News

As the litigation funding sector becomes more mainstream there have been a number of developments which illustrates its growing recognition and acceptance.

Amongst larger law firms and corporate clients there has been a realization that, far from a case by case basis for high cost / long term litigation, the sector can be used as leverage to grow. The access to working capital releases the law firm from its traditional monthly billing cycle required by equity partners reluctant to fund cases out of their own capital. Some law firms recognize that they can take more work on a contingency or other split risk basis, which helps them pick up business.

Corporates with regular flows of litigation cases are also making use of the portfolio potential on offer. In the previous post, we referred to the notion of making legal departments into “profit centres”.

Many still believe that “Lawyers can’t accept this type of finance, or work for a share of the award…”  – it all depends!

Litigation funding has been championed in a number of jurisdictions, not least Australia which has been the driving force behind the sector up until now. USA and England & Wales are now committed to the concept, as is Canada.  But what of the rest of the world and what’s the problem with it?

Litigation funding has existed in something of legal limbo in many common law jurisdictions, due to the concepts of Maintenance, Champerty and Barratry that impact on criminal laws and the law of tort.

In laymen’s terms maintenance is the concept of providing support to a third party to further a legal claim. Champerty is a form of maintenance whereby funds are provided to further a legal claim in return for a share of the proceeds.  Barratry is the incitement or encouragement of a party to bring or continue a claim.

The reason why these concepts became outlawed hundreds of years ago is the very reason why they have been, and are being, overturned now – access to the law.  They were outlawed because the rich and powerful were using the law to block-off, frustrate or assail the financially weaker side in an argument.  This would restrict the legal system as a means of resolving disputes and use the law as a weapon to threaten coerce and generally undermining the public policy of trust in the law.  Fast-forward to more recent times and it is the cost of the legal system itself that is restricting access.

Perhaps the most obvious example of where the criminalization of maintenance and champerty cannot be seen as anything other than restrictive to justice is in the field of insolvency.   An insolvent company, by definition, has no money.  It is therefore unable to pursue legitimate claims against third parties which, if judgement is found in its favour, would benefit the company and, by extension, the creditors.  It is therefore no surprise that in England and Wales the concept of champerty was removed from insolvency cases first.  In Hong Kong, where champerty is still a criminal matter, the concept of third-party funding has made in-roads in the insolvency sector already.

As for Asia – although not an exhaustive list, LSR’s research indicates that, under certain circumstances, a litigation funder’s services could be applied in China, South Korea and Japan. The UAE appears to have never had any restrictions and, as previously mentioned, both Singapore and Hong Kong are now allowing limited access in insolvency and international arbitration matters.

Currently there are three main areas where litigation funders source capital:

Private Equity / Finance:  The bulk of litigation funders raise capital through the use of private investors. The funds can be raised via a general fund, for use as working investment capital or via Single Purpose Vehicles on a case by case basis. It is more often the case that investors wish to remain anonymous.  However, certain new litigation funding companies attempt to trade on the “justice for the small guy” brand, connecting with young, tech-savvy clients and openly advertise their finance partners.

Stock-Market:  Burford Capital Limited is the leading company in litigation funding. Its stock is listed on the London Stock Exchange’s AIM market. IMF Bentham Limited’s shares are listed on the Australian Securities Exchange. Both companies produce fully audited financial statements and regular stock-market announcements as part of their fiduciary obligations.

Fintech: It’s interesting to note that a relatively new industry has already evolved from being too “old-fashioned” in order to reduce costs and provide easier access to users and investors.  At least one litigation funder uses online crowd-funding platform technology, inviting investments of US$ 1,000.  Another has a more direct registration platform, seeking investments from as low as US$ 2,500.

With the appetite for alternative investment opportunities, investors are intrigued by the appealing litigation funding opportunity. According to the Wall Street Journal the current litigation market in the USA is valued at over US$ 200 billion.  Of that, only an estimated US$ 3 billion is subject to litigation funding so, on the face of it, the scope of expansion is enormous.

