Champerty pops up again!

Champerty pops up again!
Author:
Jeremy Marshall
Senior Investment Manager - England

Like with buses, another case has just come along that needs to be jumped on. One of the issues that funders have been considering for a while is the efficacy, outside of the insolvency context, of funding assigned claims held in a special purpose vehicle (SPV), possibly owned by the funders themselves. This is something that we have done outside of England, but we haven’t yet completed in England. An example of a case that could be susceptible to being funded in this way is one where a group of claimants (having the same underlying claims) will group together, potentially so as to make it economic to pursue the claims. The funder would fund the SPV and put up any necessary security for costs on its behalf.  One of the primary challenges for us has been the champerty jurisdiction and the confusion as to whether such causes of action can be assigned at all. The recent case of Farrar v Miller[1] considers these issues and appears to take one step backwards, so theoretically making such a solution less attractive unless we are prepared to put the issue to the test.

Maintenance and champerty

It’s best to remind ourselves of the champerty problem. Maintenance, and its fellow troublemaker, champerty, are common law rules that have almost been branded on all funders. As has been set out in numerous cases, a person is guilty of maintenance if he supports litigation in which he has no legitimate concern without just cause or excuse. Champerty occurs when the person maintaining another seeks a share of the proceeds of the action. It is for this reason that people speak of champerty being an aggravated form of maintenance.

Maintenance and champerty are rules that apply to all contracts and the consequences are significant. Such contracts can be voided – either by a claimant (perhaps unlikely) or, in order to cause trouble, by a defendant (much more likely). Therefore, a transfer of a cause of action can certainly be voided because it infringes the rules of maintenance and champerty.

The champerty test

The case law regarding maintenance and champerty is really anchored in the decision of the House of Lords in a case titled Giles v Thompson[2] from 1994. There was only one speech of Lord Mustill who said, as it pertained to the common law, “I believe that the law on maintenance and champerty can best be kept in forward motion by looking to its origins as a principle of public policy designed to protect the purity of justice and the interests of vulnerable litigants.” Lord Mustill stated that the single question that should be asked is whether there is “wanton and officious intermeddling with the disputes of others in where the meddler has no interest whatever, and where the assistance he renders to one or the other party is without justification or excuse.”

Litigation funding should pass the test

It is unusual for an entire industry to develop when the efficacy of litigation funding in a key jurisdiction like England is still not crystal clear and funders have to judge the acceptable limits to their “meddling”. The industry has, however, developed in earnest and it has sought to navigate the choppy waters that maintenance and champerty create. Occasionally, the defendant waves rise up – a key example was in the 2020 Akhmedova[3] litigation where a full-on challenge on champerty grounds was made and rejected – Mrs Justice Knowles referring back to the Court of Appeal’s implicit support of funding in Excalibur[4] (“litigation funding is an accepted and judicially sanctioned activity perceived to be in the public interest”) and concluding that “It is thus difficult to envisage how litigation funding conducted by a responsible funder adhering to the Code of Conduct[5] could be construed to be illegal and offensive champerty or might be held to corrupt justice”.

But we need to tackle the aspect that causes most difficulty – the control or “meddling”. To date, although the researches of counsel in Akhmedova revealed no example of any agreement with a litigation funder having been found to offend public policy, equally it is likely that no such agreements provided for control of the litigation to be unconditionally in the hands of the funder (in a non-insolvency context). In Akhmedova, counsel was very quick to point out that the claimant remained in control of the litigation and the industry’s Code of Conduct referred to by Knowles J requires that the funder does not seek to influence the lawyers to cede control or conduct of the dispute. However, since the extent of Burford’s control was a ground for the champerty challenge in the case, Knowles J did address the issue head on and she found that “Burford's mere control would not - of itself - suffice to engage the law of champerty. A funder of litigation is not forbidden from having rights of control but is forbidden from having a degree of control which would be likely to undermine or corrupt the process of justice."

