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Third-Party Funding Agreements: An Analysis of Therium Litigation Funding v. Bugsby Property LLC [2023] EWHC 2627 (Comm)
DATE OF JUDGEMENT: 20TH OCTOBER, 2023
COURT: IN THE HIGH COURT OF JUSTICE KING'S BENCH DIVISION BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES COMMERCIAL COURT
QUORAM: MR JUSTICE JACOBS
Introduction
It was during the late 1990s and early 2000s that the complexities and costs of international disputes gave rise to the concept of third-party funding (TPF). It primarily involves an independent third party entering into an arrangement with a party in an arbitration proceeding to cover their litigation costs in exchange for a share of the damages to be awarded. This affords financially limited parties the capacity to pursue their claims.
Despite their increasing popularity, third-party funding agreements are constantly in the thicket of legal scrutiny regarding their enforceability. Some courts have recognised their enforceability[1], while others remain on the critical side[2].
Discussed herein is an analysis of a recent judgment that has demystified the misconceived notions surrounding the enforceability of third-party funding or litigation funding agreements in arbitration.
Facts of the Case
In this case, Therium Litigation Funding had entered into a litigation funding agreement (LFA) with the respondent (Bugsby LLC). The arrangement was for Therium to fund Bugsby in its arbitration proceedings against Legal and General Group (L & G) in exchange for an apportioned percentage of the damages awarded to Bugsby, should they succeed.
Under Clause 13 of the arrangement, the LFA accorded to Therium recovery of the invested funds plus 5% of any recovery over £36, 569, 295. Furthermore, any settlement funds were to be held in trust for Therium until the correct distribution was agreed upon.
The decision in Bugsby Property LLC v. L & G[3] awarded Bugsby an amount less than what was initially claimed by it. This was an unsatisfactory award against which a fund loss appeal was filed. However, Bugsby proceeded to sign a financial settlement with L & G before the appeal could be heard.
The solicitors of Bugsby notified Therium of the settlement as well as their intention to forward the entirety of the sum to Bugsby Property LLC. Therium promptly applied for a freezing injunction against the entirety of the settlement funds under Section 44 of the Arbitration Act 1996[4].
Question of Law
The issue for determination before the court was whether there was a serious issue to be tried about the asserted proprietary claims.
Submissions by Bugsby Property LLC
The respondent submitted that in PACCAR[5] it was held that third-party litigation funding agreements that provide for remuneration as a percentage of the damages recovered may be unenforceable. It submitted that the Therium LFA was invalid and unenforceable under English law; and that the agreement fell within the scope of Section 58AA of the Courts and Legal Services Act 1990 (the 1990 Act) which prohibits arrangements calculated to influence the outcome of arbitral proceedings.
Secondly, Therium’s claim amounts to only a portion of the entire settlement funds, therefore freezing the entirety of the settlement funds would be unjust and inconvenient since the worth of the assets is significantly more than the value claimed by Therium.
In addition to that, it was argued that Clause 13.1 of the Therium LFA was superseded by the Omni LFA which accorded a holding on trust for Omni Bridgeway (Funds) Cayman Invt Ltd (Omni)[6] and the Variation Agreement meaning the trust was no longer valid.
Bugsby further contended that the sum received from the ‘fund loss appeal’ did not constitute a part of the proceeds. According to the Therium LFA and Amended and Restated Priorities Agreement 2021 (APA), if Omni and Therium do not undertake to fund ancillary proceedings such as appeals, such proceedings will not form a part of the ‘Proceedings’. That is to say, they cannot claim the settlement funds therein.
Submissions by Therium Litigation Funding
In response to Bugsby’s defence, Therium argued that Bugsby was hesitant to distribute the proceeds as agreed because it was not satisfied with the awarded damages and payment of the dues owed to the funders, solicitors and insurers would exhaust the whole sum. The agreement was enforceable and would survive the PACCAR dictum as it was not designed to influence the arbitral tribunal’s decision on the merits of the case.
Therium further contended that Bugsby had agreed to hold proceeds received by it or its solicitors on its behalf upon trust for Therium until the correct distribution was agreed upon. Even if Clause 13.1 of the Therium LFA was to be held as invalid, Bugsby had to honour the Waterfall arrangement under the APA and pay Therium the monies due to them thereunder.
