Keynote Address Delivered by Professor Rachael Mulheron"
Third Party Funding in England and Wales: Drawing Lessons from the Past and Envisioning the Future
Thank you for this very kind invitation to present at this International Conference on Third Party Funding, it is a very great honour to be invited to speak to you today about Third Party Funding in England and Wales. Thank you also to my hosts, Houzhu Capital, who have made me feel so very welcome in your beautiful city of Beijing.
I have called this presentation, ‘Learning from the Past, and Looking to the Future’, because although England has a sophisticated and established third party funding industry for both litigation and for commercial arbitrations, we do not have all the answers!! In fact, we still have some important questions to answer as to ‘best practice’ of third party funding.
So what I will present to you today is an outline of how third party funding operates in England and Wales, and the sorts of issues which we, as a jurisdiction, confront, looking to the future.
In fact, this year, 2024, marks 30 years since when the House of Lords approved of the concept of third party funding as an acceptable part of English law. Prior that, trade associations, recreational groups, and trade unions had financed their members’ litigation – but in the case of Giles v Thompson [1994]1 AC 142 (HL), the House of Lords approved of a stranger financing another’s litigation for reward.
‘The garage owner agrees to finance the action, which he believes certain to succeed, leaving the motorist to employ her own lawyers at the garage owner’s expense… I am quite unable to see how it could be said that the car rental agreement is [unlawful or against public policy]. There is no “wanton and officious intermeddling” in the dispute between the motorist and the defendant. The garage owner does not meddle at all, but allows the motorist to get on with the claim, and merely awaits a favourable result.’
That was the first House of Lords endorsement of third party funding in England, 30 years ago – and it has come a long way since!
I will now divide this presentation into five parts.
The first will introduce third party funding as a concept in England.
The second will outline the typical business model of a funder which operates in England.
The third part will explore some issues associated with the funder’s success fee – that’s the upside for the funder.
The fourth part of the presentation will explore the potential downsides for the funder who is involved in another’s litigation.
Finally, the fifth part looks at important protections which English law insists upon for the funded client. After all, it is that client who is giving up some of its damages or arbitral award to a funder, if successful – and that requires, as a quid pro quo, that some safeguards are put in place for that funded client.
Over its past 30 years in England, third party funding has become a complex and sophisticated industry. There are over 20 funders operating in England now. In addition, there are litigation brokers who put funders in touch with claimants who require financing; and law firms also take a key role in arranging the funding for their clients’ disputes. It is a complex landscape.
Third party funding is used in England to support both litigation (especially commercial and class actions litigation) – and it also commonly supports arbitrations which are seated in London.
But not only that. Many of the 20+ funders that I mentioned previously fund international litigation, and also arbitrations which are seated in other jurisdictions around the world.
This slide sets out the key players in a piece of funded litigation or arbitration in England.
The contract between the claimant, the funded client, and the funder, is called the ‘litigation funding agreement’, or ‘LFA’. As a general rule, the fact that the claimant is being funded by a funder does not have to be disclosed to a defendant. The main exception to that rule is in the case of the statutory class action regime in England. Where this operates in the narrow field of competition law, the fact that the class representative is being third party funded is disclosed to the defendant and to the Competition Appeal Tribunal. Otherwise, typically, the fact that the litigation or arbitration is being third party funded; the identity of the funder; and the terms of the LFA do not need to be disclosed to the opponent.
Also in this landscape is the ATE insurer, or ‘after-the-event’ insurer. This party may have an arrangement with the funder, or with the funded client directly, to cover the client’s adverse costs, should the client lose its case. If the client loses, it could be very expensive, because usually ‘costs follow the event’ in English litigation and arbitrations. In other words, a winning defendant is entitled to its costs from the losing claimant. Hence, an ATE insurer may be involved to cover the prospect of those adverse costs – and the third party funder typically pays the insurance premium for that insurance on behalf of the funded client.
In this slide, I set out the key characteristics of third party funding in England.
