The future of litigation funding – have the rules changed?

By James Gbesan on Wednesday 18 January 2017

Alternative Lending

The growing emergence of litigation funding has opened new opportunities for businesses that are seeking redress on various issues through the courts and offers law firms the opportunity to pursue more cases for clients with fewer risks.

Litigation funding – or as it also sometimes known as third party legal financing –enables a party to litigate or arbitrate without having to cover the initial costs of bringing a claim to court or arbitration. Instead they agree that a percentage of the final amount awarded to them is given over to the funder should the case be successful.

Law firms are constantly seeking new ways to relieve pressure on fee income and in-house counsels are often constrained by their budget, which means that more and more members of the legal profession are looking to third party financing as a viable alternative.

Claimants are also attracted to the ability of setting a larger legal budget giving them greater confidence and allowing them to make returns on good claims that may once have been avoided because of the lack of a guarantee of outcome.

This renewed interesting in legal financing, especially from the corporate world, has led to a significant expansion of the litigation funding market. Backed by new funding from investors, who are more confident in funders’ abilities to make returns, the industry now looks set to grow exponentially in the years to come.

The once poor view of litigation funding as a last resort is gone and it is now in the process of becoming an established way of seeking redress, while reducing the initial risks to businesses that may wish to pursue a claim.

Until now the additional costs and risks of litigation funding have fallen on the claimant that decides to take this route however, things may be about to change.

Late in 2016, the High Court made a landmark ruling, which for the first time made the losing party liable for a claimant’s third party litigation funding costs.

In the initial case of Essar Oilfield Services v Norscot Rig Management Ltd, the court found in favour of Norscot Rig Management Ltd, but an arbitrator decided that £1.94 million in litigation costs should be recoverable in full against Essar under both the Arbitration Act 1996 (the Act) and the ICC Rules.

This decision was appealed by Essar Oilfield Services, but the arbiter found that the additional litigation funding costs were fully recoverable as “other costs of the parties” under Section 59 of the Act, disputing the company’s claims that it amounted to a serious irregularity.

A following High Court case concluded that the arbitrator had not exceeded their jurisdiction and that it was not an “erroneous use of an available power” for them to interpret that third party funding costs fall under the definition of other costs’.

Although this ruling offers no binding precedent beyond the boundaries of the relevant arbitration forum, the implications for this decision may be far reaching indeed.  For the first time the High Court has shown itself willing to accept the idea that third party/litigation funding costs are in limited circumstances recoverable from the losing Defendant. It is almost a certainty that others using litigation funding will test and extend those circumstances where costs of third party funding are recoverable. 

It is likely then that more funders will look to enter the market as it continues to grow, backed by the knowledge that cases, such as Essar Oilfield Services v Norscot Rig Management Ltd, will make their funding options far more attractive.

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