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Splitting it Three Ways: The Case of Third Party Litigation Funding in Kenya

Francois-Marie d’Arouet, better known by his pen name Voltaire, consistently repulsed efforts by his father nudging him towards the pursuit of law as a profession. As if Voltaire’s rebuffs of his father’s

(himself a lawyer) career advice was not enough, Voltaire went on to famously criticise the very notion of a lawsuit when he lamented thus: “I was never ruined but twice: once when I lost a lawsuit, and once when I won one.”

In his brooding, perhaps Voltaire was merely speaking to the ugly side of litigation, where both the winner and loser of a lawsuit are prone to incur significant costs. Perhaps, looking through the lens of Voltaire’s eyes, lawsuits were too time-consuming and acrimonious for him. Or perhaps he was just disillusioned with the process of trying a lawsuit, which sometimes bears no resemblance to the notion of justice as sought by the aggrieved party. Whatever informed Voltaire’s view, it is generally accepted that a litigant would be ‘less ruined’ if the legal costs payable are contingent on the outcome of the dispute, or are borne by a third-party. Such considerations have enkindled and spurred the concept of third-party funding in dispute resolution.

Definition of Third-Party Funding

Despite the existence of various definitions, third-party funding may be aptly described as “an arrangement between a litigant and a third-party with no prior interest to the legal dispute in which the third-party agrees to fund the litigant’s costs in consideration of a percentage of the damages awarded to the litigant”.

In some jurisdictions, such arrangements may be likened to contingency fee agreements known as champerty, where lawyers charge fees based on the outcome of the case and agree to split or share

the award recovered by their clients in a certain ratio or percentage. Ardent proponents of these arrangements insist that they enhance access to justice, reduce the risk of loss by the litigant, and rule out  frivolous suits given that the third-party is likely to fund only claims with a reasonable chance of success. On the flip side, the third-party funder would be the party to bear the financial brunt of the lawsuit, as the litigant does not have to repay the funding, should the suit be unsuccessful.

Historical Perception and Global Trends

Historically, litigation financing arrangements i.e., champerty and maintenance, were unenforceable under common law, as they were considered to be against public policy. For instance, in British Cash

& Parcel Conveyors Ltd v Lamson Store Service Co Ltd [1908] 1 K.B. 1006, it was held that “maintenance and champerty are founded on the principle that no encouragement should be given to litigation by the introduction of parties to enforce those rights which others are not disposed to enforce…the law of maintenance as I understand it is confined to cases where a man improperly, and for the purposes of stirring up litigation and strife, encourages others either to bring actions or make defences which

they have no right to make.”

In view of the global economic uncertainty and the upsurge of international commercial litigation, common law jurisdictions have over the years grown receptive to the notion of litigation financing, and a number of countries have legislated on the legality and enforceability of such arrangements. Equally, some arbitral institutions have recognised third-party financing as an essential feature of moder dispute resolution process in the international arbitration landscape. For instance, the International Chamber of Commerce Arbitration Rules 2021, under Article 11(7), encourage non-party or third-party financing, subject to certain requirements on disclosure and transparency.

These notable gains notwithstanding, it may be argued that the recent majority decision of the Supreme Court of the United Kingdom has eroded the bright outlook of litigation financing in R (on

the application of PACCAR Inc and others) v Competition Appeal Tribunal and others [2023] EWCA Civ 299 by holding that arrangements which entitle a third-party funder to recover a percentage of

the damages awarded constitute “damage-based agreements” and are thus unenforceable if they fail to meet the statutory requirements for such agreements. The import of this decision is that most funders in the United Kingdom will have to review and interrogate the extent to which their current litigation financing arrangements are statutorily compliant and enforceable.

Moreover, going forward, litigants seeking litigation financing should undertake a rigorous due diligence exercise on the third-party funder just as the funder would, to ensure the arrangements comply with relevant statutory schemes of regulation as far as damages-based agreements are concerned.

The Position in Kenya

Despite the progress made in various jurisdictions, such as the United Kingdom, Australia, Nigeria, and Singapore, in recognising third-party financing both as an investment opportunity and a catalyst for access to justice, Kenya, just like many common law jurisdictions, prohibits these arrangements, including contingent fee agreements.

Section 46 of the Advocates Act (Cap. 16) Laws of Kenya and the Law Society of Kenya Code of Standard of Professional Practice and Ethical Conduct 2016 regard such agreements as invalid and unenforceable. Kenyan litigants must therefore fund their legal costs or seek legal aid from non-profit organisations who not only offer legal services but also procure Advocates to render services for litigants ordinarily on a pro bono basis.

Given the current trends where costs for commencing and sustaining international commercial arbitration or litigation are on the rise, it is arguable that Kenya is ready for the recognition of third-party financing. It is probable that to catch up with comparative jurisdictions such as the United Kingdom, Australia, and Nigeria, Kenya may soon loosen the grip on the unenforceability of litigation financing, marking a new dawn in the country’s litigation history, particularly in

the arbitration space. Such a bold step would certainly spearhead the realisation of Article 48 of the Constitution of Kenya, 2010 which mandates the state to ensure access to justice to all persons despite the constraints of legal fees and associated costs.

Kenya cannot, however, clamour for the recognition of litigation financing without critically looking into its overstated fears. Critics believe that litigation financing would erode the very foundation of

the practice of law, which maintains that legal practice is a profession and not a business.

Some maintain that dampening the grip on the invalidity of litigation financing would prioritise the monetization of legal claims at the expense of justice. It is also believed that litigation financing might lead to an increase in unmeritorious or frivolous claims as well as an undisclosed conflict of interest between the parties involved. Party autonomy over the course of the litigation would also be ceded to the third-party funder, who would naturally want to have a say on the course that litigation would follow, the strategy deployed and even the choice of Advocate to be engaged.

Whatever the concerns, it is possible to allay or mitigate against the risks or downsides through regulation. For instance, in the aforementioned decision by the United Kingdom Supreme Court in R (on the application of PACCAR Inc and others) v Competition Appeal Tribunal,

it was held that for litigation funding arrangements to be enforceable, they must meet the mandatory requirements prescribed in law, being inter alia:

  • The agreement must be in writing.
  • The funder must be a person of a description prescribed by the Secretary of State.
  • The sum to be paid by the litigant must consist of any costs payable to him in respect of the proceedings which the agreement relates together with an amount calculated by reference to the

funder’s anticipated expenditure in funding the provision of the services.

  • The amount must not exceed such percentage of that anticipated expenditure as may be prescribed by the Secretary of State in relation to proceedings of the description to which the agreement related.

It would also be prudent to encourage self-regulation by the third-party funder through developing a code of conduct to be observed by them, and by the same token, establishing an association for the said funders to regulate and ensure compliance with the code of conduct.

Conclusion

Third-party funding in both arbitration and litigation is poised to inhere itself within the international commercial disputes landscape. Kenya should thus take cognizance of the changing tides and perhaps borrow a leaf from other common law jurisdictions, such as Nigeria, which have adapted to the times and now allow for third-party funding.