Litigation funding and the little guy

Can litigation funding play a useful role in increasing “access to justice” for the individual, as opposed to an SME with a £1 millon plus damages claim?

The next few years should provide an answer as the litigation funding market matures and develops, but there are some intriguing hints that the combined effects of ABS structures, litigation funding and an incremental step in the law of assignment might work to this effect.

Australia

The modern law of litigation funding in the common-law jurisdictions has its roots down under: as the Australian Court of Appeal noted before the case of Fostif.v.Campbells Cash and Carry [2005] 63 NSWLR 203 was appealed to the High Court:

These changes in attitudes to funders have been influenced by concerns about access to justice and heightened awareness of the costs of litigation. Governments have promoted the legislative changes in response to the spiralling costs of legal aid. Court have recognised these trends and the matters driving them. “Ambulance chasing” still has negative connotations in many quarters, but it is now widely recognised that there are some types of claims that will simply never get off the ground unless traditional attitudes are modified. These include cases involving complex scientific and legal issues. The largely factual account in the book and film A Civil Action has demonstrated the social utility of funded proceedings, the financial risks assumed by funders, and the potential conflicts of interest as between group members in mass tort claims propounding difficult actions against deep-pocketed and determined defendants.

If any personal injury lawyer has not seen “A Civil Action” it can be cheaply purchased on Amazon: leaving aside the amusing incongruity of watching Stephen Fry and John Travolta in the same film, it has the best opening scene of any legal drama in cinema history.

But I return to Fostif. The landmark decision of the High Court of Australia in the Fostif case was to legitimise the role of third party funders who not only funded the litigation but (in Australia) substantially controlled it. In turn third party funding or litigation funding is now recognised as a legitimate form of financing litigation in England and Wales and not prohibited by the last few vestiges of the law of maintenance and champerty.

Yet the scope for deployment of litigation funding (at least in it current form) to promote wider access to justice seems constrained. As noted by HK Insall SC in his article Litigation Funding and the impact of the decision in Campbells Cash& Carry Pty Ltd v Fostif Pty Ltd it may be limited to “big ticket” litigation where claims for damages are substantial, with a claim valued in the hundreds of thousands or millions of pounds in order to provide a sufficient return on investment:

It is questionable whether litigation funders will provide “access to justice” in any broadsense. It is doubtful whether litigation funders have any interest in providing funding forthe vast majority of individual litigants with relatively small “one-off” claims. If they do,it would probably only be on terms which emasculates the litigant’s control of andfinancial interest in the litigation.

This paragraph could be applicable equally to the position in Australia and the position in England and Wales at the current time. Yet the litigation funding market in England and Wales is immature, nascent and according Jackson LJ, unsuited for a regime of statutory regulation.

A role for litigation funding

In a world increasingly devoid of Legal Aid, or where the market for ATE insurance is contracting either because of the introduction of QUOCS or the end of the recoverability of premiums, it is possible to envisage litigation funding having a role to pay in increasing access to justice, by expanding into areas where there is currently a dearth of funding options or inadequate options.

This could be achieved in a number of ways.

The first is to note that the key benefit of an ABS, is not that it permits wider ownership of law firms, or facilitates barristers, solicitors or other professionals working in multi-disciplinary partnerships, it is that it permits the introduction of outside capital into law firms, which in turn facilitates the abilities of lawyers-as-funders to underwrite the costs of litigation: not just in respect of their own fees, but crucially through funding disbursements, and in certain contexts as demonstrated by the decision in the case of Sibthorpe and Morris.v.London Borough of Southwark [2011] EWCA Civ 25 providing indemnities in respect of adverse costs. This would be litigation funding through an organisation which combined roles in claims management, litigation services and litigation funding.

The second is to note that the ancient prohibition on trafficking in litigation is weakening. It is quite conceivable that the common law could develop to permit litigation funders to purchase claims for compensation, for an appropriate discount, take an assignment of the right of action and then fight the claims.

At a stroke, considerations of asymmetric litigation might vanish, and an equality of arms be introduced to a variety of consumer disputes. This might be particularly attractive in respect of some of the financial mis-selling claims of recent years, product liability claims or property damage claims. In short, claims which whilst possessed by individuals are not personal claims or claims dependent on the oral evidence of the claimants but rather are cases where the result will hinge evidentially on documentary or expert evidence. It would obviously be less attractive or indeed impracticable for personal injury claims, discrimination claims or claims where a non-monetary remedy is sought to be bought and sold in this way.

The rules against assignment

Such a development is far from impossible. Consider this position noted by Professor Andrew Tettenborn in his classic article Assignment of rights to compensation

Suppose for example, a finance company agrees with a large client to discount its damages claims wholesale, buying them up for a portion of their estimated value and then seeking to sue on them for its own benefit and keep the profits (rather as non-recourse factoring companies do every day in respect of debts). The financier’s interest, arising from a pre-existing contract with the client, is a very real one-just as real as that of underwriters, who it is well established can take an assignment of a tort claim. Nevertheless, if ever there was a case of the kind of “trafficking in litigation or selling lawsuits as articles of commerce” this is it: and short of a wholesale rewriting of Trendtex, it must be that such assignments remain ineffective.

The reference to Trendtex is a reference to the leading authority of the House of Lords: Trendtex Trading Corp.v.Credit Suisse [1982] AC 679. Trendtex was a Swiss company financed by Credit Suisse which had sold cement to Nigerian buyers, with letters of credit issued by the Central Bank of Nigeria. When the Nigerian economy collapsed, the letters of credit were dishonoured.

Trendtex had a good cause of action: they had no money to litigate. Credit Suisse took an assignment of the rights of action. It then sold the rights onto a financier for $1.1 million. The House of Lords held that Credit Suisse were entitled to take the assignment because they “had a genuine commercial interest in the enforcement of a claim of another”. Had Credit Suisse then litigated the claim, they could have done so. But in the event, the subsequent sale to the financier, who was a mere speculator, vitiated the whole transaction.

So the current test in England and Wales, as to whether an assignee can sue in respect of an assigned right of action is whether prior to the assignment they had a “genuine commercial interest” in the claim, which justifies the assignment being good in law.

The restriction on assignment is linked to the ancient doctrine of champerty, but the doctrine of champerty is passing away. It is now more than 40 years, since it ceased to be a criminal offence, and every few years, there appears to be another appellate decision which restricts its scope.

Moreover, as noted by Professor Tettenborn, there is an intellectual incoherence, in a system which allows some intangible rights to be assigned (eg debt) but not others (eg claims for damages).

Conclusions

In summary as capital flows into the litigation industry, driven by the prospect of returns on investment in excess of 15% (if you believe the blurb), it must find an outlet. The restructuring of the legal services and claims management industries is one route to the sea: overcoming the dykes and barriers of the law against assignment is likely to prove another.

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