Abdulali Jiwaji reacts to the recently published CJC report on the effectiveness of the current regulatory approach to third-party funding, in The Law Society Gazette

With a nod to the need for greater protection in consumer cases, the CJC has also recommended independent legal advice from a KC to the funded party prior to entry into the funding agreement, and paid for by the funder. This must recognise that it will not be appropriate for solicitors to advise clients on related agreements to which the solicitor will be a counterparty, such as priorities agreements.

The LSLA response had pointed out that the need for solicitors to navigate conflict issues in funded cases is enhanced, given the complex commercial arrangements and relationships that exist. Solicitors need to be transparent and clear on their position when advising funded claimants, given the risk of perception by clients that they may be beholden to funders as a result of commercial relationships which may straddle multiple cases.

CFAs and DBAs

The CJC report recommends reform of conditional fee agreements and damages-based agreements, and in respect of funding to commercial parties that there should not be any cap on the legal representative’s return.

The LSLA response raised the question of why funder returns should be uncapped, whereas solicitors’ success fees are capped under CFAs and DBAs. Reviewing the limits applicable to CFAs and DBAs would allow law firms to support that group of cases where the quantum is insufficient to fulfil a funder’s requirements. Funders commonly apply a 10:1 damages-to-cost ratio, which means that securing funding in cases where the quantum falls below GBP 10m is a real challenge.

This must be a ‘win’ in terms of access to justice for commercial parties which cannot attract third-party funding for their claims.

How this all moves forward will also be dependent on the outcome of the review of the Solicitors Act 1974, which is in progress. There is a clear need to review the implications of recent case law, including the ability for solicitors to issue interim statute bills in cases where there is a CFA. As the LSLA response pointed out, supporting the ability of solicitors to undertake work on a deferred fee basis but with the security that they will be able to recover some basic fees on a monthly basis is essential, and goes hand in hand with promoting litigation funding.

Certifications

The CJC recommends that litigation funding regulations should provide that no LFA is enforceable unless various requirements are met, including:

• The funder maintains during the lifespan of the funded litigation a sufficient level of capital adequacy to enable it to meet financial obligations that may arise; and that funder and the funded party’s legal representative must, jointly, certify to the court and any other party to the funded litigation that the funder has and maintains sufficient capital adequacy.
• ATE insurance with robust anti-avoidance endorsements is in place where funding is provided for a non-commercial party or for collective or group proceedings. The funder and the funded party’s legal representative must certify to the court and other parties that such insurance is in place… Breach of the certification requirements by the party’s legal representative should render them subject to disciplinary proceedings by their regulatory body.
• Any such certification requirements would not be for the faint-hearted, and would clearly need careful thought, as they would involve complex technical accounting and detailed insurance policy wording. Practitioners will rightly be wary of giving wide certifications, which may well be forward-looking and require constant monitoring and review. This may have the potential therefore to stifle and not promote activity in these types of claim.

Conclusions

While some of what the CJC final report proposes is codification of existing and established principle, there are some fundamental changes to come through.  Critical for practitioners will be the efficiency with which the review moves forward in relation to CFAs and DBAs, alongside the Solicitors Act review. There is a significant opportunity for practitioners here when acting for commercial parties. It will be important to keep the momentum going so that meaningful legislation can be implemented before the next electoral cycle.