In other words, a Net Realized Gain is Proceeds minus BUR’s invested capital in the case – not minus the investment’s Carrying Value. We think the vast majority of investors believes the opposite is true – that Net Realized Gains are Proceeds minus the Carrying Values.’32 31 @muddywatersre 32 Muddy Waters Capital LLC MW is Short Burford Capital Ltd. (BUR LN) 7  August 2019. Muddy Waters Capital LLC. Available online: www.muddywatersresearch.com/content/ uploads/2019/08/MW_BUR_08072019.pdf

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Types of investors in litigation finance 11.83

11.76 Burford responded by saying that it ‘has provided both audited IFRS financial statements, with clean audit opinions from Ernst & Young since 2010, and detailed investment-level data on a cash basis using the same reporting approach since it began reporting.’ 11.77 Whoever is right, it is clear that IFRS accounting presents a challenge for litigation finance businesses. It is very hard to be consistent about the valuation of litigation assets, which inevitably requires a significant amount of human input that is necessarily affected by subjectivity. 11.78 Muddy Waters also alleged that Burford’s performance was unduly reliant on only four cases, allegedly demonstrating that the broader portfolio lacked strength. Muddy Waters stated that these four cases (Teinver, Jaguar, Desert Ridge and Peterson), out of a portfolio of 1,110 litigation claims, accounted for 70 per cent of net realised gains. It was said that, excluding these cases, Burford’s ROIC would have been only 16 per cent since 2012. 11.79 Burford responded: ‘This is hardly novel analysis and we addressed this very point in depth in our 2019 interim report… We often say that our litigation finance investment outcomes have some similarities with venture capital, albeit with fewer losses – we tend to have some outsize successes, some losses and a number of investments that perform at a more conventional level.’33 11.80 Many have sympathy with Burford’s response. Many diversified portfolios will include some investments that are significantly bigger than others, and which have the potential for outsized returns. 11.81 Muddy Waters also claimed that, with ‘just’ US $880 million of capital to fund its commitments, Burford was ‘arguably insolvent’. 11.82 Burford responded by categorically denying that they were in financial stress arguing that, ‘We believe it is a benefit that our growth rate currently exceeds the level at which we could be self-financing, and we have significant cash reserves (approximately US $400 million currently) and have demonstrated a very successful track record of raising external capital.’ 11.83 One of the benefits of funding through a permanent corporate, as opposed to through a time-limited fund, is that a company can source cases first and then raise the capital to fund them as the case commitment is translated into actual cash outlay. Good litigation funders with a good track record will raise capital to fund what is fundamentally an attractive asset class which can deliver attractive uncorrelated returns. Funds, in comparison, need to raise the fund first (although this is often not fully committed capital) and then source cases. Burford was correct to assert that it had previously had no trouble raising capital, be it in the 33 Burford Capital Limited. 8  August 2019. Response to Short Attack. London Stock Exchange. Available online: www.londonstockexchange.com/news-article/BUR/responseto-short-attack/14182058?lang=en

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11.84  The investors in litigation finance

form of equity (around US $600 million), bonds (over US $600 million) and latterly since their acquisition of Gerchen Keller, capital from investors in their litigation funds.

Alternative funds/hedge funds 11.84 To complete this chapter on investors, it is interesting to look at some of the better-known funds with an interest in the litigation finance sector. 11.85 Fortress Investment Group, which had US $41.5 billion under management in Q3 2019,34 has become a relatively serious investor in litigation finance either by investing directly into claims or by providing debt facilities to other investors. 11.86 Fortress provided US $100 million to IMF Bentham (now called Omni Bridgeway) when it launched its first fund in 2017 (US  Fund 1) which was dedicated to investing in US opportunities. The structure provided Fortress with a preferred return on both invested and committed but uninvested capital as well as 15 per cent of residual cash flows. The deal effectively provided Fortress with a debt-like structure with IMF Bentham’s committed US $33 million serving as equity in the structure absorbing first losses. 11.87 Fortress also provided London-based Vannin with a significant loan facility, and ultimately Fortress took over Vannin following the latter’s decision to pull its IPO in October 2018. 11.88 Elliott, the well-known activist investor based out of New York, with over US $37 billion35 under management, has also seen litigation finance as an extension of one of its cornerstone investment strategies which involves acquiring non-performing loans and asserting the legal rights of the creditor against the debtor. Elliott formed a joint venture with IMF Bentham, called Bentham Europe, in the Spring of 2014. The business funded a number of actions including the high profile trucks cartel case against the large European truck manufacturers as well as shareholder claims against Volkswagen for its diesel scandal and Tesco for its alleged accounting fraud. The business was wholly acquired by Elliott Management around June 2016 and has subsequently changed its name to Innsworth, going on to fund other class actions including the appeal of Walter Hugh Merricks CBE v Mastercard Incorporated and Others at the Competition Appeals Tribunal. 11.89 It is hardly surprising that litigation finance has caught the eye of established hedge fund managers. As discussed previously, the asset class firmly fits into the 34 Fortress.com, Q3 2019 Assets Under Management. 35 ‘The largest managers of hedge funds (P&I Sep 2019)’ (Special Report Hedge Funds). United States: Pensions & Investments. Crain Communications Inc. 16 September 2019, put Elliott’s funds under management at US $37.7 billion at 30 June 2019.

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Types of investors in litigation finance 11.89

alternatives space which attracts forward-thinking hedge fund managers looking for assets which have certain features that these investors understand and seek, be it an illiquidity premium, their uncorrelated nature or potentially lucrative return profile. The underlying assets (contingent claims on creditworthy counterparties) can also be packaged to support debt facilities which fit the investment profile of some debt funds, although the risky nature of these assets and uncertain income profile should naturally limit the loan to value achievable. Finally, the actual nature of the litigation and its usefulness in extracting value from hitherto undervalued assets, such as distressed debt, is well understood by certain investment managers, which has made litigation finance a natural extension to their existing business. The acquisition of the underlying asset which gives rise to the litigation, may it be debt, patents or assigned rights, gives the litigation funder ever more control of the outcome and arguably more certainty.

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CHAPTER 12

High risk, high return Alex Hickson Woodsford, London

Introduction 12.1 Key risks 12.9 Big losses 12.72 Risk assessment and risk management 12.78 High rewards 12.95 Big wins 12.109 Conclusion 12.114

INTRODUCTION 12.1 As an asset class, investments in legal claims have a high-risk, highreturn risk profile. As discussed in detail in this chapter, commensurate with the risks undertaken by litigation funders, the potential returns are substantial. 12.2 In economic theory, there is a distinction between risk and uncertainty, postulated by Frank Knight in 1921, which has become widely accepted.1 Krystel De Groot and Roy Thurik helpfully summarise this distinction as follows: In the case of risk, the outcome is unknown, but the probability distribution governing that outcome is known. Uncertainty, on the other hand, is characterised by both an unknown outcome and an unknown probability distribution. In both cases, preferences are defined across chance distributions of outcomes. For risk, these chances are taken to be objective, whereas for uncertainty, they are subjective. Consider betting with a friend by rolling a die. If one rolls at least a four, one wins 30 Euros (or Pounds, Dollars, Yen, Republic Dataries, Bitcoins, etc.). If one rolls lower, one loses. If the die is unbiased, one’s decision to accept the bet is taken with the knowledge that one has a 50 per cent chance of winning and losing. This situation is characterised by risk. However, if the die has an unknown bias, the situation is characterised by uncertainty. The latter applies to all situations in which one knows that there is a chance of winning and losing but has no information on the exact distribution of these chances.2 1

De Groot and Thurik (2018) Disentangling Risk and Uncertainty: When Risk-Taking Measures Are Not About Risk (2018) Frontiers in Psychology 9 2194. doi; 10.3389/fpsyg.2018.02194 2 Ibid.

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12.3  High risk, high return

12.3 In this chapter, to summarise the risks and uncertainties involved in a litigation funding asset, the terms are used interchangeably, as on a practical level, most risk or uncertainty that applies to funding in litigation is a blend of the subjective and objective; for one, because legal principles are both objective and subjective and for another, because within any claim there will objective elements (such as jurisdiction, legal team and claimant, defendant) and subjective (such as the application of law to a current set of facts). A decision to invest in a legal case is based on both the objective and subjective. 12.4 The proceeds available from litigation are contingent assets which may be realised by successful parties entitled to legal remedies. The stronger the merits of the legal case and the larger the entitlement of a claimant to damages, the stronger the asset and the more risk a third-party funder is usually willing to assume in order to purchase that asset. To be clear, here it is not meant that a litigation funder will always ‘purchase’ a claim from a claimant, although this does happen through assignment in some cases where a litigation funder is involved. The ‘asset’ the litigation funder is purchasing is a portion of the contingent remedy available at the end of the litigation and the price of that portion is tied to the cost of the funding required by a claimant to achieve that remedy. 12.5 The decision whether or not to invest in a litigation asset is not unique to litigation funders, and the ‘speculation’ in litigation didn’t start with litigation funding. Many claimants in litigation have a choice whether or not to litigate. Company boards choose whether to pursue litigation against other parties that have caused loss to the company. Investors choose whether to pursue arbitration against the foreign States that have expropriated their assets. Lenders choose whether to pursue litigation against borrowers that have defaulted. In choosing whether to pursue such claims in risky, and often expensive, litigation, the claimants will go through a decision-making process that is similar to that of a litigation funder. 12.6 Of course, there are some potential claimants whose choices are limited. The company board that has been wrongly harmed by a competitor may have been pushed to the brink (or beyond) of insolvency and unable to pay for litigation. The inventor whose intellectual property is being wilfully infringed by a Silicon Valley giant will likely not have the resources to seek redress. Increasingly, businesses and companies recognise that litigation assets can be sold in an increasingly competitive market. As John Peysner puts it, ‘most companies do not pursue profit via litigation. Thus, if they have to use their money or human resources in litigation, this is an opportunity cost. A  “good” case with strong chance of success and recovery creates an asset class that, subject to the regulatory/legal position, can be sold just like any other asset class such as intellectual property or real property.’3 Litigation funders ensure that claimants have more options available to them than they otherwise would.

3

van Boom (2017) Litigation, Costs, Funding and Behaviour: Implications for the Law (1st ed) Routledge, p 60.

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Key risks 12.10

12.7 Like any asset, a consideration of its inherent risks is necessary to determine its value and whether it will be a good investment. As will be evident from the below analysis, many of the risks of investing in litigation funding are claim type and jurisdictionally specific. This chapter provides an analysis of the key risks and rewards of investing in litigation, predominately focussing on the UK and Australian markets, as two of the more developed markets in the litigation finance industry. 12.8 There are different ways to invest in the litigation. The litigation funding industry itself comprises a number of different types of entity, ranging from private limited, public (both listed and not listed), limited liability partnerships and private individuals. More recently, online platforms4 have made investing in litigation possible. Obviously, the risks of investing in different types of company or platform that engage in litigation funding, by buying shares, contributing equity, or investing directly, varies, and this chapter is not to be construed as a guide to how to invest in the industry. Rather, it provides an analysis of the risks and returns of direct investment in litigation on a claim-by-claim basis, rather than an investment with a litigation funder by way of fixed-term bond or shareholding, albeit that any such investment would, to a degree, be subject to the risks described below.

KEY RISKS Legal uncertainty – merits and regulatory risk 12.9 At a high level, the risk that legal uncertainty poses to a litigation funder manifests in two ways: first, that the application of the law is inherently uncertain (the ‘legal merits risk’); and second, that the law to be applied to a claim may change in the time between the claim’s commencement and conclusion (the ‘regulatory risk’).

Legal merits risk 12.10 Legal claims are inherently risky endeavours, for one, because the law is complex and ever developing. As Sir William Blackstone put it in Commentaries on the Laws of England: The uncertainty of legal proceedings is a notion so generally adopted, and has so long been the standing theme of wit and good humour, that he who should attempt to refute it would be looked upon as a man who was either incapable of discernment himself, or else meant to impose upon others. Yet it may not be amiss, before we enter upon the several modes whereby certainty is meant to be obtained in our courts of justice, to inquire a little wherein this uncertainty, so frequently complained of, consists; and to what causes it owes its original.5 4 5

See, for example, platforms such as Lexshares or AxiaFunder. Blackstone (1753) Commentaries on the Laws of England Volume 2, Book 3p 260.

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12.11  High risk, high return

12.11 In addition to legal uncertainty, the funder contends with factual uncertainty. The law (uncertain or otherwise) is applied to facts which are often uncertain. Indeed, many of the facts that must be established in order to succeed in litigation will not be known by the claimant (and therefore the funder) until a significant amount of time and money has been spent pursuing the litigation through disclosure and witness evidence. 12.12 Thus, the funder’s decision to invest will be based on an assessment of the merits of that claim from the limited information available at the time of the investment. The funder’s assessment of the merits will commonly be informed by an opinion by a senior legal practitioner. Therefore, provided that the facts and assumptions relied upon in the advice prove correct, an accurate assessment of the merits with a view to investing in a claim that will ultimately be successful is contingent on the correct legal analysis by the litigation funder, of the legal opinion of the senior legal practitioner. In simpler terms, if the legal opinion is positive about the merits, the litigation funder will identify whether they agree with the opinion, and if they do, the success of the investment will hang on whether that assessment was correct, subject of course to other risks, described below, materialising. In other circumstances, a claim-holder will bring a claim to a litigation funder and the funder will need to determine the merits of the claim. Often a funder’s analysis of the merits of a claim will be an informed analysis as many litigation funders are staffed by experienced lawyers. Increasingly, litigation funders also originate claims themselves by identifying wrongdoing in society and the victims who may have suffered loss. 12.13 However developed or originated, a correct analysis of the merits will not always lead to the desired outcome as the correct analysis of the law is a moving target. While in common law jurisdictions, the law has necessarily developed over centuries, legal uncertainty does, and will always, remain. Similarly, in civil law systems, where rules are codified, the interpretation of definitions, and the intention of the policymakers in enacting those rules, still gives rise to legal uncertainty. As Giuseppe Dari-Mattiacci and Bruno Deffains proffer in their article Uncertainty of Law and the Legal Process, there are a number of reasons why the law may be difficult to predict. ‘Unforeseen contingencies, the inherent ambiguity of language itself, the use of vague notions (such as bona fide, reasonable man or bonus pater familias), and a natural process of obsolescence due to continual change in society and technology may all contribute to this state of affairs.’6 12.14 Some legal theorists argue that indeed as the law develops, legal uncertainty increases because as courts make decisions or clarify interpretations relating to rules or legal principles, those decisions become part of the rule or principle, thus making it more complex and its future application more uncertain.7

6 Dari-Mattiacci and Deffains (2007) Uncertainty of Law and the Legal Process Journal of Institutional and Theoretical Economics 163(4) 627–30. 7 D’Amato (1983) Legal Uncertainty California L Rev 71 1–55.

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Key risks 12.19

If this is taken to be true, the litigation funder’s job is becoming increasingly more difficult. 12.15 Thus litigation funders are faced with the difficult notion that, absent some earlier negotiated dispute resolution, the claim in which they have invested in will be determined by a court or arbitration panel, and despite an informed, educated assessment of the merits, the application of the law by that court or panel is subject to uncertainty. 12.16 Legal uncertainty does not necessarily lead to a system where claimants do not bring claims; if there is uncertainly on the part of the claim-holder there must also be uncertainty on the part of the respondent. For the same reason, neither does legal uncertainty lead to a litigation funding industry unwilling to fund claimants. There is rarely such a thing as an assured victory in litigation and this is even rarer where a claimant is seeking a third party to fund their case. For if the law to be applied to a claimant’s claim was certain and settled, it is unlikely that the respondent would seek to litigate it and thus funding would not be required.

Regulatory risk 12.17 In addition to legal merits uncertainty, over the course of the litigation, the legal landscape can change from the time of the decision to invest to the time in which a return might be realised. Regulatory risk poses another challenge for the litigation funding industry. While litigation funders must comply with regulatory requirements which differ across jurisdiction8 and changes to these may pose a risk to funders, ‘regulatory risk’ in this chapter, refers to the risk that regulators, the legislature or the judiciary will change the law in a way that might adversely impact a claim in which a funder has invested. 12.18 Often regulatory change will be sign-posted and can be predicted; a Bill will be proposed by a first reading, then it will be subject to debate and need to obtain the assent of different houses of parliament in order to become a law. This could all take place over a matter of months or even years. In such circumstances, there is a degree of foresight afforded to a claimant and litigation funder as to the course regulatory change may take. This, however, will not always be the case, as regulatory change will not always take the course of a Bill travelling through the checks and balances of government. Other examples of more pronounced changes to the law, include where the judiciary may seek to interpret a piece of legislation in a way which gives it new meaning, or where an upper court overturns the long-standing application of a principle which had become widely accepted in lower courts. 12.19 In a Presidential address to the Bentham Association, in the context of whether judges may have too much power in exercising judicial law-making, 8

See chapter 3.

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12.20  High risk, high return

Lord Dyson pointed to a number of examples where the law has changed quite dramatically in England and Wales. Take Woolwich Building Society v Inland Revenue Commissioners,9 where the House of Lords was tasked with deciding whether to overturn a long-standing rule that there was no right of recovery of money paid under a mistake of law in response to an ultra vires demand by a public authority.10 Arguments were advanced that in doing so, the judiciary would be overstepping the boundary between the legitimate development of law and the legislature’s power to create law. Lord Goff, in his judgment, said that he felt bound to acknowledge the existence of a boundary, but that he was ‘never quite sure’ where that boundary was to be found.11 Nevertheless, the majority found it was in the court’s power to overturn the rule, and the law was changed. Another example, which will be explored in more detail later on this chapter, is the courts’ departure from the Arkin cap, which for many years operated in England and Wales to provide litigation funders with a degree of certainty (and comfort) over their adverse cost exposure when funding a claim. 12.20 In Australia, in December 2019 the High Court considered whether the court had the power to make what was referred to as a Common Fund Order (CFO); the making of which had become commonplace in Federal and state courts overseeing class actions. In 2016, in Money Max v QBE Insurance, the Federal Court made the first CFO which allowed a third-party litigation funder in a class action to charge its funding commission across the whole class, as opposed to only those class members who had signed funding agreements. Prior to this decision, courts would often make what is called a Fee Equalisation Order (FEO), whereby a funder would only be entitled to receive its commission from the group members who had signed funding agreements, with the equivalent payment not made by unfunded group members, redistributed back to funded group members on a pro-rata basis. A CFO was a way of dealing with ‘free-rider’ class member problems and meant that all class members (both unfunded and funded) who benefited from the lead applicant’s claim and the funding provided by the funder for that claim, owed obligations to the funder which existed outside of the contract. The difference between what a funder might recover on its investment if it could only charge its funding commission across class members who had entered funding agreements can be stark, especially in claims where the class is large. In BMW Australia Ltd v Brewster; Westpac Banking Corporation v Lenthall,12 the High Court determined that the making of CFOs at interlocutory stages was not within the courts’ power. 12.21 The implications of this on the funding industry, to an extent, remains to be seen at the time of writing this chapter. However, the decision provides an example of how regulatory change might suddenly impact the value of a litigation asset. At the time the decision was made, a number of funded class actions were on foot in which CFOs had been made. The decision of the High Court meant 9 [1993] AC 70. 10 Dyson, ‘Are the judges too powerful?’ Bentham Association, Presidential Address, 2014. 11 Ibid. 12 [2019] HCA 45.

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Key risks 12.24

that these had to be unwound, and the degree of certainty over a funder’s return in those claims was diminished. 12.22 Direct regulatory intervention in claims also poses a risk to litigation funders. In the Australian case Richards v Macquarie Bank Limited (No  4),13 the Australian Securities and Investments Commission (ASIC), intervened in a class action proceeding related to the collapse of Storm Financial, in which the lead applicant and claimant lawyers had negotiated a settlement with the defendant, Macquarie Bank. The basis of ASIC’s intervention was that the proposed distribution of the settlement pool was not fair and reasonable because the represented group members would receive more of the settlement than unrepresented ones. In Australia, all class actions that settle are subject to court approval. The judge at first instance approved the settlement and ASIC appealed the decision. In ASIC  v Richards,14 the Full Federal Court agreed with ASIC and held that the settlement approval should not have been entered into as the settlement distribution was not fair and reasonable. While a commercial litigation funder was not involved in this case, it highlights the risk that direct regulatory intervention poses to litigants and funders. Settlement approval was eventually obtained but not without delay. 12.23 An Australian court can refuse to approve a settlement in a class action if it does not consider that the funding commission is fair and reasonable and in the interests of group members. Further still, the court has declared that it has the power to modify the amount to be paid to a funder as part of a settlement distribution and reduce the amount if it sees fit. In Blairgowrie Trading Ltd v Allco Finance Group Ltd, the court observed that ‘as part of any approval order … [it has] power in effect to modify any contractual bargains dealing with the funding commission payable out of any settlement proceeds. It may not be a power to expressly vary a funding agreement as such. Rather it is an exercise of power under s 33V(2).’15 Section 33V(2) of the Federal Court of Australia Act 1976 provides that in approving the settlement of a class action a court may make such orders as are just with respect to the distribution of any money paid under the settlement. 12.24 In another class action, Earglow Pty Ltd v Newcrest Mining Limited,16 Justice Murphy of the Federal Court determined that: in my view if the Court considers a proposed settlement of class proceedings to be fair and reasonable in the interests of class members, except that the funding commission to be deducted under the proposed Distribution Scheme is excessive, the Court’s powers are not limited to a binary choice between approving the proposed settlement or refusing approval. I  consider the Court has power to approve the settlement and reduce the funding commission rate or quantum.17

13 [2013] FCA 438. 14 [2013] FCAFC 89. 15 (2017) 343 ALR 476 [110]. 16 [2016] FCA 1433. 17 [2016] FCA 1433 [7].

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12.25  High risk, high return

12.25 As can be seen from the above, the regulatory risks posed to a litigation funding investment can take many forms, and often arise with very limited visibility afforded to the litigation funder.

Illiquidity 12.26 Where a third party pays the legal fees on behalf of a litigant in return for a portion of any successful outcome that might be achieved, the third party’s investment is illiquid. Subject to some limited exceptions, the capital expended on the legal fees is only recoverable, in the event the claimant is successful, at the end of the litigation. An investment in a legal claim will often be staggered in a way to defer as much of the payment of legal costs as possible to later stages of the proceedings. For example, a litigation funder might commit to pay legal costs, subject to caps imposed for disclosure, mediation, trial and appeal. This is done to control the outflow of the funder’s capital over the duration of the claim and ensure the claim remains on budget. It is also a risk management tool and is discussed in more detail in the Risk management section of this chapter (para 12.86). 12.27 Once costs are paid for legal work performed in a claim, there is limited ability for a funder to recover any portion of their investment before the end of the investment term, being the duration of the litigation or up until the point of settlement. Further, the investment term is uncertain and difficult to estimate. 12.28 Where an investment is illiquid, when valuing the investment, investors in some asset classes will look to apply illiquidity discounts or liquidity premiums, meaning the value of the asset is discounted as a result of how difficult it is for an investor to trade out of that asset (illiquidity discount),18 or that an illiquid asset should pay a higher yield (liquidity premium). A potential investor valuing an equity position in a private business, for example, where liquidation costs can be high relative to the size of the investment, would seek to discount the value of the investment in light of the potential illiquidity.19 12.29 A litigation funder has a very limited ability to trade out of the asset after the point of investment. The avenues to do so will often be found in the funding agreement between the claimant and the funder. Often the funding agreement20 will contain rights of termination bestowed to the funder in the event that the funded litigant commits a material breach of the funding agreement or if certain conditions are met. A typical condition in funding agreements will be that the litigation funder is no longer satisfied that the claim is sufficiently meritorious or that the claim is no longer economically or commercially viable. Provided it is contractually entitled to do so, a funder can cease funding, limiting the ‘damage’ 18 Damodaran (2002) Investment Valuation: Tools and Techniques for Determining the Value of Any Asset (2nd ed.) John Wiley & Sons, Inc., p 677. 19 Ibid. 20 See chapter 6.

