Earlier this month, UK claimant law firm Pogust Goodhead and US hedge fund Gramercy Funds Management announced a litigation financing deal worth over £450 million – the largest deal of its kind in Britain. “While it is not clear that this is a new form of third-party litigation funding – it does not mitigate the risks and the concerns that litigation funding pose to the integrity of the civil justice system.
This decision, along with the Supreme Court’s recent ruling on PACCAR, provides an opportunity to discuss how litigation and third-party funding is working in the UK, and whom it ultimately works for.
With the FT estimating the litigation funding market to be nearly £13 billion, and on course to grow 9% per year over the next five years to £20 billion, this deal prompts three important questions.
How do lawyers balance their duties to their clients and to their investors, particularly with this massive level of investment?
Lawyers owe stringent duties to their clients. Funders are primarily motivated by financial returns, and they don’t owe duties to underlying consumer claimants. This can create tensions, and even risk of conflict – funders have been sued by corporate clients for interfering with settlement decisions in pursuit of a higher figure. This is problematic enough in B2B cases, but what if the client is a group of consumers, who may not be in a position to take the same course of action? These conflicts and tensions should be avoided, and litigation funders should be regulated.
This is especially pertinent after an MP used parliamentary privilege to criticise a law firm for its conduct in a case, accused of dropping the victims “when it did not fancy its chances of winning” and withheld documents, preventing campaigners from finding other legal representation.
What proportion of the compensation do claimants get?
In the Post Office/Horizon case, Postmasters received a fifth of the £58 million settlement – £20,000 each on average, with some having lost over £100,000 – after legal fees and funders’ returns. The government even had to set up a taxpayer-funded compensation scheme to ensure that Postmasters received a fair sum.
The lack of transparency is a serious issue in litigation funding, and transparency would not impose a burden on either law firms or funders for judges or the courts to be able to review the terms of their litigation funding agreements. While FCJ would not judge what constitutes a fair proportion of redress for claimants, more transparency may well help avoid a repeat of the Postmasters’ situation if the judge can challenge unfair terms of funding agreements.
Will greater capital at law firms’ disposal lead to more litigation?
CMS’s latest annual overview of collective actions in Europe showed that litigation is continuing to gather pace in Europe, with the UK being the epicentre. RPC set out the simultaneous growth in litigation funding, including a ten-fold increase in UK funders’ assets between 2011 and 2021 from £198 million to £2.2 billion. Unfortunately, the Pogust Goodhead deal may contribute to those troubling trends, which will over time result in:
- Higher prices for goods and services
- Higher insurance costs for consumers and businesses
- Fewer resources for businesses to create jobs, innovate and grow
- Deterred foreign investment
- Greater pressure on the already stretched civil justice system
There is no doubt that litigation should be an integral part of the redress options that are available for consumers and businesses – but it must be a last resort, not a first port of call. There are less complex ways that give consumers access to justice, including ombudsman services, mediation and online alternative dispute resolution mechanisms. All of these are timelier and more cost effective; consumers do not benefit from being stuck in protracted and costly legal cases.
FCJ avoids taking sides on the merits of individual cases. However, the process and business model of litigation and third-party funding should concern policymakers and civil society. With the increasing commercialisation of civil justice, we will inevitably see more advertising on our phones and TV screens to join group claims for various issues where the court is rarely the best place to resolve these. This is why FCJ is campaigning to ensure that the interests of all stakeholders are safeguarded.
Gramercy’s managing partner and chief investment officer commented, “we feel like we are coming into the sweet spot of litigation funding.” But it will only be the sweet spot for everyone when litigation funding is fully transparent and properly regulated.
