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Unregulated litigation funding -- an Aussie import we can do without

US corporates have declared war on third party litigation funding in the UK. Lisa Rickard demands a code of conduct

While almost 17,000 kilometres separate Australia and the UK, one of Australia’s most insidious exports has arrived on English shores. Third-party litigation funding (TPLF), the practice of outside financiers investing in lawsuits, was developed in Australia some twenty years ago and is now growing rapidly in the UK.  Because of the many concerns related to TPLF, the UK Government should act now to mitigate the worst aspects of this practice.

Of particular concern is the way in which TPLF skews the British legal system away from its core purpose of delivering justice, towards a system based primarily on the profit incentive. Like most investors, litigation funders are primarily interested in getting returns on their investments, a goal incompatible with the values of the legal system.

In addition, if left unregulated, funders will have the ability to direct the strategy and direction of cases – threatening to withdraw funding from clients at any stage they wish, or forcing clients to continue to court when they may wish to settle. This threatens the long-standing client-lawyer relationship, potentially breaking the bonds of trust which lie at the heart of the British legal system.

Furthermore, following the pronounced increase in litigation over the last decade, third party funding will further enhance a pervasive litigation culture. This is already happening in Australia, where a major third party funder has attributed the recent increase in litigation to the expansion of TPLF. 

 

Cost of excessive litigation

 

The costs of excessive litigation are high. A recent report by the Centre for Policy Studies (CPS) warned that the increasing culture of litigation was “bleeding the health and education services dry” and diminishing “the quality of services, the experiences of those who use them, and the role of professionals.”

Businesses similarly suffer. As we’ve seen in the US, meritless litigation brings severe costs, including lost jobs, increased costs for businesses and less foreign investment. In addition, consumers face higher prices as businesses are forced to cover these litigation costs.

Writing for the Global Legal Post in September, Nick Rowles-Davies of Vannin Capital suggested that these concerns were based on a misunderstanding of the TPLF market. His argument consisted of three key points:  that funders’ and clients’ interests are always aligned, that funders would only pursue meritorious cases and that the Code of Conduct will provide adequate protection against the worst excesses of TPLF. Let us take them one by one.

 

Arguments against

 

First, funders’ and clients’ interests are not always aligned. Litigation funders are primarily motivated to maximize the potential return on their investment, rather than to obtain a just outcome for the claimant.

Second, it is not correct to say that funders will only fund meritorious cases. Meritorious cases may be attractive investments, but so are those of dubious merit, where the defendant wants to avoid a lengthy and costly trial and instead seeks a settlement. Funders can spread their risk across a portfolio of lawsuits, offsetting the costs (and risks of loss) from nonmeritorious suits with their recoveries from successful ones.

 

Code of conduct

 

Finally, as Mr Rowles-Davies acknowledged in a Global Legal Post blog, a code of conduct for funders exists. However, the code is voluntary and does little to restrain a burgeoning industry. This is not surprising, given that it was drafted by a working party consisting primarily of representatives from the litigation funding and legal insurance industries, both of which stand to benefit from any increase in litigation.

For example, the code does not prevent funders from exercising substantial influence over strategies and settlement decisions which should be the province of the litigant. It also does not bar funders from being owned by solicitors or their firms; nor does it bar funders from owning their own firms and appointing their own lawyers to the cases they fund, all circumstances which would interfere with the client-solicitor relationship. And because it is voluntary, the Code does not regulate the conduct of funders who choose not to join the industry trade association. Indeed, the only sanction for violating the Code is that the violator, at the discretion of the association’s board of directors, may lose its membership in the industry association.

 

Legal Future campaign

 

The US Chamber Institute for Legal Reform (ILR) represents the interests of more than 3 million businesses of all sizes. ILR is concerned about TPLF in the UK because US companies employ more than a million people in the UK. Unfortunately, they could be dissuaded from further investment and job creation if subjected to a TPLF-driven litigation increase.

ILR recently established the Our Legal Future campaign to help raise awareness of practices that encourage abusive litigation, particularly TPLF. The litigation funding industry in the UK may be in its infancy compared to Australia, but that does not mean we should ignore the perils of unregulated funding activity. Changes to the British legal framework, such as the rise of TPLF, risk undermining the UK Government’s efforts to promote economic growth.

The government should therefore establish robust statutory regulation of the TPLF industry, including requiring disclosure of funder contracts, ensuring cases are controlled by litigants and not funders, and banning formal business ties between law firms and funders. With the launch of Our Legal Future, ILR is signalling its intent to continue the pursuit of this goal.

 

Posted by:

Lisa
Rickard

15 October 2012

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