Litigation shake-up

When Stone & Rolls secured independent litigation funding for its £90m claim against auditors Moore Stephens in January 2007 it did so in a flurry of publicity (The Lawyer, 5 January 2007).

Nick Bird

Nick Bird

IM Litigation Funding provided the cash needed for the case to get to court. When Stone & Rolls lost the case in the House of Lords two weeks ago lawyers argued it would be a blow for the raft of funders coming into the market.

As Reynolds Porter Chamberlain partner Nick Bird comments: “The claim was funded by third party funders at very considerable expense and will cause concern to those in that business at a time when the future of all litigation funding is being weighed up carefully in Lord Justice Jackson’s review of civil costs.”

The funders’ investment in the case will be written off as a loss that could, sources claim, run to several millions of pounds. That is a hefty liability for a company that relies on the return of long-term investments to keep its liquidity levels up.

If the funders refuse to pay out, or if indeed are unable to do so, it will shake lawyer confidence in the third-party funding sector and could spell disaster for the industry as a whole.

That said, some argue that Stone & Rolls will actually bring a boost for the fledgling market.

James Delaney, director of funding at broker The Judge, argues: “People can be quick to criticise funders for cherry picking cases. However, this case demonstrates the inherent risks in litigation and that even seemingly good cases can and do lose.

“If anything, arguably this case helps to justify the level of returns being asked by

funders because of the risks involved.”

Rocco Pirozzolo, senior underwriter for insurers QBE, adds: “If the funders don’t pay up it’ll have two consequences. Firstly, solicitors will lose confidence in the sector and carry out a fuller check of the financial standing of the funder in future. And secondly, solicitors will insist that clients take out ATE [after the event] insurance should clients need to use this funding for their own costs.”

It is understood that while Norton Rose, which acted for Stone & Rolls, was able to secure funding, the risk was not offset through the use of ATE insurance, despite the firm’s best efforts to get cover.

This means the funders are liable for a significant proportion of the legal costs incurred. The exact costs, however, are unclear.

It is believed that IM bankrolled the case by paying Norton Rose’s legal fees. Yet funding was not secured until January 2007 – two years after the case was originally mooted – meaning that a lot of the work had been done prior to the arrangement.

Furthermore, sources said that Barlow Lyde & Gilbert, which represented Moore Stephens, managed to get security for costs totalling £700,000 for the Court of Appeal hearing. The firm has been left exposed for the costs incurred in the House of Lords, which it hopes to settle prior to a costs hearing.

After three days in the House of Lords with five Law Lords overseeing the case, Brick Court’s Jonathan Sumption QC, representing the defendants, and Fountain Court’s Michael Brindle QC, acting for the claimants, fees will be significant.

Much was made of the regulation of the third-party funding sector, with the Civil Justice Council coming up with a set of guidelines for players to adhere to (The Lawyer, 8 December 2008).

According to Peter Smith of FirstAssist the drafting of those regulations has now been put on hold until after Lord Justice Jackson reports back on the costs review at the end of the year.

That means funders are not legally required to have set levels of solvency. Neither are they required to be transparent about the arrangements.

The sector will be waiting to hear news of a payout from IM Litigation Funding. It may be a loss in the short term, but if the company fails to pay out it will be to the detriment of the entire market.