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No such thing as a free lunch – first judgment clarifies termination of third party litigation fund

Third party litigation funders look set to adopt a similar position to insurers in driving the litigation agenda after a judgment last week confirmed what the market already knew; there is no such thing as a free lunch or litigation.

Sitting as deputy judge of the High Court, Mr David Donaldson QC in Harcus Sinclair v Buttonwood Legal Capital Limited (BLC) and others set out the first judgment to consider termination of third party litigation funding agreements since the arrival of the Jackson reforms.

In deciding whether BLC was right to terminate its funding agreement with the borrowers (the third and fourth defendants in the case), the court heard BLC, represented by CMS Cameron McKenna, had not been kept informed of developments in the case by the borrowers’ solicitor Rylatt Chubb, particularly not their chance of success, which under the funding agreement had to be over 60%.

The funding agreement specifically stipulated that it was a condition of drawdown that the borrowers – Alternative Real Estate Fund and Roskill Advisors (Cayman) – provide a written letter of advice from their solicitors or counsel that its prospects of success exceeded 60%. However the advice provided by Rylatt Chubb was a short ‘preliminary view’ promising more formal advice, which did not materialise.

The proceedings were begun in December 2011 without any further advice having been obtained.

BLC’s investment advisor, Argentum, conducted a merit review shortly after a defence had been filed in the funded litigation, on the basis of which counsel’s opinion concluded that the prospects of success were less than 50% and the BLC board decided to terminate the agreement.

The deputy judge found: ‘Having obtained the funding a year earlier, [Ms Rylatt] had no incentive to facilitate or accelerate the production of an opinion which might lead to its withdrawal (if it concluded negatively on the chances of success exceeding 60%). She seems to have believed – though without any real evidential basis, and I consider wrongly – that BLC was intent on such an outcome whatever the apparent merits of the case.’

He concluded that Harcus Sinclair, which brought the claim to decide whether to pay money held by them as stakeholder to the lender or borrowers, should pay the money to BLC.

Matthew Reach, head of legal at Argentum commented: ‘The judgment in Harcus highlights the duties of transparency and disclosure that funded litigants and their solicitors owe to funders (and their investment advisors) both at the funding application stage and during the life of the litigation.’

The judgment is a stark reminder that a funder’s relationship does not end when the company first agrees to back a claim and that a funded party and their solicitors should be fully aware of their rights and obligations under the funding agreement.

Reach added: ‘Funders will view the termination of a funding agreement as an absolute last resort, but solicitors might view this judgment as a warning of the consequences of not co-operating with the reasonable requests of the funders and their investment advisors.’