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Litigation Funding: A modern approach to a medieval law

Piles of pound coins Print publication

01/07/2015

Medieval laws against third party litigation funding exist today, but in a modified form. Gwendoline Davies explains a recent case in which the High Court demonstrated a modern and commercial approach to the rule against maintenance and champerty.

Ancient Principles

The ancient law against maintenance and champerty still exists today to prevent the unlawful interference, by third parties, in litigation. Maintenance is the improper support or funding of litigation in which the supporter him/herself has no legitimate concern. Champerty is an aggravated form of maintenance, whereby the supporter shares in the spoils of a successful claim. The public policy reasoning behind this medieval law is to mitigate the risk that the involvement of interested third parties might undermine justice.

Modern Approach

The modern law of England and Wales recognises some limited exceptions to the rule against maintenance and champerty. These include Conditional Fee Agreements and some Damages Based or Contingency Fee Agreements provided by solicitors and barristers (often backed by specialist litigation funding insurance); and the ability of administrators and liquidators to assign causes of action in relation to insolvent companies. However, even in today’s commercial climate, the relatively common practice of assignment of claims should be approached with care because, if such an arrangement were found to be champertous, claims could be struck out and devastating costs consequences could follow.

A recent case shows how the court will apply ancient principles to sensible, commercial effect today.

JEB Recoveries LLP v Binstock [1] involved a claim regarding an alleged debt payable by Mr Binstock. The proper claimant, Mr Wilson, had sold his claim to JEB. JEB had been formed by Mr Wilson and other partners as an SPV with the commercial objective of recovering the debts and claims of its partners and their families against Mr Binstock. Mr Binstock applied to have the claim struck out on the recognised basis that a bare assignment of a cause of action is generally champertous and can even amount to ‘litigation trafficking’ (that is, the commercial trading of, or meddling in, litigation between unconnected third parties [2]). The High Court, however, considered that it was relevant that the rights assigned to JEB were not solely causes of action, but also debts; Mr Wilson remained connected via his direct interest in JEB; and Mr Wilson and his wife would have been witnesses for the claimant whether the claim was brought by JEB or by Mr Wilson himself, such that there was no suggestion that evidence would be different or undermined pursuant to the assignment. The court therefore concluded that setting up an SPV and assigning debt actions in this way did not amount to maintenance or champerty.

Practice Points to Note

  • Where a funding arrangement amounts to maintenance or champerty, it will be void and unenforceable. Legal fees and expenses will not be recoverable either under the agreement or even pursuant to an equitable ‘quantum meruit’ [3] claim. This could, in many cases, leave a claimant without the means to pursue its claim.
  • As a result of the indemnity principle [4] any successful party that has been funded pursuant to an unlawful arrangement will be unable to recover costs from its opponent.
  • Whether an arrangement contravenes the rule will turn on the facts of each case, but there are certain factors that the court will assess:
    • Whether the funder exerts excessive control over the litigation. The more a funder seeks to take or influence strategic decisions, the more likely the arrangement will fall foul of the rule against champerty and maintenance.
    • Independent legal advisor involvement. The more information and advice that a legal advisor provides to the funded party, the more likely it is that the funding arrangement will be lawful.
    • Whether the funder stands to gain excessive profits.
    • Whether there is a risk of distortion of evidence.
    • Whether or not the funder is regulated.
    • Whether there is an assignment of a bare cause of action or whether, as in this case, there is also the assignment of a debt.
    • The level of connection (if any) between the funder and the funded party. In JEB v Binstock, Mr Wilson’s direct connection proved crucial.
  • Given the importance of this decision to the law of champerty generally, the judge did give permission for the parties to appeal. The decision, and the law in this important area, may still be reconsidered. Walker Morris will watch the case with interest and will report on any developments.

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[1] [2015] EWHC 1063 (Ch)
[2] Trendtex Trading Corp v Credit Suisse [1982] AC 679
[3] The phrase ‘quantum meruit’ denotes a doctrine whereby the law infers a promise to pay a reasonable amount in return for goods or services which have been supplied, even in the absence of a legally enforceable agreement between the parties.
[4] A principle of law which provides that the amount which the paying party has to pay cannot exceed the amount which the successful party has to pay to his own solicitor. This means that where the receiving party is not liable to pay costs to his own legal advisor, the receiving party is not entitled to recovering costs from the paying party.

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