Can a Litigation Funder Rely on Any Form of Equitable Lien
Published: 25/03/2022 16:49
Funding family proceedings
LS v PS  EWFC 108 (23 December 2021), Roberts J concerns an application by a litigation funder (Q), as intervener in financial provision proceedings, for disclosure of material arising between a husband and wife and in relation to their settlement of LS’s financial order proceedings. The material was said to be privileged because it was, said LS and PS (the wife and husband) covered by the without prejudice rule.
Roberts J describes the issue before her as:
' This is an application by an intervener in financial remedy proceedings for disclosure [i.e. production] of material and information which is currently subject to 'without prejudice' privilege. The intervener, Q, is a corporate entity which provides litigation funding to parties involved in family… proceedings. It has lent funds to LS, the applicant wife in these financial proceedings. Her debt to Q with accrued interest currently stands at almost £1 million.'
The outcome of the financial order proceedings (it was a settlement of the husband’s appeal against an order of Parker J) was that at a private FDR in February 2021, in which the applicant wife was initially represented but became unrepresented during the course of the day, the parties ultimately agreed to an order leaving her with no assets of her own, merely a life interest in a property owned by the respondent husband's trust.
Q had funded LS in her financial order proceedings and in earlier children proceedings. With interest she owed them approaching £1,000,000. The settlement with PS left her with no way to repay her debt to Q. She is insolvent and, as matters now appear, she faces inevitable bankruptcy.
Q as intervener
Q’s role in the parties’ financial order proceedings, explained Roberts J, was as follows:
' At the heart of this dispute is an allegation by Q that the settlement which resulted from those negotiations was deliberately structured by the parties so as to leave the wife with no assets or entitlement to property or liquid funds from which her debt to Q could be met. As a legitimate creditor, Q's case is that it was effectively ‘bypassed’ and the wife, with the husband's encouragement and support, has been left without the means of satisfying her debt…'
As LS’s funders, Q had successfully joined as interveners in the couple’s financial order proceedings so that they could set aside the financial order. They had access to some material from those financial proceedings. They sought, by court order, further without prejudice privilege material in relation to their set aside application and then in their application under Insolvency Act 1986 ss 423-425 against LS.
Roberts J’s conclusion on Q’s production application is:
' … The court in March next year [i.e. the set aside application listed for hearing in March 2023] will have ample evidence available to it in the absence of the privileged material to form a view as to whether or not this order should be set aside. In the circumstances, I am not prepared to grant the application for the disclosure of the privileged material which Q seeks to adduce for the purposes of the forthcoming set aside application.'
A consequence of this, says James Roberts QC in 'FDR privilege and the risk to litigation funding after LS v PS' in Family Law Week (28 February 2022).
'The present state of the law as exemplified in this case may have a very serious, and possibly terminal, impact upon the family litigation lending market as a whole. The area is one which is already considered to be more risk laden for lenders than the other areas in which litigation funders are active conventionally. An absolute bar on disclosure of material which would otherwise be allowed in other divisions will only increase the risk. This conflicts with recent judicial comment which has been supportive of lending within family proceedings. The loss of such litigation funding, or its severe curtailment, has the capacity to undermine, in a significant cohort of cases, any talk of ‘equality of arms’ for the more economically vulnerable party.'
As an aside to this discussion, it seems that Roberts J misdirected herself on the subject of privilege. She does not distinguish between legal professional privilege (indeed she does not say why she considers legal professional privilege applies at all) and the quite different without prejudice privilege. As Charles Hollander QC puts it in Documentary Evidence (Sweet & Maxwell, 2021 at 20-02):
'Without prejudice privilege is seen as a form of privilege… It does not have the same attributes as the law of privilege. Privilege can be waived [by] the party entitled to the privilege. Without prejudice privilege can only normally be waived with the consent of both parties …'
The roots of without prejudice privilege are treated as essentially contractual; whereas legal professional privilege (mostly legal advice privilege) is an aspect of a parties’ right to a fair trial.
Parties to non-party funded litigation
Who are the possible parties to any litigation where a lender finances, as here, a spouse’s case, before any question of non-party intervention crops up? Answers to this question and a review of the law relating to the non-party funding of litigation may help to provide a way into the problem which Q seems to confront in the spouse’s financial order proceedings.
