Litigation funding: Fund fair

Litigation funding is a complex market, but it’s up to solicitors to ensure they’re able to keep clients fully informed of what’s available.

A solicitor’s duty to appraise clients of the litigation funding options available to them is clearly set out in Rule 2 (2.02 and 2.03) of the Solicitors Code of Conduct. However, there is a considerable lack of clarity as to how far this duty extends.

Given that we are in a crunched market, which will inevitably lead to increased ­litigation as businesses seek to claw back losses, it is clearly a priority for the ­profession to work this one out. Rather ­worryingly, a recent Mori poll of 350 senior executives in FTSE 350 companies found that a full one-third of respondents were completely unaware of third-party funding and after-the-event (ATE) insurance: the message clearly is not getting out there.

Care of duty

But how far does the duty under Rule 2 extend? It has been reported before that many practitioners resist the requirement to talk to clients in detail about funding options, stating that they do not think it appropriate to ‘take on the role of salesperson, or broker, for litigation funders’. This is true enough in one sense: it ­certainly is not the solicitors role to ‘sell’ funding products.

But in another sense this entirely misses the point. Let us not forget that Rule 2 falls under the heading of ‘Client Care’ in the Code of Conduct: the duty set out is all about ensuring that both solicitor and client understand each other’s expectations and responsibilities – moreover, to ensure clients are given the necessary information to enable them to make appropriate decisions about their case.

Given this context, it is clear that a ­solicitor’s duty extends beyond simply ­ticking a box to say they have mentioned that ­litigation funding products are available: it is about making sure a client is fully appraised of the options available to them, with enough discussion and explanation around the options presented that they can make a fully informed decision.

A common misconception among practitioners, although thankfully this is slowly changing, is that ATE insurance products are the preserve of personal injury cases. The reality is that in the past couple of years, as the market for litigation funding products has mushroomed, both ATE and third-party funding have entered the mainstream of big-ticket commercial cases.

The cause was helped in 2008 with the publicity surrounding the Moore Stephens vs Stone & Rolls (2008) case, a £70m ­professional negligence claim backed by third-party funding, which brought to everybody’s attention – lawyers, clients and funders alike – the potential for ATE and third-party funding to play a key role in big-ticket ­commercial disputes.

While it may be true to say that the growth of ATE and third-party funding started in response to the withdrawal of legal aid, the picture today is altogether more ambitious. Indeed, these innovations in litigation funding have a key role to play in London maintaining its position as a world centre for dispute resolution: we already lead many jurisdictions when it comes to transparency of our legal system and process, and the enforceability of our judgments in other jurisdictions.

However, it is widely recognised within the profession that our Achilles heel is the cost of litigating in London. It is the ATE market that has, to date, been responsible for much of the innovation in this area – and there is more to come. This is not a static picture by any means: this is a market that is expanding fast and continuing to ­innovate.

And herein lies a significant challenge for anyone with a professional duty to advise clients on what is available and how to choose appropriately: just keeping up to date with the latest developments, the numerous bespoke products and also the possibilities opened up by the interaction of ATE products and third-party funders.

Reviews and regulation

A couple of other developments should be mentioned here, on which practitioners need to keep a close weather eye. The first is the Jackson Review of civil litigation costs, due to report at the end of this year.

In his preliminary report (published in May) Lord Justice Jackson recognises the key role of ATE and third-party funders and helpfully separates out the issues in personal injury versus commercial cases. Also, the report contemplates the advent of US-style contingency fees. Clearly there are risks that such a move will create a ­similar culture of litigation excess that we see in the US and the jury is out on whether controls can be put in place to mitigate this, but what is clear from Jackson is that this is now a debate to be had in earnest.

The other key development is the move to regulate the third-party funding market. However, we have yet to decide who should do the regulating. Litigation funding is a complicated mix of insurance, finance and legal product, involving a complex interaction between these very different ­elements. Moreover, innovation in this area is moving fast and regulators will have a challenge to keep up with the detail of precisely what it is they are regulating.

The challenge is similar for practitioners: how to keep up to speed with the products available for clients and present the picture to them in a way that truly enables them to make an appropriate, informed choice. Given that the picture keeps changing, this is not an easy task. But to discharge the duty of appropriate client care, practitioners will need to find a way to rise to the ­challenge.

Bob Gordon is chief executive of ATE insurance and litigation company 1st Class Legal