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High Court: third party funder entitled to terminate funding agreement and return of money held in escrow


A third party litigation funder was entitled to terminate a funding agreement when it reasonably believed that there was a less than 60% chance that the underlying court action would succeed, the High Court has ruled.

The judge, David Donaldson QC, also found that money held in an escrow account for the purposes of funding litigation by the client's solicitors should be returned to the funder, Buttonwood Legal Capital.

Litigation funding expert Keith Levene of Pinsent Masons, the law firm behind Out-Law.com, said that the case was a useful reminder that third party funding agreements contained termination clauses just like any other commercial contract.

"Any prudent funder or insurer needs to retain the right to terminate the arrangement if, for example, the prospects of success change," he said.

"This case demonstrates the need for both solicitors and clients that become involved with third party funders to fully understand both the terms of the agreement and their entitlement to costs in the event of a termination. Although third party funders only indemnify the client's costs liability, which the client retains, the decision also shows that the termination of these agreements does not just impact on the client," he said.

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 of the award if that party is successful.

Litigation funding is not regulated, although the Association of Litigation Funders (ALF) operates a voluntary code of conduct (3-page / 27KB PDF) that is mandatory for its members. The code of conduct states that termination of a funding agreement is permitted where the funder is "reasonably" no longer satisfied about the merits of the dispute; no longer believes that the dispute is commercially viable or believes that there has been a material breach of the agreement by the client. Buttonwood is not a member of the ALF.

The case was brought by Harcus Sinclair, a firm of solicitors, which was holding money in an escrow account in connection with the third party funding agreement. The money had been obtained from Buttonwood through a third party funding agreement by AREF, an investment fund, in order to cover the costs of litigation in the commercial court. The contract allowed Buttonwood to terminate the agreement if there was an Event of Default, which included AREF's prospects of success in the proceedings being 60% or less in the "reasonable opinion" of Buttonwood.

Under the terms of the agreement, AREF had to provide Buttonwood with written advice from its solicitors that its prospects of success in its claim were higher than 60%. In 2011, this was provided by AREF's solicitors in the form of a "preliminary view" intended to "enable potential backers to decide whether to put up sufficient funds". More formal advice was expected to follow as the case progressed but was never provided, despite Buttonwood's requests. The underlying litigation began in December 2011.

In 2012, Buttonwood obtained an independent opinion on the AREF case, which found that the prospects of success were less than 60%. It then terminated the funding agreement without allowing AREF to make its own representations or considering potential witness evidence. AREF argued that this meant that the decision to terminate the funding agreement was not reached "reasonably". In addition, it claimed that an obligation in the funding agreement to pay £250,000 in respect of security for costs in the underlying court proceedings survived the termination of the funding agreement.

The judge said that the "reasonableness" requirement in the termination clause covered was a substantive question, which covered the opinion itself rather than the grounds by which it was reached.

"The reasonableness of an estimate that the prospects do not exceed 60% is a purely substantive question, to be answered by an objective assessment of the available evidence against the background of the relevant legal rules and principles applicable to the claim," he said. "If the estimated figure is by that test within the ambit of reasonableness, it matters not by what route or process it was reached: the result is all."

This being the case, the agreement was now terminated and no more money could be paid from the escrow account "in accordance with the terms of the agreement". All the money held in the account should therefore be returned to Buttonwood, he said.

"The court can only give effect to these obligations as they now exist," he said. "Unlike a monetary obligation which can accrue due before - and survive - termination, an order requiring a party to perform an act can only be made now and in the circumstances which presently obtain."

The decision was handed down in May, but reporting restrictions relating to the underlying litigation have only now been lifted.

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