The Masked Market: Illegitimate Litigation Funding Companies

Since 1967, when the medieval crimes and torts of champerty and maintenance were abolished, third party litigation funding has been a legitimate activity. Such has been its growth in recent years, especially since its further endorsement in 2010 from Lord Justice Jackson in his Review of Civil Litigation Costs, that it might now be considered an industry. In the UK at least 21 companies claim to be third party funding businesses.

Why are such companies prepared to invest millions of pounds in financing legal disputes in which they have no personal involvement, which may take years to resolve, and where if the claim fails they lose their investment and may even have to pay out further costs? Vannin Capital take a look at the pitfalls to avoid when choosing a litigation funding company.

The key to answering this question is to focus on investment: carefully chosen cases which do succeed will bring a decent return. So to start with, any legitimate funding company will be in it for the long term. ‘Make it rich quick’ litigation funding companies are to be avoided at all costs.

This somewhat begs the question of how to identify the bona fide funders. Given that they are involved in providing a financial service, one would expect some degree of regulation and client protection scheme to be in place. Indeed it is, through the auspices of The Association of Litigation Funders of England and Wales, established in 2011, in the wake of the Jackson Report. The Association drew up a Code of Conduct for its members. Although the Association is self-regulating at presents, the Code addresses the issues which would distinguish ethical funders from charlatans. It clearly identifies a Funder as One with ‘access to funds immediately within its control’. This is a salient point because not all funders have such access and control, being only intermediaries, or even agents. The astute fundee would be advised to get as much information on who he/she is dealing with. Obviously choosing only funders who are members of the Association is a good starting point. To date of twenty one companies claiming to be litigation funders, ten are not, so clearly these might be the ones to avoid.

Further aspects of the Code of Conduct offer confidence to impecunious litigants, especially that a funder must be transparent about its capital adequacy and that it should have the capacity to fund a case for at least thirty six months. The accounts of funders granted membership are subject to professional auditing. The Code also offers protection to clients in laying down standards for contractual conditional fee agreements; these must be in writing and signed only after the client has obtained independent advice. The Code makes clear that funders must not interfere with the running of a case or pressurise the lawyers conducting it. Procedures for terminating funding agreements are also set out and in the case of disputes over termination or settlement, the Code calls for the involvement of a QC.

Whether more regulation, or even statutory regulation, will be introduced in the future can only be a matter for speculation. Suffice for the moment, it is through membership of The Association of Litigation Funders and adherence to its Code of Conduct that the best distinction can be made between the legitimate funders who can be trusted, or the alternatives who are best avoided. Outside of England and Wales similar organisations and protective codes must be sought.