In this third episode of our series of commercial litigation update podcasts, we look at developments in disclosure and privilege since our February update, as well as some developments relating to costs and funding. This episode is hosted by Anna Pertoldi, who is joined by Maura McIntosh and Ajay Malhotra.
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Below you can find links to our blog posts on the cases covered in this podcast:
Last Friday (18 November) the Court of Appeal dismissed an appeal brought by various third parties who funded the claims in the high profile Excalibur case. The decision gives important guidance on the extent to which commercial litigation funders will be liable for the costs of defendants who successfully defend funded claims: Excalibur Ventures LLC v Texas Keystone Inc and others  EWCA Civ 1144.
In particular, the decision confirms that a commercial funder will ordinarily be required to contribute to the defendant's costs on the same basis as the funded party – so that where, as here, the claimant has been ordered to pay costs on the (more onerous) indemnity basis, the funder will normally also be liable on that basis. That is the case regardless of whether there is any reason to criticise the funder's own conduct.
The decision also confirms that a costs order may be made not only against the funder named in the funding agreement but a third party that provided the funds and stood to benefit (here, the funder's parent company). The Court of Appeal dismissed an argument that by exercising its discretion in this way the court was impermissibly disregarding separate corporate personality or in some way "piercing the corporate veil".
The court noted that it was not, on this appeal, asked to revisit the appropriateness of the so-called "Arkin cap", ie the principle which limits a funder's costs liability to the amount it has contributed in funding the claimant's claim, and which (the court recognised) some consider to be over-generous to commercial funders. However, it upheld the lower court's decision that, in applying the Arkin cap, funds provided for security for costs should be taken into account in the same way as funds provided to pay the claimant's own legal costs.
In early September the Civil Justice Council issued its report on DBAs, which makes a number of drafting and policy recommendations aimed at improving and clarifying the statutory regime governing DBAs.
Maura McIntosh, who was a member of the CJC working group, has published a post on Practical Law’s Dispute Resolution blog entitled “A future for Damages-Based Agreements? Civil Justice Council recommendations for reform”. Click here to download a copy of the post (or here for the Practical Law Dispute Resolution blog homepage).
The Ministry of Justice has asked the Civil Justice Council (CJC) to review the regulations governing DBAs to consider possible improvements, but has ruled out the introduction of “hybrid” arrangements where a lawyer could combine a DBA with some other form of retainer such as hourly rates. According to the CJC’s press release issued today, the government has ruled out such arrangements as it considers they “could encourage litigation behaviour based on a low risk/high returns approach”.
The exclusion of hybrid DBAs came as a surprise to the profession when the draft regulations were published in January 2013 (see post), as there was no advance warning of the restriction and it went against the recommendations of the working party set up to consider such issues. The restriction has been widely criticised, including by Lord Justice Jackson in his keynote speech at a recent Law Society conference. Lord Dyson, Master of the Rolls and Chairman of the CJC, has expressed disappointment at the government’s decision not to permit hybrid DBAs.
The CJC working group will be chaired by Professor Rachael Mulheron of Queen Mary University London and its membership and terms of reference will be published shortly. The issues the group will consider are said to include changing the regulations so that defendants will be able to use DBAs; currently they are available only to claimants (or counterclaimants) and not defendants to an action.
To date there has been very little take-up of DBAs in commercial cases. This has been attributed, in large part, to the inability of firms to offer hybrid arrangements, though other problems with the drafting of the regulations may have contributed to their lack of use. If that is indeed the key factor, then whatever improvements are made to the regulations as a result of the current review may do little to increase the popularity of DBAs.
A High Court decision handed down yesterday (23 October) has significant implications both for third parties who fund litigation on commercial terms and for defendants who face claims brought with the benefit of such funding: Excalibur Ventures LLC v Texas Keystone Inc and others  EWHC 3436 (Comm).
The judgment suggests that, where a claim is unsuccessful, the funder will normally be liable for the defendant’s costs on the same basis as the funded party. In particular, where the claimant has been ordered to pay indemnity costs, for example because a claim was found to be speculative, the funder will normally be liable on the same basis – regardless of whether the funder bears any personal responsibility for the factors which led to the order for indemnity costs. This is good news for defendants.
The decision also illustrates that the court is entitled to look to the economic realities in exercising its discretion to make a non-party costs order. Accordingly, in appropriate circumstances, a costs order may be made not only against the funder named in the funding agreement but a third party that provided the funds and stood to benefit (here, the funder’s parent company).
There are however two bits of good news for funders.
- First, the court applied the so-called Arkin cap to limit each funder’s costs liability to the amount it had contributed. In determining each funder’s contribution for these purposes, however, the court took into account amounts provided toward security for costs as well as payment of the claimant’s costs.
- Secondly, it held that each funder should be liable only to the extent the defendants’ costs were incurred after the date of that funder’s contribution. If this approach is adopted in other cases, it may act as an important limit on a funder’s potential liability, particularly where funding is provided at a late stage.
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  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.
The working party set up to consider fundamental issues relating to the planned introduction of contingency fees, or “damages based agreements” (DBAs), published its report and recommendations on Friday (3 August). The key recommendations affecting commercial clients are:
- There should not be a cap on the level of contingency fee that can be charged in commercial cases. Opinion was split as to whether there should be a cap for consumer / small business claims – if there is to be such a cap, it was agreed that the cap should be 50%.
- Lawyers should not be liable for adverse costs where they act under a DBA, unless they agree to indemnify the client for adverse costs liability. This is consistent with the position where lawyers act under a conditional fee agreement (CFA).
- Partial DBAs should be permitted, where the lawyer receives for example a reduced hourly rate as the case proceeds plus a contingency fee in the event of success.
- There should be no obligation to notify opposing parties where a lawyer acts under a DBA. The working group envisages that the current notification requirements for CFAs and after-the-event (ATE) insurance will be removed once the additional costs for such arrangements are no longer recoverable from an opponent (another change being introduced to implement the Jackson reforms). Continue reading
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. Continue reading
The recent case of Mansell v Robinson  EWHC 101 (QB) has demonstrated the court’s modern, more flexible approach to the rules against champerty. The court will not apply a mechanistic rule but will consider each case on its facts, in particular as to whether the facts suggest that the person assisting in litigation for a share of the proceeds might be tempted to abuse the litigation process for personal gain (for example, by seeking to influence witnesses). The court’s approach to this issue is important in light of growing instances of litigation being supported by third party funders in return for a share of any recovery. Continue reading