In any civil proceedings where funding is in question there are the parties to the case. There are the receiving party’s solicitors who, for this example, are either seeking costs for their client from her or against her former husband. Then there are non-party funders, who may be the legal aid fund (ie the tax payer) or a private funder. There are three funders of litigation (pending any orders for costs being made by the court):
- The Legal Aid Agency (LAA)
- Solicitors, where they have not been paid in advance by their client
- Non-party funders, i.e. Q in LS v PS
First, it is instructive to look at the funding set-up in each case and to consider what is the law on this subject in general terms. Secondly, is there any reason why in law or in equity the position for each type of funder should not be the same; and how does this question look in the case of LS and Q? Thirdly, how is all this affected by any question of costs as between the original parties to the claim or other dispute?
The statutory charge: Dr Manley, his echo sounder and the legal aid fund
LAA and solicitors acting in the private litigation have statutory protection; and solicitors have their equitable lien. To what extent may non-party funders, such as Q, have any protection? The statutory charge applies to enable a solicitor and, by extension, to LAA where a party has legal aid, to seek recovery of the solicitor’s (or the LAA’s expenditure) out of any damages or other property recovered or preserved in the proceedings where the solicitor acted.
Solicitors Act 1974 s 73 (which is similar in its effect for the LAA for a solicitor dealing with a case on legal aid: Legal Aid Sentencing and Punishment of Offenders Act 2012 s 25) says:
'73 Charging orders
(1) Subject to subsection (2), any court in which a solicitor has been employed to prosecute or defend any suit, matter or proceedings may at any time—
(a) declare the solicitor entitled to a charge on any property recovered or preserved through his instrumentality for his assessed costs in relation to that suit, matter or proceeding; and
(b) make such orders for the assessment of those costs and for raising money to pay or for paying them out of the property recovered or preserved as the court thinks fit;
and all conveyances and acts done to defeat, or operating to defeat, that charge shall, except in the case of a conveyance to a bona fide purchaser for value without notice, be void as against the solicitor.
(2) No order shall be made under subsection (1) if the right to recover the costs is barred by any statute of limitations.'
The position in LS v PS is analogous with Manley v Law Society  1 WLR 335, CA and with operation of the LAA statutory charge. Dr Manley had invented an ‘echo-sounder’ for ships to estimate the depth of water below them. Marconi at first were interested in developing it with him, but then dropped out. He was left with substantial debts. He got legal aid to sue Marconi. His case was set down for a 30 day hearing. Marconi’s wanted to avoid that since, even if his claim was thrown out, with costs, they knew he could not pay; but they would have to go on paying their own lawyers.
Marconi’s agreed to pay off Dr Manley’s debts direct to the creditors. No money would go to his solicitors; there was nothing – it was thought by Dr Manley’s lawyers – on which the charge would bite (i.e. there were no damages on which the charge could bite); and the solicitors would be paid by (as it then was) The Law Society (i.e. the non-party funders). His barrister advised the deal was safe from the statutory charge and contacted The Law Society just before the case started to inform them and of his advice. A Tomlin order was made by the court.
The Law Society were not as sanguine as counsel. In the fullness of time when the solicitors had their bill taxed (detailed assessment) they objected. At first instance the solicitors were ordered to receive payment from the legal aid fund. On appeal to the Court of Appeal Lord Denning MR was unimpressed. He allowed The Law Society’s appeal:
'This case comes under another and better principle which I stated simply in Customs and Excise Commissioners v. Pools Finance (1937) Ltd.  1 All E.R. 775, 780: “[The parties] cannot assert that black is white and expect the courts to believe it.” It is the same as that which Lord Reid and I applied in Griffiths v. J. P. Harrison (Watford) Ltd.  A.C. 1. The court should always look for the truth of the transaction. It should not let itself be deceived by the stratagems of lawyers, or accountants. It should not allow them to pull the wool over its eyes. It should not allow them to dress up a transaction in clothes that do not belong to it.'
As an aside as against LS v PS: it is clear from this case, and the next two considered, that there can have been no difficulty about the court receiving without prejudice correspondence (the legal aid authorities would be entitled to that anyway); but that would not have helped in Khans or Gavin Edmundson (below) and reference to the two cases might have encouraged Roberts J to decide LS the other way on production.
