A litigator’s job description could increasingly be said to include the skills of bookie and salesman – assessing the odds of winning a case and advising clients on the evolving market in funding their litigation.

Economic downturns spark increased litigation as companies seek to recoup losses, but faced with notoriously high legal costs the key question for those wanting to bring a claim is how to fund it. But how litigation is and might be funded in future is an area in turmoil.

The growth in third-party funding, while still a nascent market, is just one development in the turbulent world of costs. The issue of contingency fees is once again raising its head, as are self-funding schemes for civil actions. Implementation of the new claims process has been set back at least six months while the Civil Justice Council mediates between stakeholders. Then there is the running sore of referral fees, conditional fee arrangements (CFAs) are under review, and, on the group-action front, the CJC is recommending that judges have discretion to allow an opt-out rather than an opt-in scheme.

With all that material to work on, Lord Justice Jackson’s review of the costs regime is being watched with intense interest. And the one thing that is certain, says Neil Rose, editor of the Law Society’s Litigation Funding magazine, is that the ‘fun is only just beginning’.

‘The chaos that engulfed the costs world over the last decade shows no sign of letting up, even though the pre-November 2005 challenges to CFAs are finally dwindling,’ he says, ‘and this is all before we get to 2011 and alternative business structures, when the impact on much of the litigation and costs world could be seismic.’

But, he says, there is also abroad the ‘heretical thought’ that perhaps more time should be spent on finding new ways to resolve disputes – particularly smaller claims – rather than worrying about how lawyers are paid.

For David Greene, president of the London Solicitors Litigation Association, the big issue is the question mark over whether CFAs are an appropriate way of funding litigation. The Ministry of Justice is reviewing the use of CFAs in defamation and personal injury, and CFAs are increasingly being used in commercial litigation.

Greene, head of litigation and dispute resolution at London commercial law firm Edwin Coe, says the central point of any reform must be that ‘you cannot divorce costs from procedure’. He also questions whether there is any ‘political appetite’ for changes that require primary legislation.

Concern that costs, proportionality and contingency arrangements are key reputational and ethical issues for solicitors prompted the Law Society’s civil justice committee to issue a consultation paper.

The responses are still being analysed, but committee chairman Stephen Mason, a member of Leeds-based travel law specialists Travlaw, says: ‘The Law Society is against contingency fees and we wanted to see if it is time to change that policy. My personal view is that, as long as we can devise a system that abjures the excesses of the American system, we should support developments which increase access to justice.

‘We also wanted to consult on third-party funding, which has crept up on us before anyone has thought through what rules ought to be in place, to prevent abuse without discouraging what could be a valuable tool in enhancing access to justice.’

The CJC is working on a self-regulating code of conduct produced by a small group of funders. Robert Musgrove, the council’s chief executive, says the council will not be publishing the code until it has worked through the financial and legal implications with stakeholders, including funders, the FSA, the Law Society, the MoJ and practitioners.

Third-party funding is certainly provoking debate. Tony Guise, of costs specialists Guise, says there has been a lot of ‘hot air’ about third-party funding over the last 18 months. ‘Some funders are drawing in their horns because the recession means recoverability is in doubt, while others are becoming more aggressive. There is no shortage of funding available – people are putting together capital funds of £20m-£30m – but it is not clear how many cases are actually being funded this way.

‘Everyone is watching the InnovatorOne case, where Addleshaw Goddard is representing several hundred investors backed by third-party funding. Everyone is after the big commercial action but they are inherently risky and they don’t provide a good business model.’

But the litigation funding market is attracting international interest. John Rossos is principal of Canadian BridgePoint Financial Services, which funds both law firms and individual cases. He has been in the UK researching opportunities and likes what he sees. ‘While the US market is huge, we feel we have a better cultural and legal fit with the UK. I also believe that the Legal Services Act will be the "big bang" for legal services.’

Sam Eastwood, partner in Norton Rose’s dispute resolution team, has first-hand experience of the market in one of the largest independently funded cases – the Stone & Rolls £69.5m professional negligence claim against accountancy firm Moore Stephens, bankrolled by IM Litigation Funding.

Does he feel the case has led to the ‘litigation revolution’ predicted when Stone & Rolls first hit the headlines in 2007? ‘The case has served as an important catalyst in demonstrating to lawyers, funders and clients that it is possible to put together finance for a substantial commercial dispute,’ he says. ‘At the time, there was a lack of awareness of the potential for third-party funding – and considerable scepticism.’

He dismisses suggestions that the outcome of the case will impact on the third-party funding market. ‘There was a strike-out application which we won at first instance, lost at appeal and we are now waiting on the judgment of the House of Lords. The interest in the case has rightly shifted from the funding novelty to the legal arguments at the heart of Moore Stephens’ strike-out application.

‘There is a common misconception that the House of Lords is deciding the merits of third-party funding. This is not the case. The House of Lords judgment will focus on some very interesting points of law which will shape the law in relation to auditors’ negligence for years to come.’

The third-party funding market has matured considerably since the still contested Stone & Rolls case was started, adds Eastwood, and its potential has secured widespread recognition. ‘It is here to stay – particularly in the current economic climate.’

Another major third-party funding case opened in 2007 involving former Status Quo band members Alan Lancaster and John Coghlan, who were backed by AllianzProzessFinanz, the German funder, in their battle for payment of back catalogue royalties. Both won at first instance, but one lost on appeal. There are ongoing detailed costs assessments.

Simon Jacobs, a partner in central London law firm Seddons’ dispute resolution team, represents the claimants. ‘At the moment’, he says, ‘third-party funding arrangements are very much a "bespoke" product. The hope is the market will develop sensibly without too much satellite litigation. However, it is helpful when challenges are ruled on by the courts because it gives more certainty to the process.’

