Third-Party Funding - A Cure Looking for a Disease?

MANCHESTER, England, March 12, 2013 /PRNewswire/ --

The use of a third party to provide finance for a lawsuit, or third party litigation funding, is still a relatively new concept. It's use is confined mainly to commercial cases, where the business bringing the legal action has decided that either it cannot afford to pay for the law suit or does not wish to pay for it. The litigation funders will pay the legal bills in return for a multiple of their investment or a percentage of the proceeds of the case if the case wins. If the case loses then the funder walks away, having lost the investment.

It is most prevalent in Australia, where it is an accepted part of the litigation process. In Europe, in particular in England and Wales, it is more commonplace. In the United States, from where the most vocal opposition to the industry emanates, its use is still sporadic but is growing fast.

Litigation funding has been accepted in the UK and received judicial approval and recommendation when Sir Rupert Jackson published his Review of Civil Litigation Costs in 2009. It is very much here to stay.

There seems to be concern from some parts of 'corporate' America that litigation funding is something to be feared and that it threatens to change the face of the US legal system, very much for the worse.

It would be very easy, simply to ignore as ludicrous the suggestions by those commentators that say litigation funding is an abuse of the process and is a danger to all. However, it is simple to counter the allegations, but equally important to expose those who make the allegations for what they are. In doing so, their motivation, and lack of neutrality will be clear for all to see.

The US Chamber of Commerce, through the Institute for Legal Reform ('ILR'), has been a fierce opponent of litigation funding and has lobbied hard against the industry. The latest attack on the litigation funding industry comes from Robert C. Weber, General Counsel at IBM, writing in Forbes in his article 'Beware of lenders offering to finance your lawsuit'. Mr Forbes is a board member of the US Chamber of Commerce.

He has decided that litigation funding is not needed, it introduces a 'gambling mentality into the court process and creates an environment where lawyers interests are promoted over the clients' interests.

He says also that he has seen enough to know this, although we are not told what he has seen to form this conclusion. We should, no doubt, simply accept what he says.

'It is a "cure" looking for a disease' apparently. The rise of litigation funding suggests that is not the case. The increase in demand may lead one to conclude that it has already found the 'disease' that is looking for a 'cure'. This is some way removed from not being needed.

Litigation funding is quite the opposite of a gamble. Funders assess cases very carefully before deciding whether to invest. One key area is the legal merits. An oft cited criticism of litigation funding by the ILR and their ilk is that funding does and will ensure that cases without merit are pursued.

The suggestion is that funders will take a portfolio approach to cases and look to gain from volume success across the portfolio. Additionally they say that the potential for a very high return on an investment in a high-risk case is attractive and so cases without merit will be pursued.

To take this point suggests Mr Weber has not yet seen enough of litigation funding and should look more closely at the reality. No real litigation funder would invest in frivolous litigation. It is simply absurd. The returns that funders receive are based on a number of factors, with the perceived risk being just one of them. Each case, regardless of the size of the funder's resources or existing portfolio, will be rigorously assessed.

Litigation funding is a high- risk investment simply by its nature. Funders want to minimize the risk, not increase it. If the case loses, you lose your money. Whilst it is true that the higher returns are received on cases that have a riskier profile, in the main, there is a level of risk that makes no case worth funding, regardless of the returns. To receive 25% of something is far better than to receive 50% of nothing.

Any funder who backs frivolous or poor cases will not last long.

Mr Weber's article refers to the contingency fee arrangement in the US. Whilst direct there is no equivalent in the UK, contingency fees will be available from 1 April 2013.

The suggestion is that contingency fee lawyers filter out cases without merit because they do so with an eye to ethics as well as the reluctance to use their own time and money.

The position with litigation funder involved is no different. Is the suggestion that once given the funds to run a case the lawyer disregards their ethical position? That's seems a harsh allegation.      

It is also suggested that litigation funders can blur the boundaries as to where the lawyers' duties lie. This is also untrue. The lawyer and the client maintain the same clear relationship as they do in any other case. However, the funder may wish to be kept abreast of developments and be kept informed over settlement discussions. That is as far as it goes. The funder cannot influence the client's decision making and cannot interfere in the instructions to the lawyer. Sometimes though, the client actually wants that involvement. Most litigation funders are run by lawyers who have vast experience of commercial litigation. To many clients that is a resource that they wish to make use of.

Quite obviously, I have a vested interest in the success of the litigation funding industry, and my views could be disregarded as biased. Certainly, that will be the criticism from some quarters.

However, my position and preexisting allegiance is clear and in the open. Unlike the ILR and its members who have come in for criticism in the past from the American Association for Justice for their lack of transparency  .

It is plain that any proposition that levels the financial playing field between a large corporate entity and a smaller opponent in a piece of litigation, is not something that is going to be accepted readily by the larger party. But that is one of the key benefits to litigation funding. It allows a David v Goliath battle to be fought. It allows the smaller litigant to be able to fight the 'scorched earth' policy adopted by many expensive legal teams. In short, it allows for access to justice.

Litigation funding is not something which "will risk forfeiting the professional and client -driven reputation" of lawyers as Mr Weber suggests.

Indeed that is not the view of Sir Rupert Jackson, 'I remain of the view that, in principle, third party funding is beneficial and should be supported..'

He went on to say in his Report, in endorsing the role of third party funding that: "Third party funding provides an additional means of funding litigation and, for some parties, the only means of funding litigation. Thus third party funding promotes access to justice."

He also sees litigation funding in a slightly different way from Mr Weber as regards access to justice: "Third party funding tends to filter out unmeritorious cases, because funders will not take on the risk of such cases. This benefits opposing parties."

The use of litigation funding is more likely to assist with the prosecution of cases with merit, filter out cases without merit and provide access to justice. It should not be seen as the introduction of a casino mentality to the courtroom - quite the opposite.

Ironically, litigation funding is also a valuable tool for corporate litigators too. Part of the huge increase in litigation funding is down to corporate counsel and CEO's realizing that they have a choice. They can decide whether they should spend their legal budget on litigation or choose to take some risk out of the process by using a litigation funder.

There is no reason for the ILR or US Chamber to see litigation funding as a threat.

This article was written on behalf of Vannin Capital, a specialist litigation funding provider in the UK. The experts offer businesses, law firms and insolvency practitioners a funding solution to the costs of running a court case. See website for more information.

Contact: info@litigationfunding.com, +44(0)1624-615111