Kerry Underwood

BAD NEWS FOR THIRD PARTY LITIGATION FUNDERS

with 4 comments


There have been two pieces of bad news for third party litigation funders recently.

On 23 May 2017 Ireland’s Supreme Court held that litigation funding is both a civil and criminal offence in Ireland.

In Persona Digital Telephony Ltd v Minister for Public Enterprise

the claimant, Persona, sought a declaration that by entering into a Litigation Funding Agreement it was not “engaging in an abuse of process and/or are not contravening rules on maintenance and champerty.”

The Supreme Court of Ireland refused to grant such an order and upheld the decision of the High Court in Ireland that third party funding is unlawful.

Thus the Supreme Court in Ireland refused to relax the rule relating to maintenance and champerty, which prevents non-parties from financing litigation.

In the absence of a change of law by the Irish Parliament, that is the end of litigation funding in Ireland.

Meanwhile, in England and Wales, the High Court considered the issue of security for costs against non-parties, here litigation funders, in the case of

the RBS Rights Issue Litigation [2017] EWHC 1217 (Ch).

The 32 page decision is a detailed explanation of the law in relation to non-party Costs Orders and third party involvement in proceedings and the distinction between commercial litigation funders and pure funders, and the fact that that is not always an easy line to draw.

The judgment also looks at factors influencing the courts’ exercise of what is a wide discretion in relation to non-party Costs Orders and security for costs by non-parties.

These include the third parties’ awareness of the risk of liability for costs, the risk of non-payment by the primary and third parties, the existence and adequacy of After the Event insurance and any delay in making an application and the closeness of the application to trial.

Here the defendants applied for security of costs pursuant to CPR 25.14(2)(b) against two third party litigation funders who were funding claimants in a case subject to a Group Litigation Order (GLO).

The applications were made on the basis that the third party funders although not substantive parties, were persons who, as funders of the claimants’ litigation costs, may be liable pursuant to section 51 of the Senior Courts Act 1981 in respect of any order against the claimants for adverse costs on the conclusion of the proceedings.

This was an action in connection with an allegedly misleading prospectus in relation to a rights issue of RBS shares.

Thus it was a not a personal injury action and was not protected by Qualified One-Way Costs Shifting.

Previously the court had refused an application that the claimants disclose any ATE policy, but had granted an application that the third party funders be identified.

42% of the claims then settled, meaning that the third party funders would receive substantial sums in relation to those settled claims.

Section 51 provides:

“(1) Subject to the provisions of this or any other enactment and to rules of court, the costs of and incidental to all proceedings in-

(a) the civil division of the Court of Appeal;

(b) the High Court, and

(c) any county court,

shall be in the discretion of the court.

(2) Without prejudice to any general power to make rules of court, such rules may make provision for regulating matters relating to the costs of those proceedings…

(3) The court shall have full power to determine by whom and to what extent the costs are to be paid.”

Case law establishes that non-party Costs Orders are to be regarded as exceptional, but here the court said that a case with multiple claimants seeking to vindicate their rights under a GLO, and who had been accorded by the court the considerable benefit of several and not joint liability for costs, was likely to be exceptional.

CPR 25.14 allows an order for security of costs to be made against a non-party.

The High Court said:

“19.  The potential exposure of litigation funders to orders for costs against them at the end of the day does not, of course, of itself mean that an order for security for costs should be granted. At such an interlocutory stage the court must assess not only whether it is sufficiently clear that the criteria for the potential imposition of liability are fulfilled, but also whether there is a sufficient basis for interlocutory intervention. Of particular relevance 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 will be

(1) whether it is sufficiently clear that the non-party 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;

(2) whether there is a real risk of non-payment such that security against the contingent liability should be granted;

(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;

(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;

(5) whether there are factors, including for example, delay in the making of an application for security or likely adverse effects such as to tip the overall balance against making an order.

 

  1. As to (1) in paragraph [19] above, amongst the important considerations in play is as to the reasons and motivation for the funder’s involvement. In particular, the Court will seek to ascertain whether the funder has become engaged by way of business with a view to profiting from an action in which it otherwise has no interest, or whether it is what is sometimes called a “pure funder”, acting altruistically to enable access to justice and what it perceives to be a worthwhile case to be adjudicated.

