High Court finds litigation funder was entitled to terminate funding agreement

In a rare decision on termination of a litigation funding agreement, the High Court has held that the funder validly terminated the agreement under a clause which allowed termination if in the funder's reasonable opinion the claimant's prospects of success were 60% or less: Harcus Sinclair (a firm) v Buttonwood Legal Capital Limited and others [2013] EWHC 1193 (Ch).

In any case where claimants are contemplating entering into a funding agreement, it is essential that they and their advisers consider carefully the terms on which the funder can terminate the agreement. As this case illustrates, the courts are prepared to hold funded parties to their bargain. Further, where the funder has the right to terminate based on a reasonable opinion as to prospects, claimants and their advisers must ensure that they cooperate with the funder in providing information and documentation to allow that assessment to be made. Where there is a failure to do so, the present decision suggests that the courts may not be sympathetic to an argument that the funder's opinion was unreasonable.

The funder in this case was not a member of the Association of Litigation Funders of England and Wales (ALF) and was not therefore subject to its voluntary code of conduct introduced in November 2011 (see post). Funders who are subject to the code may reserve the right to terminate only in limited circumstances, but these include where the funder reasonably ceases to be satisfied about the merits of the dispute. The agreement must provide that, if there is a dispute about termination, a binding QC’s opinion shall be obtained.

Background

In this case the claimants to the underlying Commercial Court proceedings had taken out a loan from Buttonwood Legal Capital Limited (BLC) which was to be repaid on the earlier of the conclusion of the proceedings or two years from the date of the loan agreement. The loan was however to be repaid immediately if the agreement was terminated following an event of default, which included that:

"in the reasonable opinion of [BLC] the [claimant's] prospects of success in the Proceedings are 60% or less".

It was a condition of drawdown under the agreement that the claimant should have provided to BLC a written advice from its solicitors or counsel that its prospects of success exceeded 60%. The QC's advice provided for that purpose had been given almost a year before proceedings were issued and had been described as "very much a preliminary view". It envisaged that a more formal advice would be provided which, if favourable, would be followed by the issue of proceedings. However, no such advice had been obtained before proceedings were issued.

BLC subsequently terminated its agreement with its investment manager, 1st Class Legal, and began a general review of the prospects of success in all cases funded on its recommendation with the help of investment adviser Argentum. BLC was disturbed that in this case funding had been recommended without an adequate opinion on prospects having been obtained. Although the claimant's solicitors then obtained an updated opinion from the same QC as previously, this was rejected by BLC as inadequate (counsel's view was expressed in five lines). BLC insisted that a detailed opinion be obtained from a suitable counsel as soon as possible.

Ultimately BLC retained its own independent counsel for these purposes. Counsel's preliminary opinion expressed the view that the prospects of the claimants establishing a repudiatory breach (a crucial aspect of the case) were on currently available evidence less than 50%. BLC had some difficulties obtaining information and documentation from the claimant's solicitors to provide to counsel, but some further materials were provided and counsel was asked to update his opinion. Shortly before a deadline set by the court for the claimant to provide £250,000 in security for the defendant's costs, counsel provided his further opinion which was not materially different from his preliminary views.

BLC was concerned to make a decision on termination before the deadline for posting security. In a board meeting that took place by conference call, having considered counsel's opinions, the board took the view that the prospects of success did not cross the 60% threshold and decided to terminate the agreement.

The claimant challenged BLC's right to terminate on the basis that this view was unreasonable.

Decision

The court (David Donaldson QC sitting as a Deputy High Court Judge) concluded that BLC did validly terminate the funding agreement.

The claimants' arguments on reasonableness were quite narrow, as they did not seek to suggest that counsel's opinion, and BLC's opinion based on it, were unreasonable as such. They complained instead that the opinion was reached: (i) without sight of relevant material (potential witness evidence and a particular letter); and (ii) without allowing the claimants to make representations on the merits. The judge rejected these complaints.

1. The material in question was not available to BLC, as it had not been provided by the claimants' solicitors (and the judge expressed surprise at their lack of cooperation in this regard). In any event, having reviewed the material, the judge concluded that it would not have affected counsel's critical assessment of the case.
2. On the question of whether the claimants should have been allowed to make representations, the judge said that the reasonableness of BLC's opinion was a purely substantive question to be answered by an objective assessment of the available evidence against the background of applicable rules and principles.  If BLC's opinion was reasonable on that test, the process followed by BLC in reaching its opinion could not make it unreasonable.

The court also rejected an argument that BLC was precluded from terminating by promissory estoppel. The basis for the argument was an e-mail to the claimants' solicitors which stated that if BLC took the view that the prospects were less than 60% it would invite representations before deciding whether to terminate. The claimants failed to establish that they had relied on this representation, or (if that was wrong) that they had suffered any detriment by doing so. In any event, an estoppel argument would not be available to the claimants due to terms of the funding agreement which required any variation or waiver to be in writing (not including e-mail).