Funding arbitration

Publication April 2015


Introduction

There is now a much wider range of options for funding disputes in England and Wales. The market for third-party funding has expanded and become more competitive. The rules governing the financial arrangements between lawyers and clients have also changed. This Q&A looks at the opportunities now available.

How are English attitudes to funding disputes changing?

Historically the common law rules against maintenance and champerty were a bar to alternative ways to fund disputes. Maintenance is the support of litigation by a third party with no legitimate interest in the proceedings. Champerty refers to the maintenance of an action in return for a share of the proceeds. These were outlawed on public policy grounds, with Lord Denning warning that the “maintainer might be tempted, for his own personal gain, to inflame the damages, to suppress evidence, or even to suborn witnesses”.

Lord Denning’s concerns have long been embedded in the legal culture of England and Wales, and it has taken time to dispel suspicions around the involvement of third parties in the financing of disputes. However, legislation over the last 20 years has done much to limit the scope of the champerty and maintenance rules, while judicial and government support for alternative funding arrangements has grown. Forwardthinking companies and law firms are now looking seriously at alternative fee structures and funding arrangements for their disputes.

What arrangements can a lawyer enter into with their client?

The traditional method of billing by the hour is still the most popular way of funding arbitration work. However, alternative billing structures are emerging. The main options available are as follows:

  • Conditional fee agreements (CFAs) – These provide for a lawyer’s fees and expenses, or any part of them, to be payable only in specified circumstances. This can include a success fee, which in England must be capped at 100 per cent of the lawyer’s fees.
  • Damages-based agreements (DBAs) – These are “no win, no fee” agreements where a lawyer can recover an agreed percentage of a client’s damages if the case is won (capped at 50 per cent in commercial cases) but will receive nothing if the case is lost. Before April 2013, DBAs were only available in employment cases.

What impact have the Jackson Reforms had on CFAs?

The Jackson Reforms were very substantial changes to the civil procedure rules which govern litigation in English courts. They took effect in April 2013. They follow a report by Lord Justice Jackson recommending significant changes to reduce costs in the litigation process and make it more efficient.

Changes to CFAs were made to ensure that any funding arrangements entered into by the claimant do not affect the defendant. Prior to these reforms an unsuccessful defendant in a case funded by a CFA could expect to pay all the claimant’s recoverable legal costs. This included the success fee as well as the premium for any after-the-event insurance (ATE) policy taken out to cover the risk that the claimant might have to pay the defendant’s legal costs if the claim was unsuccessful. Following the reforms, the claimant can only recover standard costs (i.e. not the success fee or the ATE insurance premium).

How do DBAs work?

Solicitors and barristers can now act under DBAs. Credit for any costs recovered from the paying party will be given to the receiving party, so lawyers will only receive the agreed percentage of the damages, and any costs recovered from the other side will be paid to the successful party. Some expenses, such as experts’ fees, fall outside the cap on the contingency payment and will be additional costs to be paid for by the claimant. In commercial cases, counsel’s fees and VAT must be paid by the solicitors from their contingency payment.

As with post-Jackson reform CFAs, DBAs are designed to be cost-neutral for respondents. If a claimant funded by a DBA is successful it will not change the amount that the claimant can recover from the respondent.

Why haven’t DBAs been as popular?

The legislation introducing DBAs was unclear in a number of important respects and for this reason they have not been widely used. In particular, the uncertainty around the validity of “hybrid” DBAs attracted criticism. Hybrid DBAs permit parties entering into a DBA to also enter into a separate agreement providing for fees to be payable (usually at a lower rate) if the claim is unsuccessful. They were contemplated as permissible by the Civil Justice Council (CJC) Working Party on DBAs and are permitted in Ontario, Canada (the model adopted by English DBAs). Lord Jackson stated in a speech given on October 20, 2014 that it was his “firm view” that there was a need for hybrid DBAs.

