The regulatory framework for litigation funding is ‘out of step with the commercial realities’ and ‘urgent reforms’ are needed, according to a network of class representatives chaired by Walter Merricks CBE.
A submission to the Civil Justice Council’s review of litigation funding by the Class Representatives Network (CRN), based on evidence from around half of its 42 members and written by its legal and policy officer Rhea Gupta, highlights the network’s concerns.
It notes that collective actions are a ‘large-scale, high-risk and bespoke’ investment for funders, leading to a ‘constrained market’ in which most class representatives are presented with just one funding option by their legal teams, potentially enabling funders to state their price and terms on a ‘take it or leave it’ basis. A lack of judicial guidance from the Competition Appeal Tribunal leaves class representatives and their lawyers ‘effectively negotiating funding agreements in a legal blind spot, with insufficient knowledge about how a given term will be received by the CAT’.
The network also found that the risks of disputes between funders and class representatives ‘increase significantly as litigation progresses to trial or settlement, or when budgeted funding runs out’.
Its submission states: ‘The current regulatory framework does not adequately address the risk that funders may seek to exercise improper control over litigation… offers of additional funding are often made conditional on the introduction of contractual terms which implicitly or explicitly confer greater control over the litigation upon funders.’
Such offers may be ‘practically impossible’ for class representatives to reject without jeopardising the continuation of the litigation, the CRN says. ‘This is unacceptable and runs counter to the judicial principles prohibiting champerty and maintenance. Urgent reforms are required to ensure that renegotiations for additional funding do not pose these risks… while maintaining fairness for both class representatives and funders,’ it said.
Class representatives are ‘doubtful’ about whether existing dispute resolution mechanisms, including those provided by the Association of Litigation Funders, can address these disputes ‘in a way that properly protects class representatives or the interests of class members,’ the CRN said.
It urges the CJC to ‘strongly consider implementing a regulatory mechanism which resolves disputes between funders and funded litigants at no cost to the funded party.’ Any such mechanism should take account of how class representatives differ from ordinary commercial litigants due to their legal duty to act in the best interests of the class, while also potentially facing personal litigation despite this professional duty.
To increase guidance on what funding terms the CAT considers fair or appropriate, the CRN proposes three changes to the CAT rules: creating a distinct certification requirement for funding arrangements; allowing ex parte applications for judicial approval of funding terms; and the publication of a practice note giving the CAT’s views on the substantive content of litigation funding agreements.
The CRN’s report also highlights the ‘vital’ role of litigation funding for the collective actions regime and the fact that many class representatives ‘maintain positive relationships with their funders and consider them a helpful influence on their ability to conduct litigation effectively’. It adds: ‘Any reforms proposed by the CJC should therefore support the continued availability of litigation funding, especially for collective actions, and the healthy development of a competitive litigation funding market.’
