Ahead of Stewarts’ response to the Civil Justice Council’s review of third-party litigation funding in England and Wales, which makes reference to the European Law Institute’s Principles Governing the Third Party Funding of Litigation (the Principles), Julian Chamberlayne reviewed the Principles in Litigation Funding magazine’s December 2024 edition. That article is reproduced unedited here. 

On 9 October the European Law Institute (ELI) published its Principles Governing the Third Party Funding of Litigation. The Principles are intended to constitute a framework for guidance on, decisions about, or light-touch regulation of the third party litigation funding (TPLF) market. They aim to facilitate access to justice and ensure that the TPLF market and TPLF agreements operate fairly and for the benefit of funded parties, funders and the courts.

The ELI Principles comprise of 12 principles regarding the conduct of funders and funded parties, dealing with key issues such as transparency, capital adequacy, funders fees and control over proceedings. They are supplemented by suggested minimum content for TPLF agreements and sample wording for TPLF agreements to deal with particular issues raised in the Principles. The Principles do not in of themselves have any statutory or regulatory force and consequentially carry no sanction for non-compliance. However, it would be open to lawmakers in any given jurisdiction to choose to incorporate them into their national legal framework.

I was invited by the ELI President – Pascal Pichonnaz – and the Co-Reporters of the Principles – Susanne Augenhofer and Dame Sara Cockerill – to speak at ELI’s first webinar on this theme on 21 October 2024, to provide the perspective of the legal industry. The views expressed in this article summarise and, where necessary, expand on those I gave during the webinar.

Benefits of the Principles

My overarching view is that the Principles provide very valuable guidance for legal advice on TPLF which, if followed, will equip funded parties to make informed decisions. In this regard, they helpfully assume and allow for flexibility between different jurisdictions and practice areas rather than seeking to impose a one-size-fits-all approach. I also agree that they provide some guidance for lawmakers contemplating regulation of the TPLF market, sensibly suggesting that  any such regulation should be light-touch and focus on genuinely evidenced problems.

Whilst the Principles have no statutory or regulatory force in of themselves, I agree with the authors that they could prove a useful yardstick for courts, tribunals or other dispute resolution bodies who are faced with the (often complex) legal issues that arise from TPLF – in particular, when assessing issues of fairness between the funder and funded party.

They also rightfully recognise the importance of TPLF as a tool for broadening access to justice, as evidenced by the essential role of funding in paving a road to redress for sub-postmasters affected by the Horizon scandal.

Potential sticking points

The only aspect of the Principles that I considered potentially problematic related to the draft commentary around the definition of ‘independent legal advice’ on the funding agreement.

Principle 4.2 provides that in any promotional materials provided publicly, or to an individual, funders must include a prominent statement that any party considering entering into any TPLF agreement “should seek independent legal advice (ie legal advice from a lawyer with no connection to the Third Party Funder) prior to doing so.” The associated draft commentary (as of October 2024) stated that:

“There is a real issue as to the meaning of ‘independent’ legal advice. Often the proposed lawyer to be instructed for the claim is seen as the ‘independent’ legal advice. However, this is an unsafe model, particularly in a world where either via portfolio funding or simple repeat instruction lawyers acting for Funded Parties may well have a financial conflict of interest […] at a minimum, a prospective Funded Party must be advised in clear terms that it should obtain independent legal advice.”

The suggested minimum content for a funding agreement makes a similar point in respect of how parties should record the fact that independent advice has been provided:

“[…] in general it will be necessary for the Funded Party to receive independent

legal advice as to the terms of the Third Party Funding Agreement. Careful thought needs to be given to whether a letter confirming advice from the lawyer instructed in the dispute is adequate (as per E&W Code para 9.1).”

Read together, I am concerned that the draft commentary could be interpreted as suggesting that a lawyer has a “connection” with a funder, for the purposes of Principle 4.2, merely by reason of them being instructed (or proposed to be instructed) on the case.

