Litigation Funding: Status and Issues

Abstract

Litigation funding is new and topical. It has the capacity to significantly alter the litigation scene. It gives rise to particular issues that need understanding and attention. It is relevant only in certain situations, and while it is not a possible solution to all types of claims it has the potential to significantly increase opportunities to pursue certain claims. The basic model of litigation funding is an investment business based on securing an appropriate return on investment. It is not a banking loan as no interest is charged, and not insurance as no premium is charged. Investment is made in any case that has a sufficient prospect of success on its merits, and has a strong legal team with a convincing case strategy. In some types of offering, however, the model of litigation funding can appear to be more like the provision of legal services. This is where a funder, sometimes from a legal services background, conducts a detailed assessment of the legal merits of a case (including obtaining or providing specialist legal advice on the case) prior to agreeing to funding. Funders determine the risk, and ultimately the extent of the investment, based on an assessment of the merits of the case, the solvency of the defendant (or, in the case of a funded defendant, the resources of the claimant) and the size of the claim and likely return. However, during this research the contrary view that litigation funding is part of the legal services market has been raised. Arguably the nature of the funding being offered and background of the funder (i.e. whether legal services or insurance/financial sector) can be factor. This research examines the current structure of the litigation funding market and the types of product on offer. Litigation funding can apply advanced banking techniques to a legal claim, treating it like any other valuable asset and applying the same risk assessment techniques in determining the level of finance offered. The initial phase of 3rd party litigation funding is an exploratory affair where both the funder and the client are seeking partners in spreading risk and distributing reward. The funder cannot make such a decision without detailed assessment of the legal and factual matrix of the case and its prospects of success (and would perhaps be foolish to proceed without such an exercise) and although the funder might share such insights with the prospective client, they are essentially the funder's work product. The development of the litigation funding market has thus merely recognised an expanded use for a new asset class (claims or defences) and opened up a new market for associated finance. Litigation funding is currently a bespoke product tailored to the needs of the specific market and legal jurisdiction. There are thus, difference conceptions of litigation funding in the UK, mainland Europe, Australia, Canada, the US and South Africa. Within the UK there are examples of co-funding or risk spreading so that some funders may jointly fund a large case, and some arrangements may involve various companies providing different packets of finance or insurance. The principal constraint on the development of litigation funding is traditional public policy against funding others’ litigation or intermeddling in the conduct of litigation (the concepts of maintenance and champerty discussed later in this report). However, such rules are being reformed in some jurisdictions, although no consistency has 2 emerged over what the emerging policy and principles should be, and different jurisdictions are making different reforms at different speeds (or not doing so). This research examines the status of litigation third party funding, the different funding models currently in use and assesses the historical development of third party funding and the legislative and policy considerations that inform the current market. In doing so, it draws conclusions on the potential of litigation funding to increase access to justice in light of current policy changes in the provision of legal services.