Reports, like omnibuses in Clapham, tend to travel in threes, and there were three significant reports last year on the topic of litigation funding. The second of the reports that I am looking at, is the doorstopper that is called A review of litigation funding in England and Wales A legal literature and empirical study by Rachael Mulheron.
It is an important and timely study of how third-party funding operates in practice. The report explores the legal, regulatory, and empirical aspects of litigation funding, which has become an increasingly vital component of modern dispute resolution. It considers the impact of litigation funders on access to justice, the financial risks they assume, and the regulatory framework that governs their activities. Among the most critical discussions in the report is the issue of cost recovery, particularly whether a claimant who successfully litigates with the assistance of a funder should be able to recover the funder’s costs (or rather the cost of the litigation funding that the claimant has agreed to pay) from the defendant. This is the focus of Chapter 21.
Currently, there is a discrepancy between litigation and arbitration costs in England and Wales regarding whether the costs of funding can be recovered. Under the current legal framework, claimants in litigation cannot recover the funder’s costs from the losing defendant. In contrast, in arbitration, certain funding costs have been held to be recoverable. The leading case in arbitration is Essar Oilfields Services Ltd v Norscot Rig Management PVT Ltd, where the arbitrator allowed the recovery of the funder’s success fee from the defendant. This was on the basis that it fell within the definition of ‘other costs’ under the Arbitration Act 1996. The Commercial Court upheld this decision. However, there is no equivalent provision in English litigation. I must reveal an interest in the decision, having argued the case for the losing party.
The argument in favour of allowing recovery of funding costs in litigation is straightforward. Third-party funding enables claimants who lack the means to pursue meritorious claims to access justice. If successful, they should be able to recover not only their legal costs but also the costs associated with securing the funding needed to bring the claim. Without this, a funded claimant’s recovery is significantly reduced by the funder’s success fee, which can be substantial. This, in turn, discourages claimants from bringing claims, as the net benefit after funding costs may be insufficient to justify the risks involved.
Moreover, the current discrepancy between litigation and arbitration costs is difficult to justify in principle. If a claimant who successfully arbitrates a dispute can recover their funding costs, it is unclear why a litigant in the courts should be treated differently. This creates an uneven playing field where claimants with arbitration agreements may be better positioned than those who have no choice but to litigate in court. Such an approach runs counter to the principles of fairness and access to justice.
Opponents of potential reform argue that allowing recovery of a funder’s success fee would amount to an undue burden on defendants. Costs shifting in English litigation is designed to compensate the successful party for reasonable legal costs, not to indemnify them for all financial arrangements they have entered into to fund the litigation. There is also a concern that allowing such recovery would lead to increased costs for defendants, who would be required to pay not only the legal fees of a successful claimant but also the funder’s premium. This could encourage speculative litigation and increase overall litigation costs, which may be contrary to the principles underpinning the Jackson reforms.
There is also an argument that the current position is consistent with other areas of litigation funding. Prior to the Jackson reforms, conditional fee agreement (CFA) success fees and after-the-event (ATE) insurance premiums were recoverable from the losing party. However, following the reforms, these costs were made irrecoverable. The rationale was that success fees and insurance premiums should be deducted from the claimant’s recovery rather than imposed on the losing party. If the law were to change to allow recovery of a litigation funder’s success fee, it would represent a significant departure from this principle and could be seen as a step backwards in terms of controlling litigation costs.
Despite these objections, there is something of a growing momentum for reform. The report raises the question of whether recoverability of funding costs might be permissible, though it should not be mandatory but should be at the discretion of the court. This would allow judges to assess whether such costs should be recovered in particular cases, taking into account factors such as the conduct of the defendant, the financial position of the claimant, and the necessity of litigation funding in the case at hand. Such a discretionary approach would mirror the position in arbitration, where arbitrators have the flexibility to award funding costs in appropriate cases. An intriguing question not answered by the report, due to a paucity of data, is to what extent are arbitrators actually using their powers in the cases before them to award the cost of litigation funding?
Another possible safeguard is requiring early disclosure of litigation funding arrangements. If a claimant seeks to recover a funder’s costs from the defendant, they should be required to disclose the existence of the funding arrangement at an early stage. This would give defendants fair warning of their potential liability and allow them to factor this into their litigation strategy. It would also promote transparency and prevent any surprises at the costs stage.
The Civil Justice Council’s review of litigation funding will need to consider these issues carefully. Indeed they have raised the issue in Appendix A, of the extant consultation seeking views on recoverability. If litigation funding is to remain a viable means of enabling access to justice, there must be a balance between encouraging funding and ensuring that defendants are not unfairly burdened with excessive costs. The ability to recover a funder’s success fee in appropriate cases could be a significant step towards levelling the playing field between well-resourced defendants and claimants who require external funding to bring their claims.
One of the key questions for the Civil Justice Council will be whether the discretion to award a funder’s costs should be explicitly provided for in the Civil Procedure Rules. The current lack of a clear procedural mechanism means that any change would require either judicial innovation or legislative intervention. If reform is to be undertaken, it will be important to define the circumstances in which recovery should be permitted to avoid uncertainty and unnecessary litigation over costs.
Overall, Chapter 21 of the report highlights a fundamental issue in the landscape of litigation funding. The inability of claimants to recover funding costs in litigation, despite such costs being recoverable in arbitration, is a legal anomaly that calls for closer examination. While there are valid concerns about cost inflation and fairness to defendants, a discretionary approach to recovery—perhaps limited to cases where the defendant’s conduct has contributed to the need for funding—could offer a balanced solution. Or it could lead to endless satellite litigation. As the debate over litigation funding continues, this issue is likely to play a significant role in shaping future reforms.