REUTERS | Vijay Mathur

Third party funding in adjudication for exceptional circumstances

In Meadowside Building Developments Ltd (in liquidation) v 12-18 Hill Street Management Company Ltd, Adam Constable QC decided that where a company in liquidation sought to enforce an adjudication decision, the provision of adequate third-party security was a necessary, but not sufficient, requirement.

In her recent Blog post, Helena White provided a general summary of that decision. In this piece I focus on how Meadowside shows the continued relevance of the rules of maintenance and champerty where third parties are involved in litigation (including adjudication).

Shifting public policy

Maintenance is the improper support of litigation in which the supporter has no legitimate concern, without just cause or excuse. Champerty is a variety of maintenance where the maintaining party contracts for a share of the proceeds of the action.

Prior to the Criminal Law Act 1967, maintenance and champerty were both crimes and torts. Since then, the funding of litigation by third parties has become increasingly accepted and judicially sanctioned. Maintenance and champerty today survive as rules of public policy to prevent the wanton and officious intermeddling in the disputes of others without justification or excuse.

In Meadowside, the court considered the surviving rules of maintenance and champerty in two potentially overlapping situations:

  • Where the third party is in a position to influence the conduct of litigation.
  • Where there is potential “trafficking” in litigation.

Representatives with an interest in the outcome

Contingency fees have traditionally been seen as the most important species of champerty. The introduction of section 58AA of the Courts and Legal Services Act 1990 (CLSA) allowed litigants to enter into a damages based agreement (DBA). However, a DBA must meet the conditions and limitations set out in that section (and the regulations made thereunder), otherwise it will be unenforceable.

In Meadowside, the court considered the scope of the rules relating to DBAs, which is wider than that applicable to conditional fee agreements (CFA). The DBA regime not only covers providers of advocacy services and litigation services, but also providers of “claims management services“.

In Meadowside, the court held that section 58AA of the CLSA simply pulled the definition of claims management services from section 419A of the Financial Services and Markets Act 2000 (FSMA). This means that the DBA regime applies where a person provides advice or other services, which include financial services or assistance, legal representation,  referring or introducing one person to another and/or making inquiries. It is also covers any claims for relief, whether or not the claim is or could be made by way of legal proceedings, and is not limited to the types of claims management services that are regulated under FSMA.

In Meadowside, the claimant did not disclose the nature of its third party funding agreement. Instead, the claimant relied on the third party’s appointment as an “agent” for the liquidator with which the court could not interfere absent Wednesbury unreasonableness. The court rejected this argument, and held that the liquidator’s appointment of an agent did not affect the analysis it needed to undertake as to:

  • The nature of the agreement entered into.
  • Whether the agreement was enforceable.
  • Whether the agreement was champertous.

The court looked at the substance of what the third party agent had done and found that it had provided advice and other services. The court also drew an obvious inference from the claimant’s submissions that its funding agreement did not comply with the Damages Based Agreement Regulations 2013 (DBAR) because it provided for a percentage recovery greater than the 50% permitted.

Therefore, the court found that the claimant’s third party funding agreement was unenforceable. Further, as section 58AA of the CLSA set out Parliament’s view of what public policy dictates in this area, the unenforceable funding agreement was also champertous and contrary to public policy.

Trafficking in litigation

Maintenance and champerty can provide a substantive defence where it targets the basis for the claim. This will most obviously cover any claims for the costs incurred pursuant to a champertous funding agreement. It can also apply where a claim is founded on an assignment that is challenged as unenforceable. For example, in Ndole Assets Ltd v Designer M&E Services UK Ltd, the defendant maintained a defence based on the assignment, on which the claimant relied, offending the laws of maintenance and champerty.

Otherwise, the finding that a funding agreement is unenforceable will primarily be an issue between the parties to that agreement. The fact that the funding agreement is a non-compliant DBA and contrary to public policy due to champerty will not, by itself, provide the other side with a defence to the claim, nor cause any proceedings to amount to an abuse of process.

This shows a distinction between the circumstances where champerty provides the basis for a claim, and where it is merely incidental to its pursuit. In Meadowside, the court was effectively considering a mid-point between these two positions: the claimant relied on a champertous funding agreement to show that there were exceptional circumstances that permitted the enforcement of the adjudicator’s decision.

On this point, the court decided to apply the test for determining whether the effect of the champerty is, in the particular circumstances of the case, an abuse of process that would justify a stay. Whether a case involved an abuse of process is an issue of fact. The court would need to consider whether the case involves trafficking in litigation and/or the wanton and officious intermeddling in the disputes of others without justification or excuse. This would involve consideration of many factors, including:

  • The terms of the funding agreement between the litigant and its funder.
  • Their relationship quite apart from that agreement.
  • Whether (and if so how and in what circumstances) the litigant proposes to repay the funder.
  • The relationship between the funding provided, the sum to be repaid and the sum at issue in the action.
  • The precise purpose within the proceedings for which the funding was provided.

In Meadowside, the court found that in the majority of cases, little more will be needed than some background, and the details of the arrangement itself, in order to determine the question of abuse of process summarily. The court also suggested that where the issue was one of a stay (rather than the enforceability of an agreement), the court may be able to deal with the question of abuse of process without firmly deciding the question of champerty one way or another.

On the particular facts of the case, an element of abuse had been established through the finding that the funding agreement was champertous. Therefore, as the terms of the funding agreement had not been disclosed, the court could not satisfactorily dispose of the matter of abuse of process. This will therefore need to be considered further in future cases.

Conclusions

The introduction of DBAs, and allowing the sharing of the spoils of any litigation, represented a significant shift in the public policy regarding maintenance and champerty. The general low uptake in the use of DBAs by the legal profession due to various issues with the DBAR has deferred the resulting issues being identified and addressed in detail. Instead, the decision in Meadowside suggests that DBAs might have been more widely used (unintentionally) among providers of claims management services, particularly in the construction industry.

The current review and re-drafting of the DBAR being undertaken by Professor Rachael Mulheron of Queen Mary University London is likely to lead to the more widespread use of DBAs in the future. Similarly, the encouragement that Meadowside provides for third party funding business models in adjudication enforcement potentially opens up a new market that can run alongside that which exists for security for costs generally.

The potential increase in uptake in DBAs will require the courts to balance various overlapping public policy issues and concerns. This includes allowing access to justice, supporting liquidators and their agents in collecting sums due, providing security for parties facing claims by companies in liquidation, managing court resources and protecting its process from abuse.

Courts are likely to increasingly encounter circumstances where the named parties to litigation have diluted their interest in the outcome, and control of the conduct, of litigation. Following Meadowside, this could include a situation where a third party-funded claimant brings a claim to overturn an adjudication decision that a defendant liquidator has enforced on the basis of the security provided by a third party who wishes to resist the claim. In order to continue to guard against trafficking in litigation, courts will necessarily need to review the underlying arrangements between parties as the line between this and mere meddling in litigation becomes increasingly blurred.

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