 

  1. There will of course be variations within that spectrum (as indeed is illustrated by the rather different positions of the two Respondents in this case).”

In relation to Section 51 Orders the court said:

“34. Furthermore, I accept the Defendants’ analysis that (a) Section 51 orders can be made against non-parties whether or not the claimant is able to pay an adverse costs order himself/herself and (b) CPR 25.14 is ancillary to the Court’s jurisdiction to make costs orders against non-parties under Section 51. If the Court is persuaded that a Section 51 costs order is likely to be made against Hunnewell BVI and LNCP, and that there is a real risk that they may be unable or unwilling to pay, it may well be just and appropriate to make an order under CPR 25.14 to ensure that, when the time comes, there will be funds available to meet such an order.”

The court also said that the case law that an applicant for a non-party Costs Order should warn the third party as soon as possible had little relevance in relation to commercial litigation funders:

“39. However, as the exercise of the jurisdiction has become more usual, and especially with the growth of litigation funding as a business in which funders may be assumed to know their business and its inherent risks, the requirement for express warning has gradually been diluted. Thus in Deutsche Bank v Sebastian Holdings [2016] 4 WLR 17 at paragraph 32 Moore-Bick LJ stated that the importance of a warning will vary from case to case and may depend on the extent to which it would have affected the course of the proceedings.

  1. In my view, in the case of commercial litigation funders, the lack of an express warning is unlikely to be a particularly weighty consideration, still less determinative: it is not for the Court to protect a party from inherent business risks of which it should be well aware.”

Delay in making the application would be a factor, but not a determining one. Here the court quoted with approval LJ Moore-Bick in

Deutsche Bank A.G v Sebastian Holdings [2016] 4 WLR 17  that the “… only immutable principle is that the discretion must be exercised justly.”

The court rejected the third party’s submission that its income from the settled cases would enable it to meet any Costs Order in the ongoing matter.

“65. In my judgment, that evidence is insufficient for that purpose. The absence of any real evidence as to Hunnewell BVI’s financial position leaves the court with no way of knowing whether even quite substantial receipts will result in an available fund for payment of costs, or whether such proceeds will, as it were, go down the plughole for other creditors or unsuccessful ventures in an uncertain line of business. The resort to assertions of confidentiality and secrecy are too general and commonplace to carry conviction and persuade me that they are the true and predominant reasons for reticence.

  1. The impression given of deliberate reticence has not been dispelled; the inference that the real reason for such reticence is that in truth Hunnewell BVI cannot demonstrate sufficient resources to meet an order for costs, has not been displaced by the presently available evidence; and see paragraph [31] above as to the practice of ordering the provision of security for costs in such circumstances.”

The court took into account the inadequacy of the claimant’s After the Event insurance policy.

The court made an order against the professional litigation funder for security for costs.

The court said that it appreciated that this order required the professional funder to provide something similar to ATE cover without receiving a premium, but said that that was a consequence of the risks inherent in undertaking commercial funding for a substantial potential profit without ATE cover being provided.

The court declined to make an order against another third party funder, who it described as a “philanthropist”, who it likened to a pure funder who was not in the business of litigation funding generally, although apparently standing to make a profit in this case.

“120. Put another way, I do not think the evidence presently suggests that LNCP has identified and supported the litigation as a business opportunity; it has extracted a price, but it has sought to assist the parties it has funded to vindicate their rights for their own benefit in the apparent belief that without such assistance a deserving cause would founder. Its support is not, as it were, a self-interested and separate commercial adventure in which the litigation is a vehicle not so much for vindication as speculative profit. It seems to me that its primary motive and interest has been to assist the Related Claimants to obtain damages for their own benefit as compensation for wrong done to them and there is no sufficient evidence that its involvement in this case was primarily or even materially motivated by a wish to gain access to justice to profit from the process.”

 

It may be that these two decisions represent the turning of the tide in relation to third party funding.

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Written by kerryunderwood

August 21, 2017 at 9:27 am

Posted in Uncategorized

4 Responses

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  1. Nonesense

    Bob

    August 21, 2017 at 2:41 pm

  2. A very well-developed post on third party funder.
    The way you explained each point with necessary details and maintained a good balance between theory and practice is really commendable.
    I highly appreciate your hard work for creating this post.
    Many Thanks for sharing.

    Maddux law

    October 28, 2017 at 7:52 am


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