“There is a lot to like in report,” says ACL chair
The Civil Justice Council (CJC) working party on litigation funding this week recommended the introduction of “light-touch regulation” through legislation, as well as greater use of costs management in funded cases.
“It is apparent that there is a direct relationship between the incidence of costs and litigation funding,” it said.
“It is apparent that, while funding will, by definition, result in an incidence of costs that would not otherwise be incurred but for the funding, it can also be said with some force that litigation funders have an incentive to increase costs for their own benefit.”
The 150-page report made a total of 57 recommendations, many of which are of direct interest to Costs Lawyers around budgeting, conditional fee agreements (CFAs) and damages-based agreements (DBAs).
The working party received 84 responses to the consultation it issued last year, including the ACL’s, and was particularly influenced by the European Law Institute’s principles governing the third-party funding of litigation, also published last year.
We have summarised the key recommendations around costs here and around CFAs and DBAs here.
The working party was co-chaired by Mr Justice Simon Picken and Dr John Sorabji (CJC member), with Mrs Justice Sara Cockerill, Professor Chris Hodges (Regulatory Horizons Council), Lucy Castledine (Financial Conduct Authority (FCA)) and Nick Bacon KC the other members. They were supported by a wider consultation group.
While backing funding as a concept, the report said there had to be “appropriate and effective protection for funded parties and defendants”.
The first step should be to reverse the Supreme Court’s 2023 PACCAR decision by legislation, which should be “both retrospective and prospective in effect”, as soon as possible.
The law should make clear that there is “a categorical difference” between contingency fee funding by lawyers through CFAs and DBAs, and litigation funding. “The two are separate and should be subject to separate regulatory regimes,” the working party said.
This should be followed by a litigation funding bill introducing a baseline level of regulation – such as around capital adequacy certified by funder and lawyer to the court, disclosure of the fact of funding, and avoiding conflicts of interest – with enhanced provisions where the client is a consumer or it is a group action of whatever kind. Arbitration proceedings would be excluded from its scope.
Where the funded party was a consumer or it is a group action, the funder should also have to comply with a regulatory consumer duty, modelled on the FCA’s, while the party should receive independent legal advice from a KC, paid for by the funder, before entering into the LFA.
To minimise the cost of such advice, standard LFA terms should be developed and annexed to the regulations. Further, the funded party, on a without-notice basis, should disclose the LFA for approval by the court at the outset of proceedings.
A lawyer breaching the certification requirements should face disciplinary action by their regulator, while failure to comply with either the capital adequacy or after-the-event insurance requirements should result in the funder having to give security for costs. If they cannot, the agreement would be unenforceable.
The report conceded there was “a great deal of force” in calls for FCA regulation, but said its proposed regime should be given five years before making that decision.
The report rejected statutory caps on funders’ returns “on the basis that they are a blunt instrument and are unable to take proper account of the variable risks of funding different claims”.
It continued: “They are also unnecessary as a means to secure effective consumer protection. Such protection, for non-commercial parties and for claimants or class members in collective or party proceedings, is, however, provided by making provision for the court to approve that the level of return is fair, just and reasonable.”
The working party also called on legal regulators to improve the regulation of the legal profession where funding is concerned, including requiring lawyers to consider with their clients the various available forms of funding, and declaring any connection with the funder.
Other recommendations included the possible development of a pre-action protocol for mass claims, that the government should promote the uptake, utility and use of legal expenses insurance; and consider whether to introduce an Access to Justice Fund, “a new and supplemental aspect of civil legal funding” funded by a small percentage of the profits from litigation funding, CFAs and DBAs. It would back early legal advice and alternative forms of dispute resolution.
Sir Geoffrey Vos, Master of the Rolls, head of civil justice and chair of the CJC, said: “This landmark piece of work epitomises the raison d’être of the CJC: promoting effective access to justice for all. Litigation funding and its impact on access to justice has long been a priority for the council…
“I believe that the recommendations in this report, if adopted, will form the foundation for a more transparent, fair and effective litigation funding framework in England and Wales. I encourage all stakeholders to examine them carefully.”
ACL chair David Bailey-Vella said: “Our first reading of the CJC report is that there is a lot to like in it. The working party has put forward measured proposals to regulate third-party funding, as the ACL had recommended.
“It seems to have borne in mind the lessons of the costs war in the 2000s, when parties went to extreme lengths to try and show that CFAs breached the regulations and so were unenforceable – but much will depend on how the new litigation funding regulations, if introduced, are drafted.
“We welcome recommendations to introduce mandatory costs management for all funded group actions and to give the court the power to make pre-action costs budgeting and case management orders in funded cases on the application of a prospective party. This recognises how the legal profession as a whole, and Costs Lawyers in particular, have worked to make budgeting an increasingly effective tool.
“There are several other recommendations that could improve the way the costs system works – including a single, simplified legislative contingency fee regime – and the ACL stands ready to provide its expertise to make these ideas a reality.”