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Litigation funding – or as it is sometimes known third party legal financing – allows a party to litigate or arbitrate free from the upfront costs traditionally associated with bringing a claim.

Using a funder usually means that a claimant agrees to pay a percentage of the final amount awarded back to the fund if the case is successful. Where a case is unsuccessful the claimant is not required to pay.

To ensure that they make a return on their investment most third party legal financiers will have a set of criteria by which they judge the potential success of a case and using this they will select those claims which they feel have the most merit.

James Gbesan
James Gbesan

Pressure on fee income has never been higher for most law firms, especially with the constant emergence of new competitors in the market, while in-house counsels continue to be limited by their ever-shrinking budgets, which is why an ever increasing number of legal professionals have turned to litigation funding.

Law firms havebeen attracted to the prospect offered by litigation funding and many now advise clients to access finance where they feel it is suitable, particularly in larger cases or where there is a significant portfolio of legal work required.

The corporate world has taken a particular interest in litigation funding and while many of these firms could afford the costs, the funding allows them to defer them until a case is successful.

Those bringing a claim also feel more secure in setting a larger legal budget, allowing them in turn to enjoy a higher rate of success, ensuring they make returns on claims that may once have been ignored because of the lack of a guaranteed successful outcome.

These trends have led to a significant expansion of the litigation funding market, which is increasingly receiving investment thanks to the additional confidence in the sector.

One issue that all those who use litigation/third party funding must consider is the cost. Up until now the additional costs and risks of litigation funding have fallen on the claimant.This may be about to change.

At the end of 2016, an ongoing dispute between Essar Oilfield Services and Norscot Rig Management Ltd was settled when the High Court ruled that Essar must pay the litigation funding costs of Norscot. This is the first time that a losing party has become liable for a claimant’s third-party legal financing costs.

In theproceedings Essar Oilfield Services v Norscot Rig Management Ltd,the court found in favour of Norscot Rig Management Ltd.  However, an arbitrator subsequently ruled that Norscot’s £1.94 million in litigation costs should be recoverable in full against Essar under both the Arbitration Act 1996 (the Act) and the ICC International Court of Arbitration Rules.

Essar Oilfield Services appealed against the ruling, but the arbiter argued that the additional litigation funding costs were fully recoverable as “other costs of the parties” under Section 59 of the Act and refutedEssar’s claims that it amounted to a ‘serious irregularity’.

The ruling was then taken to the High Court, which concluded that the arbitrator had not exceeded theirjurisdiction and that it was not an “erroneous use of an available power” for them to interpret that Norscot’s third party funding legal financing costs fall under the definition of other costs’.

This ruling does not offer any binding precedent beyond the boundaries of the relevant arbitration forum, and yet the implications for this decision may be far reaching.

By making this judgement the High Court has shown that it is willing to accept the idea that third party/litigation funding costs, are in limited circumstances, recoverable from the losing Defendant.

It is almost certain therefore that more parties using litigation funding will test and extend the circumstances where costs of third party funding are recoverable. Possibly one day developing the doctrine to a point where the recovery of third party costs from an unsuccessful party becomes almost common place.

It is likely then that more funders will look to enter the market as it continues to grow, backed by the knowledge that cases, such as Essar Oilfield Services v Norscot Rig Management Ltd, will make their funding options far more attractive.

It is clear then that litigation funding is no longer a last bastion of cash strapped company – as the common misconceptions suggest – but is now in the process of becoming an established way of seeking redress.