Third-party litigation funders may be asked to formalise capital adequacy standards to demonstrate their financial strength, under a code of conduct being drawn up by the Civil Justice Council (CJC).
The CJC committee, chaired by Irwin Mitchell chairman Michael Napier, is expected to finalise the draft code before the end of the year.
Funders will not be obliged to sign up to the code, but commentators said it would give them added credence in the litigation market.
Funders are attempting to break into the domestic litigation market, arguing that they offer general counsel an alternative method of funding cases. Typically, funders want a slice of any settlement as repayment for the funding.
However, concerns about cases collapsing because funders have run out of money have prompted the community to respond through a formal code.
Vannin Capital, which launched in the UK in June with £8m earmarked for seven disputes, said it would welcome more transparency in the market.
Founding solicitor Nick Rowles-Davies said: “It gives a way for the client to find out whether [a funder] can fund the case from start to finish. If you’re a client you need to know that.”
Up for discussion in the CJC committee is the question of how much funders should set aside, and for how long.
According to one source, players could be expected to show they can cover any losses for the next three years with cash reserves.
The source said: “Some funders have in the past relied on the settlement of case A to fund case B; that isn’t acceptable. There have been cases where the client has been forced to settle on the back of the funder’s advice, and maybe that serves the funder more than the client.
“Clients need to be sure they are working with funders that have enough capital to pay.”
Third-party funders have long talked about a possible code of conduct. Lord Justice Jackson mentioned it in his review of civil litigation funding, published in May 2009.
Until now, however, the funders have been unable to agree on the details.
It is understood the CJC committee is expected to have a formal code drafted by the end of the year, with the support of market players.
Another key issue that needs to be settled before then is what can be done when funders effectively force cases to settle by threatening to withdraw funding.
Rowles-Davies said: “It’s about under what terms and conditions can a funder withdraw its funding.”
One proposal is that a dispute resolution clause should be inserted into funding agreements specifying that a silk can mediate when the relationship breaks down.
However, in order for this to succeed, third-party funders will have to be clear about their position in the market.
According to research by Calunius Capital head of care assesment Christian Stuerwald, around 20 entities claim to operate in the market, offering easy access to capital to fund commercial disputes. In reality, he said, there are far fewer.
Stuerwald added: “It’s an unfortunate fact that not all entities are completely open about their role, and in particular whether they have immediate access to funds directly under their control or whether they’re intermediaries who would have to raise money from third parties – the actual funders – if a case looks promising.”
Stuerwald is not alone. “It should be absolutely clear and fair who they’re acting for,” said Rowles-Davies. “There should be a distinction between brokers and funders.”
For the third-party market to thrive it needs to convince litigators it is serious about commitment. Funders who sign up to the code of conduct will be promising an era of transparency, but that needs to be matched with certainty over capital adequacy. It will only take one funder to collapse for the market to crash, but it will take the entire industry to ensure this burgeoning sector continues to flourish.