However in November 2014, it was announced that while the CJC has set up a working party to take a detailed look at some technical revisions to the regulations for DBAs, the government has ruled out hybrid DBAs. It considers such arrangements “could encourage litigation behaviour based on a “low risk/ high returns” approach”. This is a blow to companies and law firms that had been looking at the new DBA model with interest. Without the option to create hybrid DBAs it is likely that regular DBAs will continue to see little take up.


It may not be practical for lawyers to undertake a long commercial action on the basis that they will recover no payment for their labours if the case is lost. On the other hand, they may well be willing to work for (a) reduced fees in the event of defeat and (b) a share of the winnings if the case is won. If that is what both lawyers and clients want, why should they not be allowed to proceed on that basis?

What is the English third-party funding market like?

The UK is a leading jurisdiction when it comes to the size of the specialist third-party funding market. England and Wales were the first jurisdictions to have a code of conduct for third-party funding, written and enforced by the Association of Litigation Funders. This was introduced in 2011 and applies equally to arbitration funding. The code of conduct ensures that members have proper capitalisation and that funders cannot terminate the funding agreement mid-dispute without good reason. It clarifies and restricts the extent to which a funder can influence the proceedings and any settlement negotiations.

What are the main benefits in using third-party funding?

Using third-party funding provides some certainty about the costs of arbitration and ensures the cash flow required for the case is available. Where one party is in a much stronger financial position, third-party funding can help to create a more level playing field by removing the ability of one party to stifle the claim by deliberately increasing costs. Engaging a third-party funder can assist settlement as an opponent then knows that the party has the means to pursue the case.

To what extent is third-party funding being used in international arbitration?

Third-party funding is regularly used to fund investment treaty arbitration. It was noted by the tribunal in the recent ICSID case Giovanni Alemanni and Others v The Argentine Republic, ICSID Case No. ARB/07/8 that “individual views may differ as to whether third-party funding is or is not desirable or beneficial, either at the national or at the international level, but the practice is by now so well established both within many national jurisdictions and within international investment arbitration that it offers no grounds in itself for objection to the admissibility of a request to arbitrate”.

What do third-party funding arrangements cover?

Funders will support both claimants and respondents with a substantial counter-claim. To be suitable for third-party funding, a case generally needs to have strong arguments on liability and good prospects for enforcement of an award both legally and in terms of the solvency of the paying party. Funders will be looking for a good ratio between the realistic amount to be recovered and the likely legal costs and disbursements. They will also favour claims that are likely to be resolved quickly. Clients are normally expected to fund a proportion of the costs themselves. Funders will want to see an experienced legal team in place, and if that team is working on a contingency basis through a CFA or DBA and is sharing the risk, that will encourage them to invest.

A third-party funder might fund some or all of the lawyer’s fees, the client’s disbursements including counsel’s fees, expert’s fees, institutional and tribunal costs and security for costs (and any associated indemnity). The funder’s fees are usually paid from the sums recovered if the claim is successful. The fee is normally expressed as a percentage of the amount recovered or a multiple of the amount spent on the legal fees or a combination of the two.

What will be included in a funding agreement?

Third-party funding arrangements are necessarily bespoke and the terms will vary depending on the case and the client. In England and Wales any funding agreement needs to be carefully drafted to avoid giving rise to champerty, as this would make the agreement void and unenforceable. The agreement must not extract too high a return, give the funder power to withdraw unreasonably or give them too much power to intervene. Although funders need to be cautious about intervening, they must be careful to monitor the proceedings and their merits.

The recent case of Excalibur Ventures LLC v Texas Keystone Inc and others [2014] EWHC 3436 highlighted the risks when the third-party funders were ordered to pay indemnity costs subject to the Arkin cap (i.e. that a third-party funder can only be liable for the winning party’s costs to the extent of the funding provided). Although the funders were not directly responsible for the factors leading to the indemnity costs order and had not behaved with any impropriety, the judge found that the pursuit of objectively hopeless claims that required much expense to refute was itself a ground for indemnity costs both against the litigant and his funder.


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