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Key risks 12.32

it may have incurred by funding an investment it no longer wishes to pursue. After termination, the capital already invested and any return will usually still be subject to the duration of the claim and dependant on the outcome. The funder may attempt to sell its interest in the claim or assign the interest to another thirdparty funder, with the costs of the interest being payable to the original funder upfront or contingent upon a successful recovery by the new funder. Although this has its own difficulties and will obviously be met by the market with scepticism as to why the original funder no longer wishes to pursue the claim. Thus, if the investment begins to go bad there is little the funder can do to recover monies already spent. 12.30 Unlike with some other illiquid asset classes, it is difficult for a thirdparty funder to seek to discount the cost of its investment in a legal claim at the outset. The costs of the legal fees to run a claim will usually be provided to the funder by way of an estimate from the lawyers that will pursue the claim on behalf of the litigant. A third-party funder might seek to cap those costs, or limit its spend by requesting that the law firm act for the litigant on some kind of contingent or conditional fee arrangement where part of their fees are deferred until the successful resolution of the claim. There would, however, be limited utility in a funder seeking to take a position where, if a litigant was seeking an amount of funding based on the estimate provided by a law firm to pursue the claim, a funder would offer half of that amount to account for illiquidity. Indeed, such a step might even hinder the chances of a successful resolution. As it is difficult for a third-party funder to apply any illiquidity discount in relation to the amount to be invested, the high return charged by funders to some extent reflects a liquidity premium which is necessary to justify the investment.

Investment term and duration risk 12.31 The term of the investment in a legal claim is uncertain and difficult to estimate. Unlike in other fixed-term investments, because the investment is illiquid, as discussed above, and the litigation duration is uncertain, the term of the investment will be unknown to the investor at the outset. Identifying that a legal claim will take a long time to resolve may be a reason to decide not to fund a claim at all, irrespective of its merits. 12.32 Duration risk is a common concept in asset classes such as bonds. Essentially it refers to the risk that interest rates will rise, making the fixed interestrate bond less valuable. When pricing bonds, investors expect a higher return, the longer the term of the bond; a ten-year bond should pay a much higher return than a one-year bond. There are a number of reasons for this, but two primarily are the risk factors associated with longer-term bonds. That is, firstly, over longer periods of time, it is more likely that interest rates will move, impacting the value of the bond, and secondly, the longer the investment term, the more likely it is that a company may become insolvent during the term (sometimes referred to as bankruptcy risk). 373

12.33  High risk, high return

12.33 Investment term and duration risk in litigation funding is not dissimilar to the concept of duration risk in bonds, albeit that the market factors impacting the value of the asset over the duration are different. In a bond, the interest rate is the influencing market factor which impacts the value of the bond. In litigation funding, the price at which funding opportunities are being agreed in the wider market may change over time, impacting the value of the litigation asset that has been obtained. A  litigation funder agrees a price at the beginning of the investment. One year later, the price for this type of investment may have gone up (by reference to what is being offered in the rest of the market). Funders therefore run the risk that over a longer period of time, the pricing they have agreed devalues the asset. 12.34 As mentioned above, a second factor which increases the risk of a longerterm bond, is that the company issuing the bond goes bankrupt. In a litigation funding arrangement, there is the risk that the defendant will go bankrupt, and therefore be unable to satisfy any judgment or award that might be obtained against them. Beyond this though, many of the other the risks outlined in this chapter become heightened with the passing of time. For example, the chance of a key-person risk materialising increases the longer the investment term; as does the chance of regulatory, currency and circumvention risk. Further, over the course of the litigation, the risk profile of the investment changes as the parties get closer to the final hearing. This is because the trial will usually be the most expensive part of the litigation, the settlement window is most narrow, and a full hearing of the dispute takes control away from the parties and leaves the decision in the hands of the courts. In addition, longer investment terms will likely expose the funder to larger adverse costs consequences in the event that the claim is unsuccessful. 12.35 Investment terms can be extremely difficult to estimate because so much of the conduct of the litigation is out of the litigation funder’s control. If we take Australian class actions as an example, court systems have historically been efficient in resolving claims. The average duration of a class action in Australia from filing to resolution between June 1992 and May 2017 was 978 days or two years and eight months.21 Within these cases, however, there are outliers and timelines can be unpredictable. In another class action that arose out of the Storm Financial collapse, Hodges v Waters,22 funded by IMF Bentham, the defendant filed and contested 16 interlocutory applications, all of which delayed the progression of the claim to resolution. The claim proceeded over the course of five years and while it might be argued that a tightly run case would not give rise to interlocutory battles, if a defendant is hell-bent on taking every point, regardless of the interim costs consequences associated with interlocutory spats, there is little the claimant can do to speed up the process. In Hodges v Waters, in the judgment accompanying the settlement approval in March 2015, Justice Perram quoted a decision in one of the earlier interlocutory 21 Morabito ‘The First Twenty-Five Years of Class Actions in Australia: An Empirical Study of Australia’s Class Action Regimes, Fifth Report’ (July 2017). 22 (No 7) [2015] FCA 264.

374

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applications, where after determining the early application, the court said the parties ‘now steel themselves for a long and drawn out procedural Stalingrad in which no quarter will be given’. Perram J  noted that the 16 interlocutory judgments which had been given in the litigation show the correctness of that pessimistic appraisal. 12.36 Some of the factors outside the parties’ control might also be given little consideration in a funder’s investment term estimate, such as how long after the hearing the court might take to hand down its decision. Recent examples of this in England and Wales can be seen in the Lloyds/HBOS Shareholder class action backed by funder Therium Capital, in which the judgment was handed down some one year and eight months after the hearing (albeit in favour of the defendants and so a contingent return to Therium had not in actuality been delayed). More unfortunate is the case of Bank St Petersburg PJSC & Anor v Arkhangelsky & Anor,23 in which the Court of Appeal upbraided a High Court judge for taking 22 months to deliver a judgment. Further, the court allowed the appeal and committed the matter to be retried, meaning that the claim, which was filed in 2012, still needs to be heard at the time of writing. 12.37 While statistics and historical efficiencies of procedural systems give an insight into the expected duration of a litigation funding investment, they often do not paint a full picture. According to the International Chamber of Commerce dispute resolution statistics for 2018, the average duration of proceedings in cases that reached a final award was two years and four months.24 These statistics do not shed light on how many of those awards were subject to delays as a result of enforcement, and as indicated above, outliers exist which are very hard to predict with any certainty. 12.38 In other types of cases, historical data as to court efficiencies isn’t available. In the UK, the recent introduction of an opt-out regime in the Competition Appeal Tribunal (CAT) has been met by strong interest in the litigation funding market. Changes to English competition law in 2015 gave rights to claimants to bring private damages actions and for authorised class representatives to bring collective proceedings on their behalf, either on an opt-in or an opt-out basis. Under the CAT rules, group actions must first obtain certification by way of a Collective Proceedings Order (CPO). Since 2015, the CAT has heard two CPO applications (Dorothy Gibson v Pride Mobility Products Limited and Walter Hugh Merricks v Mastercard Incorporated & Others) and both of them were rejected at first instance. Mastercard, eventually funded by Innsworth, was appealed. In April 2019, the Court of Appeal overturned the CAT decision and remitted the application to be reheard. The Court of Appeal’s decision is being appealed by Mastercard. Since the Mastercard proceedings were filed, a number of other group competition claims have been filed in the CAT all of which have

23 [2020] EWCA Civ 408. 24 International Chamber of Commerce. 2018. ICC Dispute Resolution Statistics.

375

12.39  High risk, high return

been backed by litigation funders.25 These have effectively all been stayed awaiting the Supreme Court’s decision in relation to the appeal. Mastercard and other CAT claims show how difficult it can be to foresee the course of litigation, especially in circumstances where no historical data is available because the dispute resolution regime is in its infancy. 12.39 None of the above is to say that there are not examples of types of litigation that are quicker to resolve than others. There are indicators which a litigation funder can identify at the start of proceedings which may assist in estimating the time a claim will take to resolve. While the pitfall of historical efficiencies of court systems in resolving types of disputes has been explored above, this is still a good starting point in estimating investment duration. As the industry continues to grow and become more competitive, the sophistication and specificity in which litigation funders predict reliable estimates of how long a proceeding will take to resolve also develops. This is aided by technology which has developed as a response to the increasing demand for the efficient analysis of data in relation to litigation. Legal analytics tools such as Lex Machina, Westlaw Edge and Gavelytics are used by lawyers, funders and other interested parties in order to estimate how long a claim will take to resolve, and also identify classes of claims which more often than not resolve successfully but also more efficiently than others.

Key-person risk 12.40 Key-person risk is evident in many asset classes. FTSE 100 or S&P 500 shares are exposed to key-person risk in the form of the company’s CEO, for example. If a CEO leaves one such company, it may cause a significant drop in the value of shares in that company. Litigation funders are often very lean in their structure and so the departure of persons at the upper management level could also see investor capital placed at a higher risk. 12.41 In litigation funding, the impact of losing a key person in litigation may render the investment completely worthless if that key person is the claim-holder. Where the evidence that may be provided by a claim-holder is crucial to the factual matrix of the claim, their death or unwillingness to continue for any reason will call into question the viability of the whole investment. In its half-year results for 2019, Burford reduced a previously recognised return by US $3 million, where a settlement had been reached in an intellectual property claim, part of which was dependent on the continuing activities of the inventor. The inventor passed way, which called into question the ongoing viability of the intellectual property and

25 See, for example, Road Haulage Association Limited v Man SE and Others (1289/7/7/18); UK Trucks Claim Limited v Fiat Chrysler Automobiles NV and Others (1282/7/7/18); Justin Gutmann v London & South Eastern Railway Limited (1305/7/7/19); Justin Gutmann v First MTR South Western Trains Limited and Another (1304/7/7/19); Michael O’Higgins FX Class Representative Limited v Barclays Bank Plc and Others (1329/7/7/19).

376

Key risks 12.44

caused Burford to write down the value of the investment in their portfolio and income statement.26 12.42 Unlike other risks, such as adverse cost risk or concentration risk, keyperson risk is very difficult to mitigate against. If there are concerns about the claim-holder’s health, such that a litigation funder might look to mitigate this risk by taking out key-person insurance, the costs of that insurance in light of the poor health of the claimant will likely make it prohibitive. Within the litigation or arbitration, the members of the legal team may have knowledge gained from the experience of the litigation that is vital to its future outcome. Litigations and arbitrations managed and heard by sole judges or arbitrators also pose a keyperson risk to an investment and if anything happens to them it can cause the investment unforeseen delays.

Claimant risk 12.43 A  litigation funder is heavily reliant upon the decision-making of the claimant in the action it is funding. The claimant makes decisions about the overall conduct of the claim, and whether to make settlement offers or accept offers made by the other side. The decisions made by the claimant may be contrary to the interests of the funder. As Burford Capital notes in its Prospectus dated 21 July 2014, the funder: is generally not the client of the law firm representing the owner of the claim that is the subject matter of an investment or financing by the [funder]. Accordingly that law firm may be required to act in accordance with its client’s wishes rather than those of the [funder] or may be subject to an overriding duty to the courts, which could result in the law firm acting in a manner that is not in the [funder]’s best interests.

12.44 Claimant risk is one of the more difficult risks to mitigate against, but certain measures can be taken by litigation funders in order to do so. Much of the recourse a funder will have against a claimant will be found in the litigation funding agreement (LFA) between the parties. These agreements will usually include clauses which govern certain aspects of the claimant’s behaviour and impose obligations on the claimant that decision-making is done with some funder oversight. Rules in different jurisdictions dictate the level of control a funder can exercise over the litigation it is funding. While it is the funder’s capital at risk, it is primarily the rights of the claimant which the claimant-side stakeholders are seeking to enforce through the litigation. Funding agreements therefore need to observe the rules of the jurisdiction it is funding relating to LFAs, and not fall foul of rules relating to maintenance and champerty.27 Influence might be acceptable, but control might not. 26 Burford Capital Finance LLC  (2019) 2019 Interim Report. Available online: https://www. burfordcapital.com/media/1520/bur-32541-interim-report-2019-web.pdf 27 For more on this, see chapter 2.

377

12.45  High risk, high return

12.45 While the funding agreement will usually govern the relationship between the funder and claimant and the respective of obligations of each, this does not stop claimants from breaching those obligations, which may cause loss of investment or at least a delay to expected returns. In Therium (UK) Holdings Limited v Brooke & Others28 a funded claimant was sentenced to prison for contempt of court after failing to obey court orders that arose from his alleged failure to pay his litigation funder a success fee following the settlement of his litigation. The funding agreement provided that any monies obtained in the litigation would be payable to the law firm, who in turn would disperse the funds pursuant to the LFA. Nevertheless, the claimant negotiated a settlement with the defendant and the money was not forthcoming to the law firm, with the claimant offering no explanation as to why the money had not been paid. 12.46 Apart from contractual provisions in the funding agreement there are other measures of mitigating against claimant risk, by aligning the claimant’s interests with that of the funder.29 These include taking security over a claimant’s assets to protect against adverse revelations over the course of the litigation which the claimant has not been upfront about. Take the hypothetical example of a claimant who has a claim for breach of contract against a defendant. The funder might have a concern that the underlying contract which has been breached was, in the first place, procured by fraud. In such a situation, the funder might take the step of only agreeing to fund the claimant if the claimant agrees to give the funder security over its assets, which can be enforced only in the event that fraud is uncovered. This would give the funder confidence that the claimant is telling the truth, as well as a right of recourse in the event that the claimant has not been honest.

Legal team risk 12.47 The performance of the legal team is another risk. A  mistake from the legal team, such as a missed court deadline, a failure to plead a cause of action, or a miscalculation of a limitation period can be fatal to an investment. A  litigation funder will look at a law firm’s past track record as well as the experience and specialisations of the senior members of the legal team before investing in a claim. 12.48 The materialisation of this risk can be seen in examples where a litigation funder sues a law firm following allegations of mishandling in a case. In the Excalibur claim (discussed in detail at paras 12.73-12.74), the litigation funders who backed the claim and lost, ended up suing the law firm acting for the claimants they had funded, Clifford Chance. The claim settled confidentially for an undisclosed sum. The firm and the partner handling the matter were also fined £100,000 by the Solicitors Disciplinary Tribunal following an investigation by the Solicitors Regulation Authority.

28 [2016] EWHC 2421. 29 See chapter 6.

378

Key risks 12.52

12.49 There is also a risk that the legal team may not be upfront about adverse aspects of the claim when negotiating funding for a client or that may come to light during the course of litigation after funding has been obtained. In Hall v Saunders Law Ltd & Ors,30 litigation funder John Hall and his company 1st Class Legal sued the lawyer and law firms who acted in a case 1st Class Legal was funding for failing to disclose various pessimistic views expressed by counsel as to the prospects of success of the action. It was alleged that this failure was in breach of the funding agreement between the law firm, the funder and the claimant, as well as in breach of duties owed by the law firm to the funder. The court dismissed Mr Hall’s claim, finding that the no cause of action arose in contract, tort or breach of fiduciary duty. The case highlights the importance, from a funder’s perspective, of ensuring that the contractual documentation entered with claimants and law firms effectively imposes obligations on the relevant parties to disclose material information to the funder, which may impact the funder’s decision to invest or continue to invest in the claim.

Concentration risk 12.50 Concentration risk refers to the risk that a litigation funder is exposed to if its portfolio is too heavily weighted towards a particular type of claim or claim feature. Concentration risk can intensify if a litigation funder over-invests in a particular jurisdiction, court system, type of claim, cause of action within a jurisdiction, defendant or defendant industry or claimant. For example, if a funder’s portfolio is heavily invested in claims in a particular jurisdiction, the portfolio has a heightened exposure to regulatory risk severely impacting its value. Similarly, if a litigation funder is backing a number of claims against the same defendant, the combined costs of those claims to the defendant puts them at a greater risk of insolvency. 12.51 As discussed in further detail in Diversification of portfolio below (paras 12.90–12.92), it is an important risk mitigation strategy that a funder maintains a diversified portfolio of claims.

Circumvention risk 12.52 There is also the risk that the defendant may try to circumvent procedural dispute resolution by engaging with the claimants directly. This risk is most prominent in class actions and group litigation, where not all of the affected claimant parties will have contracted directly with the litigation funder. In February 2020, in Germany, Volkswagen announced that settlement negotiations had broken down between the parties over VW’s concerns about the lawyers’ fees. They then proceeded to make an offer of settlement to consumers directly.

30 [2020] EWHC 404 (Comm).

379

12.53  High risk, high return

12.53 There will usually be clauses in the funding agreement which will preclude claimants from engaging with the defendants directly or otherwise settling their claims outside of the court process for which the funder has agreed to provide funding. Nevertheless, a move like that made by VW could cause funders in Germany logistical headaches (to put it mildly) if claimants elected to take up VW’s offer and the funder was left to chase the claimants for their fee.

Decision-maker risk 12.54 All litigation and arbitration disputes are determined by a decisionmaker (or group of decision-makers). This may be single or panel judges or arbitrators, or a jury. If the legal merits analysis performed by the funder is correct, it still requires the decision-maker to come to the same conclusion. It is inevitable that judges, juries and arbitrators will make bad decisions. There is a risk that those bad decisions may be rooted in incompetence, corruption or other factors that vary widely from jurisdiction to jurisdiction (such as time-pressure on the decision-maker or personal and cultural biases). 12.55 In England and Wales, jury trials are scarcely conducted for civil claims, save for some limited exceptions where the parties may make an election.31 Similarly, in Australia they are not commonly adopted in civil claims. In the United States, however, where civil jury trials are more common, the jury poses a risk to funders by virtue of the uncertainty of their decision-making process. Each juror that hears a case is a unique individual and at the time of a funder’s decision to invest, nothing will be known about the jury’s constitution. Further, where the subject matter of the dispute is complex, the jury may be ill-equipped to decide the dispute, irrespective of what directions are provided by the judge. 12.56 Biases also play a role in the conclusions reached by decision-makers. Take the example of a Texan jury in a patent infringement action. The claimant is a foreign organisation who is having its patents infringed by a Texan company represented by local Texan lawyers. Is the jury more likely to side with the local Texan party or the local Texan lawyers over the foreign party? While judges and arbitrators also have biases that may influence their decision-making, these biases are more easily identifiable. A funder can look at the past track record of an arbitrator to determine whether they have any ‘pro-investor’ or ‘pro-State’ biases. Legal data aggregation and analytics platforms can also assist with this process. A funder involved in a US patent infringement claim can search for the judge hearing the claim and see how many times they have found in favour of the claimants. 12.57 Ultimately, funders must put their faith in the decision-making process when investing in a claim, but it will not always be the case that a sound investment decision results in a decision in the claimant’s favour. 31 For England and Wales, see the County Courts Act 1984 s 66.

380

Key risks 12.61

Competition risk 12.58 Competition with other funders poses a risk to each litigation funder’s investment. This is a risk that arises where multiple claimants are able to bring a claim, such as in group claims or class actions, and therefore different claimants may have entered into agreements with different funders.32 The risk posed by competition is twofold: firstly, the funder who tries to price out its competition risks agreeing to unfavourable terms in respect of an investment that does not warrant such competitive pricing; and secondly, that the funder’s action will not be allowed by the court to continue, in the event that another funder’s action is preferred. 12.59 Unlike with some other risks, the risk posed by competition does not lead to more favourable pricing of returns in order to compensate for the risk. Instead, out of necessity to beat out competition, funders may offer cheaper pricing for an investment than they otherwise would, in order to be preferred over another funder. The impact of competition on a funder’s pricing is described in more detail below (paras 12.98–12.100).

Defendant credit/solvency risk 12.60 In his book Private Debt: Opportunities in Corporate Direct Lending, Stephen Nesbitt draws a distinction between the asset profile of pre-judgment and post-judgment litigation financing.33 This distinction is appropriate. Before the judgment or settlement a litigation funder is exposed to a plethora of risks, many of which are described in this chapter. Post-judgment, the risk exposure becomes narrower and primarily consists of duration risk (referring here to duration risk in the sense of interest-rate risk), defendant credit or solvency risk and enforcement risk. 12.61 Litigation funders bear the risk that at some stage before they have recovered their investment and return from a defendant, the defendant will become insolvent and be unable to pay any judgment rendered against it or negotiate a settlement. A funder will usually take a very detailed look at a defendant’s balance sheet, in order to satisfy itself that the defendant will be able to pay a future award. This will usually involve an analysis of whether it is likely the defendant will hold insurance that will respond to a claim, the limit of that insurance, and how the defendant might be able to pay additional amounts above that limit.

32 Examples of litigation funders competing for claims is prominent in many jurisdictions. These competitions air publicly in the context of Australian class actions, and have been described as ‘beauty parades’ where litigation funders compete against each other, advocating that the terms they are offering claimants are the most preferred and that their class actions should be allowed to continue over other class actions backed by different litigation funders. See for example, Wigmans v AMP Ltd; Fernbrook (Aust) Investments Pty Ltd v AMP Ltd; Wileypark Pty Ltd v AMP Ltd; Georgiou v AMP Ltd; Komlotex Pty Ltd [2019] NSWSC 603 and Perera v GetSwift Limited [2018] FCA 732. 33 Nesbitt (2019) Private Debt: Opportunities in Corporate Direct Lending John Wiley & Sons, p 213.

381

12.62  High risk, high return

Enforcement risk 12.62 If a litigation funder provides funding for a claimant that ultimately obtains a judgment or arbitral award in its favour, the claimant must still be able to enforce that finding against the defendant. The risk that enforcement will not be possible is another factor to take into account in the overall risk profile of a litigation funding investment. There are a number of reasons why enforcement of an award may not be possible or may be delayed: the defendant may be insolvent (as discussed above); the defendant may have transferred assets during the course of litigation which can no longer be enforced against; or the defendant may simply refuse to recognise the award or dispute some aspect of it. When a funder is considering whether to fund a claim, it will look at the likelihood that a defendant will comply willingly with a judgment or arbitral award, what assets the defendant has that may be enforced against, and where those assets are located. Different jurisdictions have different enforcement risks. 12.63 Thus, once an arbitral award or judgment is received, the route to recovery of the claimant’s damages, and therefore the funder’s investment, is not over. An apt example of this can be seen in the dispute between Process and Industrial Developments Limited and the Federal Republic of Nigeria. Process and Industrial Developments obtained an arbitral award for a staggering US $6.6 billion (plus interest) against Nigeria arising out of a breach of a gas supply agreement. The agreement contained an arbitration clause which provided that ‘the venue of the arbitration shall be London, England or otherwise as agreed by the Parties.’ The award was made on 31 January 2017 and some three years later the claimant has still not been able to enforce it. The procedural history of this case is long and is not fully reproduced here, but to summarise the later stages: after the award was made, Nigeria challenged it on the grounds that London was not the proper seat of the arbitration pursuant to the agreement. If a dispute arises after an arbitral award, a claimant must seek to enforce it in the courts of the seat of the arbitration that provide a supervisory function. In this case, after the award, it was necessary for Process and Industrial Developments to seek to enforce the award in the England and Wales High Court. They did so and in August 2019 (more than two years after the award) the court granted the application to enforce. Nevertheless, the $6.6 billion and substantial interest is still unforthcoming. 12.64 This case highlights issues of enforcement and the materialisation of enforcement risk, which represents not only the risk that an award will not be enforced at all, but also the risk that further capital will need to be expended in order to fund the procedural steps necessary to enforce a judgment.

