At the beginning of this decade hardly anyone had heard of the concept of completely independent Third Party Funding of litigation for commercial reasons. That was despite the fact that in insolvency cases it has been approved by the courts of England and Wales since 1880 and the crimes and torts of maintenance and champerty were abolished by the Criminal Law Act 1967. Since 2005, when a report of the Civil Justice Council (CJC) recommended to the Lord Chancellor that "further consideration should be given to the use of third party funding as a last resort means of providing access to justice", there has been increasing activity in the market and increasing awareness. Third Party Funding of litigation has developed in other jurisdictions for longer, in Germany, Austria and Switzerland and particularly in Australia. It is also more developed in the United States, although not as prevalent as one might expect.

In England and Wales the judiciary have become more enthusiastic. The CJC delivered another report in 2007 which contained a further developed recommendation that: "Properly regulated Third Party Funding should be recognised as an acceptable option for mainstream litigation." It also recommended regulation. Lord Justice Jackson considered the whole question of the cost of litigation and produced his final report in 2009, which included the declaration that he is of the view that "in principle, third party funding is beneficial and should be supported, essentially for five reasons". Those five reasons are:

1. it provides an additional means of funding litigation, possibly the only means for some and therefore promotes access to justice;
2. it is better to recover a part of the damages rather than none at all;
3. it does not impose an additional burden on the other side (unlike no win no fee arrangements, or Conditional Fee Agreements (CFAs), which presently increase the costs recoverable from the losing party);
4. it will become increasingly important as a means of funding when the recoverability of success fees for CFAs is abolished, as the government now propose; and
5. the third party funders filter out unmeritorious cases.

A large part of the enthusiasm for Third Party Funding is that it promotes "access to justice". The debate about the costs of litigation that has raged over the last decade has in large part been as a result of the approval of CFAs and allowing the success fee, which can double the costs payable to the lawyers, to be recovered from the losing party. The reason that that causes such a stir is that the inherent expense of litigation in English and Welsh courts is greatly increased for the losing party, which in practice, in the vast majority of cases, means the insurance industry. The debate, therefore, is how can the average consumer be allowed access to justice for his or her claim, probably a personal injury claim, when there is no hope of paying for lawyers out of his or her own income and the risk of having to pay twice as much if the case is lost is too awful to contemplate. This is not an arena, however, where the additional access to justice provided by Third Party Funding will make any impact.

There are many ways of funding litigation and some of those can and do provide the means for firms of solicitors to represent individuals in personal injury cases. When the CJC and Jackson LJ talk of Third Party Funding they mean bespoke funding for individual cases where the funder pays some or all of the costs in return for a share of the proceeds, either expressed as a multiple of the investment or as a percentage of the damages. That model is not suitable for personal injury cases, or indeed any case that does not involve a claim for a substantial amount in damages. For the average, or even large, personal injury claim the amount of damages is simply not sufficiently high to allow a return that justifies the risk of the investment.

It is, therefore, in commercial cases that Third Party Funding is improving access to justice. There are obvious cases where there are no, or insufficient, funds available to pursue a claim. An insolvency situation or where the company is too small to have the resources to spend on litigation and remain in business. In those situations there is a complete parallel with the consumer in the same situation and the additional provision of access to justice is obvious. But what about those companies that have resources and could, if they chose, manage to fund the litigation? Is there an access to justice argument in that situation also?

For the same reason that some banks have taken to instructing their solicitors to act on a CFA basis, to reduce their litigation budget, there is an access to justice issue even for companies with strong balance sheets and revenues.

Many companies have potential claims that they do not pursue. Those claims are assets that sit gathering dust because the CFO is unwilling, or unable, to commit the funds to the uncertainty of success. What board of directors would lightly commit the company's funds in perhaps sums of £500,000 to £750,000 to pursuing a claim that has perhaps a 60% chance of success? Even if the success were to be an award of damages of, say, £5,000,000, the risk involved when that money could be spent on furthering the core business and adding certain value to the shareholders is significant. There is however the additional risk of the consequences of losing, which could increase the costs payable to £1,500,000. At present insurance is available in respect of the adverse cost risk but soon the premium for such insurance will be payable by the claimant in any event. The commitment to spend on lawyer's fees must be provided for in the accounts. The risk of adverse costs may have to be provided for. There are few companies that can say to their shareholders that they have sufficient free cash that it can provide no better return than investing in the risk of litigation.

In many cases the decision is difficult. There is no real access to justice because the costs of litigation are so significant, and uncertain, that the decision to incur them is bound to have an adverse effect on spending elsewhere and may have an adverse effect on the business. In 2008, MORI conducted a survey among corporate counsel and other decision makers and reported that 84% of respondents regarded the cost of pursuing the litigation as important or very important in their decision. The costs of losing was a factor that was either important or very important for 80% of respondents. The present economic climate has no doubt contributed to the depth of those concerns.

One solution is to consider Third Party Funding. True, you will have to give up a share of the expectation of damages. That share will typically be between 20% and 40%. The same survey revealed that corporate litigation decision makers were not particularly happy about that. When asked whether 25% was a reasonable return for a funder, 36% thought it was either a little or much too high. When asked whether 40% was reasonable, 68% thought it was a little or much too high. This must be a reflection of not fully understanding the value of Third Party Funding.

Apart from Jackson LJ's five reasons why Third Party Funding is a good thing, and in this context the points relating to the alternative being not recovering the damages at all are important if the real situation is that the company can not sensibly commit to the litigation, there are a number of other reasons why Third Party Funding is a sensible option and the return will not be too high:

1. the return in any particular case reflects the risks of: losing, winning and not recovering damages, inadequate budgeting and the time for which the funds are committed;
2. the return is also a reflection of the funds required and the amount likely to be recovered;
3. the provision of the funds is non recourse and the returns usually requested are not unusual compared to similar funding provision, such as factoring;
4. the risks are removed from the company and the cost is taken off the balance sheet;
5. the budgeting and management of the case is supervised by the funder, through monitoring of the work and expenditure;
6. the return to the funder is not a cost to the company but merely a reduction in expectation; and
7. the company obtains a chance of recovering damages at no risk or cost to itself.

It is important to also remember that the agreement will be negotiated on a commercial basis. There will be other options and both the company considering litigation and the funder are entirely free to make their own decisions. What is certainly true is that Third Party Funding provides a real alternative which will allow many companies to realise the asset of a claim in circumstances when it will either be commercially difficult or impossible to do so. It also provides a company with an alternative way of adding value to its shareholders even when that does not apply.

William Evans