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Where there is a will, there is a lawsuit: Third Party Funding of Litigation in Scotland

Throughout 2016 the Dispute Resolution have been looking at innovative ways to help clients pursue claims, and litigate where necessary. Increasingly, this has seen the team working with a number of different litigation funders, and as their recent and successful seminar on litigation funding demonstrated, there is no shortage of interest in this area. Mr Carlyle was no exception. What allowed him to have his day in court was the involvement of third party litigation funders.

The Carlyle case is far from complete, however. The issue which the Supreme Court had been asked to consider was simply that of liability: had the bank had broken a promise to provide development funding? Fortunately for Mr Carlyle, the judges unanimously found that the bank had indeed broken its promise. However, this left other crucial parts of the case as yet undecided. These relate to what the bank’s breach of contract actually meant in real terms for the client: what effect the bank’s breach had on his business; whether the bank caused him loss; and if so, what the measure of his loss should be.

These are complex, technical questions. To answer them requires considerable resource, including input from expert surveyors, quantity surveyors, and forensic accountants. These are costs which, with the best will in the world, only the more affluent individuals and companies can afford. Fortunately, thanks again to third party litigation funding, Mr Carlyle has been able to take his case forward and quantify his losses.

At both stages of the case, third party litigation funding enabled Mr Carlyle to pursue a claim he otherwise simply could not have afforded to pursue. So what is litigation funding, and how does it work?

Third Party Funding (“TPF”) provides a mechanism to enable businesses with a commercial dispute to pursue it without worrying about cost. The litigant obtains all or part of the financing to cover its legal costs from a private commercial litigation funder, who has no direct interest in the proceedings. Via TPF it is possible to avoid financial risk: the funder pays all legal costs in return for a share of the damages. If the case fails, the funder bears all the costs and the claimant pays nothing. In this way a TPF will take on the financial risk of litigation, freeing up cash flow for the claimant and shifting the risk off the claimant’s balance sheet.

Because the litigation funder’s return is tied to the success of the case, funders will risk-assess all cases and will only fund cases with good prospects of success. The funder’s share of the proceeds of a successful case is negotiated with the claimant at the outset. This financial reward typically consists of either a percentage of the damages recovered, or a multiple of the amount advanced by the funder, or a combination of the two.

Third party litigation funding can be a particularly powerful weapon in cases where the opponent has deep pockets and can spend heavily on a legal war of attrition. The presence of a powerful backer can be a means which would not otherwise be available of forcing that opponent with greater firepower to the negotiating table, because with TPF backing for the smaller business, the larger opponent is no longer able to outspend the smaller business. In this way, TPF can work particularly well in claims against banks, or professional negligence claims where insurers are involved. As was recently argued in the English Law Society Gazette:

"Large firms often find it preferable to bury claimants under excessive costs, rather than settle genuine claims....Funding removes this weapon from their armoury and puts previously weak claimants on a level playing field."

Cases which are likely to be funded are those where the potential for a financial return is significantly greater than the cost of recovery. In the early days of the TPF industry in the UK, active funders were often companies who had expanded into the UK from the US and Australia, who typically would not look at claims worth less than at least £1 million. In some cases, such funders set their minimum claim level at £5 million. However, in more recent times, funders with an interest in funding lower value claims have entered the market. Examples include Novitas, who previously dealt with high value divorce cases, but who now offer loans from £3,000 to fund divorce cases, and organisations such as Augusta Ventures and Ferguson Litigation Funding who specifically profess to focus on lower value claims and to be able to consider claims of any size above a value of £20,000. Nevertheless it is still those claims typically worth £500,000 or above which are most likely to be attractive to multiple funders.

In England and Wales, the incidence of companies undertaking TPF has risen dramatically since the economic downturn. Traditionally English law had prohibited “champerty”, the support and control of litigation by a stranger with a financial interest in the outcome. Although champerty as a crime was abolished in 1967, the concept continued to be regarded as contrary to public policy and strangers supporting litigation could be held liable for the other side’s costs. However, by 2009, Lord Justice Jackson, who had been charged with overhauling English rules on costs and funding, identified a “sea change” in the courts approach to TPF, recognising that TPF had a valid part to play in allowing claimants, who would otherwise not be in a position to fund the pursuit of valid claims, to pursue such cases.

In Scotland on the other hand, there has never been any restriction on a litigation being funded wholly, or in part, by a third party. Although the Scottish courts have always been able to impose liability for judicial expenses on a person who, though not a party to the action, has clear control of the litigation (such a person is known as a dominus litus), such liability has always been extremely rare and the prohibition on champerty itself, has never been part of Scots law.