Currency risk 12.65 Third-party funders often operate in a number of different markets around the world. As such, certain investments are exposed to the risks associated with the movement of currency. John Stephens, in his book Managing Currency Risk: 382

Key risks 12.69

Using Financial Derivatives, describes the currency risk a company might face in any one transaction, in simple terms, using the example of a company purchasing machinery for US $1 million. If US dollars are not the foreign company’s home currency, the company faces the risk that their home currency devalues against the US dollar after purchase, which would eventually require the company to pay more for the machinery in their home currency than they bargained for at the time of purchase.34 12.66 Like many of the risks discussed in this chapter, currency risk exposure increases with duration. Take the example of a UK funder who invests in a claim in the United States in 2014 when the pound was buying US $1.65. That claim settles in 2015, but enforcement of the award isn’t achieved until 2017 when the pound is now only buying US $1.29. The value of the capital they invested in 2014 and their return have diminished by over 20 per cent. Savvy funders will look to buy currencies in the jurisdictions in which they invest at favourable prices and if necessary, hold those currencies until investment opportunities arise. This obviously requires the funder to be well-capitalised and also exposes the funder more generally to the risks associated with currency trading.

Adverse cost risk and the extent of a funder’s risk exposure 12.67 In an investment in a legal case, not only does a litigation funder risk the capital they have invested, but often also exposure to adverse cost consequences, if the party they have funded loses and is ordered by the court to pay the other side’s costs.35 This exposure can be substantial. The number of separate defendants involved in a piece of litigation may increase the financial exposure of the funder dramatically. 12.68 Compare litigation funding investment with that of a short sale. While in theory if you short a stock and do not monitor it, your losses could be limitless, because the stock you have shorted could continue to increase in value infinitely, in practice an investor would monitor the value of the stock they have shorted to ensure that they were able to cut their losses if the price of the stock rose by too much. In litigation funding, the investment is illiquid and therefore there is little ability for a funder to trade out of its position and the adverse costs exposure of a litigation funder will continue to increase the longer the claim continues. 12.69 The contingent risk of losses to a funder beyond their capital investment may apply where litigation finance is employed in jurisdictions which maintain cost-shifting rules. The application of cost-shifting rules differs around the world. In the United States, most commonly each party to a litigation bears their own costs, regardless of the outcome. By contrast, in the UK and Australia, the losing party is usually required to pay the other side’s costs in accordance

34 Stephens (2003) Managing Currency Risk: Using Financial Derivatives John Wiley & Sons, p 4. 35 See chapter 7.

383

12.70  High risk, high return

with the principle that ‘costs follow the event’. This means that throughout the course of the investment, in a ‘costs follow the event’ jurisdiction, a litigation funder may incur a number of adverse costs liabilities which erode a portion of the funder’s return. In theory, it is possible that a funded plaintiff might win a final judgment, but throughout the course of the litigation lose a number of interlocutory applications, which the funder is liable to pay, to such an extent that the costs awarded to the plaintiff for succeeding at the final hearing are nullified by the costs awarded against the plaintiff in pursuing the litigation and making the applications. 12.70 For many years, in England, litigation funders were afforded a certain level of protection by the principle established in Arkin v Borchard Lines Ltd & Ors,36 which is discussed in more detail in chapter 7. In that case, the England and Wales Court of Appeal established what become known as the ‘Arkin cap’, which provided that a funder’s liability to pay the adverse costs was limited to the extent of the funding the funder had provided. From a risk assessment perspective, the Arkin cap provided litigation funders with a degree of certainty as to what their exposure might be at the start of the investment term. In 2019, the High Court of England and Wales in Davey v Money & Ors37 found that the Arkin cap was not a rule to be applied automatically to cases involving commercial funders. Instead, the court determined that it is ‘best understood as an approach which … should be considered for application in cases involving a commercial funder as a means of achieving a just result in all the circumstances of the particular case.’ Ultimately, in considering the facts of the case, the judge in Davey chose not to apply the Arkin cap and awarded indemnity costs against Davey. The cost order made against Davey was not paid and the defendants applied for a nonparty costs order against the litigation funder in the claim, which was ultimately granted. The court held that while the funder had not ‘directed the way that the case was conducted, it nevertheless had every opportunity to investigate and form a view as to the nature of the Claim and the support for the allegations which were being made before choosing to fund it.’ The decision was appealed and in February 2020 the Court of Appeal upheld the decision.38 12.71 The court’s departure from the application of the Arkin cap means that in England and Wales the financial exposure of the litigation funder can be substantially more than the capital invested.

BIG LOSSES 12.72 When the risks described above materialise, the losses can be significant. Davey is one such example of this, and it is by no means the only one. It is sometimes difficult to gauge the extent of losses suffered when a litigation funder 36 [2005] EWCA Civ 655. 37 [2019] EWHC 997 (Ch). 38 Chapelgate Credit Master Fund Opportunity Ltd v Money & Others [2020] EWCA Civ 246.

384

Big losses 12.75

backs a claim that is ultimately unsuccessful. Often discontinuances or losses will be subject to confidentiality obligations. Bad news travels slowly and really bad news doesn’t travel at all. There are, however, some examples of large losses which are public. 12.73 The claim of Excalibur Ventures v Texas Keystone & Ors39 is a cautionary tale for the litigation funding industry and provides an example of the dire consequences of funding an unsuccessful claim. Excalibur was a brass plate company who pursued Texas Keystone and other related Gulf Keystone companies for specific performance of a collaboration agreement pursuant to which Excalibur said it was entitled to an interest in a number of extremely profitable oil fields in Kurdistan or alternatively damages in the amount of US $1.65 billion. The potential upside for the litigation funder was obvious; any percentage of $1.65 billion is a big number. Similarly, the lawyers acting for Excalibur, Clifford Chance, were enticed by the size of the claim. They acted for Excalibur, charging discounted fees of 40 per cent recoverable with an uplift and success fee in the event that the claim was successful. 12.74 There were four groups of funders involved in the litigation and over its course they advanced £31.75 million to Excalibur to fund the claim to the conclusion of trial. The trial lasted 60 days. Excalibur failed on every footing with Lord Justice Christopher Clarke describing the claim as being ‘speculative and opportunistic’40 and having been met with ‘a resounding, indeed catastrophic, defeat’41. As a result of the claimant’s spurious pursuit of a number of unmeritorious causes of action the trial judge ordered Excalibur to pay the defendants’ costs on an indemnity basis. The funders had put £17.5 million into court by way of security for costs during the course of the litigation. The indemnity cost order meant that this amount was insufficient to cover the defendants’ costs calculated on an indemnity basis. The trial judge then ordered that if the shortfall was not placed by way of security, the defendants would have leave to join the funders. There was a shortfall of £4.8 million and the funders were joined. 12.75 The judgment of Christopher Clarke LJ is the actualisation of a litigation funder’s worst nightmare. Leaving aside the question of how it came to pass that a claim which the judge described as ‘speculative’ could garner the support of so many different stakeholders, the case highlights the extent of the risk that litigation funders assume. Analysing this investment by the funders on a singlecase basis, it is obvious that the risks of funding litigation can be profound. In an investment term of over three years (or six years if including the appeal), it culminated in the investors having contributed a combined £31.75 million for a loss in excess of capital of £4.8 million and a total loss of over £35 million pounds. In this case, the headline figures were big, and the risk appetite of the funders corresponded accordingly. In what becomes a side-note in this disaster is that the amount the funder stood to gain was ill-informed. According to Tomlinson LJ 39 [2016] EWCA Civ 1144. 40 [2013] EWHC 4278 at [8]. 41 [2013] EWHC 4278 at [9].

385

12.76  High risk, high return

in his judgment, the best-case scenario put the quantum of the claim at US $3.3 million.42 12.76 In July 2016, the IMF Bentham-funded Bank Fees Class Action against ANZ Bank43 was heard by the High Court in Australia. The claim was funded by IMF in 200944 and commenced in 2013. The Federal Court initially found in favour of the IMF-funded claimants, but this was overturned on appeal by the Full Court of the Federal Court. The claimants appealed this decision and the High Court dismissed the appeal, finding in favour of ANZ. IMF funded a number of Bank Fees Class actions against different banks, all of which (apart from one against NAB which had previously settled) had to be discontinued following the High Court ruling. In its announcement to the market following the dismissal, IMF said they estimated that the aggregate impairment value and adverse costs provisioning for both the ANZ case and the other Bank Fees claims would reduce the company’s net profits after tax by AU $9.5 million for that financial year.45 It had previously written off the intangible asset in respect of the claim following the Full Court of the Federal Court’s decision to allow ANZ’s appeal. The previous day it had announced the loss of a separate case in the United States, causing it to write down its intangible assets by AU $1.5 million.46 12.77 Burford’s  2018 Annual Report shed light on some of the losses that litigation funders can suffer (as well as some of the ‘big wins’), discussed further below. In 2018, Burford reported the loss of two of its investments. The first was a dispute over the ownership of a foreign oilfield in which Burford lost US $3.7 million after a US court found it could not take jurisdiction over the case. The second loss disclosed was in a claim against a government which was unsuccessful and caused Burford a loss of its $10.4 million investment and the bankruptcy of the claimant. In October 2018, another litigation funder, Vannin Capital, withdrew its planned initial public offering. At the time it blamed a number of market factors for its decision not to float but a month earlier it had announced a US $6.6 million loss in an investor–State arbitration against Costa Rica.

RISK ASSESSMENT AND RISK MANAGEMENT 12.78 As the industry continues to develop, so does the sophistication of risk management employed by litigation funders. Many litigation funders manage 42 [2016] EWCA Civ 1144 at [29]. 43 Paciocco v Australia and New Zealand Banking Group Ltd [2016] HCA 28. 44 IMF Bentham 2020, Bank Fees Class Action. Available online: https://www.imf.com.au/cases/ detail/bank-fees-class-actions 45 IMF  Bentham (2016)  ANZ  Bank Fees Case – High Court Judgment [Australian Securities Exchange Release]. 27  July. Available online: https://www.imf.com.au/docs/default-source/ site-documents/anz-bank-fees-case---judgment 46 IMF Bentham (2016) USA Case 17 Update [Australian Securities Exchange Release]. 26 July. Available online: https://www.imf.com.au/docs/default-source/site-documents/usa-case-updat e129304010281659d9b61ff00006a85af

386

Risk assessment and risk management 12.82

legal merits risk by employing senior legal professionals, whose ability to identify strong cases has been honed through years of experience. Woodsford Litigation Funding, for example, is staffed by a number of senior lawyers across multiple disciplines. In addition, its Investment Advisory Panel comprises a formidable group of ex-judges, senior arbitrators and highly experienced litigators. 12.79 According to Burford Capital, in relation to risk management employed by the funder, in its investment portfolio, Burford: employs a disciplined, comprehensive, multi-stage process to evaluate potential investments and obtain the benefit of the judgment and experience of the Group’s highly qualified team of experienced lawyers and finance professionals. The Group also uses an internal, proprietary risk tool to assess risk during the investment process and regularly after the investment has been made, and engages in substantial portfolio management activities using a risk based approach.47

12.80 The risk assessment and risk management process of the funder starts with the selection of the investment. Funders carry out extensive due diligence to determine investment selection, ensuring that the risks of each investment are identified and considered. Funders will avoid funding claims where there is insufficient upside to warrant the investment in light of its risks. 12.81 When risks have been identified, litigation funders will employ a number of risk minimisation strategies which serve to spread the risk across multiple parties who in turn will stand to benefit from success in the litigation. If the risks identified cannot be mitigated to some extent, the investment may not be pursued.

Minimisation, mitigation and spreading of risk Co-funding and sub-funding 12.82 Co-funding or sub-funding allows funders to share the risk and return associated with a claim with another funder. This might be done in circumstances where the risk exposure is particularly high, because, for example, the claim value is significant, or there are a number of defendants involved and so adverse cost exposure is high. Either at the time of considering whether to invest, or after the funder has invested, the funder will put the opportunity out to a select number of trusted funding partners in the market to gauge their interest in co-funding or sub-funding the investment. Co-funding refers to the situation where all the funders are involved on an equal footing; each pays an equal proportion of costs as they arise. Sub-funding is where one funder sits below another funder and is able to assist with funding the claim if the first funder exhausts the limit of its funding for a particular case. 47 Burford Capital Finance LLC  (2018) Prospectus dated 23  January 2018. Available online: https://www.burfordcapital.com/media/1017/2018-prospectus-burford-capital-offeringcircular-usd-bond-final.pdf

387

12.83  High risk, high return

12.83 In some circumstances, co-funding may be agreed between funders to mitigate the risk that each funder poses to the other; if one funder’s action is not able to proceed because the other’s is preferred by claimants or the court hearing the claim. Deferring legal fees and imposing cost ‘caps’ 12.84 Litigation funders will often prefer that the law firm running the claim also put themselves at risk, by deferring a portion of their legal fees until successful resolution of the claim. This indicates to the funder that the law firm is confident in the merits of the claim and is willing to stand behind their belief. It also means that the overall funding commitment may be reduced and that the funder’s commitment is not exhausted as quickly as it otherwise might be if the lawyers were charging 100 per cent of their hourly rates. 12.85 Lawyers in different jurisdictions have different degrees of incentivisation to act on a conditional or contingent basis. For example, in the UK, lawyers are permitted to act on conditional fee agreements (CFAs) and damages-based agreements (DBAs). A CFA allows lawyers to defer their fees which are conditional on success. If the client is successful, the lawyer is entitled to payment of the conditional fees, plus a further uplift (up to a maximum of 100 per cent of the lawyers’ base rates). DBAs are similar to US contingency fee agreements, where if the case is successful, the lawyer’s fee is calculated as a percentage (capped at 50 per cent in commercial cases) of the financial benefit obtained. If unsuccessful, none of the deferred fees are payable. In Australia, on the other hand, while lawyers are permitted to act on CFAs, the maximum uplift allowed by way of success fee is 25 per cent. CFAs and DBAs are not permitted. This may soon be subject to change as a Bill has recently been proposed in Victoria to allow lawyers to charge CFAs.48 12.86 In addition, funders will sometimes insist that legal teams cap their costs overall and up to key stages of the litigation. For example, a funder might impose staggered caps on legal fees up until discovery, mediation, trial and appeals. These limits ensure that the claim remains on budget, and that legal team does not run up unnecessary fees. It also allows the funder to defer some of its duration risk, by only outlaying investments in staggered amounts, at times when more is known about the claim. The letter of engagement entered into between the litigation funder and lawyers may also contain provisions that if these caps are exhausted by the legal team, they will commit to acting in the matter up until resolution on a fully deferred and contingent basis. Insurance products 12.87 There are a number of insurance products available to litigation funders which assist them in managing the risks associated with litigation. 48 Justice Legislation Miscellaneous Amendments Bill 2019 (Vic).

388

Risk assessment and risk management 12.92

12.88 After-the-event insurance is discussed in detail in chapters  7 and 8, Part C. 12.89 Some insurers may offer capital protection insurance, meaning that litigation funders can insure a portion of the capital they have invested in the legal costs, although this is far less common than after-the-event insurance. There is also award default insurance which is a form of insurance that protects against enforcement and defendant insolvency risks. In the event that a claimant is successful at trial or arbitration, and the defendant is ordered to pay an award but cannot or will not, award monetisation insurance will pay out a portion of that award. Diversification of portfolio 12.90 In his book Against the Gods: the remarkable story of risk, Peter Bernstein notes the importance of diversification risk mitigation in economies. He points out that: [i]f we had no liquid capital markets that enable savers to diversify their risks, if investors were limited to owning just one stock (as they were in the early days of capitalism), the great innovative enterprises that define our age – companies like Microsoft, Merck, DuPont, Alcoa, Boeing and McDonald’s – might never have come into being. The capacity to manage risk, and with it the appetite to take risk and make forward-looking choices, are key elements of the energy that drive the economic system forward.49

12.91 Diversification of a portfolio is an important tool to mitigate the risks associated with any asset, and the litigation funding industry is no different. IMF Bentham, in its Annual Report, states that one way of tempering its exposure is by ‘consciously diversifying [its] portfolio’ which involves ‘varying the types of cases in which [it] invests; the jurisdiction in which [it operates] and expanding the size of [its] total global portfolio.’50 12.92 As previously discussed in this chapter, there are a number of different types of concentration risks which should be identified and avoided in the litigation funding industry. Over-investing in any particular type of claim, jurisdiction, law firm or co-funder may expose a funder’s capital to an increased vulnerability in relation to regulatory or other changes. Take the example at para 12.20 above of the Australian High Court ruling that CFOs should not be permitted. While it is difficult at the time of writing to appreciate the full impact of the decision moving forward, some lawyers envisage that claimant lawyers and litigation funders will need to build books of claimants to ensure that the

49 Bernstein (2012) Against the Gods: the remarkable story of risk (revised ed.) John Wiley & Sons, Inc. 50 IMF  Bentham (2019) Annual Report 2019. Available online: https://www.imf.com.au/ InvestorPresentations/imf-bentham-limited-annual-report-2019/

389

12.93  High risk, high return

litigation funder has direct contractual entitlements with class members.51 In any event, book-building would seem to be at least a prudent measure for a funder to take following the High Court’s decision until the impact of the decision can be fully appreciated. So, what then of funders who had invested significantly in class actions, where book-building will be difficult, relying on the CFO in place to charge its funding commission across the class? They may now be faced with a situation whereby a number of the claims in their portfolio are weighted heavily towards investments where the true cost of bringing the claim was not accurately represented at the start of the investment and the costs of the book-build might make certain investments uneconomical. Portfolio funding of law firm 12.93 Law firm portfolio funding is a way of spreading the risk of any one claim across a number of different claims a law firm might be acting in. It involves a litigation funder paying an amount to a law firm which can be used to fund different matters as and when the law firm sees fit, subject to conditions agreed with the funder. The law firm received the funder’s investment, and then services it similarly to a loan, where if recovery is made in any of the claims within the portfolio, the law firm repays the funder’s investment and a return from those proceeds. This means that not all of the claims the funder has invested in, through the portfolio, need to be successful in order to generate a return to the funder. Control and conduct 12.94 The litigation funding agreement (LFA), entered into between a claimant and the litigation funder is one of the primary tools available to a litigation funder in order to minimise the risk of an investment. The litigation funder’s obligations to the claimant and its rights in respect of the claimant’s claim, originate from the LFA. In different jurisdictions, there are different rules as to the amount of control a litigation funder can exert over a claim it is funding.52

HIGH REWARDS Pricing the risk 12.95 Generally speaking, from a litigation funder’s perspective, pricing should align all the stakeholders’ interests, while also giving the funder a good return. Thus, pricing of terms should incentivise claim-holders and law firms to run the claim expeditiously and as efficiently as possible, accept good settlement 51 Pembroke-Birss and Brighton High Court delivers major setback for litigation funding. Norton Rose Fulbright. Available online: https://www.nortonrosefulbright.com/en-au/knowledge/ publications/51161d21/high-court-delivers-major-setback-for-litigation-funding 52 This is discussed in further detail in chapters 2 and 3.

390

High rewards 12.100

offers if they are made, and discourage parties from taking the matter to trial chasing a higher return, when they themselves might not be exposed to the same degree of risk as the funder. 12.96 Funders in order to align law firms’ interests with their own, will often put caps in place, limiting the amount of capital disbursed against various litigation phases. This is an important tool in protecting a funder’s interests, as if, for example, a law firm were to take a large uncapped amount of funding prior to trial, the firm may not be incentivised to promote settlement, as they may have hit their break-even margin and thus could ‘roll the dice’ and attempt to achieve a windfall at trial. In this situation, the funder’s interests are not aligned with the law firm, because the funder would also be rolling the dice, but in circumstances where it will either achieve a win or a total loss of capital. 12.97 In addition, many funders aim to ensure that claim-holders will receive a substantial part of the net proceeds of the litigation. It is not in the funder’s interests, or in the interests of access to justice, to run cases where the claimant will not achieve a decent return. Aside from the public scrutiny that may come with such endeavours, it also aligns the claim-holders’ interest with the funder, in that a claimant would not be pushing for higher settlement offers or be incentivised to go to trial jut to achieve enough profit after paying the funder’s commission or success fee. 12.98 Subject to the pricing factors listed below, funders will adopt different models to calculate their success fees. These models include, the ‘higher of’ model to calculate its success fee, where the funder will take the higher of: (a) a minimum fee (usually calculated as a percentage of contributions), (b) a multiple of the funder’s contributions, or (c) a percentage of proceeds obtained in the litigation. Other models include the ‘lesser of’ model, which might be implemented if the funder is of the view the claim is strong, and as the ‘lesser of’ model would head off competition in the market to fund the claim. In other circumstances, a funder might simply charge a multiple of its outlay or a percentage of the proceeds. 12.99 Broadly speaking, there are a number of factors that impact pricing and the terms agreed by a litigation funder are often case-specific. These factors include the market (ie  what is appropriate pricing in the market and what will make the litigation funding terms competitive, by reference to what other litigation funders are offering for similar types of claims?); certainty of assumptions in relation to type of case (ie what historical data or other indicators are there which give the funder a degree of comfort relating to the likely claim value, duration, settlement prospects, claimant-side costs and cost exposure?); case-specific features (ie what are the features about the case which position it on the continuum of risk the funder is willing to fund?); and targets (ie what return on invested capital (ROIC) and internal rate of return (IRR) are the funder aiming to achieve across its entire portfolio?). 12.100 The market factors that influence pricing are largely outside the ambit of this chapter. Pricing with reference to the market is, however, relevant to risk 391

12.101  High risk, high return

for two reasons. Firstly, a funder that does not consider the market in its pricing risks being priced out of the market. Conversely, if a funder thinks there may be little competition in the market because certain risk factors of the case would put the claim outside the risk profile of other funders, it may offer terms which are more favourable. This also recognises the additional risk the funder is assuming, by agreeing to fund what might be considered a riskier case. Secondly, if a funder is too competitive with its pricing, in light of the market, they risk over-exposing themselves and agreeing to unfavourable terms which do not fully reflect the risks of the investment. 12.101 Pricing should reflect and, where possible, mitigate the risks associated with claims in light of the certainty of assumptions within a type of claim, as well as case-specific features of claims. Uncertainty and lengthy investment terms will often be accounted for in a funding agreement, by increasing the return depending on the stage of the proceedings the claim resolves. For example, the funding agreement might stipulate that the funder is entitled to a return of 2x its investment if the claim resolves within two years and 3x its investment if the claim resolves at a stage after two years has expired. The longer the duration, the higher the risk, the higher the return. 12.102 In order to mitigate legal team risk, as discussed above at paras 12.84– 12.85, terms put forward by funders will often contemplate a law firm carrying or deferring some of its fee until a successful resolution. This aligns the law firm’s risk exposure more closely with that of the funder’s and also gives the funder confidence that the law firm believes in the merits of the claim as they have ‘skin in the game’. In relation to defendant insolvency risk, litigation funders will usually insist on being paid out of the proceeds as the first priority, meaning that any shortfall in recovery may be borne by the other stakeholders. Adverse costs insurance can be taken out to minimise the litigation funder’s risk and the price of this should be included as recoverable as part of the funder’s cash outlay. A funder should also pay careful consideration to whether the costs of adverse costs insurance might be recoverable from the defendant53 or whether a court exercising supervisory functions over the litigation and or funding terms might form the view that the costs associated with adverse costs insurance should not be recoverable from the claimant.

