Cockerill: Project co-leader
There should only be a move to regulate third-party litigation funding (TPLF) in the event of “an identifiable problem or market failure”, a major report has concluded.
The European Law Institute (ELI) instead proposed a set of principles, supported by suggested minimum content for funding agreements.
“Ultimately, we have concluded that the best focus is on ensuring key minimum content and full visibility and understanding of terms on the part of the funded party,” it said.
The report comes ahead of the overdue publication of the interim findings of the government-commissioned Civil Justice Council TPLF review, which was meant to be in the summer.
The ELI project was led by Dame Sara Cockerill, a High Court judge and former judge in charge of the Commercial Court who is also a member of that review, and Austrian legal academic Professor Susanne Augenhofer. Barrister Joseph Rich of 7KBW was also on the project team.
The former Lord Chief Justice, Lord Thomas, was one of three assessors supporting the team, while members of its advisory committee included Susan Dunn, founder of Harbour Litigation Funding, solicitor-advocate Noor Kadhim, of counsel at City firm Fieldfisher, and Professor Rachael Mulheron of Queen Mary, University of London, who authored a separate report on TPLF earlier this year for the Legal Services Board.
The ELI said the principles sought “to enhance transparency, fairness, and accessibility in litigation funding” and it encouraged jurisdictions to incorporate them into legislation or “light-touch”, non-prescriptive regulation to ensure effective enforcement.
Much of the control of TPLF to date has been via statements of best practice and codes of conduct. While the report recognised “the importance of a degree of continued self-regulation”, it suggested that there was “a limit to the utility of this approach”.
One reason was that codes of conduct developed by funders “tend to be drafted by those market participants who already have fairly high standards. They sometimes take for granted aspects which are very important and which may be neglected by less sophisticated users or funders with less experience”.
The ELI continued: “A growing number of commentators… advocate for a scheme of comprehensive regulation. Generally, however, the development of such regulation remains at an early stage. Even so, concerns have been expressed about the effect of prescriptive regulation.
“Such regulation significantly affects the risk/reward balance for funders and may well lead to funders ceasing to offer funding in the regulated territory – with consequent impact on access to justice issues.
“Those risks are sufficiently important that ELI does suggest that such regulation is only appropriate where there is an identifiable problem or market failure.”
The report explained that increased regulation meant increased costs of capital and hence increased costs of funding. “A ‘one-size-fits-all’ approach, which is what prescriptive regulation effectively yields, ignores the different contexts in which funding can assist in access to justice and the different risks or other factors which can justify a diverse range of solutions.”
The ELI’s principles offered a middle way: “They identify and provide guidance on key issues necessary to ensuring that the TPLF market operates fairly and to the benefit of both funders and funded parties and that TPLF agreements are drafted in a manner consistent with this purpose.”
They feature 12 key principles, framed in mandatory terms, on the conduct of funders and funded parties. They deal with points of controversy such as transparency – saying the other side should be told of the existence of funding and the name of the funder – capital adequacy of funders, funders’ fees and control over proceedings.
The suggested minimum content and sample wording of agreements attempt “to anticipate and ensure provisions are made for potential issues such as the scope and duration of funding, the terms of repayment and the resolution of disputes”.
The report said: “This approach has been considered preferable to the alternatives because it helps to level the playing field between funders and funded parties without imposing overly restrictive obligations on either party.
“It thereby achieves the twin goals of protecting participants while preserving TPLF as an effective means of access to justice. It also allows for flexibility between different jurisdictions and practice areas rather than seeking to impose a one-size-fits-all approach.”
In a joint statement, Cockerill J and Professor Augenhofer said: “There is no doubt that recent years have seen both cause for celebration of TPLF as a vital driver of access to justice in a world where state-funded legal aid is often not available – but also cause for concerns as to whether the difficult issues which can arise within this structure are always being fairly handled.
“ELI’s project was started with the view that it was necessary to provide an objective and balanced view of the competing considerations, and that need has only become more acute as the debate has progressed, with the subject being actively considered in multiple jurisdictions – most notably in the EU.
“What we have been able to produce is something which has moved beyond an evaluation of the two sets of arguments, but has looked to how, in practical terms safeguards can be put in place without stifling the beneficial use of funding.”
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