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The funder is a commercial entity who views litigation as a form of investment – in England, its funding often provides the only realistic means of access to justice, or getting the case to a court or an arbitral tribunal. This is especially true in the class actions context, for those actions are very expensive to run, and other methods of funding are generally not available;
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The funder has no pre-existing interest in the dispute between the claimant and the defendant, the funder is a true stranger to their litigation;
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The funder will fund all or part of the claimant’s costs, which we call ‘own side’ costs – the funder may or may not agree to fund adverse costs, should the claimant lose (which I’ll come to later);
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Third party funding is called ‘non-recourse’ funding in England, because if the claimant loses, there is no requirement to pay the funder back – it is not a loan. The funder is only entitled to payment if ‘success’ is achieved. That could be a settlement, a judgment, an arbitral award, or even a costs order in the funded client’s favour;
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The funder’s return or profit of its investment is crucial – that is always the aim, to fund a winning case and hence, make some return!
- As already mentioned, an ATE insurer is often involved in the funding package too, to cover adverse costs, should the claimant lose the case.
In England, we do not have the statutory regulation of funders. It is a form of self-regulation which we adopt in England. In 2011, the Association of Litigation Funders was formed, called the ‘ALF’. This body is made up of various funders, and it also regulates funders who are members. This regulation is made up of two key components.
The first and most important is that all funders who are members of the ALF must abide by the Code of Conduct for Litigation Funders. That Code was developed in 2011, and has been reviewed regularly since, to keep it up-to-date. This Code requires, for example, that funders maintain a minimum capital adequacy, and also that they are audited annually.
The second component of the regulation is that the ALF has a system of managing any complaints which are made against a funder by a funded client. Thus far, since 2011, there have only been four such complaints made.
Not all of the funders operating in England are members of the ALF. Presently, 16 funders are members, but others are not.
The question of whether the oversight of third party funding should be tightened by a more formal statutory regulation of funders is currently under law reform consideration in England. But for now, the ALF and its Code of Conduct apply.
NOW I TURN TO THE SECOND PART OF THE PRESENTATION, THE FUNDER’S TYPICAL BUSINESS MODEL:
As I’ve already mentioned, funders will cover all or part of the claimant’s own side costs. They will cover everything that I’ve put on this slide:
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Court filing fees, or if it is an arbitration, the claimant’s share of the arbitrator’s fees and arbitration venue costs;
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Any expert witness fees, as their reports can be very expensive!
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The lawyers’ fees – both the law firm’s and the barrister’s (the legal profession being a divided profession in England, divided into solicitors and barristers – the fees of both are covered by a third party funder);
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Any court transcript fees or witnesses’ travelling costs; and
- As I mentioned earlier, if an ATE insurer is covering the risk of adverse costs, then the insurance premium will be covered by the third party funder.
There are four criteria which funders in England apply to the cases that are pitched to them:
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First of all, they have to be strong cases that are brought to them. Typically, a merits assessment of 60% or higher is applied. There has to be a ‘better than evens’ prospect of winning the case;
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Secondly, the claim value itself must be between 3x and 10x the costs which the funder invests in the case. That’s known as the costs to claim ratio which funders in England apply;
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Thirdly, English funders don’t typically fund any claim under £3M, and some don’t fund any claim value under £10M;
- Fourthly, English funders insist on good enforceability of a judgment. So, the defendant being sued must have the capacity to pay any judgment or settlement or arbitral award; and the judgment or arbitral award must be capable of being recognized and enforced.
So, all of this means that English funders fund between only 2% and 10% of all cases pitched to them! This was one of the really interesting findings to come out of my recent doctrinal and empirical study of third party funding and England and Wales. It is a very low rate of acceptance under their business models!
NOW I TURN TO THE THIRD PART OF THE PRESENTATION, ISSUES AROUND THE FUNDER’S SUCCESS FEE:
In English law, and with very rare exception which I’ll come to later, the funder’s success fee comes out of the funded client’s damages or arbitral award.
Until July 2023, funders calculated their success fee via two possible methods:
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As a percentage of whatever the funded client recovered from the defendant, say, 30%; or
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As a multiple of the costs which the funder either committed to the case, or actually spent, say, 4 x what it cost to fund the case to success.
Why July 2023 is important, I’ll come to soon!