Risk as justification for return – judicial commentary 12.103 In Australia, a high degree of oversight is exercised by courts hearing class actions and the courts are given extensive case management powers. Court approval is required for all proposed settlements of class actions in Australia and applications at interlocutory stages have often considered the reasonableness of a litigation funder’s commission. As such, judicial commentary in this jurisdiction

53 See Essar Oilfields Services Limited v Norscot Rig Management PVT  Limited [2016] EWHC 2361 (Comm).

392

High rewards 12.107

often explores the risks that a funder may face in bringing an action, as well as what the court considers are reasonable and appropriate returns as justifications for the assumption of those risks. 12.104 The Australian Federal Court Class Action Practice Note provides that when applying for court approval of a settlement, the parties will be required to persuade the court that the proposed settlement is fair and reasonable having regard to the claims made on behalf of the class members who will be bound by the settlement.54 The Practice Note goes on to say that: in an open class action, the parties, class members, litigation funders and lawyers may expect that unless a judge indicates to the contrary the Court will, if application is made and if in all the circumstances it is fair, just, equitable and in accordance with principle, make an appropriately framed order to prevent unjust enrichment and equitably and fairly to distribute the burden of reasonable legal costs, fees and other expenses, including reasonable litigation funding charges or commission, amongst all persons who have benefited from the action.55

12.105 An application for court approval should address, among other things, the complexity and likely duration of the litigation; the risks of establishing liability; the risks of establishing loss or damage; the risks of maintaining a class action; the ability of the respondent to withstand a greater judgment; and the range of reasonableness of the settlement in light of all the attendant risks of litigation.56 12.106 In approving settlements or considering a litigation funder’s commission at an interlocutory stage, courts will often cite the funding reasonableness of a commission as fair consideration for the risk the funder has undertaken in bringing the claim on behalf of the class members.57 Not only is the funder being adequately reimbursed for the significant risk it has taken, but it is the nature of the bargain that the plaintiff or claimant is paying for the absolution of any risk that they may have faced in bringing the claim.58 12.107 In England and Wales, in the landmark decision of the High Court in Oilfields Services Limited v Norscot Rig Management PVT Limited,59 the court also considered the reasonableness of the funder’s return. The High Court decision concerned an application made by Essar to set aside an award made in an arbitration between it and Norscot, in which the arbitrator found that Essar should be liable to pay Norscot’s costs, including the costs Norscot was liable 54 55 56 57

(2019) cl 15.3(a). Ibid. cl. 15.4. Ibid. cl. 15.5. See, for example, Money Max Int Pty Limited (Trustee) v QBE  Insurance Group Limited [2018] FCA 1030; Botsman v Bolitho [2018] VSCA 278; Liverpool City Council v McGrawHill Financial, Inc (now known as S&P Global Inc) [2018] FCA 1289; Clarke v Sandhurst Trustees Limited (No 2) [2018] FCA 511. 58 See, for example, Dorajay Pty Limited v Aristocrat Leisure Limited [2005] FCA 1483 [77]. 59 [2016] EWHC 2361 (Comm).

393

12.108  High risk, high return

to pay the litigation funder, Woodsford Litigation Funding. The sole arbitrator deemed Essar, having deliberately put Norscot in a position where it could not fund the arbitration on its own, should pay the reasonable costs of obtaining litigation funding from the funder and that it was reasonable for it to obtain litigation funding from Woodsford on the terms that it did. The High Court upheld the decision of the sole arbitrator. In determining whether the funding terms entered into between Woodsford and Norscot were reasonable, the arbitrator heard expert evidence from a litigation funding market participant and deemed that the sums payable were appropriate. 12.108 More recently in England, the appropriateness of funding returns has garnered some commentary in the claims being heard in the CAT. In Walter Hugh Merricks v Mastercard Incorporated & Others,60 an argument was put forward by the proposed defendants that the tribunal was not in a position to determine whether the price for litigation funding obtained by the proposed class representative in that case was appropriate. Citing the Essar case, the tribunal disagreed, finding: ‘as for the supposed difficulty of the lack of expertise of the Tribunal in deciding what is an appropriate price for litigation funding, on which Mr Williams sought to rely, that is no less novel a task than the process of approving a collective settlement under sects 49A or 49B CA. There is now a developing market in litigation funding, and the Tribunal can, if necessary, hear evidence as to what would represent an appropriate return. We note that this appears to be what Sir Philip Otton did as the arbitrator faced with such a question in the Essar Oilfields case.

BIG WINS 12.109 Despite the risks outlined in this chapter, the litigation funding industry has been extremely profitable for some of the experienced players. The increasing competition within the industry reflects this. According to Burford Capital’s concluded investment performance table, maintained on its website, since 2009 it has invested US $585.9 million and has recovered US $1.16 billion, representing an ROIC of 98 per cent and an IRR of 32 per cent. IMF Bentham, the Australianbased funder, has achieved total recoveries of AU $2.4 billion with a success rate of 89 per cent and ROIC of 134 per cent. 12.110 IMF funded one of the Centro Properties class actions, which settled in 2012 and at the time was Australia’s largest class action settlement. Two class actions were brought against Centro Properties by shareholders alleging that the company breached its continuous disclosure obligations and did not inform the market of relevant matters in relation to its debt obligations. IMF Bentham funded the class action which was pursued by Maurice Blackburn on behalf of institutional shareholders. The other class action was pursued by Slater &

60 [2017] CAT 16.

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Big wins 12.113

Gordon on behalf of retail investors. The IMF-backed claimants settled for AU $150 million. Following the settlement, IMF informed the market it expected to generate revenue of around AU $60 million from the settlement and an overall profit before tax of AU $42 million. 12.111 Burford has had particular success in selling portions of entitlements to claims it has funded. In late 2016 and early 2017 Burford sold a 25 per cent portion of its entitlement in a claim on behalf of Petersen Energia Inversora and Petersen Energia against the Republic of Argentina (commonly referred to as the Petersen claim) for US $106 million. Petersen was a major shareholder in YPF, an Argentinian energy company which was nationalised by the Argentinian Government without compensation for shareholders. Petersen went bankrupt as a result and claimed damages against YPF and Argentina alleging that they breached obligations under YPF’s by-laws to buy out shareholders when it was renationalised by Argentina expropriating a majority of its shares. At the time of selling its 25 per cent interest in the Petersen claim, Burford’s total investment amounted to $17 million. Later, Burford sold a further 10 per cent of its interest in the claim for a further $100 million. The claim has not been resolved, yet Burford has made a huge return on its investment by selling interests in it. 12.112 In a similar story, in 2017 Burford also announced the sale of it its investment in another claim where investors Teinver, Transportes de Cercanías and Autobuses Urbanos del Sur went bankrupt following the expropriation of two major Argentinian airlines by the Argentinian Government. In the Teinver case, an arbitration which arose following the expropriation of two major Argentinian airlines by Argentina’s Government, Burford invested approximately US $13 million and the claimants obtained an arbitral award in excess of US $325 million. Burford’s entitlement in the award was more than $100 million. They sold this entitlement for US $107 million, which represented a $94.2 million investment gain and a 736 per cent return on its invested capital.61 In 2018, Burford also reported a return of US $30.1 million from the resolution of a claim which involved multiple arbitrations. The total investment in that claim was US $5.4 million. 12.113 While not enormous in the size of award, compared with some of those mentioned above, the case of Essar v Norscot62 provided an example of an almost perfect ‘win’ as between claimant and funder. In this arbitration, not only was the claimant successful in recovering damages, but in a first, the arbitrator also awarded the claimant costs on an indemnity basis and the amount of £1.94 million which Norscot owed to the funder, Woodsford, pursuant to the funding agreement it had entered into. Woodsford had provided funding in the amount of £674,000. The arbitrator found that such litigation funding costs were ‘other costs’ for the purposes of s 59(1)(c) of the Arbitration Act 1996 and therefore recoverable from Essar. The decision was upheld by the English Commercial Court to allow the successful claimant to recover its third-party litigation funding costs. 61 Burford Capital Finance LLC (2017) Burford Annual Report 2017. Available online: https:// www.burfordcapital.com/media/1528/bur-28711-annual-report-2017-web.pdf 62 [2016] EWHC 2361 (Comm).

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12.114  High risk, high return

CONCLUSION 12.114 As is evident from the above, the litigation funding industry contends with a plethora of risks; some unique to the industry, and others common across other types of investment. There are those risks that can be mitigated and managed, and others which are more difficult to negate. 12.115 There are also risks to litigation funding assets that could not possibly be conceived at the time of investment. To quote a phrase made famous by former US Secretary of Defence, Donald Rumsfeld, there are known knowns, known unknowns and unknown unknowns. Within a litigation investment, there will be information that is known, such as the current balance sheet of a defendant. There will be information that a funder knows is unknown, such as how that defendant’s balance sheet will be impacted by market conditions in the years ahead when the funded claimant may obtain a judgment which the defendant is required to satisfy. Then there will the unknown unknowns; things inconceivable at the time a decision is made to invest in a claim that materialise and render the investment unrecoverable for a reason unforeseen. 12.116 A  litigation funder’s decision to invest in a claim is based on a determination made at an early stage of the investment lifecycle as to the veracity of the current known knowns, the likelihood of known unknowns arising, and the acceptance that unknown unknowns may materialise. Sizeable returns are available to those in the market who identify the risks that are known unknowns and that manage and mitigated those risks. As the industry develops, the more unknown risks become known, and accordingly can be considered and managed. As the saying goes, the safest way to double your money is to fold it in your pocket. Litigation funding is not an investment for those who lack the appetite for risk.

396

CHAPTER 13

Tax Jared Wade Partner, Vault Group LLP

Walter Mansfield Partner, Vault Group LLP

David Tran Tax Director, BDO UK LLP

John Middlemass Tax Manager, BDO UK LLP

The devil is in the detail UK tax considerations US tax considerations

13.3 13.8 13.63

13.1 Tax can be an afterthought in the process of entering litigation proceedings and arranging litigation funding, with all parties focused on working towards a successful case outcome and receiving their share of the eventual compensation or damages. However, the wide-ranging tax rules can be complex, and their interpretation and application can result in unexpected tax consequences, such as a lower net return than originally forecast upon entering the litigation funding arrangement and also possibly having to pay tax before the conclusion of the case. 13.2 The relative newness of the litigation finance industry relative to other more familiar and well-established commercial areas produces a wide gap between experience and theory. This chapter will help bridge that gap and seeks to give a flavour of the key tax themes from a UK and US tax perspective with potential pitfalls to watch out for.

397

13.3  Tax

THE DEVIL IS IN THE DETAIL 13.3 Each funding agreement is based on a unique and very specific set of facts and details. As such, there is no one-size-fits-all approach to funding arrangements, so careful analysis and drafting of the agreement is key.1 13.4 Funding agreements may provide for a regular return on the funding, akin to interest payments, but most will take a speculative approach with income realised based on the success of the underlying case. Regardless of the form of the funding agreement, managing UK and US tax considerations must be a focal point from the start. 13.5 A  particular area of debate or uncertainty in the taxation of litigation funding is often how to characterise the nature of the agreement in order to apply the established UK and US tax principles, which are generally applied to the provision of services, or are related to debt and equity instruments. 13.6

• • •

These principles will often dictate: What is the nature of the return (income or capital)? How is the return taxed, and at what rates? When is the return taxable?

Key tax themes 13.7 Considerations What is the character of the funding for tax purposes? What is the nature of the return? When is the return taxable? Cross-border agreements – will there be tax leakage in other jurisdictions?

Funder ✓

Claimant Legal advisers ✓ ✗

✓ ✓ ✓

✓ ✓ Possibly

✓ ✓ ✗

✓ = should be taken into consideration as part of the decision to enter into litigation funding agreements

UK TAX CONSIDERATIONS 13.8 This section of the chapter focuses on the UK tax considerations for UK litigation funding arrangements that involve one or more of: 1

See further at chapter 6.

398

UK tax considerations 13.15

• • •

a corporate UK litigation funder; a UK claimant receiving external funding for litigation; or a UK law firm involved in the litigation.

13.9 Firstly, it should be pointed out that litigation funding is a relatively new concept in the UK tax landscape and there is no specific UK tax legislation, guidance or established case law. 13.10 There could be additional complexity where there are cross-border litigation funding arrangements, either outbound funding from the UK funder or UK claimants receiving funding from abroad. This book does not attempt to give details of all of the international tax aspects of litigation funding. 13.11 Ultimately, the tax consequences for each party will depend on the legal construct and drafting of the litigation funding agreement (LFA) and the arrangements between all parties, and each case could be different. 13.12 The following sections give an overview of the key UK tax themes and points to consider before entering into a litigation funding arrangement, in the eyes of each of the above parties.

UK litigation-funding companies 13.13 UK litigation-funding companies that provide funding to UK and overseas claimants will need to consider how they provide their funding to manage their UK and overseas tax exposure. The form in which the funding is provided can have a significant impact on how the litigation funding company is subject to tax in the UK and overseas. Character of the funding and nature of the return 13.14 Broadly, litigation funding in the UK takes the form of either debt, equity or a combination of both. The legal form of the funding and expected classification for tax purposes will be dictated by the terms of the LFA that the UK litigation funding company enters into with the claimant. The character of the funding is important, as there are specific UK tax rules that apply to debt instruments, which dictate the treatment of the returns and the timing of UK taxation. 13.15 It should be noted that litigation funding is a relatively new concept in the UK tax landscape and therefore there is limited guidance on how the funding should be treated for UK tax purposes. The UK tax principles are fairly simple in this regard and generally apply to an instrument that is either:

• •

a loan where the repayment could be contingent; or an instrument that represents an ‘equity’ interest in the issuer. 399

13.16  Tax

13.16 The uncertainty here is that the overall arrangement has both the characteristics of a financing arrangement between funder and claimant – one provides money now in the expectation of receiving it back, plus a return, at the end of the litigation case – but also the return is usually a zero-sum outcome for the funder – they either receive a return if the claimant is successful or they get nothing back, akin to an ‘equity’ stake. 13.17 The general characteristic of a debt is that the creditor will, at some stage, be repaid even if the amount repayable is unascertainable. However, an instrument that returns an unascertainable sum, which only becomes payable on the occurrence of a particular event (ie a truly contingent amount) should not be considered a ‘debt’, but instead should be a ‘chose in action’ – capital asset.2 13.18 Guidance from the UK tax authority, HMRC, refers to assessing whether there are ‘marks’ of a loan, based on case law. For example:

• • • • •

Is there a ‘firm or unqualified obligation to repay’? Is it evidenced by a debt instrument? Does it carry interest? Does it have preferential ranking over share capital in a liquidation? and Is it ‘an ordinary mercantile transaction by way of loan’?

13.19 Where the LFA includes words such as ‘credit’, ‘advance’ and ‘loan’, terms such as the funding being repayable irrespective of whether the case is successful, and references to interest, the funding is likely to be seen as a debt instrument by HMRC. Alternatively, where it can be evidenced that the funding is non-recourse and the potential returns on the instrument do not represent a time value of money, it is likely that the funding is more akin to an equity-like participation in the underlying litigation claim. In this case, the funder should hold some form of an intangible capital asset, being a right to a share of the claimant’s future proceeds from the litigation. 13.20 The nature of the litigation funding also has an impact on indirect taxes such as UK value added tax (VAT). The starting position is that any supply is likely to be subject to UK VAT unless there is a specific exemption. One such exemption relates to the provision of credit. However, the nature of the funding may not be seen as credit in the ordinary sense. Again, similar to the direct tax position, this is a relatively untested area and the nature of the arrangement between funder and claimant is not formally identified in UK VAT law or HMRC guidance and will depend on the contractual terms. 13.21 Funders that are involved in cross-border arrangements have additional considerations on the characteristics of the LFA. While the funding may be 2

Marren v Ingles 54 TC 76.

400

UK tax considerations 13.26

treated in a certain way in the UK, it may be treated differently in the jurisdiction where the claimant resides. The definitions of debt and equity vary between jurisdictions and therefore it is important that the LFA is reviewed on a case-bycase basis to confirm how the funding should be treated for tax purposes in each jurisdiction. How the funding is treated by the overseas jurisdiction can also have an impact on whether there are any overseas indirect taxes such as goods and services tax (GST), and so this should always be looked at in conjunction with the direct tax position. Timing of taxation 13.22 Once the nature of the funding and the return is established, the next consideration is the timing of any UK tax on the potential returns. While funders would expect to be subject to UK tax once they receive their return from a successful outcome, this may not necessarily be the case. The timing of UK tax will be primarily be driven by:

•

the accounting treatment and amounts recognised in the financial statements; and

•

whether the funder is treated as trading for UK tax purposes.

Accounting 13.23 The starting point to ascertain what is subject to UK corporation tax in a given period is generally to follow the accounting profit recognised in the financial statements. 13.24 UK litigation funding companies may be required to fair value their underlying book of litigation claims they have funded and recognise unrealised gains and losses when preparing their financial statements. Any unrealised gains and losses will be calculated based on an assessment of how likely it is that the underlying litigation claims will result in a successful outcome, and this will generally be a matter for senior management in the company to evaluate and conclude on. Whether or not these unrealised gains and losses are taxable will be dependent on the character of the funding and if the UK litigation funding company is treated as a trading company or an investment company. 13.25 If the funding is treated as a debt instrument by the UK tax authorities, the UK litigation funding company will be required to bring any unrealised gains and losses into their taxable income for the period irrespective of whether they are a trading company or an investment company. In essence, the returns will be taxable based on the accounting income recognised. 13.26 On the other hand, if the funding is treated as more akin to an equitylike participation by the UK tax authorities and the funder’s share in the right of action is some form of intangible asset, whether or not the UK litigation funding company is required to bring any unrealised gain or losses into their taxable 401

13.27  Tax

income for the period will be dependent on whether the company is considered a trading company or an investment company. Trading v investment 13.27 Where the funding is treated as akin to an equity-like participation and the UK litigation funding company is deemed to be carrying on a trade of the provision of funding for UK tax purposes, it will be subject to UK corporation tax on any fair value movements that go through the profit and loss in the financial statements (ie based on the accounting income). However, if the UK litigation funding company is seen as an investment company, any unrealised gains and losses will not be subject to tax until the claim is resolved and the funder receives its return (ie on a realisation basis). As such, there is a potential cash flow issue if the company is considered to be trading as it could be subject to tax before the income is received (a ‘dry tax charge’). 13.28 There is no statutory definition of ‘trading’ in the UK tax legislation and therefore the matter is determined by reference to the activities of the company and its staff and by applying the principles established in various cases that have been decided in the UK courts. Relevant factors have been identified in the UK courts which are collectively known as the ‘badges of trade’.3 The key badges of trade that are generally more applicable to UK litigation funding companies are profit motive, length of ownership, frequency of transactions, reason for sale and the method of finance. Another factor that would be considered is whether it is an integral part of the business operations to employ capital to produce such income from the LFAs, akin to a bank or similar financing vehicle. For example, this could include a company that employs a large number of staff to undertake origination, ongoing monitoring and active project management of litigation cases, in addition to the actual provision of the funding. This fact pattern would be indicative of a trade. 13.29 It is important that a UK litigation funding company undertakes a detailed review of its activities and the badges of trade when preparing its tax computation to ensure that it brings the correct amounts in when calculating its taxable profits for any given period. 13.30 If the litigation funding company is not considered to be a trading company and the LFAs are capital assets, the returns should be subject to UK corporation tax as chargeable gains. Unsuccessful case outcomes 13.31 In the majority of litigation funding cases, where the underlying case is unsuccessful, it is likely that the UK litigation funding company will not be entitled to receive anything from the claimant. As a result, the UK litigation 3

The ‘badges’ were summarised in Marson v Morton and Others [1986] 59 TC 381.

402

UK tax considerations 13.37

funding company is expected to make a loss in relation to the underlying case. The categorisation and tax treatment of the loss will be dependent on the character of the funding and whether the company is a trading company or not. 13.32 Funders should be aware that the utilisation of certain tax losses are more restrictive than others. For example, capital losses can only be utilised against current or future capital gains of the company. This could cause a tax mismatch between the net accounting profits and losses recognised; for example, if the litigation funder receives other income. Cross-border LFAs – will there be tax leakage in other jurisdictions? 13.33 Even if the expected UK tax has been considered and modelled, the funder’s effective return may be reduced further by foreign tax in relation to the LFA. This is a complex area and detailed tax advice will need to be sought. Generally, the foreign tax considerations revolve around:

•

whether the funder will be subject to tax in the foreign territory based on the nature of the funding and activities; and

•

whether the payer will be required to withhold local tax on the return due to the funder.

Source risk 13.34 Certain jurisdictions impose tax on a territorial basis and may seek to tax the LFA returns on the basis that the returns are considered to be sourced from that jurisdiction. Where this is the case, the funder would be subject to tax in that overseas jurisdiction at the prevailing tax rate. 13.35 Whether the returns have an overseas source will vary between jurisdictions and will largely be based on the domestic tax rules and case law. These rules are wider than the UK source concept, which is generally limited to trading activities in the UK or interest on loans, and other annual recurring payments. Examples of jurisdictions which have a potential local source risk include Australia, Spain and the United States. 13.36 However, where the UK has a double tax treaty with the overseas jurisdiction which provides that the ‘business profits’ of the UK litigation funding company would only be taxable in the overseas jurisdiction if the company carries on a business in the overseas territory through a permanent establishment situated in the overseas jurisdiction, the UK should retain taxing rights. Therefore, the returns should not be subject to tax in the overseas jurisdiction, irrespective of whether or not the returns have an overseas source. 13.37 As a result, it is important that the corporate governance and operations of the UK litigation funding company is monitored to assess whether the company 403

13.38  Tax

could create a permanent establishment in the overseas jurisdiction where the claimant is based. Permanent establishments 13.38 Whether or not the UK litigation funding company has a permanent establishment in an overseas jurisdiction will be dependent on the definition of a permanent establishment in that overseas jurisdiction. Broadly, the term permanent establishment in most jurisdictions includes:

• • • •

a place of management; a branch; an office; and a ‘dependent agent’, ie a person acting on behalf of an enterprise who has and habitually exercises an authority to conclude contracts that are binding on the enterprise in the overseas jurisdiction.

13.39 It will be important for the UK litigation funding company to assess whether or not it has a permanent establishment in an overseas jurisdiction as it may have tax filing requirements in that jurisdiction if it does. 13.40 Where the UK litigation funding company has a permanent establishment in the overseas jurisdiction, it should be noted that it may be able to claim double tax relief to reduce the overall tax cost. Withholding tax 13.41 Foreign tax may also be suffered on the funder’s returns if the payments made by the claimant to the UK litigation funding company will be subject to withholding tax in the jurisdiction where the claimant resides. This will be dependent on how the funding is treated for tax purposes in the jurisdiction, the domestic tax rules applicable in the jurisdiction and whether the UK has a double tax treaty with the jurisdiction that the UK litigation funding company is able to benefit from. 13.42 The withholding tax rules vary considerably from jurisdiction to jurisdiction. For example, one jurisdiction may withhold tax on dividends but not interest, and another jurisdiction (such as the UK) may withhold tax on interest but not dividends. As a result, it is important that the LFA is reviewed on a caseby-case basis to confirm how the funding should be treated for tax purposes in the jurisdiction where the claimant is resident. 13.43 Once it has been established how the funding should be treated in the claimant’s jurisdiction, the domestic tax rules of the jurisdiction should be reviewed to confirm whether there is a requirement to withhold tax on the returns to the UK litigation funding company. If there is an obligation to withhold tax on 404

UK tax considerations 13.48

the return under domestic tax law, there may be a tax treaty between the UK and the claimant’s jurisdiction that reduces this withholding tax to a lower rate or nil. 13.44 Where withholding tax is required to be withheld on the return payable to the UK litigation funding company, the company may be able to claim double tax relief to reduce the overall tax leakage.

