Opinion: Funder the cosh

Stone & Rolls v Moore Stephensshows why clients’ liability in litigation funding is a major concern, says Rocco Pirozzolo

It is understandable that the case of Stone & Rolls v Moore Stephens has attracted as much attention for the funding used in bringing the claim as for the law established by the House of Lord’s decision.

In summary, a preliminary issue was decided in Moore Stephens’ favour such that the professional negligence claim brought was unsuccessful in its entirety.

This claim was financed by third party funders – in this instance IM Litigation Funding Limited (IMLF) – in return for an anticipated share of the spoils.

Norton Rose acted for the claimants under a ‘no win, lower fee’ agreement. But it is widely believed that no after the event (ATE) insurance could be obtained for this claim.

In law, the net effect of this funding arrangement is that IMLF are liable for the costs of Moore Stephens up to the sum that they have invested in bringing the case to the House of Lords.

Norton Rose together with counsel for the claimant were probably being paid upon interim bills being presented.

Accordingly, these costs have not been the focus of any attention. Instead, attention has centred on the shortfall of the opponent’s costs over and above the £700,000 already paid as security for costs.

The amount of this shortfall is expected to be significant given the level of the defendant’s costs (which can be estimated from the sum ordered to be paid as security) and the claimant’s own funded costs.

The Stone & Rolls case merely highlights the issue that funders are not regulated. As such, there are no solvency requirements for funders to satisfy before offering funding to litigants even though some claims that are funded may be very expensive (as opposed to run of the mill).

It is this absence of any consumer protection that has been looked into by the Civil Justice Council and, naturally, considered by Lord Justice Jackson in his preliminary report. Indeed, in the report, the question has been raised as to whether formal regulation is required.

If a funder does not comply with its obligations, the claimant is ultimately liable for costs. An opponent can, therefore, pursue the claimant for any costs ordered to be paid.

Is a contractual obligation in the agreement between the claimant and the funder sufficient protection for the claimant as a consumer of third party funding?

This is particularly a concern where funders do not have adequate capital within the funder’s own company accounts (as filed at Companies House) to finance the claim (or a number of claims) that they have agreed to invest in.

Instead, these funds are, invariably, held in offshore hedge funds that are not named as a party to the agreement between the claimant and the funder.

If there are any difficulties with the funder meeting their obligations set out in the agreement, these claimants will turn to their solicitors who advised them to use the funder.

These clients will ask about the due diligence they carried out on the funder as to their solvency and the ease of accessing the finance agreed to be provided. 

Accordingly, this is a live issue for solicitors advising on third party funding as well as for their professional indemnity insurers.

Funders are now more wary of exposing themselves to paying opponent’s costs as in the Stone & Rolls case. The current trend is for funders to offer terms of funding only if an ATE policy from a UK, financially strong insurer is secured. 

Rocco Pirozzolo is a solicitor and senior underwriter at QBE European Operations