Originally published in BLG's Directors' and Officers' Liability Review, Summer 2007

Litigation funding is a growth industry both in the UK and beyond these shores. Company directors (especially those who benefit from D&O insurance) will be among those in the firing line as tempting targets for such claims.

Other obvious targets include professional advisers. For example, the accountancy firm Moore Stephens has recently found itself on the receiving end of a £90 million negligence claim by the liquidator of Stone & Rolls over its role as auditor of that company. The claim against Moore Stephens is being funded by IM Litigation Funding, a UK company. To date, it is the largest claim in the UK involving independent litigation funders.

It is true that litigation funding is not new. Forms of funding have been available in the context of insolvency for many years. Liquidators, for example, can sell the claims of insolvent companies in return for a promise by the purchaser to pay the company a proportion of any proceeds recovered. That said, the prohibitions against "champerty" and "maintenance" (the promotion and pursuance of claims by non-parties for their own interests) used to carry criminal sanctions. Whilst the criminal offences were abolished under the Criminal Law Act 1967, a civil law rule was retained to the effect that champertous agreements were invalid and unenforceable. However, the effective abolition of legal aid together with the introduction in the mid-1990s of conditional fee arrangements has seen a steady erosion of the English courts' reluctance to enforce litigation funding arrangements.

An important landmark along the way was the decision of the Court of Appeal in Arkin v Borchard Lines Ltd & Ors (2005). Here, the Court of Appeal gave qualified support to third party funders. In that case, however, the Court ruled that if the funder does not simply fund the proceedings but substantially controls or benefits from them, it should potentially be liable for the opposing party's costs up to the extent of the funding provided.

More recently, the Privy Council decision in Massai Aviation Services v Attorney General of the Bahamas (2007) involved the validity of the assignment of litigious rights under Bahamian law. It held that the assignment was valid where there was a 'genuine commercial interest' in the assignment of the cause of action. Noting that the position under English law is effectively the same as the Bahamas, Baroness Hale recalled that a contract involving maintenance or champerty is unenforceable and void. However, Baroness Hale suggested that the need for these rules was receding in modern times and that the sale of rights of action has become commonplace.

Developments in Australia

If Australia is anything to go by, litigation funding is set to become an even faster growth industry here in the UK. In Australia, the principles of maintenance and champerty were abolished through a combination of common law developments and legislation introduced in 1993. The largest of the Australian litigation funders is IMF, which has funded over 70 cases worth a total of £400 million. It takes on average 30 per cent of the recoveries - 60 per cent of the cases settle out of court. Its claimed success rate of court cases is approximately 65 per cent.

The Australian litigation funding industry has received further encouragement in the recent case of Campbell's Cash & Carry Pty Ltd v Fostif Pty Ltd (2006). In Fostif, the Australian High Court was asked to consider whether the actions of litigation funders amounted to an abuse of process in the context of proceedings commenced against various wholesalers by tobacco retailers seeking to recover the fees that they had paid to the wholesalers. Representative proceedings were financed by the litigation funding company. Addressing the question of whether litigation funding was an abuse of process, the High Court observed that fears about adverse effects on the processes of litigation as a result of these sorts of arrangement were not enough to establish a rule of public policy to prohibit representative actions financed by litigation funders. This landmark decision appears to clear the way for litigation funders to control class action litigation with the purpose of profiting from it.

What the future holds

The growth of litigation funding is not a development likely to be welcomed by those organisations (typically insurers) responsible for funding the defence of such claims. Insurers are also keeping close track of signs of growth under a different litigation funding mechanism. This is the system under which law firms themselves assume a degree of risk in the outcome of litigation. The concept of a "plaintiffs' bar" is firmly entrenched in the US system of justice. It allows lawyers to share with their clients in the proceeds of litigation. Whilst such arrangements are not yet permissible in the UK, there has been significant growth in litigation funded by conditional fee arrangements - i.e. arrangements in which lawyers accept a share of the risk in the outcome of the litigation in exchange for an uplift on the fees they would otherwise recover in the event of a successful outcome. A number of US plaintiff law firms have recently set up branch offices in the UK and elsewhere in Europe or have expressed an interest in doing so. The growth of so-called "after the event" insurance which provides an alternative funding mechanism for such litigation has also been significant.

It would be easy to conclude that growth in litigation funding, whether by lawyers and/or by speculative investors, is inevitable. This is not necessarily so. The scope for getting one's fingers seriously burned is ever present. This was the fate of the claimants in the ill-starred Railtrack litigation. A few years earlier, this had also been the fate risked by the lawyers who faced potential costs in relation to proceedings brought by over 227 individual claimants in a well publicised tobacco-related class action claim. The "loser pays" principle is alive and well in the UK. Courts also have wide discretionary powers to award costs including in certain instances against non-parties to litigation. Claimants need to choose their battles with care.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.