UK claimants (receipt of litigation funding) 13.45 The UK tax position for UK claimants in relation to their award from the litigation proceedings and the receipt of litigation funding depends on a number of factors, including:

• •

the nature of the litigation dispute;

•

how the funding provided by the litigation funder is viewed by the UK tax authorities (ie debt or equity).

whether the UK claimant is a UK incorporated and tax-resident company (a ‘UK corporation’) or a UK tax-resident individual (a ‘UK individual’);

Nature of return Resolution of the underlying claim 13.46 The key factor to consider is whether the award is income or capital, which will impact how the return is subject to UK tax, the rate of tax and timing of tax payments. 13.47 Whether the damages are income or capital is complex and derived from case law principles, but a general rule of thumb is to answer the question: is the award ‘filling a hole’? If the claimant is receiving compensation or damages that replaces something that would be subject to tax as income, then the award is also likely to be income in nature. However, if the right of action relates to a loss or disadvantage in connection with property which is a ‘capital gains’ asset, then the capital sum should be treated as derived from the underlying asset and subject to capital gains tax. This is confirmed in HMRC’s published extrastatutory concession, ESC D33,4 which gives their view of the tax treatment of capital sums in relation to a right of action. It should be noted that the courts have decided that the right of action is itself considered a capital asset. However, the concession states that it is the underlying property that should be assessed. 13.48 There can be uncertainty on the tax position for the claimant where there is no underlying asset, such as in relation to private or domestic matters or misleading professional advice. In relation to the scenario where there is no 4

The Government commenced a consultation process in relation to legislating the principles outlined in ESC D33 in 2015, but no additional legislation has been introduced to date.

405

13.49  Tax

underlying asset, ESC D33 states that up to £500,000 of the award could be taxfree (from 27 January 2014) by concession, with the remainder taxable, subject to making a claim and getting HMRC’s view on whether the whole sum could be tax-free. This would be determined by HMRC on a case-by-case basis. UK corporations

13.49 On a successful resolution of the underlying case, a UK company is likely to be required to bring into account the amount it receives in relation to the underlying claim for tax purposes if the action is business-related or relates to capital assets held by the corporation. However, the distinction is less relevant here as both profits and capital gains are taxed at the same rate of corporation tax. UK individuals

13.50 UK individuals may be taxed on the return they receive. The expected tax liability on the return is dependent on whether the return they receive is received in the ordinary course of their business (likely to be subject to income tax), the underlying matter relates to capital assets (subject to capital gains tax), or it is a ‘private’ matter (potentially tax-free up to a certain threshold). 13.51 It is worth noting that, if part of the compensation paid is made up of interest, it is important to understand whether the interest is actually interest or damages. Where part of the payment is made up of a genuine interest, the interest element will still be subject to income tax irrespective of whether the compensation is paid in the ordinary course of business or it is in relation to some other underlying asset or matter. Treatment of litigation funding 13.52 The treatment of the litigation funding may impact the net amount of the claimant’s award that is subject to tax. UK corporations

13.53 For a UK corporation claimant, again the accounting treatment (how the funding is recognised), and the nature of the LFA for tax purposes will be important. 13.54 In particular, if the funding is viewed as a debt instrument, then any interest on the funding liability that accrues through the UK corporation’s profit and loss account will be subject to various UK interest deductibility rules that can impact on the timing of a deduction (eg late-paid interest rules and corporate interest restriction), or the absolute deduction that is available to the UK corporation (eg  deemed distribution rules, hybrid and other mismatches rules and transfer pricing). 406

UK tax considerations 13.60

UK individuals

13.55 For UK individual claimants, the treatment of the funding can give rise to an abnormal tax result compared with the economic split of the award between the parties. This is because the UK income tax rules only allow limited tax deductions for individual taxpayers. As the LFA is a separate arrangement to the right of action, it is possible that the claimant is subject to tax on their entitlement to the gross award from the litigation, with no tax deduction for payments made to the litigation funder (or legal costs). The basic UK tax principles on tax-deductible costs need to be followed and there is little guidance from HMRC on this result. Therefore, claimants should consult with professional advisers before entering into an LFA. Timing of taxation 13.56 In the base case, the claimant should be subject to tax in the tax year or period in which the award from the litigation is payable. 13.57 However, this is not always the case. A  prior taxable event could potentially crystallise if entering into the LFA is treated as a part sale of the claimant’s right of action, which could accelerate the tax liabilities. Ultimately, whether the right of action is a separate asset in the hands of the claimant taxpayer will be based on the facts and circumstances. In the case of UK corporations, the accounting treatment of the litigation and the funding will also be an important, but not determinative, factor.

UK law firms 13.58 In the UK, the majority of law firms are structured as limited liability partnerships (LLPs) and therefore the tax analysis in this section covers the tax implications of UK law firms that are structured that way. Due to LLPs’ taxtransparent nature, any taxation occurs at the level of the partners as opposed to at the level of the LLP. Nature of return 13.59 The tax position for the legal adviser’s return in the arrangements is relatively simple compared with the claimant and the litigation funder. The majority of the funding provided to claimants by litigation funders will be used by claimants to pay legal fees charged by the law firm who is running the underlying claim. In addition to the standard legal fees charged by law firms, the engagement contract could stipulate an ‘uplift fee’ if the underlying claim is successful. The law firm’s returns should form part of its trading income. Timing of taxation 13.60 The timing of when the income is recognised by a law firm dictates when the partners will be subject to tax. The recognition of income will be dependent on the accounting standards the law firm adopts. 407

13.61  Tax

13.61 Generally, UK law firms will be required to bring in fees for running claims and uplift fees that have been accrued in their financial statements when calculating their taxable profits for any given period. The partners of a law firm will then be required to bring into account their share of the LLP’s taxable profits when preparing their tax return and these taxable profits will be subject to taxation depending on their personal circumstances. 13.62 However, there may be situations where law firms are required to recognise fees for running claims and uplift fees before they have received payment for the work they have performed. As a result, the partners of a law firm may be required to declare profits on their tax returns for which they have not yet received cash payment; a ‘dry tax charge’. In extreme situations, law firms could be required to account for fees which will not be paid until resolution of the underlying case, and therefore the timing difference between when the income is taxed by the partners and when the cash is received could be significant.

US TAX CONSIDERATIONS 13.63 As is the case in the UK, litigation funding is also a developing area within US federal income tax law.5 Within this section, we will focus on certain issues central to the application of US income tax law to a litigation funding arrangement, described primarily from the perspective of the funder.

The main issues 13.64 The topics discussed below summarise basic tax considerations primarily from the perspective of the funder, but at times this section will also highlight issues relevant to the other affected parties. The key areas of focus throughout will be: (1) the basic US income tax issues when entering into the funding arrangement, (2) the tax characterisation of the funder for US federal income tax purposes, (3) the differences in character of income in relation to the funding agreement, (4) the timing of inclusion of income in relation to the funding agreement, including specific US tax considerations when using a prepaid forward contract, and (5) issues that may arise in a cross-border arrangement.

A general note regarding the parties to the funding agreement 13.65 While this section focuses primarily on the US income tax considerations to the funder, of equal importance is the application of US income tax law in 5

Unless otherwise noted, references to US income tax law are to US federal income tax only and are not intended to cover state, local, or other non-US tax of any nature. All references to ‘section’ are to the Internal Revenue Code (IRC) of 1986, as amended, or the regulations (final, proposed or temporary) thereunder, both as amended up to the date of publication of this book.

408

US tax considerations 13.69

determining the treatment of the other affected parties, which must be taken into consideration when drafting the funding agreement. Such other affected parties include not only the claimant in a given case, but may also, depending on the arrangement, include a third-party law firm, herein generally referred to collectively as the ‘counterparty’. For purposes of this section, it is generally assumed that the funding is of a US-based counterparty but considers a funder that may or may not have a presence in the United States.

The US tax characterisation of the funding agreement 13.66 A detailed analysis of the terms of the funding agreement6 is necessary to determine its characterisation for US income tax purposes. It is a critical first step and essential to determining whether any income to a US tax-relevant funder is to be taxed at ordinary income tax rates or at preferential capital gains rates. For an affected individual US taxpayer, this rate differential can be up to 17 per cent (excluding the net investment income tax imposed under IRC section 1411). 13.67 LFAs may be constructed as a loan with an interest-like return on the advance or more like a speculative investment through which the funder is compensated only in the event that the claimant’s case is successful. The latter arrangement, generally offering more significant potential returns to the funder, is more common and typically will be structured such that the funding arrangement should be regarded as an acquisition of a right to share in any proceeds from the case in exchange for the funding. We consider first, however, the treatment of a funding arrangement as a loan. Loan treatment for counterparty and funder 13.68 In the context of a funding arrangement that should be treated as bona fide indebtedness, the receipt of loan proceeds should not be a taxable event to the counterparty. The servicing of such indebtedness with payments of interest will instead provide the counterparty with a deduction equal to such payments against its income, subject to limitations that may be imposed under other sections of US income tax law and which are beyond the scope of this chapter. On repayment of the principal, the counterparty generally would not recognise taxable income. 13.69 For the funder, the receipt of interest payments is taxable as ordinary income. Whether the funder is a US taxpayer will determine how the interest income is subject to tax. For a US taxpayer, such income would be includable in a US income tax return and subject to tax at the applicable ordinary rate. While discussed further under Cross-border US tax issues to consider (para 13.118), it should be noted that to a funder that is not a US taxpayer, interest income that is 6

See also chapter 6.

409

13.70  Tax

from sources within the United States is generally subject to tax via withholding under IRC sections 1441–1443. The default rate of withholding under such sections is 30 per cent, however, may potentially be reduced under: (1)  US domestic law under IRC sections 871(h)(2) and 881(c)(2), commonly referred to as the ‘portfolio interest exemption’; or (2) by qualifying for the benefits of an income tax treaty between the United States and the funder’s country of residence. Note that in both instances it may be possible to reduce the total rate of withholding to zero per cent. US tax criteria for a loan 13.70 While US tax law does not clearly define debt per se, certain debt treatment characteristics and criteria can be found in IRC section 385 and its regulatory history. Additionally, there is an array of factors derived from decades of case law that a taxpayer must consider. An analysis of terms in the funding agreement against these characteristics and factors will help the funder and the counterparty determine whether the agreement would likely be characterised as bona fide indebtedness for US federal income tax purposes. 13.71 While there are a significant number of factors and details to consider, the following represents a truncated list of some of the most important considerations when determining whether a funding agreement should be characterised as indebtedness: (1) Whether there is an unconditional promise to pay a fixed sum on demand or on a specified date; (2) The presence or absence of a fixed maturity date; (3) Whether there is a specified rate of interest or a deferral of interest; (4) The remedies upon default and the right of the issuer to enforce payment of the principal and interest; (5) Whether the holder participates in the success of the venture or receives contingent interest; (6) The intent of the parties; and (7) The treatment of the instrument for non-tax purposes. 13.72 A  case from 2020 looked specifically at whether a litigation funding arrangement should be respected as indebtedness, as the funder intended. In Novoselsky v Commissioner,7 the Tax Court assessed the agreement against the seven factors described in Welch v Commissioner.8 Those factors, which overlap with the factors listed above, are:

7 8

T.C. Memo 2020-68. 204 F.3d 1228 (9th Cir. 2000), aff’g [Dec. 52,639(M)], T.C. Memo 1998-121.

410

US tax considerations 13.76

(1) Whether the promise to repay is evidenced by a note or other instrument; (2) Whether interest was charged; (3) Whether a fixed schedule for repayments was established; (4) Whether collateral was given to secure payment; (5) Whether repayments were made; (6) Whether the borrower had a reasonable prospect of repaying the loan and whether the lender had sufficient funds to advance the loan; and (7) Whether the parties conducted themselves as if the transaction were a loan. 13.73 The court found that the agreement lacked several of the factors listed above but, most importantly, both parties did not act as if the indebtedness was a bona fide debtor–creditor arrangement. This was primarily due to the fact that any payments with respect to the funding were expected only upon the successful conclusion of the litigation. As such, the funding agreement was determined by the court not to be debt for US tax purposes, but instead more akin to a series of advance payments for services to be performed in the future. Sale treatment for counterparty and funder 13.74 If the funding is properly characterised as a sale of a portion of the claim by a counterparty to the funder, the counterparty will need to determine the timing of recognition of the gain from the sale. The timing point is discussed in further detail later in this section, but the key consideration worth highlighting is the matching of the timing of any gain recognised from the sale to the receipt of any proceeds in the event of a successful case. Careful construction of the funding agreement to minimise the risk of a taxable income inclusion prior to the receipt of any monies from a successful case is key. 13.75 In the event of characterisation of the funding as a sale, the impact on the funder is generally more straightforward. The funder should be expected to take a tax basis in the rights it has acquired equal to the amount of the funding it provides, with a taxable gain or loss recognised equal to the differential between the total proceeds received from its share in the claim and such tax basis. The holding period, an essential factor in determining the character of such gain or loss, is expected to begin from the date the funding agreement is executed. We discuss under the next heading the tests for sale treatment. US tax criteria for a sale 13.76 The funding arrangement may be characterised as a sale for US tax purposes, and, like the discussion above, depends on the convergence of several factors. 411

13.77  Tax

13.77 Notably, Grodt & McKay Realty, Inc v Commissioner,9 contains a list of factors to determine where the benefits and burdens of ownership reside. In Grodt, specifically, the court needed to determine whether Grodt & McKay Realty had purchased a herd of cattle in a legitimate transaction. Ultimately, the court held that the benefits and burdens of ownership had indeed been transferred to Grodt and in so doing considered the following factors: (1) Whether the legal title had passed; (2) How the parties regarded the transaction; (3) Whether an equity interest was acquired as part of the transaction; (4) Whether the right of possession had vested by the purchaser; (5) Which party would be at the risk of loss should the property be damaged; (6) Which party would receive profits form the operation or sale of the property; (7) Which party pays property taxes; and (8) Whether the contract creates a present obligation on the seller to deliver the deed and a present obligation on the purchaser to make payments. 13.78 Of course, assessing the ownership of cattle is very different than assessing the rights afforded to the funder in a litigation finance arrangement, and accordingly tax courts have challenged the use of the above factors in their analysis with respect to fungible property. In the case Calloway v Commissioner,10 the Tax Court rejected the multi-factor test of Grodt & McKay Realty, making the point that the same conclusion could have been made without the complexities of a multi-factor test and that such a test is not appropriate for such a different fact pattern. However, while different in approach, both cases fundamentally focused on the same critical issue, ie whether the rights of ownership had been transferred. 13.79 While the approaches of the courts may vary, what appears consistent in determining whether the rights of ownership have transferred is: (1) identifying which party bears the risk of loss in relation to the property; (2) the intent of the transaction and evidence that there is appropriate documentation commensurate to the transaction showing this intent; and (3) the overall relative economic exposure of both parties, ie  the risk of loss, the ability to profit from the ultimate disposition of the property, and the power to dispose of the property. While no single factor should be controlling, and because the approach of the courts may vary, these key considerations must be taken into account when drafting the funding agreement, so that it is clear which party has the economic control over the property following the transaction.

9 77 T.C. (1981). 10 135 T.C. 26.

412

US tax considerations 13.85

Is the funder an investor, a trader or a dealer? 13.80 The status of the funder for US tax purposes is of importance in ultimately deciding how the funder’s activities subject to US tax will be treated, both currently and at the point of exit. For US tax purposes, a taxpayer who issues, purchases and sells securities may be classified as an investor, a trader or a dealer. Depending on status, the differences in the taxation of a funder are significant and require consideration, although, as noted in further detail below, the general expectation is that the typical funder will be treated as an investor. 13.81 Generally, distinguishing a taxpayer classified as a dealer is more obvious. Broadly, a dealer typically operates as a market-maker for its customers rather than trading on its own account, ie  selling securities to, or purchasing securities from, customers, or otherwise offering to enter into, assume, offset, assign, or otherwise terminate positions in securities with its customers. Therefore, its income would largely be driven by the services it provides, rather than from price fluctuations in the assets it holds. 13.82 Distinguishing investor from trader is a more nuanced exercise and is generally undertaken by the application of certain factors derived from a series of court cases. Such factors include, primarily:

• •

the frequency of the trading activity, or lack thereof; and the holding period of the investments.

13.83 Considering the above factors, to qualify as a trader, a funder would be expected to be frequently disposing of its litigation funding receivables prior to settlement or termination with generally a short-term investment outlook for each of its funding arrangements. Consequently, due to the nature of the business of litigation funding and the illiquid secondary market, most, if not all, funders will likely be classified as investors rather than traders. Nevertheless, we contrast investor and trader status in further detail.

Investor status 13.84 In addition to the likely investor status of a litigation funder based on its activities, the courts have generally determined the taxpayer’s status to default to investor unless certain conditions exist. 13.85 An important consideration with investor status is the deductibility of certain expenses related to the production of investment income. Historically, an investor was permitted to deduct such expenses to the extent these exceeded a defined threshold. Now, however, the investor often finds that no such deductions are available owing to sweeping legislative changes that took effect from 2018. 413

13.86  Tax

13.86 Nevertheless, in the context of a litigation funding arrangement that is classified as a sale or exchange, investor status is linked to a funder taking a position that any gain derived from such funding arrangement should be from the sale or exchange of a capital asset. Further discussion on this point is included below under Character of the income from the funding arrangement (para 13.90). Trader status 13.87 The requirements to assert trader status under US tax law are stringent. Going back to 1941, the US Supreme Court in Higgins,11 provided that investing as a business where it meets a ‘sufficient extent, continuity, variety, and regularity’ does not itself qualify as a trade or business. In a later court decision in Moller,12 the court held that, to achieve trader status, there would need to be active management in its short-term gains rather than long-term capital appreciation. Further cases focused on the number of trades and the short-term nature of holdings in an attempt to capitalise on short-term swings in price fluctuations. 13.88 Under US tax law this distinction will produce different results. In contrast to a funder classified as an investor, a funder that may be classified as a trader is presumed to be engaged in the active conduct of a trade or business. To the extent that such business would be undertaken within the United States, the resulting income effectively connected with that trade or business (’effectively connected income’, ECI) may be offset by the expenses the funder would reasonably incur in producing such trade or business income, including depreciation expenses for certain assets used in that trade or business. Further, the activities and strategy of a funder that should be classified as a trader are unlikely to result in the realisation of income of a type that should be subject to taxation at the preferential capital gains rates, largely due to the failure to meet a one-year holding period requirement. For a non-US funder classified as a trader, further discussion is included in this chapter under Cross-border US tax issues to consider (para 13.124). 13.89 A  final note regarding dealer status. While consideration should be given to assessing investor versus trader status, it can reasonably be assumed that a litigation funder would not be considered to be actively dealing in its litigation funding receivables with customers, and therefore such receivables are not likely to be considered inventory or stock in the trade of the funder. This particular point is important when considering the character of the asset.

Character of the income from the funding agreement 13.90 The character of the income from the funding agreement is an important consideration when structuring the agreement itself. Funders will often be 11 312 U.S. 212 (1941). 12 721 F.2d 810 (Fed. Cir. 1983).

414

US tax considerations 13.93

motivated to recognise income that is characterised as capital gains and subject to preferential rates of tax, subject to meeting a holding period requirement. First, however, the funder must ensure that the asset it holds by way of its funding agreement should be classified as a capital asset. Capital asset defined 13.91 The definition of a capital asset under section 1221 provides that property is a capital asset unless that asset meets the conditions of one of eight different items described in that section: (1) Stock in the trade of the taxpayer that is included as inventory of the taxpayer; (2) Depreciable or real property used in the trade or business of the taxpayer; (3) A  patent, invention, a model or design, a secret formula or process, a copyright, a literary, musical, or artistic composition, a letter or memorandum, or similar property held in various manners; (4) Accounts or notes receivable acquired in the ordinary course of the taxpayer’s trade or business for services or from the sale of stock in the trade of the taxpayer that is treated as inventory (see condition 1); (5) Certain publications of the US Government; (6) Certain commodities derivatives; (7) Certain hedging transactions; or (8) Supplies regularly used or consumed by the taxpayer in the ordinary course of the trade or business of the taxpayer. 13.92 We specifically call attention to item 1. This item identifies ‘stock in the trade of the taxpayer that is included in the trade of the taxpayer.’ The status of the funder is an important consideration insomuch as its status as a dealer, however unlikely, should result in the asset not qualifying as a capital asset, rather being viewed as inventory of the funder. 13.93 Absent such classification, generally a properly constructed LFA should be correctly classified as a capital asset. We note, however, that this very point has been considered in further detail in the courts with various tests having been applied. Of particular relevance are those factors outlined in Gladden v Commissioner,13 which should be considered when analysing the LFA. Those factors are, specifically: (1) How the contract rights originated; (2) How the contract rights were acquired; 13 112 T.C. 209 (1999).

415

13.94  Tax

(3) Whether the contract rights represented an equitable interest in property which itself constituted a capital asset; (4) Whether the transfer of contract rights merely substituted the source from which the taxpayer otherwise would have received ordinary income; (5) Whether significant investment risks were associated with the contract rights and, if so, whether they were included in the transfer; and (6) Whether the contract rights primarily represented compensation for personal services. 13.94 A properly constructed LFA should be able to rely on such factors to substantiate the position that the agreement constitutes a capital asset for US federal income tax purposes. Capital gains for the counterparty 13.95 At the time of the funding, if (1) the agreement is treated as a sale for US tax purposes, and (2) the consideration provided by the counterparty is treated as a capital asset, the counterparty will generally recognise capital gains at the time of sale. While the computation of the amount and the treatment of such gain is generally well understood, often the key issue of consideration to the counterparty in such a transaction is the timing itself, ie  the potential for the counterparty to recognise income well in advance of the successful resolution of a case. Further discussion is included under Timing of the income from the funding arrangement (paras 13.101 et seq.). Capital gains for the funder 13.96 Funding the counterparty should not be a taxable event to the funder. If the agreement is treated as the funder’s acquisition of the rights to a case (vs. treatment as indebtedness), the settlement of the case should generally be treated as a taxable event giving rise to either a capital gain or capital loss. 13.97 The tax rate of capital gains of a funder that is a US taxpayer differs depending on the type of taxpayer. Simply put, if the US taxpayer is a corporation, the rate is currently flat at 21 per cent. For a US taxpayer who is an individual, that rate is 20 per cent (excluding the net investment income tax imposed under IRC section 1411) for capital assets that are held by the taxpayer for more than one year. 13.98 Further considerations for funders not tax resident in the United States are included in this chapter under Cross-border US tax Issues to consider (paras 13.115 et seq.). Broadly, a funder that is not tax resident in the United States, and where the activities of the funder are not ECI, may rely on the sourcing of capital gains under IRC section 865. For a non-US funder, the resultant gain should be sourced based on the place of residence of the funder, resulting in capital gains from the sale not being subject to US federal income taxation. 416

US tax considerations 13.104

Interest income from loan agreement 13.99 As described above, if the funding agreement is characterised as a loan for US federal income tax purposes, interest income earned by a funder taxresident in the United States will be subject to ordinary income tax rates, which currently are a flat rate of 21 per cent for US corporations and graduated (up to 37 per cent) for US individual taxpayers. 13.100 Further consideration on the receipt of interest income by a funder located outside the United States is considered in more detail under Cross-border US tax issues to consider (para 13.118).

