Third party funding six years on: new proposal, new opportunity?

17th Mar 2016

By: Mary Terzino – Lord Justice Jackson, author of the groundbreaking Review of Civil Litigation Costs in 2009, has a new proposal: a nonprofit third party litigation fund.

Presently, third party litigation funding (TPLF) tends to be conducted by publicly-traded and privately held firms that are decidedly profit-driven. Funders usually define their market as high-return commercial litigation. They fund individual cases or a portfolio of lawsuits in exchange for a portion of the recovery if the litigation is successful. It is a lucrative business: one of the largest funders operating in Europe, Burford Capital, posted operating profits of US$60.7 million in 2014.

In endorsing the use of TPLF in civil litigation, LJ Jackson proffered that rationale that it “promotes access to justice”. At the time of his 2009 report, he accepted that TPLF was “still nascent” in England and Wales, and noted that it focused on “commercial or similar enterprises with access to full legal advice”. He cautioned that if its use were to expand, “then full statutory regulation may well be required”.

It is instructive to examine his new proposal in light of these prior comments.

First, what need is LJ Jackson attempting to fill?  According to an article posted recently on litigationfuture.com, Sir Rupert urged the creation of a Contingent Legal Aid Fund (CLAF) for cases that would otherwise be unattractive to the established funders because of the amount of damages claimed.

“Unlike other funders, the CLAF would not have owners or shareholders creaming off the profits, the litigationfutures.com piece reports him as saying. “Instead it would plough all profits back into building up reserves and future litigation funding. The CLAF would be an independent body established by the legal profession in the public interest. Its function would be to promote access to justice”.

But if for-profit funders were successfully promoting the goal of “access to justice”, why would a non-profit enterprise be necessary? Implicit in Sir Rupert’s new suggestion is the acknowledgement that perhaps the original rationale for supporting TPLF has not been realised.

A second question arises from LJ Jackson’s concept that the CLAF could be funded by investments from lawyers, who would receive what he termed a “reasonable return” from their investment. What are the ethical implications of this form of investment?

The proposed structure may create the same conflicts of interest risks as with more traditional TPLF. Both reward investors who profit from bringing litigation, and do not embody a duty to act in the client’s interest.

In the case of the CLAF, if those investors are lawyers who also represent the funded client, they may well use this structure to achieve the equivalent of a contingency fee atop their representation fees. They may also use the CLAF to steer cases to themselves or other investors. And with additional profit to be realised from the investment, lawyers may be tempted to persuade their clients to pursue strategies that maximise monetary returns — even if doing so is inconsistent with the client’s interest– absent controls that would prevent a lawyer who is an investor from also operating as legal counsel in the funded litigation.

A third question is whether, in light of all of the developments of the past six years, the TPLF business is still a “nascent industry” that is adequately managed without government oversight.  A recent study by Justice not Profit discovered that global assets under management by 16 of the TPLF providers operating in the UK are over £1.5 billion, representing a 743% growth since 2009. This is hardly the hallmark of a “nascent” industry.

Moreover, the voluntary code of conduct supported by the Civil Justice Council presently applies to only seven funders who have joined the Association of Litigation Funders (ALF), the England and Wales industry group. Other individuals and firms, including hedge funds, are financing litigation, their practices unimpeded by the specific safeguards needed for this industry.

While the concept of a privately-capitalised legal aid fund is intriguing and worth consideration, it raises some of the same questions as the more established TPLF mechanisms. Additionally, because CLAF funding would be geared to parties that are not “commercial or similar enterprises with access to full legal advice”, enforceable  protections may be needed for consumers of the service. Particularly given the ethical perils inherent in the proposed CLAF, isn’t it time to revisit the implementation of a targeted set of reforms that will guide the behaviour of all TPLF investors, with meaningful consequences for breaches?

In his 2009 report, LJ Jackson identified certain concerns of the Law Society (which advocated for regulation), including a capital adequacy requirement, guarantees against funder insolvency, and prohibitions against withdrawal from a case in circumstances contrary to the client’s interest.  One could add to those items a prohibition against conflicts of interest and funder interference in strategy, and transparency to the courts regarding funding arrangements.

These protections would, of course, also benefit commercial claimants; some of these safeguards (but not all) are already embodied in ALF’s voluntary code of conduct.  Lord Justice Jackson’s intriguing proposal presents a good opportunity to once again consider the benefits of mandatory, industry-wide regulation.