Voluntary third party funders' code has 'manifest weaknesses', peers say

Liberal Democrat peer Lord Thomas of Gresford suggested the introduction of a statutory code of conduct as part of a House of Lords debate on the Legal Aid, Sentencing and Punishment of Offenders Bill.

"I am not at all content that this development in litigation funding should be subject to a voluntary code without any parliamentary debate, approval or control," he said.

A new Code of Conduct for Litigation Funders (3-page / 27KB PDF) was published in November. Although voluntary, compliance will be mandatory for funders seeking to join the newly-formed Association of Litigation Funders of England and Wales. The Code was developed by the Civil Justice Council Working Group on Third Party Funding, which was set up in response to leading judge Lord Justice Jackson's comprehensive review of civil litigation costs in 2010.

Third party funding, or litigation funding, is where a person or business which has no other connection with a case agrees to fund the costs of a party's case in return for a share in the proceeds if that party is successful.

Lord Thomas said that if a funder intended to take a percentage of the damages awarded to its client, it should also have to pay the other side's cost if its client loses. Although the new voluntary code allows funders to set out whether they will cover those costs it does not state that they "must" do so, he said. "The funder could walk away and leave a small business to carry the costs of the other side, which would leave it completely broke," he said.

He added that the voluntary code as it stood made it too easy for funders to withdraw their support or force the party to the case to accept an inappropriate settlement offer.

However Justice Minister Lord McNally said that further time was needed to "reflect on" the voluntary code before a more formal arrangement could be considered.

Litigation funding expert Keith Levene of Pinsent Masons, the law firm behind Out-Law.com, said that mandatory standards should be established for third party litigation funders. The new voluntary code goes against the flow of regulation generally, he said.

"When this was discussed before I was of the view that third part funders would ultimately require proper regulation as with any other quasi-financial service," he said. "These cases often involve substantial sums of money that quite often run into the millions of pounds. As the Legal Aid Bill changes the way that litigation is funded, third parties are likely to become increasingly involved in the field of personal litigation funding rather than its use being limited to more sophisticated corporate entities. Formal regulation is necessary for the protection of the consumer."