Timing of the income from the funding agreement The prepaid forward agreement 13.101 Previous sections have primarily considered the characterisation of any income or gains to be realised by the relevant parties. The timing of recognition of such income or gains is likewise of importance. If the funding arrangement is treated as a sale, the funder should not be expected to recognise income until a recognition event, generally when the case is settled. However, with respect to the counterparty, there is a risk that such an event may be deemed to occur upon receipt of the funding. Incurring a US federal income tax liability by the counterparty in advance, often significantly, of the receipt of any proceeds that may or may not materialise from the underlying case is generally not a desired result. 13.102 For completeness, we note again that, if the funding is treated as bona fide indebtedness, the funder would be expected to recognise interest income over the term of the funding. 13.103 Setting aside a debtor–creditor arrangement, to most effectively manage issues of both character and timing, the funding arrangement commonly takes the form of a prepaid forward contract. The expected result for US federal income tax purposes with the prepaid forward contract is: (1) to characterise the funding as a sale of the rights to the funder for a portion of the case with such rights qualifying as a capital asset; and (2) to allow for the deferral of a recognition event to the counterparty until the conditions for the funding are met, which is structured to be met at the time of the settlement of the underlying case. Criteria needed for deferral 13.104 In 2003 in Revenue Ruling 2003-7, 2003-1  C.B. 363, the Internal Revenue Service (IRS) ruled that a shareholder of a publicly traded company had not sold stock if the shareholder pledged to deliver shares at a future date. As the shareholder retained certain rights to the shares prior to their future 417

13.105  Tax

delivery, the shares were not seen as having been transferred until delivery. Specifically, the rights the shareholder retained were:

• voting; • receipt of dividends; and • the ability to reacquire the shares using cash or other shares. 13.105 Furthermore, several cases were cited in Revenue Ruling 2003-7 that the IRS used to support the deferred sale treatment. In Miami National Bank v Commissioner,14 the court held that, even though the purchaser (a brokerage firm) had a right to sell the stock in the transferor (Miami National Bank) that was held in an account of the purchaser, the transferor remained the owner of the stock as it could, at any time, reacquire such stock without any restrictions. The court determined that the holding of the stock by the purchaser was not enough to relinquish the ultimate beneficial ownership of the stock by the transferor. 13.106 In derivative types of agreements, eg  short sales, the courts have previously determined that ownership is generally not deemed to transfer until the actual shares (or property) are delivered (see Richardson v Commissioner15). Here, the court concluded that, although the intent was to deliver the shares at a specified point in time, intent was not sufficient to cause the sale. When applying this logic to a funding agreement structured as a prepaid forward contract, conditions precedent set forth in the contract may be sufficient to defer an event of recognition to the counterparty until such conditions are met (despite the intent of the parties at the time of funding). Open transaction doctrine 13.107 The open transaction doctrine relieves a taxpayer from reporting income that may never be received and is a key point of reference when taking a position that deferral should be permissible in the context of an LFA structured as a prepaid forward contract. This doctrine was derived from a seminal case in 1931, Burnet v Logan.16 In Burnet, the taxpayer held shares in a corporation which itself held a leasehold interest in a mine. The taxpayer transferred the shares in exchange for cash, plus a right to receive further annual payments from the corporation based on the amount of ore produced from the mine, with no provision for a maximum or minimum amount produced. Because the taxpayer’s capital investment might never be recovered, the court found that the contractual agreement stipulating payment based on the amount of ore produced was contingent and speculative such that value received could not be determined, and therefore any proceeds should first be treated as a return of the purchaser’s capital with any additional amount recorded as profit.

14 67 T.C. 793 (1977), 15 121 F.2d 1 (2d Cir.), cert. denied, 314 U.S. 684 (1941). 16 283 U.S. 404 (1931), X-1 C.B. 345.

418

US tax considerations 13.111

13.108 The open transaction doctrine is generally only applied in situations in which it is not possible to determine the value of the consideration exchanged by both parties to a transaction. In United States v Davis,17 the taxpayer transferred certain shares of appreciated stock to an ex-spouse in exchange for the release of her marital claims. The taxpayer argued that, since the total value of the marital rights to be transferred to him in exchange for the appreciated shares was not ascertainable at the time, the transaction itself should not be currently taxable. The court did not accept this argument and presumed that the marital rights were equal in value to the shares received, thus asserting that, if one party’s value is known and unchanging, the transfer is for that value. 13.109 The application of the open transaction doctrine is interesting in the context of a litigation funding arrangement. The Office of Chief Counsel of the IRS issued Generic Legal Advice Memorandum AM-2007-004 on 2  February 2007, citing the criteria of Revenue Ruling 2003-7 to distinguish conditions for certain types of forward contracts that should not allow for deferral. It should be noted that a generic legal advice memorandum is generally used by the IRS to resolve issues for taxpayers across a specific industry. Here, the IRS takes the view that, if the forward contract includes a share lending agreement in addition to the agreement to purchase the shares, where the purchaser is allowed to borrow against or otherwise sell and dispose the shares, the taxation of the sale cannot be deferred. This is on the basis that the dividend and voting rights have substantively transferred to the purchaser at the time of the agreement. 13.110 The essence of the IRS position of no deferral hinges on the issue of the timing of the transfer of the benefits and burdens of property ownership to the purchaser. If this happens, in substance, as a matter of the forward agreement at the time of its execution, the transaction is taxable at such time. If this happens at a future date, it is at that time that the transaction is taxable and therefore inclusion in taxable income by the seller may be deferred. IRC section 1234A 13.111 Recognition of a capital gain or loss requires an actual exchange to occur. It might seem clear in the terms of a prepaid forward agreement that, upon settlement of the underlying case, the funder receives its share of the proceeds in accordance with its contractual rights and thus fully realises its return on investment. Naturally, the funder would therefore assume that there was an event, or exchange, triggering the recognition of its gain or loss on the sale of a capital asset. However, given the manner in which a prepaid forward contract operates where the contract itself typically has not yet expired or terminated immediately after the payment under its terms to the funder, the clarity of whether a sale or exchange has occurred may be subjective. IRC section 1234A, governing gains or losses recognised on certain terminations, states:

17 370 U.S. 65 (1962), 1962-2 C.B. 15,

419

13.112  Tax

Gain or loss attributable to the cancellation, lapse, expiration, or other termination of a right or obligation … with respect to property which is (or on acquisition would be) a capital asset in the hands of the taxpayer, … shall be treated as gain or loss from the sale of a capital asset.

13.112 The Tax Court in Pilgrim’s Pride Corp. v Comm’r,18 stated that the phrase from section 1234A, ‘rights with respect to property’, includes ‘rights inherent in the ownership of the property’. Under this interpretation, the rights to the proceeds from a successful case should fit within the definition of the Tax Court, allowing the funder to take the position that a capital gain or loss is recognised on the receipt of its proceeds from the counterparty following the resolution of the underlying case. 13.113 However, on appeal of Pilgrim’s Pride Corp. v Comm’r, the Fifth Circuit (covering the states of Texas, Louisiana and Mississippi) disagreed with the broader application of inherent rights by the Tax Court, instead arguing that the type of security is limited given the specific identification of contracts governed under IRC section 1256 (‘section 1256 contracts’) in the statute (IRC section 1234A(2)). The Fifth Circuit argued that, if Congress had intended section 1234A to apply to all financial contracts, it would not have made specific mention of section 1256 contracts; therefore, the application of IRC section 1234A may be interpreted more narrowly and thus not include the rights to the proceeds from LFAs (as these would not be considered section 1256 contracts). It is important to note, however, that the Fifth Circuit’s view is only enforceable in the courts within its jurisdiction. 13.114 The critical point to highlight with respect to the application of IRC section 1234A to LFAs structured as prepaid forward agreements is the uncertainty in the manner in which the exit of the contract may be interpreted by the courts. Several commentators view the Fifth Circuit’s interpretation as too narrow a reading of the statute and Congress’s legislative history substantiating the Tax Court’s position in Pilgrim’s Pride Corp. v Comm’r. As such, the taxpayer should consider the risk of challenge. Many litigation funders include clear language in prepaid forward contracts stating that the receipt of complete payment from the counterparty should be construed as the completion of the counterparty’s duties for the purposes of IRC section 1234A.

Cross-border US tax issues to consider 13.115 The funding of US cases or the contractual relationship with a US taxresident counterparty presents further issues to consider for the funder not tax resident in the United States, some of which have been briefly discussed or alluded to previously. The overarching question is whether the non-US funder should expect to be subject to US taxation. The answer is, of course, ‘it depends’. We explore relevant cross-border issues to the non-US funder with respect to US taxation below. 18 141 T.C. 533, 543 (2013), vacated, 779 F.3d 311, 315 (5th Cir. 2015).

420

US tax considerations 13.120

Sourcing of capital gains 13.116 If the funder is located outside of the United States, the sourcing rules (see above, IRC section 865) may cause proceeds received from the funding to not be subject to US federal income tax. Subject to the considerations and analysis discussed in detail thus far throughout this chapter, a funder that is not tax resident in the United States would not be expected to be subject to US federal income taxation on capital gains arising from a capital gains transaction. 13.117 Generally, capital gains recognised on the exchange of personal property not used in a trade or business within the United States are sourced according to the residence of the seller. By way of example, let us assume Funder is a UK limited corporation that is solely tax resident in the UK. The funding agreement with a US tax-resident counterparty is structured as a prepaid forward contract that is treated as a capital asset for US federal income tax purposes. Finally, Funder does not carry on a trade or business in the United States. Upon recognition of a capital gain (in accordance with IRS section 1234A) and in accordance with the sourcing rules of IRC section 865(a)(2), such a capital gain should be sourced to the UK and therefore not be subject to US federal income taxation. Sourcing of interest income 13.118 Contrast this with the receipt of interest income with the same facts as outlined above, except that the funding agreement is treated as bona fide indebtedness for US federal income tax purposes. Under IRC section 861, interest income is generally sourced based on the location of the borrower. Thus, interest income paid in accordance with the funding agreement by the counterparty to Funder would be considered to be from US sources and subject to US federal tax levied on Funder by way of a withholding tax charge. Income that is considered to be fixed, determinable, annual, or periodical (FDAP), such as interest income, and that is from US sources, is taxed at a flat rate of 30 per cent under IRC section 871 (individual taxpayers) or 881 (corporate taxpayers). 13.119 However, FDAP withholding may be relieved in one of two ways. The first is to rely on domestic law provisions, specifically IRC sections 871(h) and 881(c), commonly referred to as the ‘portfolio interest exemption’. A detailed discussion of the exemption is beyond the scope of this section, but assuming the requirements for exemption are met, there should be no withholding levied on the interest income. We do note, however, that if there are contingent interest payments associated with the funding, the exemption likely will not apply. 13.120 If the portfolio interest exemption cannot be met, then FDAP withholding may be reduced if the funder is able to qualify for the benefits of an income tax treaty between the United States and the funder’s country of residence. Some income tax treaties with the United States allow for exclusive residence country taxation of US source interest, thus reducing the withholding rate to zero. 421

13.121  Tax

US trade or business risk to the funder 13.121 Funders not tax-resident and with no trade or business within the United States will likely view themselves as passive participants in the funding of US cases. Nevertheless, whether the activities of the funder should constitute a trade or business within the United States is a facts-and-circumstances based analysis that should be considered. In general 13.122 At the centre of this analysis is whether the activities undertaken in the United States should be considered ‘considerable, continuous, and regular’. This test has both qualitative and quantitative elements; in other words, whether a non-US funder is engaged in a US trade or business depends on both the type and the amount of its activities in the United States. Pursuant to the relevant regulations, to constitute a trade or business, a group of activities must ordinarily include every operation which forms a part of or a step in a process by which an enterprise may earn income or profit. Further, this group of activities must ordinarily include the collection of income and the payment of expenses. 13.123 In addition to being ‘active’, the non-US funder’s US activities must be of a type that are closely and directly related to the derivation of profit (although no profit need be generated) rather than being incidental, ministerial or clerical. Activities that advance the purpose for which the non-US funder was formed will generally meet this standard. 13.124 For completeness, we make the point again here that a non-US funder classified as a trader for US federal income tax purposes is likely to meet the standards described under this heading, and, to the extent that its activities are undertaken within the United States, should be considered to have a US trade or business. Partnerships and agents create US trade or business risk 13.125 Critically important, the activities of agents, partnerships, trusts and estates can, in certain circumstances, be imputed to a non-US funder. If these activities constitute a US trade or business, they may cause the non-US funder to be treated as engaged in such a business. 13.126 In certain circumstances the funding agreement may be construed, for US federal income tax purposes, as something akin to a partnership agreement, rather than being characterised as a transfer of rights or a debtor–creditor relationship. Some notable commentators have suggested that a finance agreement structured as a prepaid forward contract and intended to effect sale treatment may be classified as a partnership agreement for US federal income tax purposes as both parties have agreed to share in the successful outcome of 422

US tax considerations 13.130

the underlying claim. With that said, we find ourselves again reemphasising the need for careful construction and review of the LFA. A deemed partnership with a counterparty undertaking a trade or business within the United States may inadvertently result in a non-US funder being considered as having a trade or business within the United States. Effectively connected income (ECI) 13.127 Whether the non-US funder should be considered as having a trade or business within the United States must be determined initially. Should it be the case that the non-US funder is carrying on a trade or business within the United States, the subsequent exercise is to determine what income is effectively connected with the conduct of that trade or business. Ultimately, such income will be taxable in the United States, reduced by expenses the funder would reasonably incur in producing such trade or business income. Finally, we note that a non-US funder carrying on a trade or business within the United States will have US federal income tax compliance and reporting requirements, even in instances where the non-US funder elects to be taxed under the provisions of an applicable US income tax treaty (specifically, where the non-US funder so elects and asserts that it does not have a permanent establishment in the United States). Treaty access and permanent establishment (PE) risk 13.128 If a non-US funder is eligible for benefits under an applicable income tax treaty with the United States, generally the business profits (ie ECI) of the entity cannot be taxed in the United States unless the non-US funder has a PE located in the United States and the profits are attributable to that PE. The profits attributable to the PE are those which the PE might be expected to make if it were an independent entity acting on its own behalf. 13.129 A  PE is a fixed place of business through which the business of an enterprise is wholly or partly carried on. Examples of common PEs include offices, branches and places of management. A fixed facility may be considered an office or other fixed place of business whether or not the facility is continuously used by the non-US funder. Additionally, the regular use of another person’s offices in the United States to conduct the activities of the non-US funder’s trade or business may constitute a US PE for the non-US funder, especially if there are facilities permanently at its disposal. 13.130 Activities of an agent can also cause a non-US funder to have a PE within the United States if the agent has certain powers to act on behalf of the non-US funder and is not an independent agent acting in the ordinary course of its business. Specifically, a PE may exist if the agent has, and habitually exercises in the United States, an authority to negotiate and conclude contracts in the name of the non-US funder. 423

13.131  Tax

13.131 While assessing PE risk is also a facts-and-circumstances analysis, it may be obvious to the reader that the level of activity required to create a PE in the United States, when compared with that of a US trade or business, is generally higher. Specifically, we point out that PE risk through an agency relationship only arises when an agent is dependent on the non-US principal (unlike a US trade or business which can arise through the activities of an agent of independent status).

424

Index [all references are to paragraph number]

Access to capital English regulation, 3.12–3.14 Adverse costs Arkin v Borchard Lines, 7.36–7.49 Australia, in Gore v Justice Corp, 7.27–7.35 introduction, 7.4 securities class action regime, 7.89– 7.95 Civil Procedure Rules, 7.9 commercial arbitration, 7.163–7.177 conclusion, 7.178 ‘costs follow the event’, 7.1 Davey v Money, 7.70–7.88 discretion, and, 7.13 Dymocks & Hamilton v Al Fayed, 7.19– 7.26 England and Wales, in case law, 7.11–7.88 generally, 7.8–7.10 introduction, 3.3 ‘purity’ test, 7.19–7.26 Excalibur, 7.50–7.69 Gore v Justice Corp, 7.27–7.35 insolvency litigation after-the-event insurance, 9.62–9.63 assignment of claim, 9.55–9.57 considerations, 9.46 other forms of finance, 9.50 international arbitration CIETAC rules, 7.122 commercial cases, 7.163–7.177 generally, 7.123–7.131 HKIAC rules, 7.125 ICC rules, 7.124 ICDR rules, 7.125 introduction, 7.6 investor v State cases, in, 7.132–7.162 LCIA rules, 7.121 PCA rules, 7.122 SIAC rules, 7.125 UNCITRAL rules, 7.122 introduction, 7.1–7.7 investor v State arbitration, 7.132–7.162

Adverse costs – contd Jackson review, and, 3.3 legal expenses insurance, and case law, 7.15 control of litigation, 7.18 generally, 7.17 ‘loser pays’ principle, 7.1 maintenance, and, 7.17 non-parties, against, 7.12–7.18 parties in proceedings, against, 7.11 ‘purity’ test, 7.19–7.26 relevance, 7.7 risk profile, 12.67–12.71 security after-the-event insurance, and, 7.113– 7.122 generally, 7.96–7.112 introduction, 7.3 statutory basis, 7.8 strangers to the litigation, against, 7.12– 7.18 trade unions, and, 7.17 US, and, 7.5 wanton and officious intermeddling, 7.17 Wigmans v AMP, 7.89–7.95 After-the-event (ATE) insurance adverse costs, and case law, 7.15 control of litigation, 7.18 generally, 7.17 generally, 8.72–8.82 insolvency litigation, 9.62–9.64 introduction, 8.62 risk assessment and management, 12.88 security for costs, and Australia, 7.120–7.122 generally, 7.113–7.119 Akhmedova divorce case legal principles, 1.8–1.22 Arbitration adverse costs commercial arbitration, 7.163–7.177 international arbitration, 7.123–7.131 investor v State arbitration, 7.132–7.162

425

Index Arbitration – contd investment treaties conclusions, 9.85–9.93 costs, 9.82–9.84 generally, 9.65–9.72 parties, 9.73–9.77 value, 9.78–9.81 Arkin cap generally, 7.36–7.49 introduction, 3.3 Asia users of litigation funding, 10.35–10.36 Asset class comparison with London offices, 11.3– 11.6 complexity, 11.20 direct investing, 11.19–11.27 funds, 11.8–11.11 introduction, 11.1–11.2 peer to peer platforms, 11.19–11.25 pricing the risk, 12.95–12.102 private companies, 11.17–11.18 public companies, 11.12–11.16 rewards big wins, 12.109–12.113 judicial oversight, 12.103–12.108 pricing the risk, 12.95–12.102 risk assessment and management ATE insurance, and, 12.88 co-funding, 12.82–12.83 conditional fee agreements, and, 12.85 control and conduct, 12.94 cost capping, 12.86 damages-based agreements, and, 12.85 deferral of legal fees, 12.84–12.85 diversification of portfolio, 12.90–12.92 generally, 12.78–12.81 insurance, 12.87–12.89 law firm portfolio funding, 12.93 minimisation, 12.82–12.94 mitigation, 12.82–12.94 portfolio diversification, 12.90–12.92 spreading of risk, 12.82–12.94 sub-funding, 12.82–12.83 risk pricing generally, 12.95–12.102 judicial oversight, 12.103–12.108 risk profile adverse cost risk, 12.67–12.71 assignment, and, 12.4 big losses, 12.72–12.77 big wins, 12.109–12.113 circumvention risk, 12.52–12.53 claimant risk, 12.43–12.46 competition risk, 12.58–12.59 concentration risk, 12.50–12.51 conclusion, 12.114

Asset class – contd risk profile – contd costs exposure risk, 12.67–12.71 currency risk, 12.65–12.66 decision-maker risk, 12.54–12.57 defendant credit/solvency risk, 12.60– 12.61 duration risk, 12.31–12.39 economic theory, and, 12.2 enforcement risk, 12.62–12.64 high rewards, 12.95–12.108 illiquidity, 12.26–12.30 introduction, 12.1–12.8 investment term, 12.31–12.39 key-person risk, 12.40–12.42 key risks, 12.9–12.71 legal merits, 12.10–12.16 legal team risk, 12.47–12.49 legal uncertainty, 12.9 regulatory risk, 12.17–12.25 speculation, and, 12.5 uncertainty, and, 12.2–12.3 structures for investment, 11.7–11.27 Assignment distinction from third party litigation funding, 2.3–2.7 insolvency litigation, 9.51–9.59 risk profile, 12.4 Association of Litigation Funders (ALF) establishment, 1.3 meaning of litigation funding, 1.2 Attorney-client privilege application, 5.167–5.170 generally, 5.134–5.136 introduction, 5.5 Australia adverse costs Gore v Justice Corp, 7.27–7.35 introduction, 7.4 securities class action regime, 7.89–7.95 class actions, 9.128–9.147 conditional fee agreements, 8.121–8.122 contingent litigation aid fund, 8.19–8.21 regulation and law amending regulations, 3.126–3.131 Best Practice Guidelines, 3.137 capital adequacy, 3.141–3.144 conflicts of interest, 3.123 consumer protections, 3.124 deceptive conduct, 3.124 ‘funder’, 3.138 generally, 3.117–3.118 historical background, 3.119–3.122 ‘manager’, 3.139 misleading conduct, 3.124 policy, 3.148 reforms, 3.132–3.135

426

Index Australia – contd regulation and law – contd self-regulation, 3.136–3.148 termination, 3.145–3.147 unconscionable conduct, 3.124 unfair contract terms, 3.124 security for costs after-the-event insurance, 7.120–7.122 generally, 7.96 users of litigation funding, 10.18–10.20 Barratry litigation funding agreements, and, 6.13 Before-the-event (BTE) insurance generally, 8.64–8.71 insolvency litigation, 9.48 introduction, 8.61 Bias US regulation, 3.77–3.79 Canada class actions, 9.116–9.127 conditional fee agreements, 8.123–8.124 contingent litigation aid fund, 8.22–8.25 users of litigation funding, 10.26–10.30 Capital adequacy Australian regulation, 3.141–3.144 English regulation, 3.20–3.31 Hong Kong regulation, 3.153–3.154 Singapore regulation, 3.163–3.165 Champerty and maintenance Arkin cap on costs, 7.44 conditional fee agreements, 8.92 English regulation funded parties, 3.61 ethical obligations UK lawyers, 4.46 US lawyers, 4.11 historical background early days, 2.5–2.7 modern history in UK and Ireland, 2.9–2.12 modern history in US, 2.15–2.18 Hong Kong regulation, 3.149 insolvency litigation, 9.42 litigation funding agreements, 6.13 privilege application in the US, 5.151–5.152 introduction, 5.3 revenge funding, 8.52 US regulation Fee-sharing, 3.89 introduction, 3.71 party in interest, 3.82 Charitable funding anti-tobacco litigation, 8.47–8.49 generally, 8.44–8.46 immigration litigation, 8.51 voting rights litigation, 8.50

