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Firms told to protect themselves against a third-party funder who ‘turns’

Castellani: limited thought given at early stage to risks [1]

Castellani: limited thought given at early stage to risks

Law firms whose clients use third-party funding have been told to take steps to protect themselves in the event of the funders seeking to recoup losses from them.

Paul Castellani, an insurance partner at City firm RCP who specialises in defending solicitors, said such contractual documents as exist between funders and law firms tend to focus on the potential for the claim to succeed, and how funds will then be disbursed.

“In our experience limited thought given at the early stage to the potential risks of adverse outcomes and ways in which the firm may defend itself should the funder ‘turn’. Firms should be mindful of these risks and seek to put in place a regime which allows the firm to defend itself.”

A newly published client briefing worked from the example of a funder suing a law firm for painting an overly rosy picture of the merits of a case that a judge later said should not have been brought.

Mr Castellani said firms should put in place “an express privilege waiver by the client to allow the firm to rely upon its file to rebut claims by non-client funders”.

In the example, the client had waived privilege to the extent of sharing the firm’s initial opinion on the merits with the funder, but Mr Castellani said it was “doubtful”, absent any express wording, that this would constitute a broad waiver of privilege by the client.

He said firms should also seek an agreement that any limitation of liability language in the client retainer – such as caps and sharing of liability clauses – may be relied upon to defend a claim by the funder, as any claim by a funder would not be a contractual claim pursuant to the terms of the retainer.

Finally, Mr Castellani said there should be an agreement that the funder will not seek to recover costs it paid to the firm – limiting action to the costs the funder had to pay to the opposing party. He warned that a funder’s claim to recover the costs it paid to the firm may not be covered by the latter’s professional indemnity insurance.