knowledge 1 August 2023 |

Should Ireland liberalise its rules on Third-Party Litigation funding? The Law Reform Commission Consults

Context

The Consultation Paper describes third-party funding as “when an entity (“the funder”), who is otherwise unconnected to a party to a legal dispute, finances the cost of resolving that dispute on behalf of that party. If the dispute is resolved in favour of the funded party, whether that resolution is through a court decision following a hearing, or through a settlement, the funder is reimbursed the amount of their initial investment and receives additional remuneration as a return on that investment”.

While legislative reform of the third-party litigation funding landscape in Ireland is likely to await the outcome of this consultation, its publication is significant as the prohibition on maintenance and champerty¹ in Ireland has meant an effective prohibition on third-party funding of litigation in this jurisdiction save in limited circumstances. The LRC notes that any regulatory framework adopted for the third-party funding must be capable of operating coherently in conjunction with regulatory and legislative developments in other spheres, citing in particular the new provision for third-party funding of international commercial arbitration. See our briefing here for more on this and the enactment of the Protection of the Collective Interests of Consumers Act 2023 (the “Representative Actions Act”) which provides that a representative action for redress may be funded by a third-party “insofar as permitted in accordance with law”.  See our briefing here for more on this.

Arguments for and against the legalisation of third-party funding

The LRC considers that the fundamental question is whether third-party funding and assignment of actions promotes the commodification of justice.  It identifies 4 principal arguments in favour of legalising third-party funding:

1. that it will help to expand access to justice in Ireland;

2. that it will improve equality of arms between opposing parties. Where one party has vast financial resources, and the other does not, this can lead to power imbalances and force “weaker” parties to accept unsatisfactory settlements;

3. that it can help to increase the pool of assets available to creditors in insolvency proceedings; and

4. that it will address an inconsistency in the law, whereby corporate entities can effectively engage in third-party funding under another name, by issuing shares or transferring ownership of the company to fund its participation in dispute resolution.

The LRC also identified the following 5 arguments against legalised third-party funding:

1. it would encourage the bringing of vexatious and meritless disputes;

2. it would cause funded parties to be under-compensated (this is because third-party funders may take from the funded party’s compensation to secure their return on investment, meaning that the funded party is not fully compensated for the harm they have suffered);

3. it would cause legal costs to increase;

4. it would cause an increase in the price of insurance premiums; and

5. it is not appropriate for all types of disputes.

Means of legalising third-party funding

The LRC identified the following 3 possible means of legalising third-party funding:

1. the “preservation” approach: abolishing the torts and offences of maintenance and champerty but preserving the rules of public policy behind the torts and offences;

2. the “abolition” approach: abolishing the torts and offences of maintenance and champerty outright; and

3. the “statutory exception” approach: retaining the torts and offences of maintenance and champerty but creating statutory provision permitting third-party funding in some cases as an exception to these torts and offences.

The LRC notes that if legalising third-party funding becomes a reality in Ireland, it is likely that the “statutory exception” approach is the optimum method, and indeed this was the approach recently adopted in the international arbitration context.

Possible regulatory models for third-party funding

The LRC suggests that where legalisation of third-party funding is proposed in Ireland that any legalisation measures should be accompanied by a regulatory framework capable of mitigating the dangers that this might pose.  Five potential models were identified in order of increasing control are as follows, with the LRC noting that each has advantages and drawbacks:

1. a voluntary self-regulatory regime, as in England and Wales, with the third-party funding sector in control of regulating itself;

2. an enforced self-regulatory regime, as in Hong Kong, with the state reserving a supervisory role to regulate the third-party funding sector more intrusively if self-regulation is insufficient;

3. a regulatory regime structured primarily around certification by the court as to the reasonableness and fairness of the third-party funding agreement, as recommended by the New Zealand Law Commission for class or collective actions;

4. a licensing regime administered by an existing regulator, such as the Central Bank of Ireland or the Legal Services Regulatory Authority; and

5. a licensing regime administered by a new and specialist regulator established specifically to regulate third-party funders and funding.

The LRC further noted that an effective regulation model framework might involve a combination of methods together with legislative provision.

Priority issues for policy makers where legalisation is introduced

Although acknowledging there are likely to be other complexities to be addressed where third-party funding is to be legalised, the LRC identified the following 6 key priority issues for policy makers in that context:

1. prohibiting the provision of third-party funding in certain disputes, with personal injuries, family law and matters related to children being identified as contentious and sensitive dispute types;

2. disclosure in funded disputes
   
   The LRC sees value in mandatory disclosure as it permits opposing parties to know the true nature of their adversary and, in the case of funded representative actions, it is an important aspect of the State’s ability to comply with the Representative Actions Directive. The LRC states at the very least funded parties should be required to disclose the fact that they are in receipt of third-party funding and the funder’s identity to both the opposing party and the court. 
   
   The LRC notes however that whether the funded party should have to disclose the third-party funding agreement to the opposing party, as well as to the court, is less straightforward, due to the sensitive commercial information such agreements are likely to contain and the possible litigation advantage that the opposing party may gain as a result.

3. the exercise of excessive control by third-party funders over funded disputes and the mechanisms that could be developed to addressed this;

4. funder insolvency during the course of the funded dispute, which can lead to significant adverse impacts on both the funded party (in terms of further progressing their claim) and the non-funded party (in terms of recovery of their costs);

5.  withdrawal by funders from third-party funding agreements and mechanisms to manage this; and

6. under-compensation and mechanisms to manage this.

Assigning causes of action (selling the right to sue)

According to the Consultation Paper, in effect, where a party assigns their case to another party, that other party is buying the claimant’s case from them. The LRC points out that certain types of assignment of action, notably those involving assignment of debts, have long been recognised as important exceptions to maintenance and champerty. The LRC noted however that a number of jurisdictions that have lifted restrictions on litigation funding have retained significant restrictions, including in some instances complete bans, on assigning “bare” causes of actions.

Next steps

The LRC is clear in its view that the legal and policy context for third-party funding has shifted considerably in recent times and is seeking submissions in response to its consultation by 3 November 2023.  The LRC’s intention, following the consultation process, is to move to a final report that will set out its recommendations, which can then be taken account of by Government when considering the question as to how reform will take shape going forward.  Interesting times ahead surely.

Also contributed to by Isobel Murphy