Litigators on both sides of the claimant/defendant divide will have been poring over the detail of the Civil Justice Council’s report into litigation funding, published at the start of June. The wide-ranging proposals cover a huge amount of ground. From a litigation perspective, one particularly interesting suggestion is that successful funded claimants should be able to recover their funding costs from defendants in ‘exceptional’ cases.
What would count as exceptional? Relevant factors would include the defendant’s conduct, the claimant’s financial position and the need for litigation funding in the case.
The idea is to put a stop to a defendant tactic that funders often complain about: running a ‘strategy of attrition’ in which they make repeated procedural applications with the aim of simply racking up costs for the funded claimant. By doing so, the defendant can effectively reduce the amount of damages that would be left to a claimant if they win, putting claimants under pressure to settle for a lower amount to secure some sort of recovery.
In their submissions to the CJC, funders cited the case of Bates v The Post Office as a ‘paradigmatic example’ of the type of case where it should be possible to recover the costs of funding. That was for three reasons. First, the claimants could not have brought the litigation without litigation funding. Second, for many of them, their poor financial position was a direct result of what the defendant itself had previously done; and third, according to the submissions, the way the defendants had approached the litigation was not merely unreasonable, but had caused an unnecessary hike in the claimant’s funding costs. All of this meant that it would have been wholly fair for those funding costs to have been recoverable from the defendant.
If this proposal is implemented, the extent of its impact will clearly depend on what approach the court takes when deciding what makes for an ‘exceptional’ case. Currently, in litigation (though notably not in arbitration), a defendant can be confident they will never be on the hook for funding costs. Under the CJC proposal, that certainty would evaporate. This is bound to influence defendant behaviour and make the tactical choice to run an attritional case against a funded claimant far more risky.
Read more by Rachel Rothwell
Aside from recoverability of funding costs, which was an issue funders had been highlighting, another proposal in the CJC review was more unexpected – and less welcome. The review recommended that ‘portfolio funding’ – where law firms secure finance against a book/portfolio of cases – should be regulated by the Financial Conduct Authority as a form of loan. It also proposed that there should be consideration of whether portfolio-funded law firms should be co-regulated by both the FCA and the Solicitors Regulation Authority.
The review’s recommendation stems from the collapse of two law firms, SSB Law and Pure Legal, both of which were portfolio-funded. The CJC review highlights how SSB Law had pursued high-volume claims relating to cavity wall insulation, personal injury, clinical negligence and data protection. The lawyers worked on a contingency basis enabled by portfolio funding, but when the claims were discontinued, clients found themselves facing debts as after-the-event insurers declined to pay defendant costs. The CJC report expresses concerns that rather than being an unusual problem, there is a real risk that SSB and Pure are examples of a ‘much wider systemic problem’, with law firms using portfolio funding to develop ‘high-risk and unstable’ business models that depend on ‘unrealistically high levels of return’.
The need to protect consumers from such business practices is clear, but the danger is that many responsible law firms may become caught up in excessive regulation. Portfolio funding has become a well-established means through which many law firms secure day-to-day income against a range of their cases, with some form of link to outcome in those cases, as opposed to a straight loan.
Many law firms of different sizes depend on such commercial arrangements, which do not involve any risk to consumers. Any reform in this area should therefore be careful not to throw the baby out with the bathwater.
Rachel Rothwell is editor of Gazette sister magazine Litigation Funding, the essential guide to finance and costs.
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