22 Jun 2012

Show me the money

Third-party litigation funding is controversial, but the sector has grown rapidly in the past year. Nick Rowles-Davies gives a global perspective on an increasingly buoyant market

The recent increased interest in litigation funding has been most keenly felt in the jurisdictions of England and Wales, the US, and the birthplace of litigation funding – Australia.
The English marketplace has seen huge growth in funding, with available funds from existing funders and several new funders pouring into the market. As a result, funders have come under scrutiny by the British Parliament and from Lord Justice Jackson’s review of civil litigation costs, which, in its final report published at the beginning of 2010, strongly supported third party funding and recommended the practice for mainstream approval.

Self regulation

Litigation funders operating in the English jurisdiction will, for now, be self regulating, as the formation of the Association of Litigation Funders has started the process of ensuring providers comply with a code of conduct. This has provisions covering capital adequacy and circumstances in which funders can withdraw from cases.
It will be interesting to see the effect of damage-based agreements on this market. It is suggested that once clients understand and accept the principle of having to share their damages, then funding may well become even more widespread as lawyers see a reduction in the need to work at full risk and can take partial funding as they go along to ease their cash flow concerns.
Funding continues to become more prevalent, even with perceived setbacks such as the recent Innovator One trial (see Global Legal Post, 25 May 2012, p5). Innovator is widely held to be the largest funded case of 2008, but the funders and after-the-event insurers took a hit in Mr Justice Hamblin’s judgment where he found for the defendants.
In the US, litigation funding is viewed with more caution than it is in the UK or Australia. The main reason being the widespread use of contingency fees in US jurisdictions, which, for the time being, remain outlawed in England and Australia.

Potential abuses

There has been more interest recently, given worldwide cash flow restraints, in funding in the US, with funders reporting increasing approaches from contingency fee lawyers to provide facilities in return for a share of their own contingency fee. And the generally slower growth in the US commercial litigation market is not mirrored in international arbitration, where the use of funding by US law firms is extremely commonplace.
The concerns with funding in the US are mainly at the consumer end with a historic growth of expensive loans to plaintiffs payable out of their awards. There are also concerns in commercial cases over the potential abuses and the control funders can exert. Additionally, the state system has led to a slower breakdown of the rules on maintenance and champerty, with a wide range of views in individual state courts across the country.
The New York Bar Association confirmed last year that representing clients in non-recourse litigation funding arrangements was not unethical, but there remained waiver-of-privilege issues to overcome. And the American Bar Association issued its own advice to guide attorneys through the conduct issues of litigation financing in 2011. The privilege issue remains a problem for funders in the US – the Delaware case of Leader Technologies confirmed the release of privileged information from attorney to funder amounted to a waiver of privilege and made the documentation discoverable.
But the recent decision in Quick Cash should give funders in the US some confidence. The court held that a funding agreement was not usurious even though the annual interest compounded to some 40 per cent. The advances were non-recourse and it was the lawyers who borrowed the money. However, the New York Supreme Court suggested the outcome might have been different if the borrowers had been less sophisticated.
Since the historic decisions in the cases of Fostif and Trendlen effectively abolished the common law rules on champerty and maintenance, litigation funding has been widespread and commonplace in Australia.
That jurisdiction – in common with that of England – has an adverse costs regime. While in England the recommendation is that funders should be responsible for the losing party’s legal fees, in Australia the 2009 decision in Jeffrey and Katauskas decided the opposite – although in practice most clients would expect the funder to provide such an indemnity as part of the funding package.

All around the world

Elsewhere, litigation funding is on the rise. Canada has recently seen more activity, with last year’s decision in Manulife widely viewed as being the catalyst. The judge held that the funding agreement in that case did not violate rules on champerty and maintenance and was beneficial to access to justice.
South Africa has been in the spotlight recently, with the success of funder IMF in the National Potato Co-operative’s victory in a claim against global accountancy practice PricewaterhouseCoopers. This is the same case that nearly a decade earlier had changed the legal landscape by affirming the process of litigation funding and diminishing the rules of champerty and maintenance.
In Germany – where there is no common law doctrine of champerty or maintenance – the third-party funding market is thriving, with particular emphasis on cartel damages cases. And, in the Channel Islands, the Jersey litigation funding market was given a boost when the courts expressly approved the use of funding in the Valetta Trust case.
On a less positive note, in Hong Kong, solicitor Winnie Lo was jailed for 15 months for conspiracy to maintain in 2009. But even in that jurisdiction there is hope for the funding market. Her conviction was overturned on appeal where the court recommended reform of this area of the law should be considered.
Litigation funding has now taken its place on the worldwide stage as an invaluable tool for litigators and their clients.

Nick Rowles-Davies is consultant with Isle of Man-based litigation funder Vannin Capital