Third-Party Funding: Is Funding of Commercial Litigation Permissible in Singapore?
It is a commonly held view that third-party funding in Singapore is only permissible in international arbitration and insolvency cases. However, a close reading of Singapore case law suggests that public policy allows funding of commercial litigation as well.
2017 marked a watershed in third-party litigation funding in Singapore with the amendment of the Civil Law Act (CLA) to abolish the antiquated torts of maintenance and champerty and expressly permit the funding of international arbitration.
In parallel, the Singapore courts have confirmed the validity of third-party funding in the insolvency context, clarifying the effect of the CLA amendments and the residual impact of the prohibitions against maintenance and champerty to the extent they still apply in Singapore as matters of public policy.
This article discusses the evolving nature of the prohibitions against maintenance and champerty and suggests that, as a matter of public policy, a properly structured arrangement for the funding of commercial litigation in Singapore would not, per se, amount to maintenance or champerty, or contravene public policy in Singapore. Such an arrangement would thus be valid and enforceable as a matter of Singapore law.
Maintenance and Champerty: A Doctrine of Antiquity?
The historic prohibition on litigation funding may be traced to the medieval feudal system in England, where barons sought to fight their legal battles as they would their private feuds. The law thus became an instrument of oppression as these individuals sought to intimidate judges and court officials at sword point, suborn witnesses and support the prosecution of worthless claims against defendants who lacked the resources and influence to withstand them.
It was against this background that the doctrine of maintenance was developed to curb such abuses and protect the integrity of the judicial process. Maintenance is the giving of assistance or encouragement to one of the parties to litigation by a person who has no justifiable interest in its outcome.1Re Vanguard Energy Pte Ltd (2015) 4 SLR 597 at (33). Champerty is an aggravated form of maintenance, whereby a maintainer takes a share in the proceeds or subject matter of the action.2Lim Lie Hoa v Ong Jane Rebecca (1997) 1 SLR(R) 775 at (23).
Following the Statute of Westminster (1275), maintenance and champerty were criminal offences as well as torts in England until the passage of the Criminal Law Act 1967 (1967 Act). That was because, as the centuries (and barons) passed, the courts became stronger and more resilient to the sorts of abuse that the doctrine sought to check. Yet, maintenance and champerty clung on to vestigial life: the 1967 Act provided that contracts could be invalidated if they were contrary to public policy or otherwise illegal.
Public policy, however, is not static and is a continually evolving concept: as the House of Lords noted, “[i]n the context of public justice, contemporary public policy needs to reflect the legislature’s and society’s attitude to the maintenance of litigation.”3Giles v Thompson (1994) 1 AC 142 at 149. See also Hill v Archbold (1967) 3 All ER 110, per Lord Denning MR: “Much maintenance is considered justifiable today which would in 1914 have been considered obnoxious. Most of the actions in our courts are supported by some association or other, or by the state itself. Comparatively few litigants bring suits, or defend them, at their own expense. Most claims by workmen against their employers are paid for by a trade union. Most defences of motorists are paid for by insurance companies. This is perfectly justifiable and is accepted by everyone as lawful, provided always that the one who supports the litigation, if it fails, pays the costs of the other side.” (emphasis added)
In modern litigation, it is both common and acceptable for third parties with no direct interest in the outcome of a case, such as insurers, trade unions or lawyers under a legitimate conditional fee arrangement, to maintain litigation. This is significant because it reflects the shift in contemporary attitudes away from the historic concerns underpinning maintenance and champerty, toward a policy favouring access to justice. The increasing acceptance of third-party funding, where a professional funder assumes the legal costs of a litigant in exchange for a share in the proceeds or commercial benefit if the case is successful, further exemplifies this shift.
Clarifying the Scope and Applicability of the Rules Against Maintenance and Champerty: The Singapore Court’s Approach
Like the 1967 Act, the amendments to the CLA abolished the torts of maintenance and champerty, but allowed the doctrine to subsist residually as a means to avoid a contract on public policy grounds.4Section 5A. But, when may a contract be invalidated on such grounds? To answer this question, it is useful to examine several decisions of the Singapore High Court (HC) in the insolvency context.
The starting point is the seminal decision in Re Vanguard Energy Pte Ltd5(2015) 4 SLR 597. (Vanguard), which pre-dates the changes to the statutory regime. Under an assignment agreement, the proceeds received by the company from pending or potential claims would be sold by the liquidator to the assignees (ie, the funders, who happened to be the shareholders of the company rather than a third-party funder) by way of assignment (the Assigned Property) in consideration for their funding. Without such funding, the company could not pursue these claims.
