Learning Outcomes
After studying this article, you will be able to explain the concept of third-party funding in legal services, identify the legal principles and regulatory issues involved, and evaluate the benefits and risks for clients and solicitors. You will also be able to apply the rules on funder liability, confidentiality, and conflicts of interest to SQE1-style scenarios.
SQE1 Syllabus
For SQE1, you are required to understand the funding options available for legal services, including third-party funding. This article focuses on the legal and practical implications of third-party funding, which may be tested in client-based scenarios.
- the main types of funding for legal services, including third-party funding
- the legal principles governing third-party funding, including champerty and maintenance
- funder liability for adverse costs
- regulatory and ethical risks for solicitors and clients
- how to advise clients on the suitability and consequences of third-party funding
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
- What is third-party funding and how does it differ from legal expenses insurance?
- Which historical doctrines are relevant to the regulation of third-party funding?
- In what circumstances can a third-party funder be liable for the opponent’s costs?
- What are two key risks solicitors must consider when advising on third-party funding?
Introduction
Third-party funding (TPF) is an arrangement where a person or company with no prior connection to a legal dispute agrees to pay some or all of a party’s legal costs in return for a share of any money recovered. TPF is increasingly used in commercial litigation and arbitration, especially where claimants lack the resources to fund proceedings themselves. For SQE1, you must understand the legal basis, regulatory issues, and practical risks of third-party funding.
The Legal Basis of Third-Party Funding
Third-party funding is permitted in England and Wales, but is subject to legal and regulatory controls. The law has developed from the historical doctrines of maintenance and champerty, which originally prohibited outsiders from supporting litigation.
Key Term: maintenance
Maintenance is the improper support of litigation by a third party who has no legitimate interest in the case.Key Term: champerty
Champerty is a form of maintenance where the third party supports the litigation in exchange for a share of any proceeds.
Modern courts recognise that third-party funding can improve access to justice, provided it does not encourage frivolous claims or undermine the integrity of the legal process. The doctrines of maintenance and champerty still exist, but are now applied to prevent only abusive or improper funding arrangements.
Key Term: third-party funding
Third-party funding is a contract where an external funder pays legal costs in return for a share of any money recovered in the case.
Regulation and Professional Standards
There is no statutory regulation of third-party funders, but most reputable funders in England and Wales are members of the Association of Litigation Funders (ALF), which has a voluntary Code of Conduct. The Code sets minimum standards for capital adequacy, transparency, and funder behaviour. Solicitors must ensure that any funding arrangement complies with the law and the SRA Principles.
Key Term: Association of Litigation Funders (ALF)
The ALF is a self-regulatory body whose Code of Conduct sets standards for third-party funders in England and Wales.
Funder Liability for Adverse Costs
A key legal issue is whether a third-party funder can be liable for the opponent’s costs if the funded party loses. The leading case is Arkin v Borchard Lines Ltd [2005] EWCA Civ 655, which established that a commercial funder may be ordered to pay the successful opponent’s costs, but only up to the amount the funder contributed to the case (the “Arkin cap”).
Key Term: Arkin cap
The Arkin cap is the principle that a third-party funder’s liability for adverse costs is limited to the amount they funded in the litigation.
However, recent cases have shown that courts have discretion to depart from the Arkin cap in exceptional circumstances, and may order a funder to pay a greater share of costs if justice requires.
Worked Example 1.1
A funder pays £100,000 towards a claimant’s legal fees in a commercial dispute. The claimant loses and is ordered to pay the defendant’s costs of £300,000. Can the funder be liable for the defendant’s costs?
Answer: Under the Arkin cap, the funder can be ordered to pay up to £100,000 (the amount funded). The claimant remains liable for the balance. However, the court may order a higher contribution from the funder if the facts justify it.
Benefits and Risks of Third-Party Funding
Benefits
- Enables claimants to pursue meritorious claims they could not otherwise afford.
- Transfers the financial risk of losing to the funder.
- Allows businesses to manage cash flow and litigation risk.
Risks
- Funder may seek to influence litigation strategy or settlement decisions.
- Disclosure of confidential information to the funder may risk waiving legal professional privilege.
- Conflicts of interest may arise if the funder’s commercial interests diverge from the client’s objectives.
- If the claim fails, the client may still be liable for the opponent’s costs not covered by the funder.
Key Term: legal professional privilege
Legal professional privilege protects confidential communications between a client and their lawyer from disclosure to third parties.Key Term: conflict of interest
A conflict of interest arises when a solicitor’s duty to act in the client’s best interests conflicts with another interest, such as a funder’s commercial aims.
Worked Example 1.2
A small business has a strong claim against a larger competitor but cannot afford the legal fees. It enters a third-party funding agreement. The funder agrees to pay all legal costs in return for 30% of any damages recovered. The case settles for £1 million. How is the settlement divided?
Answer: The funder receives £300,000 (30% of £1 million). The business receives the remaining £700,000, less any costs not covered by the funder.
Solicitor’s Duties and Regulatory Issues
Solicitors advising on third-party funding must:
- Act in the client’s best interests (SRA Principle 7).
- Ensure the client understands the terms, risks, and costs of the funding agreement.
- Protect client confidentiality and privilege.
- Avoid conflicts of interest between the client and the funder.
- Not allow the funder to control the litigation or settlement decisions.
Exam Warning
Solicitors must not allow a funder to dictate litigation strategy or settlement. The client must retain control of the case. Breach of this duty may result in disciplinary action.
Revision Tip
Always check whether the funding agreement gives the funder any right to veto settlement or instruct the solicitor directly. If so, advise the client to seek independent advice.
Practical Considerations
- Funding is usually available only for claims with good prospects of success and a realistic chance of recovery.
- Funders will conduct due diligence before agreeing to fund a case.
- The funding agreement should clearly state the funder’s rights and obligations, including liability for adverse costs and termination rights.
- Solicitors should advise clients to consider after-the-event (ATE) insurance to cover the risk of adverse costs not funded by the third party.
Worked Example 1.3
A claimant enters a third-party funding agreement. The funder pays the legal fees, but the agreement allows the funder to withdraw funding if the case’s prospects fall below 60%. What should the solicitor advise the client?
Answer: The solicitor should warn the client of the risk that funding may be withdrawn before the case concludes, and advise on alternative funding options or insurance to cover this risk.
Key Point Checklist
This article has covered the following key knowledge points:
- Third-party funding allows an external funder to pay legal costs in return for a share of any recovery.
- The law of maintenance and champerty restricts improper funding, but modern TPF is permitted if not abusive.
- Funders may be liable for adverse costs, usually limited to the amount funded (Arkin cap).
- Solicitors must protect client confidentiality, avoid conflicts of interest, and ensure the client retains control.
- Funding agreements must be carefully reviewed for risks, including funder influence and termination rights.
Key Terms and Concepts
- maintenance
- champerty
- third-party funding
- Association of Litigation Funders (ALF)
- Arkin cap
- legal professional privilege
- conflict of interest
