Litigation funding

The Code requires solicitors to discuss alternative funding options with the client on litigation matters. Keystone's template Litigation Engagement Letters help achieve compliance in this regard by attaching the Alternative Funding Sheet.

It has been suggested that some firms are not discussing with clients the options for funding their claim and, in particular, they are not exploring whether the client has insurance that would cover their legal costs. Firms usually have to accept a discounted rate if the insurer is funding the matter and so a reluctance to check insurance policies can be both misconduct and negligence. You must not take advantage of your clients, and you have a duty to make clients aware of, and understand, the options available for funding their claim and the terms of any fee agreement they enter into with you. (See, for example, paragraphs 1.2, 8.6 and 8.7 of the Code of Conduct for Solicitors, RELs, RFLs and RSLs and paragraphs 1.2 and 7.1(c) of the Code of Conduct for Firms).

The SRA has provided detailed guidance you must read before helping the client consider funding: https://www.sra.org.uk/solicitors/guidance/using-arranging-third-party-litigation-funding.

We usually only accept cases on the basis of the client paying our full fees, and so you'd simply let the client know this and refer them to the alternative funding sheet in the Engagement Letter should they ask. Typically, if they don't wish to pay for the work themselves in the usual way, you'd decline the instruction. You are under no obligation to do work on an alternative funding basis. However, where you agree to, then you should review the section on CFAs and the Insurance Distribution Directive bearing the following in mind:

