27th June 2019

Making legal departments into profit centres with the use of litigation funding? Should contingency fees be allowed in a lawsuit?

Industry Analysis Litigation Litigation Funding

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.