Actually speaking, my empirical study showed that there was a fairly large range of numbers for both the percentage and the multiple methods.
Percentages tended to range between 10-50% of whatever amount is recovered from the defendant; and multiples tended to range from just half of what the funder spent on the case, to 14 times what the funder spent on the case! And everything in between.
Also, the LFA between the funder and the client typically will state that the funder is entitled to the greater of the percentage method or the multiple method. A formula for each will be in the LFA, and the funder is entitled to whichever turns out to the higher.
A question inevitably arises when it comes to the funder’s success fee – should that reward, that success fee, be capped? Should there be some upper limit on what the funder can take from the funded client’s damages?
Presently, there is no cap on a funder’s success fee in English law. In the case of Golden Eye v Telefonica UK mentioned on the slide, the success fee was 75% -- and the court there allowed it, although it called the success fee ‘a handsome return’ for the funder!
But you can envisage a situation whereby, if the success fee is not capped, that success fee might consume all of the judgment, settlement or arbitral award. Especially where a multiple of costs is used, the entirety of a judgment may be paid towards the funder’s success fee – not a mere 65%, but much higher could be possible.
The pros and the cons of insisting on a cap are being much debated in England at present. There are certainly arguments in favour of a cap, and against one.
This brings me to what ‘success’ to a funder actually means, when it comes to third party funding. Success has two possible meanings in third party funding:
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The first is ‘outward looking success’ – this is where the funded client wins their arbitration or court case, or achieves a settlement, and is entitled to their success fee. The trigger for success has been met! That is a winning case for them, to outward eyes;
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BUT: in reality, that success fee paid to a funder may have been totally consumed by the costs which the funder invested to win the case. It may have cost the funder more to fund the case than the funded client actually recovers. That is a losing case for a funder. As one funder said to me during the course of my empirical study, ‘a successful case to us is making one more penny than we spent on it’. That’s inward-looking success!
That is why third party funders typically do not like the notion of caps on the success fee. Their argument is that a case may be commercially unviable to fund, if the success fee was capped at 50%, as it would cost them more than that to fund it, so that it would be an inwardly unsuccessful case, and they won’t fund losing propositions. That would be a bad investment.
One issue about the funder’s success fee that is really rather controversial in England is whether that fee can be recovered from a losing defendant. After all, what a big difference to the funded client that would make! The funded client would not have to lose some of its damages to the funder; the funded client could keep all of its damages, and the defendant would have to pay the funder’s success fee.
In English litigation, the recovery of a funder’s success fee from the defendant has never been allowed.
But in English-seated arbitration, it has been allowed at least twice – and I’ve noted the two cases on the slide, Essar and Tenke. In Essar, the court allowed the funder’s success fee to be recovered from the opponent in the arbitration because the defendant’s behavior was considered to be very poor; whereas in Tenke, the reason was quite different: it was reasonable for the funded client to have used third party funding, and the success fee was not unreasonable.
In my report, it was suggested that the right of a funder to recover its success fee from a defendant should be extended to litigation, and that it should occur more frequently in arbitration. It was also suggested that this should be possible only where an LFA was disclosed early to the defendant, so that the defendant knew that it could be ‘on the hook’ for that success fee.
This point about recovery of a funder’s success fee remains quite controversial in English law.
Now we come to what I’ve called the ‘Paccar problem’! Paccar was a judgment which was handed down by the United Kingdom Supreme Court in 2023. It has caused a lot of turmoil in the English third party funding market ever since!
The problem arose because of the distinction between two types of agreement. On the one hand are the LFAs, the litigation funding agreements, which funders enter into with their funded client. On the other hand are ‘damages-based agreements’, or DBAs. These are contingency fee agreements which lawyers can enter into with their client, and are calculated as percentage contingency fee agreements. These DBAs have very strict drafting requirements. They operate somewhat differently from LFAs too, in that not all the costs are within the lawyer’s success fee – a client may have to pay some costs on top of the lawyer’s success fee. Whereas you will remember that all of the costs of funding the case are covered by the funder’s success fee, that is all that the funded client pays to the funder – just the success fee, not success fee + costs.
