Post Office scandal shows value of litigation funds
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Warriors for social justice or profiteering ambulance chasers? The world of private litigation funding will rarely get a better case in their favour than the Post Office one.
The verdict last week quashed the criminal convictions of 39 sub-postmasters. It was the culmination of years of legal wrangling and decades of injustice in which the state-owned Post Office criminalised hundreds of its own staff, ruining lives and livelihoods and causing untold heartache to those accused of false accounting because of flaws in the IT system.
The former Post Office chief executive Paula Vennells this week stepped down from the boards of Wm Morrison and Dunelm, and from her duties as a Church of England minister. She had also sat on a group advising the Church on ethical investing.
Under her leadership from 2012 to 2019 the Post Office took an aggressive legal strategy against a civil case brought by 550 sub-postmasters, dragging out litigation and driving up costs, even as evidence mounted that the Horizon system was at fault. It was the outcome of the civil case that unlocked last week’s result.
On the other side of the scorched earth legal strategy was a team backed by a litigation fund, a type of case financing historically associated with the hedge fund world and sometimes derided as ethically questionable or even a threat to the legal system.
The two are connected. High court battles are astronomically expensive. Defendants try to drive a wedge between claimants and third-party funders by running up costs and delaying tactics, in the hope the latter might walk. Funders, such as Therium in the Post Office case, face total loss if a case goes against them and can be called upon for more money as costs ratchet up (even as expected claims fall).
That is one reason this type of funding doesn’t come cheap. Funders receive their investment back, plus a multiple of their costs or a share of the eventual award. Given that the “loser pays” UK model rarely covers all legal costs, this also diminishes the pot left for the claimants.
In the Post Office civil case, the sub-postmasters were left with £12m to share from a £58m settlement. Further civil cases are likely to follow.
The reality is that without the grubby sounding involvement of profit-seeking money, this case and many others would never make it to court. Contingent fee deals — where lawyers effectively finance cases upfront through no win-no fee structures — are less common in the UK than in the US.
Therium financed the unsuccessful lawsuit by 6,000 shareholders against Lloyds Banking Group over its 2008 acquisition of HBOS. More recently another fund, Harbour, backed the case to force insurers to pay out on business interruption policies during the pandemic.
The sector’s image hasn’t been helped by questions around Burford Capital’s accounting practices, probed by shortseller Muddy Waters in 2019; nor arguably by its involvement in some high-profile divorce cases.
Indeed, as more institutional money comes into the sector looking for uncorrelated returns, there is a danger of too much cash hunting for good cases. Only a tiny proportion of overall cases are third-party funded. But new figures from law firm RPC put the pipeline of cases and cash to be invested at £2bn, nearly four times the amount four years ago.
Funders will need to be creative in seeking out new opportunities, argues RPC. The sector could usefully develop its pricing models to take on cases with claims of less than £10m-£20m, says Tets Ishikawa of Lionfish Litigation Finance, with most funding dollars now chasing the biggest cases.
The further the sector moves beyond its commercial roots, the more calls there will be for regulation. The government in 2017 said the market was at an “early stage in its development” and the industry argues that these are agreements between parties all represented by lawyers. But the effectiveness of a five-page code of conduct, a voluntary one at that, should be questioned as the sector grows in influence.
Calls for greater scrutiny, though, have sometimes stemmed simply from a distaste for what is seen as an American concept infiltrating UK justice. For a start, the loser pays rule deters the type of ambulance-chasing claims seen in the US. And if the Post Office shows anything, it is that when it comes to challenging appalling behaviour by a deep-pocketed establishment entity, some private firepower is essential.
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