Choice of law ethical obligations, 4.2–4.7 Circumvention risk risk profile, 12.52–12.53 Civil Procedure Rules adverse costs, 7.9 Claimant risk risk profile, 12.43–12.46 Claimant’s legal team ethical obligations choice of law, 4.2–4.7 conclusion, 4.59 England and Wales, in, 4.22–4.58 introduction, 4.1 US, in, 4.8–4.21 regulation in England, 3.44–3.46, 3.63– 3.65 risk profile, 12.47–12.49 Class actions Australia, in, 9.128–9.147 Canada, in, 9.116–9.127 Competition Appeals Tribunal (UK CAT), and generally, 9.162–9.178 introduction, 9.101 conclusions, 9.192–9.195 conditional fee agreements, 9.96 contingent fee arrangements, 9.96 damages-based agreements, 9.96 drivers of growth, 9.95 England and Wales, in collective proceedings, 9.162–9.178 group litigation orders, 9.184–9.191 introduction, 9.148 overview, 9.101 representative proceedings, 9.149–9.161 EU, in, 9.181 introduction, 9.94–9.97 meaning, 9.94 Netherlands, in, 9.179–9.181 ‘no win, no fee’ arrangements, 9.96 opt-in actions England and Wales, in, 9.184–9.191 generally, 9.182–9.183 opt-out actions Australia, in, 9.128–9.147 benefits, 9.99 Canada, in, 9.116–9.127 ‘carriage dispute’, 9.100 efficiencies, 9.99–9.100 England and Wales, in, 9.148–9.178 EU, in, 9.181 generally, 9.98–9.102 meaning, 9.98 Netherlands, in, 9.179–9.181 US, in, 9.103–9.115 US, in, 9.103–9.115

427

Index ‘Client protection letter’ ethical obligations, 4.17 Code of conduct English regulation, 3.8–3.54 Co-funding risk assessment and management, 12.82– 12.83 Commercial arbitration adverse costs, 7.163–7.177 Common interest privilege application, 5.167–5.170 generally, 5.139–5.142 introduction, 5.37–5.46 Competence ethical obligations England and Wales, 4.33 US, 4.8–4.11 Competition risk risk profile, 12.58–12.59 Competition Appeals Tribunal (UK CAT) class actions generally, 9.162–9.178 introduction, 9.101 Complaints English regulation, 3.52 Concentration risk risk profile, 12.50–12.51 Conditional fee agreements (CFA) Australia, in, 8.121–8.122 Canada, in, 8.123–8.124 class actions, 9.96 England and Wales, in, 8.91–8.98 funding market, and, 8.125–8.126 other jurisdictions, 8.116 risk assessment and management, and, 12.85 US, in, 8.117–8.120 Conduct of cases risk assessment and management, 12.94 US regulation, 3.80–3.86 Confidentiality See also Privilege English regulation, 3.40 ethical obligations England and Wales, 4.34–4.36 US, 4.12–4.13 litigation funding agreements, 6.54 privilege, and, 5.1 Conflicts of interest Australian regulation, 3.123 ethical obligations England and Wales, 4.40–4.51 US regulation, 3.77–3.79 Consumer agreements litigation funding agreements, 6.3 Consumer protections Australian regulation, 3.124

Contingent fee agreements Australia, in, 8.121–8.122 Canada, in, 8.123–8.124 class actions, 9.96 England and Wales, in, 8.91–8.98 funding market, and, 8.125–8.126 insolvency litigation, 9.60–9.61 other jurisdictions, 8.116 risk assessment and management, and, 12.85 US, in, 8.117–8.120 Contingent litigation aid funds (CLAF) Australia, 8.19–8.21 Canada, 8.22–8.25 England and Wales, 8.16–8.17 Europe, 8.26 generally, 8.14–8.15 Hong Kong, 8.18 volatility, 8.15 Control of cases risk assessment and management, 12.94 US regulation, 3.80–3.86 Cost capping risk assessment and management, 12.86 Costs awards Arkin v Borchard Lines, 7.36–7.49 Australia, in Gore v Justice Corp, 7.27–7.35 introduction, 7.4 securities class action regime, 7.89– 7.95 Civil Procedure Rules, 7.9 commercial arbitration, 7.163–7.177 conclusion, 7.178 ‘costs follow the event’, 7.1 Davey v Money, 7.70–7.88 discretion, and, 7.13 Dymocks & Hamilton v Al Fayed, 7.19– 7.26 England and Wales, in case law, 7.11–7.88 generally, 7.8–7.10 introduction, 3.3 ‘purity’ test, 7.19–7.26 Excalibur, 7.50–7.69 Gore v Justice Corp, 7.27–7.35 international arbitration CIETAC rules, 7.122 commercial cases, 7.163–7.177 generally, 7.123–7.131 HKIAC rules, 7.125 ICC rules, 7.124 ICDR rules, 7.125 introduction, 7.6 investor v State cases, in, 7.132–7.162 LCIA rules, 7.121 PCA rules, 7.122

428

Index Costs awards – contd international arbitration – contd SIAC rules, 7.125 UNCITRAL rules, 7.122 introduction, 7.1–7.7 investor v State arbitration, 7.132–7.162 Jackson review, and, 3.3 legal expenses insurance, and case law, 7.15 control of litigation, 7.18 generally, 7.17 ‘loser pays’ principle, 7.1 maintenance, and, 7.17 non-parties, against, 7.12–7.18 parties in proceedings, against, 7.11 risk profile, 12.67–12.71 ‘purity’ test, 7.19–7.26 relevance, 7.7 security after-the-event insurance, and, 7.113– 7.122 generally, 7.96–7.112 introduction, 7.3 statutory basis, 7.8 strangers to the litigation, against, 7.12–7.18 trade unions, and, 7.17 US, and, 7.5 wanton and officious intermeddling, 7.17 Wigmans v AMP, 7.89–7.95 Costs exposure risk profile, 12.67–12.71 Covenants litigation funding agreements, 6.40–6.42 Currency risk risk profile, 12.65–12.66 Damages-based agreement (DBAs) class actions, 9.96 ethical obligations, 4.37–4.39 generally, 8.99–8.115 insolvency litigation, 9.61 risk assessment and management, 12.85 Deceptive conduct Australian regulation, 3.124 Decision-maker risk risk profile, 12.54–12.57 Deed of adherence litigation funding agreements, 6.4 Defendants credit/solvency risk, 12.60–12.61 English regulation, 3.66–3.68 Deferral of legal fees risk assessment and management, 12.84– 12.85 Discretion adverse costs, 7.13 Dispute resolution provisions litigation funding agreements, 6.55

Distribution ‘waterfall’ generally, 6.44–6.49 introduction, 6.7 Diversification of portfolio risk assessment and management, 12.90– 12.92 Due diligence litigation funding agreements, 6.11–6.12 structure of funding, 10.51–10.54 Duration risk risk profile, 12.31–12.39 Endowment funds cashflow profile, 11.54–11.56 considerations, 11.51–11.53 generally, 11.46–11.50 Enforcement risk risk profile, 12.62–12.64 Engagement agreement litigation funding agreements, and, 6.4 England and Wales access to capital, 3.12–3.14 adverse costs case law, 7.11–7.88 generally, 7.8–7.10 introduction, 3.3 ‘purity’ test, 7.19–7.26 Arkin cap, 3.3 capital adequacy, 3.20–3.31 claimant’s lawyers, 3.63–3.65 claimant’s legal team, 3.44–3.46 class actions, collective proceedings, 9.162–9.178 group litigation orders, 9.184–9.191 introduction, 9.148 overview, 9.101 representative proceedings, 9.149– 9.161 code of conduct, 3.8–3.54 collective proceedings in CAT generally, 9.162–9.178 introduction, 9.101 complaints, 3.52 conclusion, 3.69 conditional fee agreements, 8.91–8.98 confidentiality, 3.40 contingent litigation aid fund, 8.16–8.17 costs case law, 7.11–7.88 generally, 7.8–7.10 introduction, 3.3 ‘purity’ test, 7.19–7.26 damages-based agreements, 8.99–8.115 defendants, 3.66–3.68 ethical obligations ALF Code of Conduct, 4.55–4.58 competence, 4.33 conclusion, 4.59

429

Index England and Wales – contd ethical obligations – contd confidentiality, 4.34–4.36 conflicts of interest, 4.40–4.51 damages-based agreements, 4.37–4.39 fee-splitting, 4.37–4.39 introduction, 4.22–4.26 professional regulation, 4.27–4.54 SRA Conduct of Business Rules, 4.52–4.54 SRA Code of Conduct, 4.24, 4.33– 4.51 SRA Firm Code, 4.27, 4.33–4.51 SRA Scope Rules, 4.28, 4.52–4.54 SRA Principles, 4.27, 4.31–4.32 fund vehicles, 3.51 funded parties, 3.60–3.62 funder’s identity, 3.38 group litigation orders, 9.184–9.191 independent advice, 3.41–3.43 introduction, 3.2 investors, 3.58–3.59 Jackson review, 3.2–3.11 legal advice privilege generally, 5.19–5.30 introduction, 5.17–5.18 meaning, 5.4 legal aid availability, 8.5 challenges, 8.9 eligibility, 8.6 exceptional case funding, 8.7–8.8 generally, 8.3–8.4 Legal Aid Agency, 8.3 perspectives, 8.9 legal professional privilege common interest privilege, 5.37–5.46 generally, 5.13–5.17 legal advice privilege, 5.19–5.30 litigation privilege, 5.31–5.36 types, 5.18 litigation funding agreements, 3.17–3.19 litigation privilege generally, 5.31–5.36 introduction, 5.17–5.18 meaning, 5.4 marketing, 3.39 monitoring investments, 3.53–3.54 other issues, 3.55–3.68 other liabilities, 3.47–3.48 privilege after-the-event insurance, and, 5.111– 5.130 application to TPLF, 5.47–5.133 common interest privilege, 5.37–5.46 communications between claimants, lawyers and funders, 5.52–5.78

England and Wales – contd privilege – contd Competition Appeal Tribunal, and, 5.131–5.133 disclosure of funding arrangements, 5.90–5.133 documents produced by funders, 5.79–5.89 generally, 5.12 introduction, 5.4 legal advice privilege, 5.19–5.30 legal professional privilege, 5.13–5.18 litigation privilege, 5.31–5.36 regulation and law access to capital, 3.12–3.14 capital adequacy, 3.20–3.31 claimant’s lawyers, 3.63–3.65 claimant’s legal team, 3.44–3.46 complaints, 3.52 conclusion, 3.69 confidentiality, 3.40 defendants, 3.66–3.68 fund vehicles, 3.51 funded parties, 3.60–3.62 funder’s identity, 3.38 independent advice, 3.41–3.43 introduction, 3.2 investors, 3.58–3.59 Jackson review, 3.2–3.11 marketing, 3.39 monitoring investments, 3.53–3.54 other issues, 3.55–3.68 other liabilities, 3.47–3.48 relevant disputes, 3.15–3.16 settlement, 3.49–3.50 statutory regulation, 3.4–3.7 subsidiaries, 3.51 termination of ongoing litigation, 3.32–3.36 relevant disputes, 3.15–3.16 representative proceedings, 9.149–9.161 security for costs, 7.95–7.112 settlement, 3.49–3.50 state funding legal aid, 8.3–8.9 ‘ombudsman’ schemes, 8.10–8.11 statutory regulation, 3.4–3.7 subsidiaries, 3.51 termination of ongoing litigation, 3.32–3.36 users of litigation funding, 10.14–10.17 Enforcement action users of litigation funding, 10.47 Ethical obligations choice of law, 4.2–4.7 conclusion, 4.59 England and Wales, in ALF Code of Conduct, 4.55–4.58

430

Index Ethical obligations – contd England and Wales, in – contd competence, 4.33 conclusion, 4.59 confidentiality, 4.34–4.36 conflicts of interest, 4.40–4.51 damages-based agreements, 4.37–4.39 fee-splitting, 4.37–4.39 introduction, 4.22–4.26 professional regulation, 4.27–4.54 SRA Conduct of Business Rules, 4.52–4.54 SRA Code of Conduct, 4.24, 4.33– 4.51 SRA Firm Code, 4.27, 4.33–4.51 SRA Scope Rules, 4.28, 4.52–4.54 SRA Principles, 4.27, 4.31–4.32 introduction, 4.1 US, in ‘client protection letter’, 4.17 competence, 4.8–4.11 confidentiality, 4.12–4.13 fee-splitting, 4.18–4.21 informed consent, 4.16–4.17 performance of acts for benefit of funder, and, 4.16 side promises, 4.17 truthfulness in statements, 4.14–4.15 Family offices flexibility, 11.44–11.45 generally, 11.29–11.45 liquidity events, and, 11.31 long-term outlook, 11.34–11.37 multi-family offices, 11.30 nature of litigation finance, 11.38–11.43 resources, 11.44–11.45 single family offices, 11.29–11.32 Fee deferral risk assessment and management, 12.84– 12.85 Fee-splitting ethical obligations England and Wales, 4.37–4.39 US, 4.18–4.21 US regulation, 3.87–3.91 Fixed charge litigation funding agreements, 6.18–6.19 France users of litigation funding, 10.34 Fund vehicles English regulation, 3.51 Funded parties English regulation, 3.60–3.62 Funder’s identity English regulation, 3.38 Funding definition, 2.1

Germany users of litigation funding, 10.33 Governing law litigation funding agreements, 6.55 Hedge funds investors, 11.84–11.89 Historical background conclusion, 2.20 early period, 2.3–2.7 introduction, 2.1–2.2 modern period, 2.8–2.19 UK and Ireland, in, 2.8–2.12 US, in, 2.13–2.19 Hong Kong contingent litigation aid fund, 8.18 regulation and law capital adequacy, 3.153–3.154 generally, 3.149–3.152 termination, 3.155–3.157 users of litigation funding, 10.35–10.36 Illiquidity risk profile, 12.26–12.30 Immigration philanthropic litigation funding, 8.51 Independent advice English regulation, 3.41–3.43 litigation funding agreements, 6.62–6.63 Informed consent ethical obligations, 4.16–4.17 Insolvency litigation adverse costs after-the-event insurance, 9.62–9.63 assignment of claim, 9.55–9.57 considerations, 9.46 other forms of finance, 9.50 after-the-event insurance, 9.62–9.64 assignment of claim, 9.51–9.59 availability of legal expenses insurance, 9.48 before-the-event insurance, 9.48 considerations for practitioners, 9.44–9.47 contingent fees, 9.60–9.61 creditor support, 9.49 damages-based agreements, 9.61 evolution of funding, 9.39–9.43 introduction, 9.38 maintenance and champerty, and, 9.42 no-win-no-fee, 9.60 other forms of external finance, 9.50 Insurance adverse costs, and case law, 7.15 control of litigation, 7.18 generally, 7.17 after-the event (ATE) generally, 8.72–8.82 introduction, 8.62 risk assessment and management, 12.88

431

Index Insurance – contd before-the-event (BTE) generally, 8.64–8.71 introduction, 8.61 generally, 8.60–8.63 legal expenses policies after-the event, 8.72–8.82 before-the-event, 8.64–8.71 introduction, 8.61–8.62 ‘no win no fee’, and, 8.63 other uses, 8.83–8.88 risk assessment and management ATE insurance, 12.88 generally, 12.87–12.89 security for costs, and Australia, 7.120–7.122 generally, 7.113–7.119 US regulation, 3.92–3.96 work-in-progress hours generally, 8.84 introduction, 8.63 International arbitration adverse costs CIETAC rules, 7.122 commercial cases, 7.163–7.177 generally, 7.123–7.131 HKIAC rules, 7.125 ICC rules, 7.124 ICDR rules, 7.125 introduction, 7.6 investor v State cases, in, 7.132–7.162 LCIA rules, 7.121 PCA rules, 7.122 SIAC rules, 7.125 UNCITRAL rules, 7.122 privilege, 5.176–5.189 users of litigation funding, 10.37–10.44 Investment term risk profile, 12.31–12.39 Investment treaties arbitration conclusions, 9.85–9.93 costs, 9.82–9.84 parties, 9.73–9.77 value, 9.78–9.81 bilateral treaties, 9.66 disclosure of funding, 9.69–9.71 dispute resolution, 9.67 forms, 9.66 introduction, 9.65 multilateral treaties, 9.66 protections, 9.68 public international law, and, 9.65 types, 9.66 Investors endowment funds cashflow profile, 11.54–11.56

Investors – contd endowment funds – contd considerations, 11.51–11.53 generally, 11.46–11.50 English regulation, 3.58–3.59 family offices flexibility, 11.44–11.45 generally, 11.29–11.45 liquidity events, and, 11.31 long-term outlook, 11.34–11.37 multi-family offices, 11.30 nature of litigation finance, 11.38–11.43 resources, 11.44–11.45 single family offices, 11.29–11.32 hedge funds, 11.84–11.89 introduction, 11.28 private equity, 11.84–11.89 retail investors, 11.63–11.83 sovereign wealth funds, 11.57–11.62 venture capital, and, 11.51 Jackson review English regulation, 3.2–3.11 Key-person risk risk profile, 12.40–12.42 Lawyer-client relationship litigation funding agreements, 6.13 Lawyers English regulation, 3.44–3.46, 3.63–3.65 ethical obligations choice of law, 4.2–4.7 conclusion, 4.59 England and Wales, in, 4.22–4.58 introduction, 4.1 US, in, 4.8–4.21 Legal advice privilege See also Privilege generally, 5.19–5.30 introduction, 5.17–5.18 meaning, 5.4 Legal aid and assistance England and Wales, in availability, 8.5 challenges, 8.9 eligibility, 8.6 exceptional case funding, 8.7–8.8 generally, 8.3–8.4 Legal Aid Agency, 8.3 Perspectives, 8.9 introduction, 8.1–8.2 US, in, 8.12–8.13 Legal expenses insurance adverse costs, and case law, 7.15 control of litigation, 7.18 generally, 7.17 after-the event (ATE) generally, 8.72–8.82

432

Index Legal expenses insurance – contd after-the event (ATE) – contd introduction, 8.62 before-the-event (BTE) generally, 8.64–8.71 introduction, 8.61 introduction, 8.61–8.62 ‘no win no fee’, and, 8.63 security for costs, and Australia, 7.120–7.122 generally, 7.113–7.119 US regulation, 3.92–3.96 Legal merits risk profile, 12.10–12.16 Legal professional privilege See also Privilege generally, 5.13–5.17 legal advice privilege generally, 5.19–5.30 introduction, 5.17–5.18 meaning, 5.4 litigation privilege generally, 5.31–5.36 introduction, 5.17–5.18 meaning, 5.4 types, 5.18 Legal team ethical obligations choice of law, 4.2–4.7 conclusion, 4.59 England and Wales, in, 4.22–4.58 introduction, 4.1 US, in, 4.8–4.21 regulation in England, 3.44–3.46, 3.63– 3.65 risk profile, 12.47–12.49 Legal uncertainty risk profile, 12.9 Legislation and regulation Australia amending regulations, 3.126–3.131 Best Practice Guidelines, 3.137 capital adequacy, 3.141–3.144 conflicts of interest, 3.123 consumer protections, 3.124 deceptive conduct, 3.124 ‘funder’, 3.138 generally, 3.117–3.118 historical background, 3.119–3.122 ‘manager’, 3.139 misleading conduct, 3.124 policy, 3.148 reforms, 3.132–3.135 self-regulation, 3.136–3.148 termination, 3.145–3.147 unconscionable conduct, 3.124 unfair contract terms, 3.124

Legislation and regulation – contd England access to capital, 3.12–3.14 adverse costs, 3.3 Arkin cap, 3.3 capital adequacy, 3.20–3.31 claimant’s lawyers, 3.63–3.65 claimant’s legal team, 3.44–3.46 code of conduct, 3.8–3.54 complaints, 3.52 conclusion, 3.69 confidentiality, 3.40 defendants, 3.66–3.68 fund vehicles, 3.51 funded parties, 3.60–3.62 funder’s identity, 3.38 independent advice, 3.41–3.43 introduction, 3.2 investors, 3.58–3.59 Jackson review, 3.2–3.11 litigation funding agreements, 3.17–3.19 marketing, 3.39 monitoring investments, 3.53–3.54 other issues, 3.55–3.68 other liabilities, 3.47–3.48 relevant disputes, 3.15–3.16 settlement, 3.49–3.50 statutory regulation, 3.4–3.7 subsidiaries, 3.51 termination, 3.32–3.36 Hong Kong capital adequacy, 3.153–3.154 generally, 3.149–3.152 termination, 3.155–3.157 introduction, 3.1 Singapore capital adequacy, 3.163–3.165 generally, 3.158–3.162 termination, 3.166 US bias, 3.77–3.79 champerty and maintenance, 3.82 conflicts of interest, 3.77–3.79 control, 3.80–3.86 definition, 3.74–3.76 disclosure debate, 3.73–3.96 fee-splitting, 3.87–3.91 generally, 3.70–3.72 insurance analogy, 3.92–3.96 legislation, 3.97–3.116 Litigation Funding Transparency Act, 3.116 Maine, 3.98 New York, 3.113–3.115 party in interest, 3.80–3.86 usury, 3.82 Vermont, 3.100–3.106 West Virginia, 3.107–3.112

433

Index Liquidity risk profile, 12.26–12.30 Litigation definition, 2.1 Litigation funding background, 1.3–1.7 business context, 1.23–1.25 legal principles, 1.8–1.22 meaning, 1.2 Litigation funding agreements (LFAs) bank credit agreements, as, 6.14 ‘boilerplate’ provisions, 6.53–6.55 categories, 6.3 certificate of compliance, 6.4 champerty and maintenance, and, 6.13 class representatives, 6.43 closing, 6.56–6.60 commercial agreements, 6.3 commitment by funder, 6.24–6.30 conclusion, 6.64 confidentiality, 6.54 consumer agreements, 6.3 corporate due diligence, 6.11–6.12 covenants, 6.40–6.42 deed of adherence, 6.4 dispute resolution provisions, 6.55 distribution ‘waterfall’ generally, 6.44–6.49 introduction, 6.7 due diligence, 6.11–6.12 engagement agreement, 6.4 fixed charge, 6.18–6.19 funder’s commitment, 6.24–6.30 funder’s option, 6.22–6.23 funder’s success fee, 6.31 governing law, 6.55 grant of security interest, 6.15–6.20 independent advice for claimant, 6.62–6.63 introduction, 6.1–6.2 lawyer-client relationship, and, 6.13 litigation funding process, 6.32–6.33 miscellaneous provisions, 6.53–6.55 non-recourse transactions, as, 6.21 option, 6.22–6.23 parties, 6.4–6.7 pre-paid forward purchase agreements, 6.61 purpose, 6.2 regulation in England, 3.17–3.19 representations, 6.34–6.39 retainer agreement, 6.4 role, 6.2 security interest in claims, as, 6.15–6.20 signature, 6.8–6.12 success fee, 6.31 termination rights, 6.50–6.52 types, 6.3

Litigation funding agreements (LFAs) – contd US tax implications, 6.61 warranties, 6.34–6.39 Litigation Funding Transparency Act US regulation, 3.116 Litigation privilege See also Privilege generally, 5.31–5.36 introduction, 5.17–5.18 meaning, 5.4 Maine US regulation, 3.98 Maintenance and champerty adverse costs, 7.17 Arkin cap on costs, 7.44 conditional fee agreements, 8.92 English regulation funded parties, 3.61 ethical obligations UK lawyers, 4.46 US lawyers, 4.11 historical background early days, 2.5–2.7 modern history in UK and Ireland, 2.9–2.12 modern history in US, 2.15–2.18 Hong Kong regulation, 3.149 insolvency litigation, 9.42 litigation funding agreements, 6.13 privilege application in the US, 5.151–5.152 introduction, 5.3 revenge funding, 8.52 US regulation fee-sharing, 3.89 introduction, 3.71 party in interest, 3.82 Manager Australian regulation, 3.139 Marketing English regulation, 3.39 Merits of claims risk profile, 12.10–12.16 Misleading conduct Australian regulation, 3.124 Monitoring investments English regulation, 3.53–3.54 Netherlands class actions, 9.179–9.181 users of litigation funding, 10.32 New York US regulation, 3.113–3.115 ‘No win, no fee’ agreements class actions, 9.96 conditional fee agreements Australia, in, 8.121–8.122

