Interest charges

Occasionally, you come across one of those legal concepts that lurk in the more obscure reaches of the textbooks which seem to have more of a curiosity value than any practical use. Champerty is a good example. It also illustrates another characteristic of such concepts: they are often not as irrelevant as might be thought.

The legal dictionary defines champerty as a particular kind of maintenance. That is not very helpful. To put it in plain terms, champerty is "trafficking in litigation", where a person takes over or initiates a dispute which has absolutely nothing to do with them (or, in other words, in which they have no "interest") on the basis that they are going to make a profit out of it. This is contrary to public policy (another nebulous term). If a contract is found to be champertous, it is illegal and consequently of no effect.

Champerty can extend to both litigation and arbitration. This was confirmed in the Bevan Ashford decision.¹ This case also provides a useful illustration of the way in which champerty fits into the modern legal framework regarding no-win, no-fee agreements. More of this later.

The key to deciding whether an agreement is champertous is the definition of "interest", which in these circumstances is wide. There can be a pre-existing financial interest, or even an interest based on religious beliefs. If the assignee can show a "genuine and substantial commercial interest in taking the assignment and in enforcing it for his own benefit", this will avoid any implication that the agreement is champertous.²

These days, many actions are not brought by private individuals at their own expense. Some are paid for by insurance companies, others by trade unions or associations. None of these are champertous because of the existing commercial interest such organisations have in the outcome of the proceedings. If you feel the urge to donate money to support litigation or arbitration for purely altruistic motives, this would not be champertous either.

The existence of a commercial interest is now the most common ground for the decision to assist in litigation or arbitration or to sue on a contract assigned to you. The courts construe this test fairly widely, as you would expect. In fact, the court will allow you to make a profit out of the dispute provided this is not massively disproportionate to the amount (if any) you paid to obtain the right to sue.³ However you apply this test, it is clear that the commercial interest in the transaction must arise independently of, and not as a result of, the allegedly champertous agreement.

Assigning what is often called a "bare right of litigation" is champertous unless that right accompanies the assignment or transfer of the property to which it relates. So, for example, assigning the right to a dilapidations claim to A upon the transfer of the lease to B would be champertous because the right to the claim has been separated from the property (the lease) to which it refers.

So much for the theory. How does this occur in practice in the construction industry?

There are, of course, any number of situations in which the benefit of a contract might be assigned. It is common on completion and transfer of, say, a commercial development, for the benefit of the building contract to be assigned from the developer to the new owner.

It is clear that the benefit of the contract assigned to the new owner includes the right to sue on it. Suppose, however, that there were defects in the building and a good chance that someone on the contractor's team was liable. If the developer decides to sell the right to sue to someone who has no connection with the development, but who is willing to take a chance in litigating to recover a substantial profit, such an arrangement might be champertous.

More common, perhaps, is the insolvency of a construction company with genuine claims against others but no funds to enable the receivers or liquidators to proceed. It is precisely this scenario which gave rise to the Bevan Ashford decision I referred to, which confirmed that the rules relating to champerty and maintenance apply to arbitrations.

In Bevan Ashford, a construction company in liquidation had a substantial claim available in arbitration proceedings. The liquidator therefore entered into an agreement whereby solicitor Bevan Ashford would charge only disbursements if the proceedings failed but would charge disbursements and normal profit costs if it succeeded; in other words, a no-win, no-fee agreement. An insurance policy was taken out by the liquidator at the same time to pay the costs of the other side in the arbitration and a further agreement was entered into with counsel along similar lines. The issue in question was whether either or both these agreements fell within the Courts and Legal Services Act 1990 or whether they were champertous. Proceedings were issued to enable the court to consider the issues.

The court held that the agreements were neither champertous nor otherwise unlawful on grounds of public policy. Given the not uncommon situation in which Bevan Ashford, the liquidator and the company found themselves, this decision is obviously correct.

To summarise, the allegation of champerty will not apply to the majority of commercial transactions and it does not apply to the sort of no-win, no-fee agreements that were considered in the Bevan Ashford decision. This does not mean to say, however, that it has gone away entirely. There are circumstances in which it may still bite, so be careful.