Apart from holding that the doctrine of maintenance and champerty did not apply to the liquidator’s statutory power of sale,6Pursuant to section 272(2)(c) of the Companies Act because it is a statutory power of sale and thus a statutory exception to the rules as to maintenance and champerty. Chua Lee Ming JC (as he then was), found that the assignment agreement itself did not offend the doctrine of maintenance and champerty. After considering leading cases in Australia, England and Hong Kong, the Court found:7Paragraphs, 43, 46, 47 and 49.
“… an assignment of a bare cause of action (or the fruits of such actions) will not be struck down if:
- it is incidental to a transfer of property; or
- the assignee has a legitimate interest in the outcome of the litigation; or
- there is no realistic possibility that the administration of justice may suffer as a result of the assignment. In this regard, the following should be considered:
- whether the assignment conflicts with existing public policy that is directed to protecting the purity of justice or the due administration of justice, and the interests of vulnerable litigants; and
- the policy in favour of ensuring access to justice.
In my view, the relevant public policy in this case is that of protecting the purity of justice and the interests of vulnerable litigants. There is nothing in the Assignment Agreement that is objectionable from either perspective. The purity of justice is protected in that the Liquidators have full control of the legal proceedings and the Assignees’ agreement is required only on the choice of solicitors and on any settlement or discontinuance of any Claim. The Assignees are not in any position to influence the outcome of the litigation on the Claims. As for the Company’s or creditors’ interests, without the funding, the Company would not be able to pursue the Claims. The prospects of the Claims succeeding are not illusory, and success in the Claims would result in more assets for distribution to the Company’s creditors.
I also noted that the Assignees will recover only the amounts funded by them (if the Claims are successful), and this only after the Company’s Co-Funding has been repaid first. This fact made the case for upholding the Assignment Agreement stronger, although I do not think it would be fatal even if the Assignees were to be entitled to a share in the Recovery exceeding the amount they funded. Realistically speaking, litigation funders would expect to be compensated for the risks they are taking. Considering all the circumstances, I could not find anything in this case that could be said to amount to wanton intermeddling or to involve trafficking in litigation. In my view, upholding the Assignment Agreement would not be contrary to public policy.
Finally, I would add that, for the same reasons, the Funding Agreement8The parties had initially recorded their commercial arrangement in a Funding Agreement, which was replaced by the Assignment Agreement in order to take advantage of provisions permitting the assignment of assets under Singapore insolvency legislation. would not have run foul of the doctrine of maintenance and champerty.”
A close reading of Vanguard reveals that Chua JC considered both policy considerations in (c) above. As for the protection of the purity of justice and the interests of vulnerable litigants, he found that the Assignment Agreement was not objectionable from either perspective: the liquidators had full control of the legal proceedings (with the assignees only having a say on the choice of solicitors and any settlement or discontinuance of a claim) and the assignees were not in a position to influence the outcome of the litigation. As for the policy ensuring access to justice, without funding the company could not pursue the claims, the prospects of success of which were not illusory and would result in more assets for distribution to the creditors.9Vanguard at (46).
Two further observations in Vanguard bear mentioning. First, it was not necessary for a third-party funder to have a “genuine commercial interest” in the outcome of a case; rather, the public policy test is broader and purposive in nature.10At (41). Second, it would not have been objectionable for the assignees to recover an amount exceeding what they had funded because litigation funders would be expected to be compensated for the risks they were taking.11At (47). The assignees/shareholders only sought to recover the amounts funded by them.
Although this decision was given in the context of claims arising out of an insolvency, the Court’s observations in respect of these public policy considerations are general in nature and may be considered of equal application outside of the insolvency context. Applying these principles, a litigation funding agreement should be valid and enforceable as a matter of public policy, provided the administration of justice and the interests of vulnerable litigants are protected. In particular:
- the claimant should retain ultimate control of the proceedings (the funder may influence the choice of lawyers, settlement or discontinuance);
- the prospects of succeeding must not be illusory; and
- the funder’s involvement in the case should provide a genuine benefit to the claimant and should not amount to wanton intermeddling or trafficking in litigation.