Funders in England now undertake a degree of voluntary regulation via the Association of Litigation Funders of England and Wales. Funder Members follow the Association’s Code of Conduct, which sets out rules governing the relationship between a funder and its client, including case control, settlement, and withdrawal. The Association also plays a role in regulating the litigation funding industry in England and Wales although there is inevitably an inherent conflict between the role the Association plays in representing funder members, and the part it plays in ensuring member compliance with the voluntary code of conduct.

With the enactment of Alternative Business Structures (“ABS”) legislation in England, allowing for the provision of legal services via external non-solicitor ownership, some Funder Members are expanding into the legal sector: after receiving a licence in January 2016, in October of this year Burford Capital launched its own law firm, Burford Law. Meanwhile the industry has also seen expansion in the opposite direction, with law firms establishing commercial litigation funding services. In February 2016 Welsh firm Capital Law established a £50m disputes funding pot, whilst in April 2016 Ferguson Litigation Funding announced its company launch; the team behind the new limited company is English law firm Ferguson Financial Solicitors.

So what does this all mean for Scotland? Just as traditionally the UK can appear to be several paces behind the US in terms of litigation trends, so too is Scotland typically anywhere from years to decades behind England, and the TPF litigation market in Scotland is no exception. The Scottish equivalent of the Jackson report, the Taylor Review, compiled by Sheriff Principal Taylor and published in October 2013, specifically considered the role of Third Party Funding in litigation and access to justice. In Chapter 11 Taylor noted:

“Empirical research in England and Wales found that many of the cases suitable for third party funding were of a David vs. Goliath nature and would never have proceeded without it…. The research also demonstrated that demand for third party funding in England and Wales far outstripped supply, so that funders were able to select meritorious cases that offered the best returns. These were frequently high value cases. Hence, the availability of high value cases may not be a necessary condition of supply. Rather, it may be that the present restriction of funding to very high value cases is a consequence of high demand, which allows funders to take their pick of cases. As the market for third party funding matures, and supply increases, investors may choose to support cases with higher risk and lower value.”

Taylor noted the “current paucity of TPF in Scotland” but commented that :

“third party funders are reportedly looking for new markets and I am aware of several who are presently making tentative steps into the Scottish marketplace by making initial contact with a number of commercial firms”.

Although Taylor’s overall conclusion was that TPF was a positive development, which should be encouraged, his recommendations seem rather at odds with this conclusion. They included the recommendation that a professional funder who finances a pursuer's litigation should be potentially liable for the judicial expenses of the opposing party – a move which would see Scotland, which has hitherto never experienced the restrictions of champerty, adopting champerty-like restrictions.

Taylor’s recommendations have yet to be implemented. The Scottish Civil Justice Council Costs and Funding Committee, in their 2015 Report on Implementation, endorsed some of Taylor’s recommendations in relation to TPF, but interestingly not the recommendation on a funder’s liability for expenses. The uncertainty surrounding this recommendation may be one reason for slower growth in the Scottish market than in England: if the recommendation is enacted, this will undoubtedly serve as a disincentive to invest in Scottish litigation.  

Another key issue likely to determine the extent of future growth is whether at long last ABS will become a practical reality in Scotland (currently an unknown). The Legal Services (Scotland) Act 2010, which allows solicitors to become “licensed providers” of legal services provided via non-solicitor partners, multi-disciplinary practices and external ownership, received royal assent on 7 November 2010. In principle, then, Scotland should be able to accommodate ABS developments of the type seen in England in 2016 with the advent of Burford Law. However, regulations in Scotland enabling solicitors to convert to become licensed providers remain some way off - the government consultation on the Licensed Providers Regulatory Regime closed in May 2016 but there is still no timescale for implementation. The lack of Scottish ABS is likely to be a major inhibitor to internal growth in the Scottish TPF market.

Scotland has seen a steady increase in TPF in the 3 years since Taylor was published, but unsurprisingly the growth which has been seen in Scotland has been almost entirely as a result of English companies expanding northwards and establishing a Scottish footprint. These include Augusta, Manolete, Ferguson Litigation Funding, and brokers such as Annecto Legal, who specialise in placing claims with funders.

The only home grown funder, Restitution, a Scottish registered company backed by Scottish investors, was established in 2012 but with a lack of resource compared to its larger English competitors, has struggled to grow in what is gradually becoming a competitive market. Nevertheless, it can be proud of the fact that it has supported, and continues to support, one of the highest profile Scottish TPF cases to date – that of Mr Carlyle. And Mr Carlyle lives to fight on.

For further details on the above, please contact:

Cat MacLean
Partner and Head of Dispute Resolution
cat.maclean@mbmcommercial.co.uk
0131 226 8218

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