As Partner Ben Pilbrow detailed in his previous article, the Post Office Group case was made possible by litigation funding. However, there are still criticisms of this funding as a malign influence rather than an access point to justice.
We recently wrote about how Mr Bates, the lead claimant in the Post Office Group Litigation, publicly acknowledged the important role that litigation funding played in their case. The historic win for sub-postmasters was made possible not by legal aid but by funds invested by Therium, a commercial funder.
The funding allowed the sub-postmasters, already financially crippled by the Horizon scandal, to get their claim off the ground and fund the significant legal costs of a lengthy litigation. It's believed that the Post Office spent in excess of £100 million, while the sub-postmasters received only £12 million of the £58 million settlement, with the rest going to their lawyers and Therium.
The division of the settlement may seem stark. Together with an over a decade-long upwards trajectory for the litigation funding industry (with a report in June 2022 estimating that the value of the UK litigation funders assets had hit a record £2.2 billion), some commentators have voiced that litigation funding is a malign influence on litigation in this country, rather than an aid to access justice.
We review some of the common criticisms below.
Meritless claims
Much of the distaste for litigation funding comes from the concern that the industry encourages disputes, with funders often portrayed as "ambulance chasers" seeking to extort profit from large claims and class actions. It is perhaps a fear stemming from a comparison to the litigious culture of the United States (valid or not).
This image of litigation funding opening the floodgates to frivolous lawsuits is misleading in the UK, because it fails to acknowledge certain fundamental differences between the structures of the UK and US disputes systems, specifically relating to costs shifting and punitive damages. Although the UK structure comes with disadvantages, whereby (i) the losing disputant must pay the winner's costs and (ii) the punitive damages are vanishingly rare, it does discourage weak claims.
That is not to say that the UK structure halts weak claims completely. Cases such as Excalibur Ventures v Texas Keystoneshows that it does not, however, the eventual outcome in those proceedings illustrates why it discourages them.
This dispute arose out of valuable oil fields in Kurdistan. Excalibur Ventures claimed an interest in the oil fields against their owners and funded its claims using litigation funding. However, its claims were found to be meritless, and the funders were required to contribute over £20 million towards the defendants' costs. Because litigation funding is non-recourse, the overall cost to the litigation funders was (at least) double this.
As a result, funding claims which are unlikely, or even moderately likely, to succeed is not attractive to funders. As the Court of Appeal recognised in Excalibur, responsible funders carry out "rigorous analysis of law, facts and witnesses, consideration of proportionality and review at appropriate levels" before entering into litigation funding agreements.
Wrongful Control
Another criticism levelled at the litigation funding industry is that funders wrongfully gain control of the claim and that as such, the integrity of the proceedings will be threatened.
Control per se is not a forbidden quality of litigation funding. It can be exercised, but within constraints. As Mrs Justice Knowles noted in Akhmedova v Akhmedov:
"A funder of litigation is not forbidden from having rights of control but is forbidden from having a degree of control which would be likely to corrupt or undermine the process of justice."
When it's argued that a conflict of interest arises due to the funder's financial control and influence over the litigation, these criticisms are often framed in a way that presents a funder holding litigation puppet strings, influencing witnesses and twisting lawyers to pursue claims for their own financial end.
Whilst the funder does hold the purse strings of the litigation, does that mean that they hold, or want to hold, the puppet strings? Funders must necessarily become involved in the trajectory of a case from a financial perspective, but, in our experience, commercial funders are not interested in more than that. Nor would it make sense financially for them to look for more control for a simple reason: control requires monitoring, and monitoring requires personnel. Funders simply don't have the needed manpower to actively manage a portfolio of cases.
Typically, funder control only manifests at commercial pinch points such as in circumstances of spiralling costs or settlement negotiations. Objectively, the risks to the purity of justice – of increasing the risks of an abuse of process – are unlikely to spring from those pinch points.
Profiteering
The Post Office Litigation highlighted the stark contrast between the amount of money ending up in the claimant's pocket compared to the funder. Therium and the claimants' lawyers were entitled to more than triple the figure than the claimants themselves. In these circumstances, it is perhaps not surprising that assertions of profiteering are loudly directed at litigation funders. Yet, these figures must not be interpreted in isolation.
Funders have to pay for court fees, legal fees, legal accountants, travel expenses – the list goes on. Often costing millions of pounds, litigation is not a cheap business. The proportion of an award that a funder is entitled to is necessarily high because litigation is very pricey and very risky. If a favourable judgement is not obtained, a funder could lose millions.
Looking at the recent profits reported by a couple of large litigation funders, it's clear that the mega-profits touted by the sector's critics are inaccurate. For Augusta Ventures, 2022 was their second year of losses. Similarly, despite a record number of completed cases, Manolete, another leading litigation funder, reported serious losses in March 2023.
The fact that these respected commercial funders are losing money demonstrates the realities of the economics of litigation funding. It is risky and, when funders lose, very expensive. For them to make any profit, they have to charge significant fees when they win. While that might look like profiteering, the absence of profits is telling.
Looking to the future
The Ministry of Justice is commissioning a review of litigation funding following calls for government amendment to the Digital Markets, Competition and Consumer Bill. This amendment is proposed to roll back the effect of the PACCAR. It will hopefully provide the perfect forum for the industry's critics to voice their concerns and preserve the industry's best quality: as a tool to improve access to justice.
Without reviews like this, and the subsequent developments that often follow such criticism, the litigation funding industry, like any sector, would become stagnant and ineffective.
Conservative Peer Lord Hodgson recently voiced concerns over the emergence of sovereign wealth funds financing class actions and the risk that targeted litigation funded by such entities may have on impeding development within UK-based companies. This is a valid concern and one that should be taken seriously. Yet this narrative of wrongful control from profiteering, cowboy litigation funders, is objectively incorrect.
Criticisms based on claims that funders will infiltrate the justice process to its core ignore the reality of the situation. Influence will be exercised at points in the litigation process only where commercial, financial decisions are made. Even then, checks and balances are in place to avoid claims of wrongful control and ensure that litigation funders know they will be held to account if such claims hold merit.
Litigation is an expensive and risky investment. Even when the outcome is good, the profits are not routinely so seismic to justify criticisms of profiteering. But there certainly is some profit to be made and a favourable judgment may hold more than just financial value for a claimant.
Litigation funding can enable voices to be heard, articulated, and judged in a way that results in a monetary pay-out for their losses, but also vindication. The focus should be on making the industry as effective as it can be, re-framing the narrative surrounding a funders relationship with litigation, and ensuring that this important tool for accessibility in the justice system remains available for years to come.
This article was co-written by Trainee Isobel Murray John.
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