In a subsequent unreported decision in 2018, Chua JC declared that a funding agreement between IMF Bentham (a professional third-party litigation funder) and the liquidators of Trikomsel Pte Ltd did not offend the common law on maintenance and champerty, presumably applying the same policy considerations above.12SGX announcement available at: http://infopub.sgx.com/FileOpen/20181109_%20Outcome%20of%20HCOS%209892018.ashx?App=Announcement&FileID=524725.
In Solvadis Commodity Chemical Gmbh v Affert Resources Pte Ltd13(2018) SGHC 210. (Solvadis), the HC adopted the public policy analysis in Vanguard in a different context: reviewing the validity of a liquidator’s exercise of its statutory right to assign whole causes of action to a funder. Lim JC found that neither the purity of justice nor the interests of vulnerable litigants were affected because the liquidator had acted in good faith: the company would not incur the costs of recovery which would be borne by the funder, other funders which the liquidator approached were disinclined to providing funding, the company stood to obtain 40 per cent to 50 per cent of the recoveries, and while the liquidator relinquished control to the funder over the recovery actions, the funder still had to provide regular updates to the liquidator, could not make further assignments and had to sell the assigned causes of actions/receivables back to liquidator for nominal value if it did not commence recovery actions within a certain time.
Further, like Vanguard, Solvandis recognised that the doctrine of maintenance and champerty would not be offended simply because a third party made a profit. Indeed, such arrangements served a public interest because it allowed insolvent companies to pursue legal remedies against debtors which they would otherwise be unable to.
Re Fan Kow Hin14(2018) SGHC 257. (Fan) made further inroads into the doctrine of champerty and maintenance. In upholding an assignment agreement where the fruits of the litigation were assigned by trustees in bankruptcy to a third-party funder, Aedit Abdullah J held that it was not contrary to public policy as being champertous or in maintenance because it was aimed at providing access to justice where no other option for litigation funding would be viable.15At (5). In his view, the profit motive of a third-party funder is not objectionable. Rather, what cannot be countenanced is the sole focus on such a motive to the detriment of the administration of justice, and that public interest is safeguarded by the criteria set out in Re Vanguard.
It is also significant that Abdullah J held that the 2017 amendments to the CLA were not intended to be exhaustive. While the funding of international arbitration and related proceedings are expressly permitted under the corresponding CLA regulations, this does not preclude the funding of other dispute categories. Parliament had left to the courts the ongoing interpretation of public policy, including the residual effect (if any) of the maintenance and champerty doctrine on the enforceability of contracts.16At (31). In other words, third-party funding of proceedings apart from international arbitration and related court and mediation proceedings is permissible, provided that they do not offend the rule against champerty and maintenance which, in turn, is to be decided by the Court. This is certainly welcome guidance for litigation funders.
A Case for the Use of Third-Party Funding in General Commercial Litigation?
Arguably, the cases above provide clear guidance as to where public policy currently stands on this issue in Singapore, which is consistent with similar case law in Australia and England where the funding of commercial litigation is generally accepted. That said, each of the four cases above arises out of the insolvency context.
In making the case for the use of third-party funding in commercial cases other than in the context of international arbitration or insolvency, the real question is this: Will the administration of justice suffer if third-party funding is permitted in such a case? It is suggested that the answer is no.
First, the doctrine of maintenance and champerty is antiquated. It was developed in an era when “(t)he mechanisms of justice lacked the internal strength to resist the oppression of private individuals through suits fomented and sustained by unscrupulous men of power.”17Giles v Thompson (1994) 1 AC 142. But today, courts are far more robust and can hold an unscrupulous third party accountable by existing doctrines of abuse of process and other procedural or substantive measures. In this regard, the Australian High Court’s observations in Campbells Cash and Carry Pty Ltd v Fostif Pty Ltd (2006) 229 CLR 386 are apposite:
“As for fears that “the funder’s intervention will be inimical to the due administration of justice”18Clairs Keeley (2004) 29 WAR 479 at 502 (125)., whether because “[t]he greater the share of the spoils … the greater the temptation to stray from the path of rectitude”19R (Factortame Ltd) v Secretary of State for Transport, Local Government and the Regions (No 8) (2003) QB 381 at 413 (85). or for some other reason, it is necessary first to identify what exactly is feared. In particular, what exactly is the corruption of the processes of the Court that is feared? It was said, in In re Trepca Mines Ltd (No 2),20(1963) Ch 199 at 219‑220. that “[t]he common law fears that the champertous maintainer might be tempted, for his own personal gain, to inflame the damages, to suppress evidence, or even to suborn witnesses“. Why is that fear not sufficiently addressed by existing doctrines of abuse of process and other procedural and substantive elements of the court’s processes? And if lawyers undertake obligations that may give rise to conflicting duties there is no reason proffered for concluding that present rules regulating lawyers’ duties to the court and to clients are insufficient to meet the difficulties that are suggested might arise.” (emphasis added)
For instance, the Court may order costs against a third party if it is just in the circumstances, such as where the third party effectively controls and funds the proceedings and causes the costs in question to be incurred. If an impecunious claimant brings an unmeritorious claim, the court may order that it furnish security for costs; a third-party funder which stands behind such a claimant would have to provide funding to satisfy the order for security for costs, failing which the claim would be stayed. A frivolous and vexatious claim might even be struck out. The Prevention of Corruption Act and Penal Code criminalise the bribery of judges and witnesses.
