Litigation funding code heads for October approval after years of argument

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By Legal Futures

8 August 2011

Litigation funding: funders will have to show they have the money to pay

A code of conduct that aims to add stability and credibility to the market for third-party litigation funding could be agreed in less than three months after four years of stalled progress, Legal Futures can reveal.

The Civil Justice Council (CJC) has drafted in Irwin Mitchell senior partner Michael Napier to chair the working party that has been trying to draft a code since 2007 but run into constant arguments about what should be in it. This will go hand in hand with the creation of the Association of Litigation Funders.

A CJC spokeswoman said: “The CJC working party on third-party funding is currently working on a revised draft of the code of conduct for third-party funders. Two meetings were held in July and two further meetings have been fixed for September and October. The intention is to submit an agreed revised draft of the code for consideration by the CJC at its meeting on 27 October.”

Mr Napier – a former member of the CJC – has brokered most of the deals done on costs under the auspices of the CJC in the past decade.

The committee’s other members are: Tim Mayer (Allianz Insurance); Professor Rachael Mulheron (Queen Mary University of London and CJC member); Susan Dunn (Harbour Litigation Funding), Leslie Perrin (Calunius Capital), and Rocco Pirozzolo (legal expenses underwriting manager at QBE).

The need for a code was given extra impetus by the Jackson report, which backed third-party funding and self-regulation of it, but said a “satisfactory voluntary code, to which all litigation funders subscribe, should be drawn up”. This should contain “effective capital adequacy requirements and should place appropriate restrictions upon funders’ ability to withdraw support for ongoing litigation”, he said.

The growth of third-party funding in recent years means it is a viable option for some, mainly commercial, litigation. Solicitors are obliged under the current Solicitors Code of Conduct to discuss with clients whether their fees “may be paid by someone else”.

This has been translated into an “indicative behaviour” evidencing compliance with the rules in the new SRA Handbook, coming into force on 6 October.

A version of the code was consulted on earlier this year, but a report published by the CJC in June found that while there was general support for a code in principle, almost all of the 24 respondents thought it should not be endorsed in that form. “The main concern was that the code did not strike the correct balance between the rights of funders and claimants so that litigants were not disadvantaged,” it said.

It is understood that one sticking point with the redrafting is the extent to which the code need to protect consumers, given that third-party funding is mainly being used by businesses.

Nick Rowles-Davies, a founder of new funder Vannin Capital, said it was important that the code allows commercial parties to contract freely. The two points a code needs to cover are how capital adequacy is proven – “if a funder funds a case, they have to provide evidence that they can pay it” – and a dispute resolution procedure that allows for an independent review if the funder wants to withdraw from the case.

Jonathan Barnes, a director of Woodsford Litigation Funding, said: “It’s clear that Michael Napier has injected momentum into the process and that the working party is working hard to bring it to a conclusion… The CJC’s challenge is to strike the right balance and resist the infanticide of the still nascent funding sector.”

He explained that while funders can live with not having control of litigation, it is unclear “whether investors can accept Jackson’s suggestion that they don’t have the right to withdraw and the open-ended financial liability it creates”.

Neil Purslow of Therium Capital Management said the code needs to be principles based and set some minimum standards, such as on capital adequacy. “It needs to avoid the trap of being overly prescriptive on terms which must be included or excluded from funding agreements. That will restrict innovation at a time when best practice is still evolving.”

Ben Hawkins, managing director of Commercial Litigation Funding, added that the previous draft allowed for too wide a definition of “litigation funding” so that it included loan arrangements.

Selvyn Seidel, founder of Fulbrook Capital and previously Burford Capital, the world’s largest funder, said the code needs “more specific and different coverage” of the rules on funders’ control of litigation.

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