He is currently looking at this funding model for a large commercial group action. ‘It is not a panacea but it’s a great tool for the right cases.’

Graham Reid, an employed barrister at City law firm Reynolds Porter Chamberlain, advises law firms who want to try some of the ‘more novel’ forms of funding on whether they comply with the Solicitors Code of Conduct.

‘Will third-party funding become big? That depends on the extent to which, in these difficult economic times, people with money see it as a business opportunity,’ he says. ‘The downturn will mean more impoverished litigants with legitimate axes to grind who will need external funding. But there will also be a large number of impoverished litigants who want to postpone paying fees and will try to raise spurious claims.’

There is currently a push to inform the profession from outside about developments in litigation funding, such as regional briefings by insurance broker Marsh on how the current economic climate has changed the risk landscape, and how litigation funding can help firms and their clients.

Reid says rule 2.02 of the Code of Conduct requires solicitors to discuss funding options with their client, but there is some uncertainty as to how far this extends. While some practitioners said, on being asked for this article, that ‘we are not salesmen for third-party funders’, Reid says the ‘sensible response is to assume that you need to discuss all options, which will increase the amount of involvement in more complicated funding arrangements’.

Guise says awareness among the profession is ‘pretty poor’. ‘When my partners and I talk about it we mainly see blank faces, and it is largely untried outside London.’

His firm is seeing something backed by research. An Ipsos Mori survey of FTSE 350 senior executives, commissioned by Addleshaw Goddard, found a third of respondents were unaware of third-party funding or after-the-event (ATE) insurance.

Brian Raincock, chairman of Litigation Protection Ltd, says one of the problems is that the ATE market is not that sophisticated when it comes to commercial cases, as its underwriting capability is more geared to personal injury and clinical negligence.

Bob Gordon is managing director of 1st Class Legal, which provides both ATE insurance and litigation funding. His firm has been testing the third-party market, lending £12m to fund 17 cases, and plans to announce a ‘dramatically higher’ position next month.

He says some funders only want cases involving a minimum of £2m in potential damages. ‘We want a spread of cases. However, the people who have real problems are those with a dispute worth £75,000, where the legal costs on each side would be £40,000, and the numbers just don’t stack up to get insurance or funding – and there are thousands of cases like that.’

Where third-party funding is available, ATE insurance complements rather than competes with it, he says. ‘You can insure a case without funding, but you cannot fund a case without insurance.’

The question of whether the ATE premium in third-party cases should be recoverable if they win is being raised at conferences, says Guise: ‘Why should funders be allowed to recover the ATE premium when the entire case is being run at least partly for their benefit, and this exposure to costs – for which they put in place ATE – is simply part of their business overheads?’

While there will be challenges over costs, Raincock does not believe third-party funding will provoke large-scale satellite litigation. ‘Most defendants are individuals and there is no unifying force to raise challenges in the way the insurance industry did on the PI side over CFAs.’

But there is potential for third-party funding in group actions, both according to funders and solicitors.

Raincock says group actions pose difficulties because they tend to be complex and difficult to manage, but the CJC’s opt-out proposal ‘would certainly make them more attractive’. Gordon at 1st Class Legal says he has been approached about funding group litigation. ‘We would be happy to do it, but there must be sensible mechanisms to control overall costs.’

Matthew Weiniger, partner in Herbert Smith’s litigation and arbitration division, says claimant lawyers are already testing the boundaries of existing court procedures to try to persuade the courts to develop ‘something akin to the US-style class action’.

But he points to the case of Emerald Supplies Ltd v British Airways Plc [2009] EWHC 741 (Ch), in which the High Court struck out the representative element of the claim, as an example of the current situation. ‘The courts appear unwilling to expand the circumstances in which collective actions can be brought, pending the government’s decision as to whether to introduce new procedures for collective litigation in response to the various recent proposals for reform.’

Under rule 9.01(4) of the Solicitors Code of Conduct, there can be no third-party funding or other contingency agreement in cases that involve personal injury or death. But Reid at Reynolds says this may have to change ‘because cases such as a group action involving people harmed by a drug would be exactly the sort of case that deserves access to justice’.

So, it is a question of watch this space on costs, but change is coming. As Litigation Funding’s Rose says: ‘The costs system must clearly be reformed, but how radically? Procedural reform will have to come hand in hand – especially for large commercial cases – and, though he shies away from the description, Jackson is the closest thing we’ll get to the new Woolf.

‘But Woolf was commissioned by the government’, says Rose, ‘and the huge question mark hanging over all of this is whether the MoJ, which is carrying on with its own, smaller costs reforms in the meantime, will implement what Jackson recommends’.

Third-party funding code of conduct?Third-party funding needs ‘soft regulation’ with a voluntary code of conduct to avoid the cost wars that arose out of conditional fee agreements, say Professor Rachael Mulheron and Dr Peter Cashman. They have researched the market and highlight key points that should be included in any code:

  • The client wants to sue on their own initiative;
  • The funder is subject to independent ‘checks and balances’ throughout the litigation;
  • The funder does not have the capacity to ‘monopolise’ the litigation improperly;
  • There is no conflict of interest between the funder and the client;
  • The funder must have sufficient resources to meet its commitments to claimant;
  • The funder must be willing and able to meet any adverse costs order should the action fail;
  • The funder must not have negotiated an ‘inordinately high’ fee; and
  • The funding agreement does not otherwise have any tendency to corrupt the legal process.

Grania Langdon-Down is a freelance journalist