Appetite for destruction?

Has a reduced appetite for risk amongst investors following the recession, combined with proposals for restrictions on the activities of litigation funders supported by Lord Justice Jackson, sounded the death knell for third party funding of large scale commercial litigation in the UK?
 
At the outset of the credit crunch it seemed that third party funding of litigation might emerge as a viable option for those investors looking for a new type of asset class. The theory went that hedge funds and institutional investors could agree to fund all or part of a claimant's legal costs in exchange for a percentage of any damages ultimately paid out. As the economic turmoil spread, many commentators were quick to point out that there was an increased likelihood that companies would look to recoup losses through the courts and such claimants would welcome third party funders willing to fund such actions.
 
Two years on the picture is not so clear. The much vaunted 'tidal wave' of litigation has not materialised as yet (although many arbitration bodies have reported a significant increase in cases as institutions seek to deal with claims away from the public gaze). Further, the actual concept of third party funding has matured a little in the light of some adverse experience.
 
It is worth looking at the outcome of the Stone & Rolls case—perhaps the most high profile example of third party funding in a commercial case. As readers may know, the claimant brought a substantial claim for professional negligence against its former auditors, with the benefit of third party funding. The Court of Appeal struck out the claim and the House of Lords dismissed the claimant's appeal. According to press reports the funder, which had stood to receive 40% of the proceeds had the case succeeded, ultimately accepted liability for the auditors' costs of around £2.5m. Notwithstanding this setback, a legal director of the funder stated in the press that the organisation still had 10 to 12 ongoing cases with a success rate of 80%.
 
Further, those investors interested in third party funding of litigation in the UK might not have been encouraged by the position adopted by Lord Justice Jackson in his seminal report on costs in civil litigation. Talk of a potential voluntary (or not so voluntary) code of practice for funders aimed at cracking down on alleged unscrupulous funders has introduced a new layer of complexity.
 
However, the position might have been much more serious for funders. Jackson LJ rejected the suggestion that full statutory regulation was required in the still 'nascent' third party funding industry. Furthermore, the draft voluntary code to which he lends his support has been developed by the Third Party Litigation Funders Association in conjunction with the Civil Justice Council. The funders are, therefore, having their say.
 
All the indications coming from Europe suggest that there is increasing momentum to encourage collective actions whereby large groups of individuals can bring claims against a single party. These types of actions often struggle to get off the ground without some form of third party funding. This will become even more the case in the UK if Jackson LJ's recommendation, that success fees under conditional fee agreements and after-the-event insurance premiums should cease to be recoverable by successful litigants, is implemented. In such circumstances, the need of claimants for third party funding is likely to increase—it remains to be seen whether third party funders will respond to this increased demand.

Neil Mirchandani, partner, Hogan Lovells
 

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