Litigation Funding: A Growth Industry

Author:Mr Francis Kean
Profession:Barlow Lyde & Gilbert

Originally published in BLG's Directors' and Officers' Liability Review, Summer 2007

Litigation funding is a growth industry both in the UK and beyond these shores. Company directors (especially those who benefit from D&O insurance) will be among those in the firing line as tempting targets for such claims.

Other obvious targets include professional advisers. For example, the accountancy firm Moore Stephens has recently found itself on the receiving end of a 90 million negligence claim by the liquidator of Stone & Rolls over its role as auditor of that company. The claim against Moore Stephens is being funded by IM Litigation Funding, a UK company. To date, it is the largest claim in the UK involving independent litigation funders.

It is true that litigation funding is not new. Forms of funding have been available in the context of insolvency for many years. Liquidators, for example, can sell the claims of insolvent companies in return for a promise by the purchaser to pay the company a proportion of any proceeds recovered. That said, the prohibitions against "champerty" and "maintenance" (the promotion and pursuance of claims by non-parties for their own interests) used to carry criminal sanctions. Whilst the criminal offences were abolished under the Criminal Law Act 1967, a civil law rule was retained to the effect that champertous agreements were invalid and unenforceable. However, the effective abolition of legal aid together with the introduction in the mid-1990s of conditional fee arrangements has seen a steady erosion of the English courts' reluctance to enforce litigation funding arrangements.

An important landmark along the way was the decision of the Court of Appeal in Arkin v Borchard Lines Ltd & Ors (2005). Here, the Court of Appeal gave qualified support to third party funders. In that case, however, the Court ruled that if the funder does not simply fund the proceedings but substantially controls or benefits from them, it should potentially be liable for the opposing party's costs up to the extent of the funding provided.

More recently, the Privy Council decision in Massai Aviation Services v Attorney General of the Bahamas (2007) involved the validity of the assignment of litigious rights under Bahamian law. It held that the assignment was valid where there was a 'genuine commercial interest' in the assignment of the cause of action. Noting that the position under English law is effectively the same as the Bahamas...

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