Solicitor’s equitable lien: ‘promotes access to justice’
The cases of Khans Solicitors (a Firm) v Chifuntwe  EWCA Civ 481,  1 WLR 1185 and Gavin Edmondson Solicitors Ltd v Haven Insurance Co Ltd  UKSC 21,  1 WLR 2052 both raise the question of the equitable lien. In both cases – a factor which may be relevant in LS v Q – defendants (or their insurers in Gavin Edmundson) settled the solicitors’ costs order against them by payment direct to the client’s (former) solicitors. But in LS v Q the solicitors only were not unpaid – as Roberts J’ judgment is understood – because they had been paid from funds provided by Q.
In Gavin Edmundson Lord Briggs in the Supreme Court (with whom the four justices with him all agreed) started his judgment as follows (approved and explained still further by Bott & Co Solicitors Ltd v Ryanair DAC  UKSC 8 (16 March 2022): see especially the judgment of Lord Burrows at –):
' This appeal tests the limits, in a modern context, of the long-established remedy known as the solicitor’s equitable lien. In its traditional form it is the means whereby equity provides a form of security for the recovery by solicitors of their agreed charges for the successful conduct of litigation, out of the fruits of that litigation. It is a judge-made remedy, motivated not by any fondness for solicitors as fellow lawyers or even as officers of the court, but rather because it promotes access to justice….'
If funders were to be treated as standing in the shoes of solicitors, as the Legal Aid Agency does, the following passage could be of interest to Q and other funders. Lord Briggs continued his previous passage by looking at solicitors funding of cases help those who ‘lack the financial resources’:
' … Specifically it enables solicitors to offer litigation services on credit to clients who, although they have a meritorious case, lack the financial resources to pay up front for its pursuit. It is called a solicitor’s lien because solicitors used to have a virtual monopoly on the pursuit of litigation in the higher courts. Nothing in this judgment should be read as deciding whether the relaxation of that monopoly means that the lien is still limited only to solicitors.'
The proviso to Solicitors Act 1974 s 73(1) (above) in effect sets out an anti-avoidance provision. If a third party meddles with property in such a way as to seek to avoid the charge operating, they may find their transaction set aside; and if that third party had notice that the charge applied or might apply.
In Khans Solicitors (a Firm) v Chifuntwe  EWCA Civ 481,  1 WLR 1185 the Treasury paid an order for costs direct to the solicitors’ former clients. The Court of Appeal dealt with the position of a defendant who knew of a claimant’s costs entitlement and made a decision to evade the lien. They explained their understanding of the law, by reference to Lord Denning MR in Manley as follows:
'… He derived from the authorities a unitary proposition, at p 347, that: “if the defendant had notice of the solicitor’s lien, and made the agreement with the plaintiff collusively so as to deprive the solicitor of his lien, then the solicitor can recover from the defendant his costs …”
 In our judgment, the law is today (and, in our view, has been for fully two centuries) that the court will intervene to protect a solicitor’s claim on funds recovered or due to be recovered by a client or former client if (a) the paying party is colluding with the client to cheat the solicitor of his fees, or (b) the paying party is on notice that the other party’s solicitor has a claim on the funds for outstanding fees. The form of protection ought to be preventive but may in a proper case take the form of dual payment.'
The ‘collusion’ element surely is the underlying aspect of Q’s position with LS.
Funders: will equity permit them a lien?
The question must be whether the court has sufficient concern for promoting access to justice to say that equity should override the deal in the LS v HS case and set aside the order. It can then be reconsidered on the basis that LS has sufficient to pay her funders.
How much reading of without prejudice rule correspondence is needed for that set aside application is questionable? It is a matter for equity and the law based on the facts of the consent order (as in Manly) which dictates how Q and its financing should be dealt with. And Lord Brigg’s introductory comments are essential elements in that.
In LS there were no funds on the basis of what the parties agreed; but if the appeal against Parker J’s order had gone ahead, there would have been assets on which the charge could attach. If it is found that the deal was done to evade LS’s liability to her funders there would be similarity with Dr Manley’s case, in which the deal was done to avoid his liability to The Law Society under the legal aid statutory charge.
4 March 2022