Litigation funding is nothing new and has been a feature of claims against directors for some time (see ‘What can go wrong’ on our D&O product page).
Notwithstanding this, the profile of litigation funding has been raised recently with the case of RBS, and there is further evidence that it is emerging as a greater threat in the event of alleged wrongdoing, whatever the nature or scale of the organisation in question.
Litigation funding in England and Wales can be broadly categorised into five different forms:
- traditional hourly rates charged in arrears;
- fixed or capped fees;
- conditional fee agreements (“CFAs”);
- damages based agreements (“DBAs” – basically contingency arrangements); and
- third party funding.
Historically, the English legal system has taken a conservative approach and favoured (i) and (ii). Ancient common law doctrines of champerty and maintenance sought to preclude frivolous litigation by restricting profit motives and, instead, sought to serve “justice” as between parties. However, as the twentieth century progressed, the rising cost of litigation prevented many claimants gaining “access to justice” and, at the same time, successive governments (of every political persuasion) sought to squeeze legal aid budgets. Given this landscape, the liberalisation of the legal services market accelerated from the early 1990’s.
CFA’s were revolutionised under New Labour in the late 1990’s when lawyers were allowed to recover up 100% success fees (and ancillary disbursements, such as premiums for ATE insurance) from losing parties. This was the dawn of the “no win no fee” era and CFAs quickly became popular with personal injury lawyers, insolvency practitioners and even celebrities pursuing the tabloid press over their latest indiscretions. In fact, they became so popular that they started to become a problem (in the eyes of Jackson LJ and others), because they started to increase the cost of litigation by passing too much of the burden onto the losing party. The 2013 “Jackson Reforms” stripped the ability of winning parties to recover success fees and ancillary disbursements from the losing party, thus rebalancing the costs burden. An exemption was maintained for insolvency cases until April 2016, but now insolvency practitioners are in the same boat as most prospective claimants.
Since the removal of the exemption, almost half of insolvency practitioners have reportedly noticed a drop in litigation. This could be down to a number factors, such as the continued growth in the wider economy but, more anecdotally, some insolvency practitioners have reportedly found it more difficult to find law firms willing to work on a full CFA (particularly if the creditors cannot afford a success fee/ATE premium). As a result, it is expected that insolvency practitioners will, in time, turn to third party funding if creditors and insolvency practitioners agree to a share of the spoils of any successful claim with a funder. Any impending recessionary movement may quicken this process.
It’s not easy to measure or define the growth in litigation funding, and meaningful statistics are hard to find, but this report states that the global assets of the 16 top litigation funds grew from £180m in 2009 to £1.5bn in 2014 (743% growth). Moreover, with the benefits of third party funding now being visible in high profile D&O cases, such as RBS, RPC consider that it is only matter of time until third party funding is used in more D&O claims and, in particular, those involving insolvency practitioners.