Assignments of causes of action

The reader may ask what all this has to do with Farrar v Miller. That case concerned an assignment of a claim (commenced in 2014) from a client to his law firm. The assignment was in writing and unsigned although it was executed as a deed and witnessed in September 2019. The recitals to the assignment recorded the fact that the solicitors had significant WIP on the clock and were acting under a CFA. The assignment stated that the client did not have sufficient funds with which to continue the proceedings to their conclusion, had fully investigated alternative funding options and, after doing so, had concluded that it was in his best commercial interest to enter into the deed. The solicitors agreed to accept the assignment and to distribute the recoveries subject to an agreed priority order – which, importantly, included themselves in priority to the client. A month after the assignment took place, the client unexpectedly died.

The judge found that the assignment was a legal assignment under the Law of Property Act since the assigned claims were legal choses of action. The assignment of a right or cause of action has generated its own case law with the general principle being set out in a case called Trendtex Trading where Lord Roskill stated that If the assignment is of a property right or interest and the cause of action is ancillary to that right or interest, or if the assignee had a genuine commercial interest in taking the assignment and in enforcing it for his own benefit, I see no reason why the assignment should be struck down as an assignment of a bare cause of action or as savouring of maintenance.” The test for whether a legal claim can therefore be assigned has often been therefore to gauge to what extent the assignee has a genuine commercial interest.

The interplay between assignments and funders

It is perhaps becoming clearer where this article is going – the aim is to consider in what circumstances assignments of causes of actions can legitimately be made, and does – or should – it matter whether the assignee is a professional funder or simply a third party?

Surprisingly, the Court has not had to grapple with this question too often. Indeed there have only been two recent examples where the principles have been considered. In JEB Recoveries LLP v. Binstock[6], three individuals who had a claim against Mr Binstock formed an LLP and assigned into it their legal causes of action. Simon Barker J rejected the suggestion that the assignment was champertous and he did not consider that any aspects of the arrangement undermined the ends of justice. In Casehub Limited v. Wolf Cola Limited[7], the claimant was a company which built consumer group actions online. It took an assignment of consumers' claims to recover monies alleged to have been unlawfully charged by third parties. It aggregated the claims into a single portfolio of claims and, once the value of the portfolio reached a certain threshold, brought a claim in its own name against the third party in question. The judge was not satisfied that there were any or any sufficient public policy grounds which would lead to the conclusion that the assignments were invalid. On the contrary, he found that there were strong public policy grounds in favour of upholding the assignments. Since the sums in dispute were quantified, there was no risk of damages being inflated or the litigation process being abused in other ways; neither the "purity of justice" nor the "interests of vulnerable litigants" were threatened and he found that there was no adverse impact on the administration of justice.

The solicitor problem

Unfortunately, the flexibility of the judicial approach to assignments has some defined limits, and they predominantly relate to the inability to assign claims to lawyers. In Farrar, the challenge for the law firm was that legislation has provided two methods of costs recovery – either the CFA or the DBA regime. The costs arrangements are either sanctioned by statute or they are not; and if they are not, the common law does not ride to the rescue. In the instant case, the assignment was not sanctioned by the relevant legislation and - assuming it to stand alone - clearly failed as a champertous transaction.

No commercial interests

However, the aspect of Farrar which appears most contentious is the parallel approach the judge took to the status and interest of the law firm. In respect of the law firm’s genuine commercial interests in the litigation, the firm pointed to the fact that all its fee income was dependent on the success of the case. The judge, though, was having none of it – he simply restated the position that if the fee agreements were not within the statutory scheme, the agreement was champertous. The judge held that control of the proceedings moved by virtue of the assignment away from the proper claimant and his proper successors in title on bankruptcy and/or death to a party that has - apart from its interest in its fee recovery - no legitimate interest in prosecuting them. The judge also held that the assignment had the arguable potential of improving the law firm’s financial position. In the event, therefore, the Judge held that the entering into the assignment in replacement of the previous cost arrangement undermined the purity of justice or corrupted public justice.

What if the assignee had been a funder?