Additionally, the trust existed as one on terms that entitled Therium to a beneficial interest in the entirety of the proceeds awaiting the distribution process. While the provision entitling Therium to a percentage of the damages would constitute a DBA, the other provisions of the LFA, on which Therium relied, were not DBAs (i.e. the entitlement to the total sum of funds invested) and that particular Clause should be treated as an agreement within an agreement.[7]
Contrary to Bugsby’s claim (that Therium was not entitled to claim the settlement funds from the fund loss appeal), proceeds under Therium LFA (clause 1) encompass all those sums received by Bugsby by the claim against the underlying defendant. The pending appeal at the time of settlement did not alter this fact and thinking so would be incorrect as a matter of fact and contractual construction.
Lastly, Therium submitted that if there is a serious issue to be tried as to the existence of the trust, the only way to protect Therium would be to freeze the entirety of those supposed trust funds.
Judgment
The courts must not hesitate in granting interim remedies to preserve trust assets[8]. The English Court held that there was a serious issue to be tried regarding the enforceability of the funding agreement granting the third-party funders asset preservation orders against the proceeds of the arbitration proceedings they had funded[9]. The court read Clause 13 of the Therium LFA and observed that the trust did exist and required Bugsby to hold the proceeds on trust until the funds were correctly distributed. Further emphasis was made on the fact that since the Therium LFA merely provided Bugsby with financial resources to pursue its arbitration claims, not to influence the tribunal’s decision on the merits of the case, it was enforceable by law.
Comment
This order will no doubt impact the very landscape of TPF agreements as it provides more clarity concerning the enforceability of TPF agreements under English law by affirming that agreements that do not influence the decision of the tribunals are enforceable.
The court herein effectively applied the American cyanamid[10] test in ordering asset preservation measures in support of the proprietary claims viz:
- Whether there was a serious issue to be tried: It found that there was an issue to be tried viz the enforceability of the Therium LFA
- Whether the balance of convenience was in favour of an injunction: The only way to protect Therium would be to freeze the assets
- Whether it was just and convenient to make the requested order: The Trust existed and Bugsby was liable to pay the dues according to the waterfall arrangement.
Only upon finding the answers to the above in the affirmative was the order passed granting asset preservation through provisional measures.
By providing clarity and certainty on their enforceability, TPF agreements have become more predictable which will create more confidence in funders entering such agreements, allowing parties with limited financial resources to pursue their arbitration claims more effectively, thus safeguarding the integrity of the arbitral process at the same time.
There are, of course, some challenges that TPFs face despite their growing acceptance such as the argument that they increase the overall cost of the arbitration proceedings, especially those TPFs that provide for a percentage of the damages awarded on top of the settlement of the investment funds.
While TPFs may continue to face scrutiny and debate, it is safe to say that as a result of this order, parties to a TPF agreement will be more mindful of the legal requirements as well as the potential conflicts of interest that may arise therewith.
[1] Zuberi v Lexlaw Ltd. [2021] EWCA Civ 16
[2] R (PACCAR Inc) v Competition Appeal Tribunal [2023] UKSC 28
[3] Bugsby Property LLC v. Legal and General Group [2022] EWHC 2001 (Comm)
[4] ‘If the case is one of urgency, the court may, on the application of a party or proposed party to the arbitral proceedings, make such orders as it thinks necessary for preserving evidence or assets’ Section 44(3) of the Arbitration Act 1996
[5] R (PACCAR) v. Competition Appeals Tribunal [2023] UKSC 28
[6] Omni LFA 2021, Specific Terms 7.1.1 & 5.2.1
[7] Therium v. Brooke (2016) EWHC 2421 (Comm)
[8] Republic of Haiti v. Duvalier (1990) 1 QB 202 per Straughton LJ at p213-4; see also Gee on Commercial Injunctions (7th Edition) at 7-011
[9] Bugsby Property LLC v. Legal and General Group (2022) EWHC 2001 (Comm)
[10] Madoff Securities International Limited v. Raven and Others (2011) EWHC 3012 (Comm)
- It primarily involves an independent third party entering into an arrangement with a party in an arbitration proceeding to cover their litigation costs in exchange for a share of the damages.
- The agreement was enforceable and would survive the PACCAR dictum as it was not designed to influence the arbitral tribunal’s decision on the merits of the case
- The courts must not hesitate in granting interim remedies to preserve trust assets[8]