• You should consider whether there is an alternative funding option that is more appropriate than Third Party litigation funding or whether it should be part of a funding package (e.g. with ATE insurance and/or a CFA).
• You should ensure that the client fully understands the costs and risks associated with pursuing the litigation. Does the client have the financial resources to meet those costs and risks? Does the client understand the likely monetary value of the claim in comparison with the likely costs and risks of pursuing the claim (including, in particular, adverse costs orders)? The calculation of the funder's fee may be complex, and the funder may seek a share of the client's recover (which can be around one third).
• We cannot recommend a single litigation funder; the same rules about recommending any third party apply. However, you can give the client the details of ALF (Association of Litigation Funders) who may be able to help. There is also a list of funders in each issue of the Law Society's bi-monthly Litigation Funding magazine. Alternatively, it is possible to use a specialised broker.
• The client should investigate the proposed funder's reputation, track record and financial resources. You should also undertake due diligence on the proposed funder. This should include consideration of the funder's financial standing, funding history, ability to meet its obligations under the proposed arrangements and, where appropriate, its ownership and control. Particular care should be taken where the funder is newly established or based overseas.
• The introduction of a third party usually slows the litigation down, reduces the client's autonomy and means that confidential information will need to be shared with that third party. Clients should consider the drawbacks carefully. You should be clear and have a written note on whether advising on taking third party funding is within the scope of your instructions, or not. By default, it would be within scope and if a client says that they are looking at funding, unless you expressly carve this out with warnings as to the consequences of doing so, then you should give a costs estimate and scope of work to advise on the pros/cons of taking funding. Note that you cannot advise on the choice of funder, that is a client choice only. You can provide some general commercial guidance as to risk/reward and unpack the commercial decision funding entails. You are well placed to do this as you know the costs of litigation and will have a feel for prospects (and may have formally advised on the same). You should be clear though that the commercial decision is the client's alone.
• If the client wishes to proceed with a funder, then you must be clear whether the scope of your retainer includes advising the client on the legal terms of that funding or not. As a default, it would not. You should always warn again, or refer back to earlier warnings given, of the downsides of taking third party funding. Note that you cannot advise on documents where Keystone itself is a party.
• Putting in place funding can take considerable time and should be budgeted and charged for. The funder's credit approval process requires extensive due diligence regarding the prospects of the claim. Often counsel must opine on the prospects as well. Some, but not all, funders will pay for this work if they decide to fund. You therefore need to discuss how the client will pay for the time incurred in applying for third party funding, which may or may not be successful. The client would usually be charged for the Central Office time as well. Where the matter is being undertaken on a CFA, Central Office will agree to defer its charges until the CFA is successful and waive them if it is not.
• If a funder offers funding, then it will typically require the client and Keystone to sign up to many documents and we may be asked to provide undertakings. You do not have the authority to bind the firm and therefore need to involve the Compliance Team in good time. You should tell the client that reviewing these documents on behalf of the firm can be expensive and that we'll quote for that work once we have been sent the draft terms. Be very clear with the client that our review is our own, and remind the client to take legal advice.
• You must send the draft terms to the General Counsel as soon as you get them and ask for a quote for reviewing them. Review of lengthy funding agreements and undertaking documents and negotiating the terms can take considerable time, so you should ensure that you provide these in plenty of time.
• Your time and that of the General Counsel should be charged to the client. If you are already on a CFA, then the General Counsel will usually agree to work on the same basis.
• If Keystone is to be a party to the funding agreement, then we would be conflicted from advising generally on the terms. Some limited advice on the client's position may be possible, but it would be better to require the client to obtain independent legal advice on the terms of the proposed funding agreement.
• Where a client is taking funding, consider the impact on confidentiality. Note Uber V White (unreported, but many notes on the web and in PLC on this) and a lack of privilege in communications with the funder. In practice, any advice on prospects to be shared with the funder should be your advice to the client, shared on a non-reliance basis and expressly requiring the funder to preserve the client's privilege. Naturally, any papers shared which are not advice will not be privileged and this should be made clear. You should keep records of all material interactions with funders and of all advice given to the client concerning funding arrangements, funding risks and funding-related decisions. Funding arrangements should be reviewed throughout the life of the matter and any material developments, emerging risks or changes in circumstances should be recorded on the file.
• You must Conflict Check the funder(s) and carry out appropriate money laundering and sanctions checks to determine whether the funding arrangements gives rise to any financial crime concerns. Third party litigation funding involves an investor providing funds through a law firm with the expectation of receiving a financial return if the claim succeeds. You should escalate any concerns you have regarding this with the MLRO immediately upon discovery. Where you have no concerns, you should still make a file note explaining why. Lower risk factors would be where the funder is well known, has an established track record and is a member of the Association of Litigation Funders. For low risk matters, further source of funds enquiries will not usually be required. However, where a funder is unfamiliar, recently established, based in a higher-risk jurisdiction, where you cannot readily identify evidence of its bona fides or where money flows appear unclear or commercially unusual, you should ask the Clients Team to assist with identifying and verifying the ultimate beneficial owner and carrying out any appropriate due diligence. You may charge for the time spent undertaking this work. You should also remain alert to unusual features or behaviour, such as opaque ownership structures, unexplained movements of funds or a requirement for claimants to pay substantial upfront fees.
• You must ensure that the funding arrangements do not allow the funder to direct or control the conduct of the litigation in a way which is inconsistent with your professional obligations. Particular attention should be given regarding settlement decisions, litigation strategy, expert evidence, counsel selection and termination rights. Your duties remain owed to the client and not the funder. As above, funders and clients do not always have aligned interests and you should remain alert to conflicts between the interests of the client and those of the funder.
• Even if you are not reviewing the funding agreement, given its impact on your conduct, you will need to read it carefully. When doing so, you must let the General Counsel know if you feel the funder has excessive control over the conduct of the litigation. Beware unreasonable termination or "escape" provisions. It may be reasonable for a funder to terminate funding where the client has acted dishonestly or is no longer behaving reasonably, but not simply because the funder wishes to exert commercial pressure in relation to the conduct or settlement of the claim.

PLC have also included helpful guidance on Third Party litigation funding setting out some further key issues for you to consider.

You should maintain a clear file record of the advice given regarding funding options, the reasons why the proposed funding arrangement was considered appropriate, the due diligence undertaken in relation to the funder and the client's informed decision to proceed.

If you have further questions, you should contact the General Counsel.