New code of conduct for litigation funders

A new code of conduct for litigation funders (who fund litigation or arbitration in return for a share of the proceeds) was launched on Wednesday, 23 November. Lord Justice Jackson's lecture on litigation funding (the sixth in his series of lectures in the implementation programme for his civil litigation costs review) describes the publication of the code as an important event. The code sets out standards to be observed by all funders who are members of the newly formed Association of Litigation Funders of England and Wales.

Although membership is voluntary, Lord Justice Jackson anticipates that solicitors will advise their clients only to enter funding agreements with litigation funders who sign up to the code and comply with its provisions. He notes that the final version of the code meets each of his particular concerns regarding the original draft, namely in relation to: capital adequacy; withdrawal of funding; and control over the litigation.

Launch of the code coincides with amendments proposed earlier this week by a group of Liberal Democrat peers to the Legal Aid, Sentencing and Punishment of Offenders Bill  to introduce greater restrictions on litigation funding and pave the way for full statutory regulation. 

Background

Lord Justice Jackson’s final report, published in January 2010, endorsed litigation funding as promoting access to justice without imposing additional financial burdens on opposing parties. Lord Justice Jackson considered whether third party funders should be regulated or should subscribe to a voluntary code. He concluded that a voluntary code would be sufficient, but that the question of full statutory regulation should be re-visited if and when the funding market expands. His report raised a number of concerns regarding the then current draft code of conduct.

Following publication of Lord Justice Jackson's report, an interim steering group was set up to form a litigation funders’ association and progress the draft code. The Civil Justice Council consulted on a revised draft code over the second half of 2010. The summary of responses published in June this year noted that although there was general support for the code in principle, almost all the respondents thought that it should not be endorsed as drafted: “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.”

Since then, a Civil Justice Council working party has been working to finalise the draft code, culminating in the launch of the final version on Wednesday.

Capital adequacy

Lord Justice Jackson recommended that there should be effective capital adequacy requirements for funders in order to protect claimants, bearing in mind that the litigation being funded may last for a number of years.

The final version of the code requires funders to maintain adequate financial resources to meet their obligations to fund all of the disputes they have agreed to fund, and in particular to cover aggregate funding liabilities under all of their funding agreements for a minimum period of 36 months. Lord Justice Jackson has described this as a very substantial improvement upon the original provision (which required that the funder should be able to meet its liabilities for the next three months) which strikes a reasonable balance between practicality and client protection. It is also an improvement over the provision in the draft code sent out for consultation, which proposed a period of 12 months.

Withdrawal of funding

Lord Justice Jackson recommended that the code should not permit a funder to withdraw from a case unless there were "proper grounds", though he did not expand on what those grounds might include. The original draft code permitted the funder to reserve the right to withdraw at any time subject to paying accrued obligations.

The final version of the code provides that the funder may reserve the right to terminate only in the following circumstances:

• if the funder reasonably ceases to be satisfied about the merits of the dispute;
• if the funder reasonably believes that the dispute is no longer commercially viable; or
• if the funder reasonably believes that there has been a material breach of the funding agreement by the litigant.

The code also provides that if the funder does reserve the right to terminate in any of these circumstances, the agreement must provide that if there is a dispute about termination, a binding QC's opinion shall be obtained.

Lord Justice Jackson has, again, described this as very substantial improvement upon the original draft, achieving a fair balance between the interests of funder and client. It is also an improvement over the draft sent out for consultation, which gave examples of when a funder might be entitled to terminate, but (as we noted in our response to the consultation) was unclear as to whether the funder could carve out broader rights to terminate.

Control over the litigation

Lord Justice Jackson's final report also noted that the uncertain ambit of the common law principles of champerty and maintenance (the ancient rules against third parties "trafficking" in litigation) had on occasions caused doubt as to the precise boundaries of proper conduct in relation to third party funding.

His recent lecture summarises his concern as ensuring that the extent of the funder’s ability to influence the litigation and any settlement negotiations should (a) be properly restricted and (b) defined with clarity. Again, Lord Justice Jackson considers that the final version of the code meets this concern, in particular by providing that the funder will:

• take reasonable steps to ensure that the litigant has received independent advice on the terms of the funding agreement;
• not take any steps that cause or are likely to cause the litigant’s solicitor or barrister to act in breach of their professional duties;
• not seek to influence the litigant’s solicitor or barrister to cede control or conduct of the dispute to the funder.

He notes that this provision should prevent the funder usurping control of the litigation, but allows the funder to be consulted which is appropriate give the funder's stake in the litigation. 

The code also provides that the funding agreement shall state whether (and if so how) the funder may provide input to the litigant’s decisions in relation to settlements.

Voluntary code vs statutory regulation

As noted above, Lord Justice Jackson endorsed a voluntary code to regulate litigation funders, but said the question of full statutory regulation should be re-visited if and when the market expands.

The possibility of statutory regulation sooner rather than later has been raised by the amendments tabled earlier this week to the Legal Aid, Sentencing and Punishment of Offenders Bill as it proceeds through the House of Lords. The amendments seek to place restrictions on litigation funding, including prohibiting funding agreements relating to collective actions (i.e. multi-party actions, representative actions and proceedings which are the subject of a Group Litigation Order), and introduce provisions allowing the formal regulation of litigation funders.

It remains to be seen whether the amendments will be accepted by Parliament.