However, with any “new”, rapidly growing sector, the potential for finger-pointing and suspicion will grow.  Already the calls for more transparency about whether cases are being funded by third parties are growing. Currently the attitude of the courts is unclear. On the one hand there is the view that funding opens up the law to those previously shut out.  On the other hand it could be seen as contributing to an even more litigious environment, especially in relation to Class Actions, which appears to be the battleground where these competing arguments are causing most friction.

The commercial threat for investors is the same for any industry – supply and demand and the threat from innovation and regulation.

Over recent years litigation funding has certainly gained traction, with new providers springing up rapidly.  It opens up the law to companies who would otherwise be unable to seek redress due to the expenses involved. This mirrors the support that is offered on a more personal, social welfare, basis to individual citizens via government sponsored legal aid.

The main driving force behind the recent growth in the size of the available funds and also in the number of these firms now in operation is MONEY. Quite simply, as an investor in a litigation funding firm you can make a great return on your investment.

How does it work?

1. Litigation funders have access to cash
2. Claimants and their lawyers approach a litigation funder and explain their case
3. Litigation funders assess the case on its merits and the likely return (successful judgement awards) that can be made against the costs to fund the case.
4. Assuming the scenario fits their in-house criteria, they agree on a return (e.g. percentage of the settlement), advance the money and step back.

Litigation funders do not normally get involved in the litigation process, provide lawyers, advise, nominate or dictate which lawyers should be used, although a monitor will be kept in order to fully manage the investment. In its purest form this is a rational, return-on-investment decision made by the litigation funders based on the offer presented to them by their client – the claimant in the law suit.

Someone else pays for your legal costs – any other advantages?

1. Manage legal risks. There is no impact on the Profit and Loss account or Balance Sheet. Litigation finance is not a loan that needs to be paid back so there is no need for the disclosure of allowances, liabilities or contingencies to impair the financial statements.
2. Positive working capital. The arrangement releases funds for normal commercial purposes that would otherwise have needed to be set aside for legal costs.
3. Fair treatment. In any commercial veneture there is the possibility that valid claims that otherwise would not have been pursued are actually pursued. It may be taking it too far to claim that a company’s legal department could be transformed from a cost centre to a profit centre, but the sentiment is correct.
4. Adverse cost awards. In jurisdictions where adverse costs are awarded against litigants it is feasible that entering into litigation may result in doubling legal expenses. However, Litigation funders can and do provide insurance cover for such scenarios.

Any downsides?

Not many. Access to legal cost funding may make a company more litigious, perhaps to the detriment of reputation.

Can you use litigation funding in all jurisdictions?

No – not yet.  The concept of champerty is still a tort and crime in some common law jurisdictions but we will cover this aspect in later posts.  However, the bottom line is that you’re good to go in Australia, England and the USA.

How much has Scandinavia influenced Chinese Maritime Law? Quite a bit it seems…

LSR stays up to date with major changes in international law and, in March 2019, attended a seminar hosted by the Hong Kong Shipowners Association. A segment touched briefly on the role played by foreign legal codes in the continuing development of China’s maritime law. We were surprised to hear about the influence that Norwegian maritime law especially had in the early years of this development.

Law in China has developed from a traditional “Confucian” system in the Dynastic period up to the 20^th Century, to a Civil Law system supporting the principles of a socialist market economy. This journey saw progress halted by civil war, changes in political direction and even cultural revolution. How to develop a legal structure that will support a new push to a more market-based economy and ease entry into the World Trade Organisation? Adopt best practice from others was the sensible approach.

Russian maritime law had provided a heavy influence due to historic familiarity with the Socialist Legal system. However, we understand that it was recognized early on that Norway, despite being a small country, had benefited greatly and projected its national influence and interests efficiently based, in part, on its maritime connections. This resulted in scholarly research and adoption, copying and influence of many of the laws and principles that Norway had enshrined in its own legal system.

Of course, time moves on, and we were also told by our Chinese contacts that, upon recently re-visiting the maritime codes and policies of both Norway and Russia, they are confident that China has moved on and has now adopted more modern attributes than its former mentors. Time will tell.