Well, in July 2023, the Supreme Court decreed that LFAs were actually also DBAs, where the funder’s success fee was calculated as a percentage of the amount recovered by the client. And hence, this meant that all percentage-of-recovery LFAs had to comply with the DBA legislation, or else, if they did not (and none did up to that point!), they were unlawful. What’s more, those retrospective LFAs which did not comply with the DBA legislation were, and always had been, unlawful!!
This decision meant that LFAs up and down the country were generally invalid, and that they had to be quickly redrafted and re-negotiated. The point is that it is generally considered that LFAs cannot be drafted so as to comply with the DBA legislation. The DBA legislation was never drafted with third party funders in mind, it had been directed at the time to lawyers’ funding, but the Supreme Court interpreted the relevant legislation to be wide enough so as to include third party funders.
Immediately after the Supreme Court’s decision, thoughts turned to reversing the Paccar decision by legislation, so as to provide that LFAs were not DBAs, and that LFAs did not have to comply with the onerous DBA legislation. There were two tacks for achieving this, and one of these tacks was adopted and drafted for in the Litigation Funding Agreements (Enforceability) Bill 2024. I was involved in this drafting, and can only say that reversing Paccar via legislation was a tricky exercise in drafting!!!
A different (Labour) government was returned at the General Election in May, and thus far, there has been no sign of that reversal Bill being re-introduced by the new government.
Because of Paccar, what funders had to do virtually overnight was to pivot, or redraft, their LFAs to multiple-of-costs DBAs. In other words, if their success fee was a percentage-of-recovery model, then they had to hastily change that to a multiple-of-costs success fee – if their funded client was prepared to let them do that!
However, even LFAs which use the multiples of costs formula are presently under appeal to the Court of Appeal of England and Wales. It has been argued that multiple-of-costs LFAs are also DBAs. Now, if that appeal is heard and the court decides that multiples are DBAs, then the industry is in serious trouble in England. If that were to happen, it would surely prompt a reversal Bill very quickly, to save the entire industry.
Of course, all of this has huge ramifications, for commercial litigation and for the class action regime in England. Much of that litigation is third party funded, and could not be funded without it!
NOW I TURN TO THE FOURTH PART OF THE PRESENTATION – WHAT ARE THE DOWNSIDES FOR A THIRD PARTY FUNDER?
As mentioned earlier, ‘costs follow the event’ in most English litigation and arbitration. So, if the funded client loses, a fairly large adverse costs bill can arise for payment!
The claimant will seek to avoid that burden, and to shift that burden to the third party funder, in one of two ways.
First, the LFA between the funder and the funded client may state that the funder or an ATE insurer will pay the adverse costs, should they arise. If the funder does take on that risk, then the success fee will inevitably be higher.
Secondly, a court may order that the funder pay the adverse costs of a winning defendant, in what is called, in English law, a non-party costs order. That is possible, even where the LFA does not provide for that. The court can order it! And in English law, third party funders generally assume that, in the event that their funded client loses the case, the funder will be liable for some amount of adverse costs.
But what of other potential downsides for the third party funder? In fact, there are a number of questions which are still quite uncertain, quite undecided, in English law. I have listed a number of examples on this slide. For example:
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Suppose that a funder invests £10M into funding a case, and the funded client loses. The adverse costs to which the winning defendant is entitled is £15M. Should the funder’s adverse costs be capped at that £10M? That position was endorsed by the English Court of Appeal in Arkin v Borchard Lines for litigation. Should it also apply to arbitrations? Is that even fair to a defendant, who loses the right to recover £5M in adverse costs?
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For commercial arbitrations seated in England, a Bill is going through the United Kingdom Parliament at the moment, the Arbitration Bill 2024, which provides that a court should be able to make a non-party costs order against a third party funder who was involved on the losing side of an arbitration. That sort of order would be discretionary, it would depend upon a case-by-case analysis of the arbitration by a court, but cl 9(2) provides for that possibility of a non-party costs order against a funder who funds an unsuccessful arbitration;
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However, the Bill does not permit an arbitrator to make that sort of non-party costs order against a third party funder in an arbitration – only a court could make that order. Some English lawyers think that arbitrators should have that statutory power, but the Bill does not presently allow it;
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Finally, I’ve mentioned previously that, in most cases, the fact, the identity, and the terms of any LFA that the claimant may have entered into with a third party funder do not have to be disclosed to the defendant, in either litigation or arbitration. Class actions are the exception to that. But should that position be reversed? Should disclosure be automatically required? Again, this is a question of real controversy in English law.
