High Court backs litigation funder’s decision to terminate agreement

Netherway: information provision terms need to be observed

The High Court has ruled that a third-party litigation funder was entitled to terminate its funding in a case where the prospects of success had fallen below 60%.

The ruling by David Donaldson QC, sitting as deputy judge of the High Court, will set a useful benchmark for funders in the post-Jackson era.

Harcus Sinclair (a Firm) v (i) Buttonwood Legal Capital Limited (BLC), (ii) Rylatt Chubb (a Firm) (iii) Alternative Real Estate Fund Limited and (iv) Roskill Advisors (Cayman) Limited [2013] EWHC 1193 (Ch) concerned monies held in an escrow account by the claimant firm as part of a litigation funding agreement between the funder, BLC, and the third and fourth defendants (collectively known as AREF), who were bringing a claim in the Commercial Court.

A condition of funding was that the prospects of success continued to exceed 60%. At the outset of funding in 2011 a short counsel’s opinion was submitted, described as a “preliminary view” so as to “enable potential backers to decide whether to put up sufficient funds”.

It promised more formal advice if the funder agreed, but eventually proceedings were begun without it being obtained.

In early 2012, BLC changed investment manager and began a general review of the prospects of success in its cases.

Having not received an adequate updated advice on the merits in this case, despite requests, BLC commissioned its own. There were problems obtaining all the papers from AREF’s solicitors, but counsel’s final opinion was that, on the available evidence, the prospects of success were less than 60%. BLC then terminated the agreement.

In a decision that was made in May but embargoed until last Friday, the judge rejected AREF’s arguments that the opinion was not reasonable and that BLC was precluded from terminating by promissory estoppel. He found that although BLC had said it would allow the borrowers to make representations before deciding whether to terminate, AREF had not relied on this promise.

The judge also held that two release requests for solicitors’ fees and disbursements which were filed after the date of termination were not payable as the loan became immediately repayable upon termination.

The same was true for a £250,000 order for security of costs in the underling proceedings. Further the judge ruled that the appropriate form of request required under the contract had not been made prior to termination.

Accordingly it was held that all relevant monies in the Harcus Sinclair escrow account be returned to BLC.

Stephen Netherway, the partner at City firm CMS Cameron McKenna who acted for BLC, said: “This case demonstrates the fact that funding agreements are very much a commercial agreement between a borrower and lender. Litigants and their solicitors must ensure that they recognise and observe their obligations towards their funders, and that information provision terms need to be observed.”