At first blush, this perhaps seems a surprising conclusion and the interesting twist is what the outcome would have been had the assignment not been to a law firm but, instead, to a professional funder. If the assignment had been to a funder, then there would have been no objections in relation to the law firm’s statutory scheme for remuneration, and so the focus of the decision would have rested solely on whether the purity of justice was undermined. The challenge is that the judge would still have found that control of the proceedings would have moved away from the proper claimant and that the funder had no legitimate interest in prosecuting them apart from its own financial interest. The funder could argue that it did have a further interest because it had agreed to distribute certain recoveries to the client – albeit that it would now distribute such recovery to the client’s estate - and the fact remains that the client had willingly ceded control of the claim in the first place (to borrow from the language of the Code of Conduct). In those circumstances, and following the reasoning of Knowles J, the argument would then be that it is incumbent on a judge to go on and consider whether the assignment to the funder really undermined the purity of justice. If the funding was provided on normal commercial terms, and the assignment had been a voluntary decision which the assignor freely considered was in his best interests, and if there were no indicia of the corruption of justice via the way that the funder went about exercising control, then it is hard to see that the mere fact of the assignment of the claim to a funder should render it champertous.

There is, however, a difference between looking at the picture through the lens of control and the lens of ownership. In the prior example, the assignment has the impact of changing the ownership structure such that the original claimant no longer has any rights over its own cause of action. This arrangement is far removed from a simple change of control. It is to be recalled that Knowles J spoke of the need to analyse the degree of control to consider whether the interests of justice are undermined. It is doubtful that she had in mind a complete ceding of ownership as well as control.

The question then becomes whether a total transfer of control has the effect of undermining the process of justice. Such an arrangement does render it understandable to speak of trafficking in litigation albeit that it is important to note that the current judicial approach is to cast that epithet into the bin[8]. To understand that term, it is best to go back to Giles v Thompson where Lord Mustill made it clear that he had in mind the risk of the transfer of such claims giving rise to “an obvious temptation to the suborning of justices and witnesses and the exploitation of worthless claims which the defendant lacked the resources and influence to withstand”. It is hard to see a professional funder seeking to fund worthless claims in the hope of a quick settlement, although it is perfectly proper that champerty remains as a deterrent for such behaviour – it was partly for this reason that Lord Justice Jackson in his Final Report on the Review of Civil Litigation Costs recommended that the rule against champerty should not be repealed. It may well be that the real battle ground in such a case would be how to set limits to what is a genuine commercial interest, and whether is it in order to create that genuine commercial interest out of the damages anticipated from the case itself. The funder’s argument will need to be that it is very much in order if there are no counterbalancing features that prejudice or suborn the interests of justice.

Deserving claims demand solutions

These champerty and maintenance issues that are specific to the common law are to be contrasted with the approach taken by civil law legal systems, where no such rules exist, but where one relies simply on the more general legal doctrines underlying tortious acts, ie fairness and reasonableness. Hence, in the Netherlands, it is in principle not against any rules to ask claimants to assign their claims into a funded SPV, with a view to having the SPV litigate those claims, which is evidently more efficient compared to each individual claimant having to participate separately in the litigation. This has led to a multitude of group claims, including anti-trust follow on actions, being litigated in the Netherlands. The Dutch courts are accommodating the process, recognizing that the claimants are served by an efficient as well as an economically viable process. Separate from the SPV model, a recent change in the Dutch legislation also allows a representative claimant to seek damages for the class it represents through a representative foundation rather than merely obtaining a declaratory judgment on liability.

So we think the time may soon be coming when we should put the maintenance and champerty rules to the test. The ideal circumstances are where there are a series of similar claims (possibly arising out of the same event) that are held by a disparate group of individuals who, individually, cannot possibly bring the claims because of costs considerations. There is a genuine desire by those individuals to protect themselves from the possible adverse costs consequences from any litigation and there is a compelling public interest to have the claims litigated. We, as a commercial funder, wish to fund the claims on the basis that a significant share of the recovery goes to the claims’ original owners but we need to ensure that appropriate control is in place. We therefore wish to take assignments of the claims and capitalise a SPV as the deemed claimant. We are prepared to put in place appropriate security for costs arrangements on behalf of the claimant. Answers on a postcard please if you can immediately see a series of claims that leap out at you as warranting such treatment.