Commercial litigation has a reputation for being expensive and uncertain and is something which some clients may make a conscious decision to avoid. As with most things, it need not be that way. Litigation funding is now an established service in the UK and elsewhere and is something which is increasingly being considered in the Channel Islands.

The very fact that a person or company has something to litigate means that they have probably already suffered a wrong. They should not have to suffer more to establish their rights and to recover what, in certain cases, was theirs in the first place.

However, as with any service, before embarking upon any litigation, potential litigants need to consider whether they can afford it. They need to consider not only their own costs but also those of their opponent in the event that the litigation is unsuccessful. And that is where litigation funding may come in useful by allowing some plaintiffs to take a more commercial approach to litigation and in assisting a cautious or impecunious plaintiff to pursue litigation they otherwise might not.

At its heart, litigation funding involves sharing (or entirely passing on to another) legal fees – as well as the risk of paying their opponent's costs if the claim is lost – in return for foregoing a slice of the proceeds if the claim is won. Funding is certainly not an option for every plaintiff, but it may well be an option worth considering for significant claims (say £2 million or more) where the prospects of success and recovery look good.

By way of background, conditional fee agreements (which were introduced into the United Kingdom in 1995) allow solicitors to enter agreements with their clients providing for no fee in the event a claim failing and allow the lawyer to apply an uplift in their fee on a time spent basis (subject to a maximum of 100%) in the event of the claim succeeding. At the same time, the risk of paying the opponent's costs if the claim fails can be insured by the purchase of “after-the-event-insurance” (known as “ATE insurance”). On the other hand, contingency fee agreements with lawyers (which allow the lawyer to take a share in the litigation proceeds following a successful claim) are still a step too far in the United Kingdom, although they are available and are legally enforceable in certain jurisdictions including the USA.

Litigation funding involves an agreement (which may take a variety of forms) struck not between a litigant and a lawyer, but between a litigant and a professional funder. In broad terms, the litigant will pass to the funder some or all of the responsibility for the ongoing legal cost of taking a case to trial; the litigant may also purchase ATE insurance to cover any adverse costs order if the case fails. The funder will take an active interest in the case but will not meddle in the litigation by getting involved in decision making. In return, the litigant will agree to share a percentage of the proceeds with the funder. The funder will not be incentivised to strike too hard a bargain with the litigant for at least two reasons – first, the funder wants the litigant to retain a sufficiently keen interest in the outcome of the case to get the best result at trial or settlement for the benefit of both parties; second, too greedy a deal on the part of the funder may lay the whole arrangement open to being set aside as abusive and contrary to underlying and longstanding rules against intermeddling in litigation.

In the United Kingdom and elsewhere, litigation funding has moved into the mainstream and has developed significantly in the past 10 years or so. Whether such agreements are valid and enforceable – as opposed to an abuse of process – is dependent on the circumstances in each case. However, as a concept – and if properly structured – they are now officially regarded as beneficial in the interests of justice and to be encouraged. In a recent high profile case in England, thought to have very good prospects of success, the claimant lost, leaving the professional funders to pick up significant legal fees on both sides of the proceedings whereas the claimant himself paid nothing. Whilst on the one hand this shows how unpredictable commercial litigation can sometimes be (even when pursued with upmost diligence and with the benefit of top level advice) it also demonstrates how any uncertainty can be hedged successfully.

Litigation funders based in the United Kingdom are now recognising that the Channel Islands have a well established litigation market but no established domestic market for funding. For the right case – in other words a case where the prospects following an initial review of the merits and the potential enforcement options both look good and where recovery of significant losses is sought by the plaintiff – funding may well be available. As a litigation practice we believe it is appropriate to consider whether funding is an option which a potential plaintiff might wish to explore further – whether our client is an individual, company, trustee or liquidator.

Finally, whilst the legality and enforceability of funding agreements in the Channel Islands is untested, it is ultimately and primarily an issue for funders rather than litigants to ensure that the balance they strike in the agreement is the right one. No funder wants to risk having its agreement struck down as unenforceable just when it thought it was in line for a share of the upside, having stood by and funded a case all the way to trial.

For further information please contact David Cadin, Alasdair Davidson, Robert Gardner, Edward Drummond.