Legal financing

 ( Lawsuits ) 

There is some concern that, if widely adopted, litigation finance could prolong litigation and reduce the frequency of settlements of civil lawsuits. A study of civil lawsuits published in the Journal of Empirical Legal Studies found that between 80% and 92% of cases settle. The study found that most plaintiffs who decided to pass up a settlement offer and proceed to trial ended up recovering less money than if they had accepted the settlement offer.

The legal financing industry has come under fire from critics for actual and potential legal and ethical violations. For example, some companies have been found to violate state usury laws (laws against unreasonably high-interest rates), champerty laws (laws prohibiting third parties from furthering a lawsuit for an interest in the recovery), or to require action by the applicant's lawyer that might be unethical under state rules of professional conduct.

A major criticism of litigation funding is that its cost is disproportionate to the risk accepted by litigation finance companies. As lenders thoroughly evaluate claims before they agree to provide financing, they have a very high likelihood of recovering their fee at the conclusion of the plaintiff's case, and further limit potential losses by providing financing in amounts that are relatively small as compared to the plaintiff's anticipated recovery.

In June 2011, the New York City Bar Association addressed some of the ethical issues raised by lawsuit financing in an ethics opinion about third-party non-recourse legal funding. It concluded that with due care a lawyer could help a client obtain legal financing and that non-recourse litigation financing “provides to some claimants a valuable means for paying the costs of pursuing a legal claim, or even sustaining basic living expenses until a settlement or judgment is obtained.” Many lawyers advise clients to pursue legal financing only as a last resort when other forms of financing are not available.

In recent years, some high-profile cases have inspired criticism of legal financing. For example, an international legal battle financed by UK-based litigation financing firm Therium involved self proclaimed heirs of the Sultan of Sulu and the Malaysian government, which was ordered to pay $14.9 billion as compensation by Spanish arbitrator Gonzalo Stampa. The award, which was eventually struck down by the Hague Court of Appeal on June 27, 2023, inspired calls for stronger regulation, over such concerns as corruption, profiteering, and undue foreign influence. In 2022, the European Parliament called on the European Commission to introduce regulations covering third-party litigation funding. The demand followed a report by German MEP Axel Voss on the same issue.

Litigation funding can be broadly split into 4 different forms in the UK, Contingent fee, Damages Based Agreements, Fixed Fees and Third Party Funding.

In 2005, in the case of Arkin v Borchard Lines Ltd & Others, the English Court of Appeal made it clear that litigation funding is a legitimate method of financing litigation. In January 2010, Chapter 11 of the Jackson Review of Civil Litigation Costs was published, effectively providing judicial endorsement to litigation funding.

In November 2011, a Code of Conduct for Litigation Funders was launched, which sets out the standards of best practice and behavior for litigation funders in England and Wales. The Code of Conduct provides transparency to claimants and their solicitors. It requires litigation funders to provide satisfactory answers to certain key questions before entering into relationships with claimants. Under the Code, litigation funders are required to give assurances to claimants that, among other things, the litigation funder will not try to take control of the litigation, the litigation funder has the money to pay for the costs of the funded litigation and the litigation funder will not terminate funding absent a material adverse development. The Code has been approved by Lord Justice Jackson and commended by the Chair of the Civil Justice Council, Lord Neuberger of Abbotsbury, the President of the Supreme Court. The regulatory body responsible for litigation funding and ensuring compliance with the Code is the Association of Litigation Funders (ALF).

In 2023, the Supreme Court of the United Kingdom decided in R (on the application of PACCAR Inc) v Competition Appeal Tribunal that litigation funding agreements were forms of damages-based agreements and thus unenforceable due to s.588AA of the Courts and Legal Services Act 1990.

The Adam Smith Institute think tank published a report in October 2024, calling for greater regulation in third party litigation funding. Recommendations included regulation of the funding by the Financial Conduct Authority, in the same way as other investment products, and increased transparency.

With the changes to legislation third party funders in Hong Kong have been made subject to codes of practices and safeguards to assure industry standards. The Hong Kong International Arbitration Centre (HKIAC) provided further guidance in 2018 to give additional guidance for arbitral tribunals, parties to arbitration and third-party funders.

The HKIAC also recognised that although third party funding is frequently associated with claimants lacking the financial resources for their claim, it may also be used by parties wishing to ‘hedge cost risks or reduce capital outlay.’

HKIAC statistics suggest that these legislative changes have contributed to an increasing use of third party funding within arbitrations. For example, in 2020, out of the 318 arbitrations that were submitted, parties made disclosure of third-party funding in 3 of them. In 2021 this increased to 6 out of a total of 277. Then in 2022, 74 disclosures were made from a total number of 344 arbitrations. However, it remains too early to draw longer-term conclusions regarding the application and popularity of funding within Hong Kong.

In terms of the global importance of Hong Kong as a destination for arbitrations, in 2021, the Queen Mary International Arbitration Survey ranked Hong Kong in the top five most preferred seats for arbitration, alongside London, Singapore, Paris and Geneva.

Following a positive response from the business community regarding to ability to use third party funding the Ministry of Law (MinLaw) initiated a public consultation in 2018 to assess if the scope of funding should be increased. As a result of this consultation the Ministry of Law (MinLaw) extended the application of third party funding from June 28, 2021 to include domestic arbitration proceedings, certain proceedings in the Singapore International Commercial Court (SICC), and related mediation proceedings.

Singapore is one of the most popular ‘arbitration seats’ globally.

A pactum de quota litis is defined as “an agreement to share the proceeds of one or more lawsuits” and it is the duty of the court to ascertain, of its own motion, the lawfulness of such agreement as it cannot lend its assistance to the execution of agreements and transactions which are contrary to law. An initial distinction between an acceptable and an objectionable pactum de quota litis was formulated in Hugo & Möller N.O. v Transvaal Loan, Finance and Mortgage Co, 1894 (1) OR 336. The Court held that a fair agreement to provide the necessary funds to enable an action to proceed, in consideration for which the person lending the money is to receive an interest in the property sought to be recovered, must not be considered per se to be contra bonos mores. The court was concerned about potential abuses of such agreements, such as using them for purposes of gambling with litigation cases.

Several cases have provided further guidelines for such litigation financing agreements. In Hadleigh Private Hospital (Pty) Ltd t/a Rand Clinic v Soller & Manning Attorneys and Others 2001 (4) SA 360 (W), the Court affirmed that an agreement to share the proceeds of one or more lawsuits is not necessarily unlawful and must indeed be considered acceptable when a litigant is not in a financial position to fund his litigation completely. In another case, the South Africa Supreme Court of Appeal held, in PriceWaterHouse Coopers Inc and Others v National Potato Co-operative Ltd, 2004 (6) SA 66 (SCA), that the "although the number of reported cases concerned with champertous agreements diminished, courts have still adhered to the view that generally they are unlawful and that litigation pursuant to such agreements should not be entertained". However, the Supreme Court sought to clarify any disagreements and took a different route.

The Supreme Court ruled that:

• An agreement in terms of which a stranger to a lawsuit advances funds to a litigant on condition that his remuneration, in case the litigant wins the action, is to be part of the proceeds of the suit is not contrary to public policy or void, and
• The existence of such an assistance agreement cannot be the base of a defense in the action. In June 2010, in an interlocutory ruling rendered in the same case, the High Court found that the funder is, after all, a co-owner of the claim and should, therefore, be joined as a party to the trial. Therefore, an order for costs may be made directly against him to the extent that the funded party cannot support them even after the termination of the funding agreement.