Sometimes a party to a claim can use the fact that the other party has limited resources to its advantage. But there are limits to this and things which can be done to counter it. Call our experts and we can help
Where a client has insufficient financial resources yet has legal rights or a potential claim against another, particularly where the opponent has assets to pay, then it is always an attractive proposition to pass such a claim to a better resourced company or entity – i.e. a third party funder.
The legal rights or claim effectively exist as an asset that is being financed solely for the purpose of gaining a return on the investment in the legal costs incurred in pursuing such rights.
However, historically such a manipulation of the law solely for financial reasons was frowned upon and could even lead to a prison sentence.
Champerty and maintenance
These are terms that in English law referred to the involvement in the encouragement of a dispute between parties and then the sharing in the proceeds arising from any such dispute.
- the public policy attitude was always that such behaviour could lead to the encouragement of weak disputes by powerful well-resourced companies or individuals against the other party
- the concern was that it would lead to injustice in terms of the dispute not being event represented to the court or, more importantly, being brought in contravention of the general policy against the commercialisation of the legal system.
To prohibit such behaviour, the involvement of third parties was a crime and also a civil offence.
This attitude has now largely changed as a result of the financial constraints on legal proceedings and with particular regard to various funding arrangements entered into between clients and their solicitors or third party funders which provide for arrangements to be entered into where a strong claim or defence exists.
However, it remains the case that very real risks remain in terms of the administration of justice, which require (in compliance with the relevant EU and UK legislation on human rights) rights to a fair trial. Where a funding arrangement exists so as to enable frivolous proceedings, then it may be that such rights are reduced or even extinguished.
Risks also exist for solicitors or financiers, who will have little knowledge of the true factual circumstances and may have had only selective access to information provided by the client with a view to assessing the risk they face.
- a solicitor, and a financier, are both businesses and cannot perpetually involve their time or money in matters where they may not lead to a return on their investment.
- accordingly, the business risk needs to be evaluated in each and every case, if anything to ensure a balanced portfolio of risk.
It is of utmost importance that as part of the initial consideration all facts and circumstances are known with a view to assessing the risks present, rather than allowing such matters to arise much later at a point when it is difficult to change course.
Matters to consider
As part of any consideration of a funding arrangement, the solicitor and/or third party funder will normally require to consider any or all of the following:
- an initial risk assessment will be required to consider what prospects of success exist for the claim or how strong the rights of action are. .
- As part of consideration of all the claim, all factual background and information requests will have to be satisfied and thus it is of vital importance to the client to ensure disclosure of all factual matters (whether documentary, from a third party or from their own knowledge) is disclosed – it is often the case that small details which are very important are overlooked by clients.
- Where a claim is considered to be frivolous, a defendant may apply to the court for an order against the third party funding the claim or may seek to restrain a party from bringing or continuing such claims in the same proceedings. More information about this risk can be found here. For this reason, a third party funder will often be unwilling to be involved actively in any decision-making in respect of the facts of the case or legal matters other than settlement.
- Where a claim is issued with third party funding or solicitor funding arrangements, in the absence of any evidence that the claimant has after the event insurance against their opponent’s legal costs, the opponent could apply for an order that the claimant pay into court security against their opponent’s legal costs. More information about applications for security for costs can be found here.
It is always important to remember that any funding arrangement entered into is not only for the benefit of the client, in terms of their cash flow, and the funders/solicitors, in terms of their business interests. It must also be fair proportionate and reasonable to the opponent, in terms of the legitimacy of the claim and the avoidance of any potential abuses of the civil litigation process.
We refer to the underlying principles which support the ability to recover any such legal costs here.
At Francis Wilks & Jones we are well accustomed to such funding arrangements, including managing the risk and assisting with the initial assessment of such risks.
Please call any member of our commercial litigation team for your consultation now. Alternatively e mail us with your enquiry we will call you back at a time convenient to you.