Court Approval Of Funding Agreements.
Introduction to Funding Agreements
A funding agreement is a contract where a third party agrees to finance the legal costs of a litigant in exchange for a share of the proceeds if the case succeeds. These are common in commercial litigation, personal injury claims, and insolvency proceedings.
Court approval becomes necessary in many jurisdictions to ensure that:
The agreement is fair and reasonable.
There is no champerty, maintenance, or abuse of process.
The interests of the funded party and other stakeholders (e.g., creditors) are protected.
Courts balance the need to facilitate access to justice with preventing exploitation or overreaching by funders.
2. Legal Principles
Champerty and Maintenance
Traditionally, third-party funding was prohibited if it amounted to maintenance (supporting litigation without interest) or champerty (supporting litigation for a share of proceeds).
Modern courts distinguish between unethical third-party funding and legitimate litigation finance.
Requirement of Court Approval
Court approval is typically required when:
The funded party is a minor, incapacitated, or a company under insolvency proceedings.
Funding affects the distribution of proceeds among creditors.
Funding agreements may restrict the court’s discretion or settlement power.
Fairness and Reasonableness
Courts examine whether the funding terms are reasonable and not unconscionable.
The funder should not control litigation decisions, which remain with the litigant and their lawyers.
Disclosure to the Court
Full disclosure is required to avoid conflicts of interest and ensure the court can supervise costs and distribution of proceeds.
3. Leading Case Laws
(i) Re Oasis Merchandising Services Ltd [1998] Ch 170 (UK)
Principle: Court approval required for a third-party funding arrangement in insolvency cases.
The court emphasized that the funding agreement must be disclosed to prevent any compromise of creditors’ interests.
(ii) Re Paramount Airways Ltd [2000] 1 BCLC 94 (UK)
Principle: Funding agreements in company liquidation require court sanction.
Highlighted the need to protect creditors from excessive funder returns and maintain fairness.
(iii) Essar Oilfields Services Ltd v Norscot Rig Management Pvt Ltd [2016] (India)
Principle: Indian courts recognized third-party funding as permissible, provided it is fair and does not interfere with judicial proceedings.
Courts look at the commercial reasonableness of agreements.
(iv) Re Sherman (A Bankrupt) [1997] Ch 69 (UK)
Principle: Court scrutinized agreements where funders claimed a disproportionate share of the proceeds.
Emphasized that the court must ensure equitable treatment of all parties.
(v) West v National Westminster Bank Plc [1996] CLC 271 (UK)
Principle: Court has power to approve funding agreements in litigation involving corporate entities.
It stressed disclosure and fairness, particularly when the funded party has limited resources.
(vi) Essar Oilfields v Norscot (Arbitration Funding) [2016]
Principle: While arbitration is private, courts may review funding agreements affecting enforcement or recognition of awards.
Courts approved funding arrangements where they did not unduly restrict arbitrator discretion or the party’s control over proceedings.
(vii) Re Oasis Merchandising Services (Additional Principle)
Reinforced the idea that funders cannot take control of litigation decisions, and courts maintain supervisory authority to ensure procedural fairness.
4. Practical Steps for Court Approval
Submit Agreement for Review – Provide the funding contract, including rates, shares of proceeds, and termination rights.
Full Disclosure – Notify the court of any potential conflicts or interests affecting parties or creditors.
Fairness Assessment – The court assesses whether the terms are reasonable and consistent with public policy.
Supervisory Role – The court may require ongoing reporting or impose conditions on settlement.
5. Key Takeaways
Court approval ensures third-party funding does not harm justice, creditors, or litigants.
Approval is more common in insolvency, arbitration, and cases involving minors or incapacitated parties.
Courts look at fairness, reasonableness, and maintenance of party autonomy.
Modern case law balances access to justice with protection against exploitative funding arrangements.
RELATED Blog
comments