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My Lords, in June 2007, the Civil Justice Council-a body headed by the Master of the Rolls and comprising members of the judiciary, the legal professions, civil servants and lay people with knowledge of consumer affairs, CABs, businesses and employers-published advice to the Lord Chancellor recommending the proper regulation of third-party funding; that is, investment by an external party otherwise unconnected to a claim in a lawsuit in order to gain a maximum return upon its investment. In this country, it used to be called maintenance and champerty, and it was both a crime and a civil tort. In 1641, maintenance was described by the jurist Coke in his Institutes as:
"A taking in hand, a bearing up or upholding of quarrels or sides, to the disturbance of the common right".
"Champerty" is the "maintenance" of a person in a lawsuit on condition that the subject matter of the action is to be shared with the maintainer. It was abolished as a crime in the United Kingdom in 1967 but as recently as July 2009 a solicitor in Hong Kong, where the offence still exists and carries a maximum sentence of seven years, was sent to prison for some 15 months. It remains illegal also in New Zealand but not in the United States.
As the practice has spread across the water into this country, specifically targeted at claim by small and medium business enterprises against large corporations, the Civil Justice Council formed a working party to consider the issue further. Consultations took place in February and July 2008 when a draft code of conduct for a third-party funding, which the working party had produced, was considered.
Following Lord Justice Jackson's recommendations -he obviously considered this as well as conditional fee agreements-the draft code of conduct was revised. In February 2010, the Civil Justice Council held another stakeholder event to consider the revised code. The working party, under the chairmanship of the very eminent solicitor and Queen's Counsel Michael Napier, chairman of Irwin Mitchell, which is essentially a leading claimants' firm, produced a voluntary code of conduct for litigation funders, which was published on
When Lord Justice Jackson considered this issue in his final report, he recommended that a satisfactory voluntary code to which all litigation funders would subscribe should be drawn up, and to that extent his preliminary recommendation is followed up by this code. But he went on to say that the code should contain "effective capital adequacy requirements" and should place appropriate restrictions on the ability of funders to withdraw support for ongoing litigation. His second recommendation was that,
"the question whether there should be statutory regulation of third party funders by the FSA ought to be revisited if and when the third party funding market expands".
It is expanding and is continuing to do so and, as Lord Justice Jackson recommended, the question of whether there should be statutory regulation is the question I am raising in this debate.
His third recommendation is very important. He said that,
"third-party funders should be potentially liable for the full amount of adverse costs, subject to the discretion of the judge".
In the voluntary code, which was published in November, there are manifest weaknesses. Rule 7(a) says that a funder will ensure that a litigant has received "independent advice" on the terms of the agreement, but then states specifically that such advice can be obtained,
"from the solicitor instructed in the dispute"- the very lawyer who is to be funded by the funding arrangement. The conflict of interest is obvious in such a situation. Rule 8 says that the funder must state in the funding agreement whether he is undertaking "liability for adverse costs". It certainly does not say that the funder must undertake such a liability. This is directly contrary to the third recommendation made by Lord Justice Jackson, which I made clear to your Lordships a moment ago. The funder could walk away and leave a small business to carry the costs of the other side, which would leave it completely broke. If a funder is to take a percentage of the damages awarded to its clients, which is the purpose of the funding agreement, the funder should bear the risk of paying the other side's costs if he loses.
Rule 9 of the voluntary code provides that the funding agreement,
"shall state whether (and if so how) the Funder may ... provide input to the Litigant's decisions in relation to settlements".
It further provides that the funder may terminate the agreement if he,
"ceases to be satisfied about the merits of the dispute;
(ii) reasonably believes that the dispute is no longer commercially viable".
In other words, the funder may dictate to the litigant that a particular offer to settle must be accepted under the threat that he will withdraw his support. If there is to be fairness, the funder should continue to fund disputes until they are finally resolved. Further, a funder may dictate to counsel how to conduct a case, putting counsel in the particular case in the impossible position of having to choose between the interests of his client and the interests of the funder, who is actually paying his fees and the fees of his instructing solicitor. Rule 9 simply does not match the first of the Jackson recommendations. As I say, for the moment Lord Justice Jackson was prepared for there to be a voluntary code, but that it,
"should place appropriate restrictions upon funders' ability to withdraw support for ongoing litigation".
In the face of that recommendation, what does the voluntary code say? "Oh well, he can withdraw if he decides that the case is not going very well." He can terminate it if he ceases to be satisfied about the merits of the dispute.
I have had a very constructive discussion with Mr Leslie Perrin, who facilitates litigation funding and is a former solicitor. I accept, as he has argued, that if a wrong is done to a business, it is very frequently a contractual wrong that hurts that business's profitability, so that damages will include not only the cost of putting right the immediate damage but also the profits lost as a consequence of the wrong-it is a commercial situation. A commercial litigation claim could be said to be a business asset and tradable as such. But there are many areas of litigation where a wrong has been done, of which personal injuries is a prime example, where the litigation is not an asset and should not be traded as such. No speculative hedge fund looking for somewhere to get a good return on its money should have an interest, for example, in a share of the damages of a seriously brain-damaged claimant.
While as yet, so far as we can tell, litigation funding has not spread into personal injuries as it has into divorce litigation, there is nothing in the voluntary agreement of November last to prevent it. No categories of case are excluded. According to Mr Perrin, the industry asked the working party to limit the code and the association to commercial litigation but, for some reason that I do not understand, it did not agree to that, so it is wide open for third-party funding to be available in serious personal injury litigation where large sums of money are at stake. I do not regard this as assisting in access to justice; rather, it takes us back to the old days of maintenance and champerty-hence, my amendment.
I do not suggest in my amendment that third-party litigation funding should be banned, provided that it complies with conditions, some of which I set out and others to be prescribed by the Lord Chancellor and brought forward for proper parliamentary scrutiny. It is all very well having voluntary codes, but Parliament, which represents the people of this country, has absolutely no say in what goes into codes of that sort. Under my amendment, proceedings which cannot be the subject of a CFA under Section 58A(1) and (2) of the 1990 Act, which I refer to, are essentially criminal proceedings but they also include family proceedings for divorce, for adoption and for the welfare of children. Sometimes, large sums are at stake in divorce proceedings. That is not an appropriate area for litigation funding to intervene. My amendment also seeks to regulate funders by requiring them to obtain a licence from a designated licensing body so as not to be operating without any control.
Some of your Lordships may have received a letter from an American association. It is not that it wishes to spread the American type of litigation into this country; rather, it wants to prevent it, because it can see from its own experience what problems it can give rise to.
I concede that if in a commercial case a company wanted to give away a third or four-10ths of its damages to a funding firm of this sort, it could do so but, so far as other areas of the law are concerned, the barriers should remain up. I beg to move.