Irish court scrutinises claims of third-party litigation funding in tax dispute

The High Court handed down a judgment which “should act as a reminder to firms that any innovative funding arrangements may ultimately be scrutinised by a court to determine whether they constitute illegal third-party litigation funding,” commercial litigation expert Lisa Carty of Pinsent Masons said.

The decision (37 pages, 383KB) arose from claims by the Collector General of the Revenue Commissioners (Revenue) against Paul Howard and Una McClean for unpaid taxes on rental income in excess of €3 million. Howard and McClean alleged that the terms of the engagement agreement between Revenue and its lawyers amounted to a third-party funding arrangement, which would have meant Revenue was not entitled to maintain the proceedings to recover the unpaid taxes.

Third party litigation funding involves someone who is not a party to a dispute providing funding for it. It is prohibited in Ireland, although-third party funding of international commercial arbitration and any court proceedings or mediation arising out of that arbitration will be permitted once a 2023 amendment to the Arbitration Act 2010 is commenced. The rules preventing third party litigation funding are those against “maintenance” and “champerty.”  Maintenance involves a third-party giving financial assistance to a party in litigation and champerty arises where the third-party who is giving the financial assistance will receive a share of the litigation proceedings.

It was claimed that a clause in the agreement between Revenue and its lawyers amounted to a champertous contingency fee agreement. The clause provided that aside from certain fees specified in the agreement, the lawyers would only be paid if legal costs due to Revenue were recovered from a relevant taxpayer. If costs were not recovered, the balance or shortfall was to be waived by the lawyers. Howard and McClean claimed that where judgment was granted to Revenue and a costs order was made, the “fruits” of the litigation would be both the tax debt and the costs, with the effect of the agreement being to confer on the lawyers a right to be paid a share of those “fruits.”

The court ruled that the proceeds of the litigation process were the unpaid taxes, surcharges, and interest, not the costs. This meant that the clause did not allow a bonus or improper profit, because the lawyers had a right to their costs. In those circumstances, the court concluded that the proceedings had not been maintained in a champertous manner. The court also rejected the claim that the agreement amounted to “a fraud on the paying party.”

Commercial litigation expert Sarah Twohig of Pinsent Masons said: “Pending any reforms in this area, it is important that firms are mindful that their engagement terms cannot be interpreted as allowing profit from the proceeds of any litigation, other than the costs fairly due.”