The ‘connection’ issue

If the above interpretation were adopted, various problematic consequences could arise.

First, it would mean that the instructed lawyer for the underlying case could not provide independent advice to the client on the funding agreement, and that in all cases the client would require separate advice.

Second, it would potentially present a barrier to parties receiving funding advice (and, in turn, funding). A requirement for seeking separate legal advice raises the challenging question of who will pay for it. The reality is that the funder would not agree to pay for that advice unless and until the funding agreement was signed.

Advising a client on a funding agreement is neither quick nor cheap. It will sometimes involve advising them not to agree to the terms offered by one or more of the funder(s) under review. In many cases, this will necessitate the advising lawyer being prepared to risk or at least defer payment of their fees whilst trying to help the client secure funding from a reputable funder and on reasonable terms. In my view, it is implausible that a sufficient cohort of lawyers would be prepared to provide discrete advice on funding agreements with their fees fully at risk.

Third, it is doubtful that separate lawyers would understand enough about the evidence, risks and likely timeline in the claim to provide what I consider to be one of the most important components of advice to the funded party: financial modelling of the likely net outcomes of the case were it to settle at various key stages, when contrasted with a likely trial outcome. Without such modelling it is difficult for funded parties to fully understand the cost of funding and what they may be left with at the end of the case.

Fourth, this requirement could potentially be exploited by an unscrupulous funded party. In such a scenario of having received advice on funding by their lawyers, understood and agreed to the funding terms, and proceeded to secure substantial proceeds from their claim with the assistance of funding, there would be a route to unmeritoriously seek to avoid making payments under the funding agreement, by claiming that they were not provided with separate independent advice.

The draft commentary also runs the risk of alienating the legal profession as it does not, in my view, give due recognition to the fact that in most (possibly all) jurisdictions the lawyer will be under strict regulatory obligations to act in their client’s best interests and to avoid own interest conflicts.

In this regard, the Principles appear to cite portfolio funding arrangements and repeat introductions from funders as evidence of why the instructed lawyer advising on the funding is an ‘unsafe model’. I acknowledge that, in these two specific scenarios, the lawyer may well have a material connection to the funder. However, these two scenarios are in practice rare and should not therefore be used as the basis to assume an instructed lawyer could not provide independent advice to their client in the vast majority of cases.

The next steps

In view of the above, I invited the authors of these ELI Principles to consider revising the draft commentary to Principle 4.2. They responded positively and indicated an intention to make changes in the near future to address the points that I had raised.

Once the ELI Principles are revised I hope that funders, litigants and the legal profession embrace and enthusiastically adopt them as reflecting best practice. In this regard, there is in my view a real legal skills gap across Europe on how to advise clients whose cases might be suitable for TPLF. The reality is that only a small cohort of firms who regularly act in funded cases have developed sufficient experience to advise on these complex and high value agreements. In applicable jurisdictions that advice will usually also require considering the pros and cons of alternative or complimentary arrangements like Conditional Fee Agreements, Damages Based Agreements and ATE insurance.

As such, I would urge the national law societies and bar councils across Europe to promote the Principles and use them to educate and equip the legal profession to better advise clients on TPLF, or at least identify whether their clients ought to have separate, specialist advice. Where the Principles are followed they will provide invaluable help to lawyers advising funded parties, assisting them in process of selecting the most appropriate funder for their client and negotiating fair funding agreements.

Conclusion – postscript added March 2025

The Stewarts team also corresponded directly with ELI to highlight the concerns listed in this article. ELI subsequently revised its commentary on the meaning of independent legal advice as addressed in Principle 4, acknowledging that while ordinarily the instructed/proposed lawyer should be able to provide independent advice, this will not always be the case. We are pleased to have had our articulated concerns recognised, and have endorsed the adoption of the ELI Principles in our response to the Civil Justice Council (CJC) consultation on their litigation funding.

The ELI Principles as amended are available to read in full here.