Should litigation funding fees be recoverable?

With the Civil Justice Council set to roll up its sleeves and begin a review of litigation funding, change is clearly on the way for the sector. This does not necessarily mean it will be bad news for litigation funders, however.

While the review will be looking at the central issue of how the sector should be regulated, it is also an opportunity to consider other significant questions. One area where funders will be very keen to open a debate concerns the recoverability of funding costs.

The idea behind an award of damages is that it should put the wronged party back into the position they were in before the wrong occurred, as far as that is possible. But say you run a small or medium-sized business, and the actions of a large, deep-pocketed company – in breaching a contract, or stealing your intellectual property, for example – have left you in dire financial straits. You have a strong legal case against the defendant, but lack the cash to finance it. Enter the litigation funder, hero’s cape flowing, to save the day.

With a funder’s financial backing, you can now bring your claim; but there is a price to pay. The funder took on the risk that if the claim failed, it would bear the cost, and you would not be out of pocket. So when the claim succeeds, it is entitled to its reward – which might be three or four times the amount that it provided, or (leaving PACCAR-related questions about the enforceability of litigation funding agreements aside), perhaps 40% of the damages. That means that while your argument has been 100% vindicated in the courts, you have not received full justice, because you have only received 60% of what the judge decided you had lost as a result of the defendant’s wrongdoing. The rest will have to be handed over to the funder, without whom you could not have brought your case.

Now, if you had fought your claim through arbitration rather than the courts, things could have been very different. Following a pivotal High Court ruling in 2016 in Essar Oilfields Services Limited v Norscot Rig Management Pvt Ltd [2016] EWHC 2361 (Comm), in an English-seated arbitration, the losing defendant could be ordered to pay the funder’s fees for you, where the arbitrator considers that to be reasonable. You would then be able to keep all of your damages.

In Essar, the arbitrator considered that the defendant’s ‘reprehensible’ conduct had driven the claimant Norscot into expensive litigation. He said Essar had acted in an ‘exploitative manner’ towards its opponent before and during the dispute, leaving it with ‘no alternative’ but to enter the funding agreement. The arbitrator ordered the defendant to pay the claimant’s funding fee of nearly £2m, which was three times the sum invested. In an appeal to the High Court, Judge David Waksman QC found that it was within the arbitrator’s powers to make such an award, and he upheld the decision.

Whether or not a losing party should be ordered to pay the winner’s funding costs falls within an arbitrator’s discretion, and will depend on what is fair and reasonable in the circumstances of each case. While the Essar decision was based on fairly extreme facts, it has since been followed in Tenke Fungurume Mining v Katanga Contracting Services [2021] EWHC 3301, where the High Court again confirmed that arbitrators have a discretion to award funding costs.

In the civil justice system, however, a judge has no such powers; placing the courts at odds with the arbitration world. The Civil Justice Council’s review presents a chance to put this right by recommending reform that could grant judges the same remit as arbitrators to award the costs of funding, where the conduct of the parties and the interests of justice dictate that that is the fair thing to do. It would certainly add another weapon into the armoury of judges who are keen to ensure the proper conduct of litigation.

Rachel Rothwell is editor of Gazette sister magazine Litigation Funding, the essential guide to finance and costs.

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