Second, the rationale for permitting third-party funding in international arbitration was because “those involved are typically well-advised, commercially sophisticated and better able to bear the reduction in damages.”21See the (then) Senior Minister of State for Law’s statements in the parliamentary debates over the amendment to the CLA cited in Fan at (32). In other words, the administration of justice was unlikely to suffer. If so, then third-party funding ought to be allowed in litigation where a claimant is legally advised and commercially sophisticated. This is especially so if the funder does not have control over the proceedings or influence over its outcome, save perhaps on limited issues such as settlement or selection of counsel, and where it assumes liability for adverse costs and thus be subject to the Court’s coercive powers.
Third, a case in which access to justice considerations arise would naturally lend itself to funding. Pursuing a claim which requires the marshalling of substantial resources might cause ordinary claimants to abandon hope where they otherwise had justifiable prospects of success. The cases above demonstrate that the Singapore courts accord due weight to such considerations, which is encouraging.
A third-party funding agreement is, by itself, not an abuse of process. The potential grounds on which a funding agreement might be found to be abusive and thus injurious to the administration of justice are, in reality, very limited in scope and the Court already possesses powers to deter and sanction such conduct. Permitting such arrangements would also be consistent with the policy shift toward allowing the indigent litigant access to justice.
|↑1||Re Vanguard Energy Pte Ltd (2015) 4 SLR 597 at (33).|
|↑2||Lim Lie Hoa v Ong Jane Rebecca (1997) 1 SLR(R) 775 at (23).|
|↑3||Giles v Thompson (1994) 1 AC 142 at 149. See also Hill v Archbold (1967) 3 All ER 110, per Lord Denning MR: “Much maintenance is considered justifiable today which would in 1914 have been considered obnoxious. Most of the actions in our courts are supported by some association or other, or by the state itself. Comparatively few litigants bring suits, or defend them, at their own expense. Most claims by workmen against their employers are paid for by a trade union. Most defences of motorists are paid for by insurance companies. This is perfectly justifiable and is accepted by everyone as lawful, provided always that the one who supports the litigation, if it fails, pays the costs of the other side.” (emphasis added)|
|↑5||(2015) 4 SLR 597.|
|↑6||Pursuant to section 272(2)(c) of the Companies Act because it is a statutory power of sale and thus a statutory exception to the rules as to maintenance and champerty.|
|↑7||Paragraphs, 43, 46, 47 and 49.|
|↑8||The parties had initially recorded their commercial arrangement in a Funding Agreement, which was replaced by the Assignment Agreement in order to take advantage of provisions permitting the assignment of assets under Singapore insolvency legislation.|
|↑9||Vanguard at (46).|
|↑11||At (47). The assignees/shareholders only sought to recover the amounts funded by them.|
|↑12||SGX announcement available at: http://infopub.sgx.com/FileOpen/20181109_%20Outcome%20of%20HCOS%209892018.ashx?App=Announcement&FileID=524725.|
|↑13||(2018) SGHC 210.|
|↑14||(2018) SGHC 257.|
|↑17||Giles v Thompson (1994) 1 AC 142.|
|↑18||Clairs Keeley (2004) 29 WAR 479 at 502 (125).|
|↑19||R (Factortame Ltd) v Secretary of State for Transport, Local Government and the Regions (No 8) (2003) QB 381 at 413 (85).|
|↑20||(1963) Ch 199 at 219‑220.|
|↑21||See the (then) Senior Minister of State for Law’s statements in the parliamentary debates over the amendment to the CLA cited in Fan at (32).|