434

Index ‘No win, no fee’ agreements – contd conditional fee agreements – contd Canada, in, 8.123–8.124 England and Wales, in, 8.91–8.98 funding market, and, 8.125–8.126 other jurisdictions, 8.116 US, in, 8.117–8.120 damages-based agreements, 8.99–8.115 generally, 8.63 insolvency litigation, 9.60 introduction, 8.89–8.90 Non-parties adverse costs, 7.12–7.18 Non-recourse transactions litigation funding agreements, 6.21 Ombudsman schemes Financial Ombudsman Service, 8.10–8.11 Housing Dispute Service, 8.11 introduction, 8.1–8.2 Pensions Ombudsman, 8.11 Opt-in class actions, England and Wales, in, 9.184–9.191 generally, 9.182–9.183 Option litigation funding agreements, 6.22–6.23 Opt-out class actions Australia, in, 9.128–9.147 benefits, 9.99 Canada, in, 9.116–9.127 ‘carriage dispute’, 9.100 efficiencies, 9.99–9.100 England and Wales, in collective proceedings, 9.162–9.178 introduction, 9.148 representative proceedings, 9.149– 9.161 EU, in, 9.181 generally, 9.98–9.102 meaning, 9.98 Netherlands, in, 9.179–9.181 US, in, 9.103–9.115 Parties litigation funding agreements, 6.4–6.7 Party in interest US regulation, 3.80–3.86 Patent infringement litigation characterisation, 9.2 claim construction, 9.3 defences, 9.3 funding in the US, and amenable strategies, 9.33–9.37 communications with funders, 9.27– 9.30 delay from PTAB proceedings, 9.14– 9.20 discoverability of LFAs, 9.27–9.30 eligibility, 9.23–9.26

Patent infringement litigation – contd funding in the US, and – contd fluctuations in damages precedents, 9.21–9.22 general arrangements, 9.4–9.9 key issues, 9.10–9.32 patent eligibility, 9.23–9.26 risk from PTAB proceedings, 9.14 standing to sue, 9.11–9.13 strategies, 9.33–9.37 university-owned patents, 9.31–9.32 introduction, 9.1 invalidity, 9.3 meaning, 9.2–9.3 non-infringement, 9.3 strategies, 9.33–9.37 Peer to peer (P2P) platforms finance as an asset class, 11.19–11.25 Philanthropic funding anti-tobacco litigation, 8.47–8.49 generally, 8.44–8.46 immigration litigation, 8.51 voting rights litigation, 8.50 Portfolio diversification risk assessment and management, 12.90– 12.92 Pre-paid forward purchase agreements litigation funding agreements, 6.61 Pricing the risk generally, 12.95–12.102 judicial oversight, 12.103–12.108 Priorities agreement generally, 10.46 Private companies finance as an asset class, 11.17–11.18 Private equity investors, 11.84–11.89 Privilege affirmative disclosure of litigation funding, 5.171–5.174 after-the-event insurance, and, 5.111–5.130 application to TPLF English law, 5.47–5.133 US law, 5.148–5.175 attorney-client privilege application, 5.167–5.170 generally, 5.134–5.136 introduction, 5.5 circumstances in which relationship arise, 5.3 common interest privilege application, 5.167–5.170 communications between claimants, lawyers and funders, 5.73–5.78 generally, 5.139–5.142 introduction, 5.37–5.46 US law, 5.139–5.142

435

Index Privilege – contd common law, and, 5.6 communications between claimants, lawyers and funders common interest privilege, 5.73–5.78 legal advice privilege, 5.52–5.60 litigation privilege, 5.61–5.72 Competition Appeal Tribunal, and, 5.131–5.133 disclosure of funding arrangements, 5.90–5.133 documents produced by funders, 5.79– 5.89 effect of TPLF on client relationship, 5.2 English law after-the-event insurance, and, 5.111– 5.130 application to TPLF, 5.47–5.133 common interest privilege, 5.37–5.46 communications between claimants, lawyers and funders, 5.52–5.78 Competition Appeal Tribunal, and, 5.131–5.133 disclosure of funding arrangements, 5.90–5.133 documents produced by funders, 5.79–5.89 generally, 5.12 introduction, 5.4 legal advice privilege, 5.19–5.30 legal professional privilege, 5.13–5.18 litigation privilege, 5.31–5.36 international arbitration, 5.176–5.189 introduction, 5.1–5.11 legal advice privilege communications between claimants, lawyers and funders, 5.52–5.60 generally, 5.19–5.30 introduction, 5.17–5.18 meaning, 5.4 legal professional privilege common interest privilege, 5.37–5.46 generally, 5.13–5.17 legal advice privilege, 5.19–5.30 litigation privilege, 5.31–5.36 types, 5.18 litigation privilege communications between claimants, lawyers and funders, 5.61–5.72 generally, 5.31–5.36 introduction, 5.17–5.18 meaning, 5.4 US law affirmative disclosure of litigation funding, 5.171–5.174 application to TPLF, 5.148–5.175 attorney-client privilege, 5.134–5.136

Privilege – contd US law – contd common interest exception, 5.139–5.142 generally, 5.134–5.147 introduction, 5.5 relevance of litigation funding, 5.158– 5.161 waiver by third-party disclosure, 5.137–5.138 work product doctrine, 5.143–5.147 waiver by third-party disclosure, 5.137– 5.138 work product doctrine application, 5.162–5.166 generally, 5.143–5.147 introduction, 5.5 Pro bono representation charities, 8.38–8.43 definition, 8.28 generally, 8.27–8.30 lawyers, 8.31–8.37 non-governmental organisations, 8.38– 8.43 sources, 8.30 Public companies finance as an asset class, 11.12–11.16 Regulation Australia amending regulations, 3.126–3.131 Best Practice Guidelines, 3.137 capital adequacy, 3.141–3.144 conflicts of interest, 3.123 consumer protections, 3.124 deceptive conduct, 3.124 ‘funder’, 3.138 generally, 3.117–3.118 historical background, 3.119–3.122 ‘manager’, 3.139 misleading conduct, 3.124 policy, 3.148 reforms, 3.132–3.135 self-regulation, 3.136–3.148 termination, 3.145–3.147 unconscionable conduct, 3.124 unfair contract terms, 3.124 England access to capital, 3.12–3.14 adverse costs, 3.3 Arkin cap, 3.3 capital adequacy, 3.20–3.31 claimant’s lawyers, 3.63–3.65 claimant’s legal team, 3.44–3.46 code of conduct, 3.8–3.54 complaints, 3.52 conclusion, 3.69 confidentiality, 3.40 defendants, 3.66–3.68

436

Index Regulation – contd England – contd fund vehicles, 3.51 funded parties, 3.60–3.62 funder’s identity, 3.38 independent advice, 3.41–3.43 introduction, 3.2 investors, 3.58–3.59 Jackson review, 3.2–3.11 litigation funding agreements, 3.17– 3.19 marketing, 3.39 monitoring investments, 3.53–3.54 other issues, 3.55–3.68 other liabilities, 3.47–3.48 relevant disputes, 3.15–3.16 settlement, 3.49–3.50 statutory regulation, 3.4–3.7 subsidiaries, 3.51 termination, 3.32–3.36 global position, 3.167–3.169 Hong Kong capital adequacy, 3.153–3.154 generally, 3.149–3.152 termination, 3.155–3.157 introduction, 3.1 Singapore capital adequacy, 3.163–3.165 generally, 3.158–3.162 termination, 3.166 US bias, 3.77–3.79 champerty and maintenance, 3.82 conflicts of interest, 3.77–3.79 control, 3.80–3.86 definition, 3.74–3.76 disclosure debate, 3.73–3.96 fee-splitting, 3.87–3.91 generally, 3.70–3.72 insurance analogy, 3.92–3.96 legislation, 3.97–3.116 Litigation Funding Transparency Act, 3.116 Maine, 3.98 New York, 3.113–3.115 party in interest, 3.80–3.86 usury, 3.82 Vermont, 3.100–3.106 West Virginia, 3.107–3.112 Regulatory risk risk profile, 12.17–12.25 Representations litigation funding agreements, 6.34–6.39 Retail investors investors, 11.63–11.83 Retainer agreement litigation funding agreements, 6.4

‘Revenge’ funding Bollea v Gawker Media, 8.53–8.54 generally, 8.52 use of courts as a weapon, 8.55–8.59 Rewards of funding big wins, 12.109–12.113 judicial oversight, 12.103–12.108 pricing the risk, 12.95–12.102 Risk assessment and management See also Risk profile ATE insurance, and, 12.88 co-funding, 12.82–12.83 conditional fee agreements, and, 12.85 control and conduct, 12.94 cost capping, 12.86 damages-based agreements, and, 12.85 deferral of legal fees, 12.84–12.85 diversification of portfolio, 12.90–12.92 generally, 12.78–12.81 insurance, 12.87–12.89 law firm portfolio funding, 12.93 minimisation, 12.82–12.94 mitigation, 12.82–12.94 portfolio diversification, 12.90–12.92 spreading of risk, 12.82–12.94 sub-funding, 12.82–12.83 Risk pricing generally, 12.95–12.102 judicial oversight, 12.103–12.108 Risk profile See also Risk assessment and management adverse cost risk, 12.67–12.71 assignment, and, 12.4 big losses, 12.72–12.77 big wins, 12.109–12.113 circumvention risk, 12.52–12.53 claimant risk, 12.43–12.46 competition risk, 12.58–12.59 concentration risk, 12.50–12.51 conclusion, 12.114 costs exposure risk, 12.67–12.71 currency risk, 12.65–12.66 decision-maker risk, 12.54–12.57 defendant credit/solvency risk, 12.60– 12.61 duration risk, 12.31–12.39 economic theory, and, 12.2 enforcement risk, 12.62–12.64 high rewards, 12.95–12.108 illiquidity, 12.26–12.30 introduction, 12.1–12.8 investment term, 12.31–12.39 key-person risk, 12.40–12.42 key risks, 12.9–12.71 legal merits, 12.10–12.16 legal team risk, 12.47–12.49

437

Index Risk profile – contd legal uncertainty, 12.9 regulatory risk, 12.17–12.25 speculation, and, 12.5 uncertainty, and, 12.2–12.3 Security for costs after-the-event insurance, and Australia, 7.120–7.122 generally, 7.113–7.122 Australia, in after-the-event insurance, 7.120–7.122 generally, 7.96 England, in, 7.95–7.112 form, 7.3 introduction, 7.3 relevance, 7.7 Security interest litigation funding agreements, 6.15–6.20 Seed funding users of litigation funding, 10.51 Settlement English regulation, 3.49–3.50 Side promises ethical obligations, 4.17 Singapore regulation and law capital adequacy, 3.163–3.165 generally, 3.158–3.162 termination, 3.166 users of litigation funding, 10.35–10.36 Solicitors Regulatory Authority (SRA) Conduct of Business Rules, 4.52–4.54 Code of Conduct competence, 4.33 confidentiality, 4.34–4.36 conflicts of interest, 4.40–4.51 damages-based agreements, 4.37–4.39 fee-splitting, 4.37–4.39 introduction, 4.24 Firm Code competence, 4.33 confidentiality, 4.34–4.36 conflicts of interest, 4.40–4.51 damages-based agreements, 4.37– 4.39 fee-splitting, 4.37–4.39 introduction, 4.27 Scope Rules generally, 4.52–4.54 introduction, 4.28 Principles generally, 4.31–4.32 introduction, 4.27 Sovereign wealth funds investors, 11.57–11.62 Speculation risk profile, 12.5

State funding England and Wales, in legal aid, 8.3–8.9 ‘ombudsman’ schemes, 8.10–8.11 Financial Ombudsman Service, 8.10– 8.11 Housing Dispute Service, 8.11 introduction, 8.1–8.2 legal aid availability, 8.5 challenges, 8.9 eligibility, 8.6 exceptional case funding, 8.7–8.8 generally, 8.3–8.4 Legal Aid Agency, 8.3 perspectives, 8.9 Pensions Ombudsman, 8.11 US, in, 8.12–8.13 Sub-funding risk assessment and management, 12.82– 12.83 Subsidiaries English regulation, 3.51 Success fee litigation funding agreements, 6.31 Supplementary legal aid scheme (SLAS) Australia, 8.19–8.21 Canada, 8.22–8.25 England and Wales, 8.16–8.17 Europe, 8.26 generally, 8.14–8.15 Hong Kong, 8.18 volatility, 8.15 Taxation accounting, 13.23–13.26 character of funding introduction, 13.7 litigation funding companies, 13.14– 13.21 recipient of litigation funding, 13.46– 13.55 US entities, 13.66–13.79 claimants character of funding, 13.46–13.55 introduction, 13.45 nature of return, 13.46–13.55 resolution of underlying claim, 13.46– 13.48 tax point, 13.56–13.57 treatment of litigation funding, 13.52 considerations for UK claimants, 13.45–13.57 generally, 13.8–13.12 introduction, 13.4 law firms, 13.58–13.62 litigation funding companies, 13.13– 13.44

438

Index Taxation – contd considerations for US agents, 13.125–13.126 business risk to funder, 13.121–13.126 capital asset, 13.91–13.94 capital gains for counterparty, 13.95 capital gains for funder, 13.96–13.98 character of funding, 13.66–13.79 character of income, 13.90–13.100 cross-border issues, 13.115–13.131 deferral of delivery, 13.104–13.106 effectively connected income, 13.127 generally, 13.63 interest income from loan, 13.99– 13.100 introduction, 13.4 investor status, 13.84–13.86 IRC section 1234A, 13.111–13.114 litigation funding agreements, and, 6.61 loan criteria, 13.70–13.73 loan treatment for counterparty and funder, 13.68–13.69 main issues, 13.64 open transaction doctrine, 13.107– 13.110 parties to funding agreement, 13.65 partnerships creating risk, 13.125– 13.126 permanent establishent, 13.128–13.131 prepaid forward agreement, 13.101– 13.103 sale criteria, 13.76–13.79 sale treatment for counterparty and funder, 13.74–13.75 sourcing capital gains, 13.116–13.117 sourcing interest income, 13.118– 13.120 tax point, 13.101–13.114 trade risk to funder, 13.121–13.126 trader status, 13.87–13.89 trading-investment distinction, 13.80– 13.89 Treaty access, 13.128–13.131 cross-border agreements introduction, 13.7 litigation funding companies, 13.33– 13.44 US entities, 13.115–13.131 general considerations, 13.3–13.7 introduction, 13.1–13.2 key themes, 13.7 law firms introduction, 13.58 nature of return, 13.59 tax point, 13.60–13.62 litigation funding companies accounting, 13.23–13.26

Taxation – contd litigation funding companies – contd character of funding, 13.14–13.21 cross-border agreements, 13.33–13.44 introduction, 13.13 loss utilisation, 13.31–13.32 nature of return, 13.14–13.21 overview, 13.8 permanent establishments, 13.38–13.40 source risk, 13.34–13.37 tax point, 13.22–13.32 trading-investment distinction, 13.27– 13.30 unsuccessful case outcome, 13.31–13.32 withholding tax, 13.41–13.44 loss utilisation, 13.31–13.32 nature of return introduction, 13.7 litigation funding companies, 13.14– 13.21 recipient of litigation funding, 13.46– 13.55 permanent establishments, 13.38–13.40 principles, 13.5–13.6 recipient of litigation funding character of funding, 13.46–13.55 introduction, 13.45 nature of return, 13.46–13.55 resolution of underlying claim, 13.46– 13.48 tax point, 13.56–13.57 treatment of litigation funding, 13.52 resolution of underlying claim, 13.46– 13.48 tax point introduction, 13.7 litigation funding companies, 13.22– 13.32 recipient of litigation funding, 13.56– 13.57 US entities, 13.101–13.114 trading-investment distinction, 13.27–13.30 unsuccessful case outcome, 13.31–13.32 withholding tax, 13.41–13.44 Term of investment risk profile, 12.31–12.39 Termination of ongoing litigation Australian regulation, 3.145–3.147 English regulation, 3.32–3.36 Hong Kong regulation, 3.155–3.157 Singapore regulation, 3.166 Termination rights litigation funding agreements, 6.50–6.52 Third-party litigation funding (TPLF) adverse costs, and after-the-event insurance, 7.113–7.122 case law, 7.11–7.95

439

Index Third-party litigation funding (TPLF) – contd adverse costs, and – contd conclusions, 7.178 generally, 7.8–7.10 introduction, 7.1–7.7 security, 7.96–7.112 agreement boilerplate clauses, 6.53–6.55 categories, 6.3 class representatives, 6.43 closing, 6.56–6.60 commitment, 6.24–6.30 conclusion, 6.64 covenants, 6.40–6.42 distribution waterfall, 6.44–6.49 funding process, 6.32–6.33 grant of security interest, 6.15–6.20 independent advice, 6.62–6.63 introduction, 6.1–6.2 lawyer-client relationship, 6.13 nature, 6.14 non-recourse transactions, as, 6.21 option, 6.22–6.23 parties, 6.4–6.7 representations, 6.34–6.39 signatures, 6.8–6.12 success fee, 6.31 termination rights, 6.50–6.52 US tax implications, 6.61 warranties, 6.34–6.39 areas of opportunity Asia, 10.35–10.36 Australia, 10.18–10.20 Canada, 10.26–10.30 England and Wales, 10.14–10.17 Europe, 10.31–10.34 France, 10.34 Germany, 10.33 international arbitration, 10.37–10.44 introduction, 10.13 Netherlands, 10.32 US, 10.21–10.25 asset class, as comparison with London offices, 11.3–11.6 complexity, 11.20 direct investing, 11.19–11.27 funds, 11.8–11.11 introduction, 11.1–11.2 peer to peer platforms, 11.19–11.25 private companies, 11.17–11.18 public companies, 11.12–11.16 structures for investment, 11.7–11.27 definition, 2.1 distinction from assignment, 2.3–2.7 due diligence, 10.51–10.54

Third-party litigation funding (TPLF) – contd enforcement action, for, 10.47 ethical obligations choice of law, 4.2–4.7 conclusion, 4.59 England and Wales, in, 4.22–4.58 introduction, 4.1 US, in, 4.8–4.21 funders, 10.7–10.12 historical background conclusion, 2.20 early period, 2.3–2.7 introduction, 2.1–2.2 modern period, 2.8–2.19 UK and Ireland, in, 2.8–2.12 US, in, 2.13–2.19 investors endowment funds, 11.46–11.56 family offices, 11.29–11.45 hedge funds, 11.84–11.89 introduction, 11.28 private equity, 11.84–11.89 retail investors, 11.63–11.83 sovereign wealth funds, 11.57–11.62 legislation Australia, 3.117–3.148 England, 3.2–3.69 Hong Kong, 3.149–3.157 introduction, 3.1 Singapore, 3.158–3.166 US, 3.70–3.116 ‘litigation’, 2.1 priorities agreement, 10.46 privilege application under English law, 5.47– 5.133 application under US law, 5.148–5.175 introduction, 5.1–5.11 purpose, 10.55–10.59 regulation Australia, 3.117–3.148 England, 3.2–3.69 Hong Kong, 3.149–3.157 introduction, 3.1 Singapore, 3.158–3.166 US, 3.70–3.116 ‘seed funding’, 10.51 structure, 10.45–10.54 ‘third party’, 2.2 users, 10.1–10.63 Tobacco philanthropic litigation funding, 8.47–8.49 Trade unions adverse costs, and, 7.17 Treaty arbitration conclusions, 9.85–9.93

440

Index Treaty arbitration – contd costs, 9.82–9.84 generally, 9.65–9.72 investment treaties bilateral, 9.66 disclosure of funding, 9.69–9.71 dispute resolution, 9.67 forms, 9.66 introduction, 9.65 multilateral, 9.66 protections, 9.68 types, 9.66 parties, 9.73–9.77 public international law, and, 9.65 value, 9.78–9.81 Truthfulness in statements ethical obligations, 4.14–4.15 Uncertainty risk profile, 12.2–12.3 Unconscionable conduct Australian regulation, 3.124 Unfair contract terms Australian regulation, 3.124 US regulation and law adverse costs, 7.5 attorney-client privilege application, 5.167–5.170 generally, 5.134–5.136 introduction, 5.5 bias, 3.77–3.79 champerty and maintenance, 3.82 class actions, 9.103–9.115 common interest exception, 5.139–5.142 conditional fee agreements, 8.117–8.120 conflicts of interest, 3.77–3.79 control, 3.80–3.86 costs awards, 7.5 definition, 3.74–3.76 disclosure debate, 3.73–3.96 ethical obligations ‘client protection letter’, 4.17 competence, 4.8–4.11 confidentiality, 4.12–4.13 fee-splitting, 4.18–4.21 informed consent, 4.16–4.17 performance of acts for benefit of funder, and, 4.16 side promises, 4.17 truthfulness in statements, 4.14–4.15 fee-splitting, 3.87–3.91 insurance analogy, 3.92–3.96 legislation introduction, 3.97–3.116 Litigation Funding Transparency Act, 3.116 Maine, 3.98 New York, 3.113–3.115

US regulation and law – contd legislation – contd Vermont, 3.100–3.106 West Virginia, 3.107–3.112 Litigation Funding Transparency Act, 3.116 Maine, 3.98 New York, 3.113–3.115 party in interest, 3.80–3.86 privilege affirmative disclosure of litigation funding, 5.171–5.174 application to TPLF, 5.148–5.175 attorney-client privilege, 5.134–5.136 common interest exception, 5.139– 5.142 generally, 5.134–5.147 introduction, 5.5 relevance of litigation funding, 5.158– 5.161 waiver by third-party disclosure, 5.137–5.138 work product doctrine, 5.143–5.147 regulation bias, 3.77–3.79 champerty and maintenance, 3.82 conflicts of interest, 3.77–3.79 control, 3.80–3.86 definition, 3.74–3.76 disclosure debate, 3.73–3.96 fee-splitting, 3.87–3.91 generally, 3.70–3.72 insurance analogy, 3.92–3.96 party in interest, 3.80–3.86 usury, 3.82 state funding, 8.12–8.13 usury, 3.82 users of litigation funding, 10.21–10.24 Vermont, 3.100–3.106 waiver by third-party disclosure, 5.137– 5.138 West Virginia, 3.107–3.112 work product doctrine application, 5.162–5.166 generally, 5.143–5.147 introduction, 5.5 US tax litigation funding agreements, 6.61 Users of litigation funding areas of opportunity Asia, 10.35–10.36 Australia, 10.18–10.20 Canada, 10.26–10.30 England and Wales, 10.14–10.17 Europe, 10.31–10.34 France, 10.34 Germany, 10.33

441

Index Users of litigation funding – contd areas of opportunity – contd international arbitration, 10.37–10.44 introduction, 10.13 Netherlands, 10.32 US, 10.21–10.25 conclusion, 10.60–10.63 due diligence, 10.51–10.54 enforcement action, for, 10.47 funders, 10.7–10.12 international arbitration, and, 10.37–10.44 introduction, 10.1–10.6 priorities agreement, 10.46 purpose of funding, 10.55–10.59 ‘seed funding’, 10.51 structure of funding, 10.45–10.54 types of funder, 10.11

Usury US regulation, 3.82 Venture capital investors, 11.51 Vermont US regulation, 3.100–3.106 Voting rights philanthropic litigation funding, 8.50 Warranties litigation funding agreements, 6.34– 6.39 West Virginia US regulation, 3.107–3.112 Work product doctrine application, 5.162–5.166 generally, 5.143–5.147 introduction, 5.5

442