When it comes to the potential downsides of third party funding in English law, there still remain some very important questions where reasonable opinion differs.
NOW I TURN TO THE FIFTH AND FINAL PART OF THE PRESENTATION, ISSUES AROUND THE FUNDER’S SUCCESS FEE:
These are stipulated in case law, but are also reflected in the Code of Conduct for Litigation Funders. I have mentioned a number of them on the slide:
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The funded client must receive independent advice about the terms of the LFA before the funded client signs that agreement;
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There are only three grounds upon which a funder can withdraw itself from a funding agreement: merits; viability, and material breach. So the client has that safeguard, that a funder cannot just walk away from the litigation without explanation or justification;
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A funder cannot control the conduct or progress of the funded litigation – it remains the client’s claim, not the funder’s! English law treats this as an important public policy point;
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This means that the funder cannot assert an improper control over any part of the litigation, especially settlement negotiations. The client may want to settle and the funder may prefer that the case proceeds. Under a typical LFA, the funder may require that it be consulted, or even that it must consent to the settlement;
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And typically, an LFA will provide that any dispute or any conflict of interest be resolved by an independent KC whose decision will be binding on both parties, the funder and the funded client;
- Finally, for the protection of the funded client, the funder has to have adequate capital behind it. The English Code of Conduct presently stipulates £5M in capital, and the ability for a funder to cover its aggregate liabilities across all of its LFAs for the next 36 months (3 years). Those are minimum thresholds that must be met, although, of course, most funders are capitalized to much higher levels than that.
Presently, it is under review in England as to whether these capital adequacy requirements are sufficient (after all, £5M is not very much in the scheme of a big case!). Even in my empirical study, some funders indicated that £5M was far too low, especially in the climate of class actions. These cases can take upwards of £20M to finance, and so a capital adequacy of £5M seems low.
SO, let me conclude with FIVE KEY TAKEAWAYS ABOUT THIRD PARTY FUNDING IN ENGLAND:
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The market is very established and sophisticated, with many funders, brokers and ATE insurers in the market now;
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Third party funding features in both English litigation and arbitration for sure;
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But because of the criteria which funders apply to cases under their business models, not many cases attract the endorsement of funders – remember, 2%-10% of all cases pitched to the funders!
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Wherever third party funding is operating, it is important that a Code of Conduct be implemented, so as to provide a framework for the governance of funding, so that the rules are uniformly known and regarded;
- Finally, to emphasise, whilst England has had much experience of this, we certainly don’t have all the answers! We have learnt from the experiences of others, and hopefully other jurisdictions will learn from us as well, because third party funding is, truly, becoming a global market!
Thank you so much for your attention during my presentation. I really hope that you have found this useful and relevant to your own work and your own experiences of third party funding.
Thank you again for the honour of the invitation to present today!!!
Rachael Mulheron
Rachael Mulheron KC (Hon) is Professor of Tort Law and Civil Justice at the School of Law, Queen Mary University of London, where she has taught since 2004. Since 2023, Rachael has also served as an Ordinary (Non-judicial) member of the Competition Appeal Tribunal. Her principal fields of academic research and publication concern Torts, Medical Negligence, Collective (Class) Actions, and Civil Justice.
Rachael was a member of the Civil Justice Council, the jurisdiction’s civil justice law reform body, for almost a decade; has participated on rules-making committees on several issues (including the class actions regime of 2015); and at the appointment of either government or judiciary, has chaired numerous law reform working parties, including ‘hot-tubbing’, BTE insurance, and litigation funding. Prior to her academic career, Rachael practised as a solicitor in Brisbane, Australia, principally in Construction Law. In 2021, Rachael was appointed as Honorary Queen’s Counsel for services to law reform, and in 2024, was elected as a Fellow of the British Academy.
