Worldwide: Third-Party Litigation Funding Revolutionizing Commercial Litigation, Despite Some Challenges In Common Law

Last Updated: June 8 2016
Article by Lincoln Caylor and Ranjan K. Agarwal

One of the most critical developments in civil – and potentially, commercial – litigation in recent years has been the growth of third-party financing of legal costs for cases that might not otherwise have their day in court. Originating in Australia and the UK more than a decade ago, third-party litigation funding agreements (LFAs), in which institutions offer financing for a percentage of any monetary recovery in the case, are enabling plaintiffs to seek justice through court actions that otherwise would be cost-prohibitive. This includes fraud, environmental, and corporate cases worldwide.

Several recent news events illustrate the dramatic paradigm shift that third-party funding can bring even to complex commercial litigation, where the parties typically bear preemptive upfront costs just to determine the merits of mounting a case.

  • On May 3, Burford Capital reported  that 28 percent of law firms used litigation financing in 2016, four times the number that used it in 2013.
  • On May 15, the Wall Street Journal reported that Los Angeles trial lawyer Raymond Boucher, architect of a $660 million settlement for California clergy-abuse victims, has taken out several million dollars in funding from publicly-traded litigation financer IMF Bentham, Ltd.
  • In February, Burford Capital, Ltd. announced it was providing $45 million in litigation financing to British Telecom. This was a watershed event, demonstrating that outside investors using financial analysis can assess the underlying value of a company's pending portfolio of litigation and invest in that litigation's outcome. It also demonstrates that household-name corporations accustomed to using financing to maximize the value or minimize the risk associated with other forms of property can now do the same with their litigation portfolios.
  • Particularly crucial for commercial litigation, Augusta Ventures recently announced that it would fund pre-proceedings costs so often required to determine the merits of making a complex business claim.
  • The Wall Street Journal also reported that pension funds, university endowments, and private offices "have collectively pumped more than a billion dollars" into litigation finance vehicles in recent years.

In the realm of commercial litigation, contingency retainers are less common than in class actions or personal injury litigation. Thus, the associated risks and expenses fall primarily and preemptively on clients, particularly at the complex and document-heavy stages of initial pleading and discovery. It's easy to see how access to third-party funding at this pre-proceedings stage of complex litigation improves access to the judicial system and removes a significant barrier to justice.

The Persona Ruling

However, a recent ruling in a high-stakes case in Ireland shows how third-party finance can still face barriers in common law jurisdictions. In Persona Digital Telephony Ltd & Anor v. The Minister for Public Enterprise, [2016] IEHC 187, Persona claimed it lost out on a mobile phone license to a rival company, Esat Digifone, in 1996, due to a bribe paid by Esat to Irish minister for communications Michael Lowry. Persona's owner, Tony Boyle, sought a declaration from the High Court of Ireland that it was not violating Irish prohibitions against maintenance and champerty by using €10m from Harbour Litigation Funding to mount and pursue its claims against Esat, Lowry, and the Irish government.

On one hand, concerns arise whenever third-party funders are permitted to interfere with lawsuits in which they have no legitimate interest. Intermeddling in a dispute in which a third-party has no interest without justification or excuse is a legal impropriety known as maintenance and, if carried out with a view to sharing in the profits of the action, will amount to champerty. In Ireland, both maintenance and champerty are still considered to be torts, as well as criminal, offenses. And historically, these common law prohibitions have deterred the use of LFAs.

In many jurisdictions, there need not be an assignment of either the cause of action being funded by a third party, or the fruits of the action, in order for the funding to avoid falling foul of the rules of maintenance and champerty. There can simply be an agreement to fund litigation in return for a contingent percentage of any amounts recovered.

Nevertheless, Persona presented the Irish courts with an opportunity to step away from the enforcement of these ancient offenses and open the door to professional third-party litigation funding. However, the presiding judge decided that the plaintiff's constitutional right to access the court was superseded by a longstanding line of statutory authorities in the common law that she did not have jurisdiction, under the Irish separation of powers, to fundamentally alter.

While noting its lack of jurisdiction, the court also indicated that its position could be amended by a ruling by an appellate court or legislative action. And, on the positive side, the court did underscore the major value of judicial access and left the door open for constitutional challenges to the statutory offenses of maintenance and champerty in the interest of access to the justice system.

It's our opinion that courts must aim to strike a balance in governing the use of professional litigation funding, between LFAs' potential to interfere with the administration of justice and their potential to unlock greater access to justice.

The deck is often stacked against plaintiffs who dare to take on companies with deep pockets. LFAs level the playing field by providing access to the courts for parties who would not otherwise be able to litigate a case. Funders can also balance lopsided financial resources between parties and assist parties who would otherwise accept lower settlements, because they lack the financial resources to continue with the litigation. The more front-end loaded a case, the more quickly critical pre-proceeding finance will make clearer the merits of litigating it, for both plaintiffs and defendants. And any development that gets parties to a quicker determination is positive, both for the parties and for the legal system.

On the business side, professional litigation funding gives corporations and law firms a way to shed risk from their balance sheets. And for investors in such funding, rather than betting on one-off lawsuits, the largescale backing of whole portfolios of cases will allow money to be deployed faster for more consistent returns. As the LF market becomes more mature, litigation finance will become more accessible, common place and transparent.

Originally published by ICC FraudNet

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Lincoln Caylor
Ranjan K. Agarwal
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