Claimants can benefit when dispute funders take an active role
- Kate Hurford
- Corporate Counsel - Australia
In some jurisdictions around the globe, dispute funders can provide claimants with more than financial support. In countries such as Australia, where maintenance and champerty restrictions have largely been abolished and supportive case law has developed, and in many civil law jurisdictions in which these ancient laws never existed, some funders offer their expertise and experience in managing complex arbitration, litigation and recoveries. In these cases, claimants can reap the benefits of a funder’s assistance and more active role in the case.
How funders can help
In jurisdictions where active involvement is permitted, some dispute funders assist by:
- Providing a fresh and independent assessment of the merits of the claim. Funders such as Omni Bridgeway undertake thorough due diligence on every case they assess for funding, primarily using their own employees who are experienced former dispute lawyers.
- Selecting (or participating in selection of) counsel and experts.
- Negotiating the legal budget with the claimant’s lawyers, reviewing invoices and participating in decisions about allocation of resources. Omni Bridgeway typically oversees the legal fees to ensure so far as possible that the legal costs and strategies are proportionate to the potential recoveries.
- Assisting with strategic and tactical decisions about the conduct of the case, liaising with and instructing the claimant’s lawyers.
- Participating in mediation and settlement discussions. In fact, the court or mediator often requests the attendance of the funder at a mediation.
Most large commercial arbitration and litigation is complex, time-consuming and expensive and can strain the resources of the claimant and their lawyers. These matters require significant case management. Consequently, many claimants who seek funding are also attracted by the prospect of the funder’s assistance (where permitted) with the day-to-day management of the case.
Sometimes, the level of funder involvement or assistance is described in case law and commentary as a funder having “control” over the proceedings. However, there is a very broad spectrum of contributions that dispute funders may make to the cases they fund, which do not of themselves, or even in combination, amount to the funder having primary control of the arbitration or litigation.
The funded claimant will always have control, or the final say, of the substantive decisions in the case. These include the decision whether to commence or discontinue proceedings, who to sue, the causes of action being pursued and whether to settle (subject to any contractually-agreed procedure to be followed if there is a difference of opinion over settlement).
Claimants are able to decide whether they wish to cede day-to-day control of the proceedings (overseeing the procedural stages of litigation or arbitration) to a funder or pay another third party to act as their agent to instruct the lawyers.
When a funder is permitted to instruct the lawyers, the claimant generally has the right to override the funder’s instructions. The interests of the funder and the claimant are usually aligned but the claimant’s lawyer can ensure that is and remains the case. And it is important to note that the claimant’s lawyer always owes their full professional and fiduciary duties to their client. This is often expressly recognised in the funding agreement.
If there is a disagreement about whether to accept a proposed settlement offer, the funding contract may provide for the disagreement to be referred to independently nominated counsel for a binding opinion on whether the settlement is reasonable, or the funding agreement may include some other form of dispute resolution clause or mechanism to address this situation.
A good funding agreement should also include a procedure to manage any potential conflicts of interest. In some jurisdictions, the relevant regulatory regime with oversight of the funder will also have rules in place regarding potential conflicts of interest. The funding agreement may provide that, in the event of a conflict between the claimant and the funder, the lawyer may continue to act solely for the claimant, even if the funder’s interests are adversely affected by the lawyer taking that action.
In practice, this procedure is rarely exercised and potential conflicts are usually resolved as the interests of the claimant and the funder typically are aligned in seeking to maximise the return from the claim.
Funder involvement around the globe
In recent years, a more supportive and flexible approach to the dispute funding industry has emerged in many countries around the globe. Judicial attitudes have relaxed, or are relaxing, and policymakers in many countries have also expressed support for the continued development of the industry.
Many experienced funders will provide more than money and be available to provide their litigation or arbitration expertise and act as a strategic sounding board, when requested by the claimant and appropriate in the jurisdiction.
Civil law jurisdictions
In civil law jurisdictions, the doctrines of maintenance and champerty do not exist. Dispute funding is permitted in many civil law countries.
For example, in Germany and the Netherlands, funders see themselves as active partners in a team that includes the claimant and the lawyer. The funder is permitted to assist in decisions about strategy and tactics before the case is commenced and also throughout the proceedings. The funder’s representatives usually attend meetings and take part in settlement discussions.
Common law jurisdictions
However, funder involvement is not universal. In some common law jurisdictions, the remnants of maintenance and champerty laws may prevent funders from actively assisting. In these jurisdictions, funders take a passive role in the arbitration or litigation and leave the conduct of proceedings to claimants and their lawyers.
In England, the criminal and tortious liability for maintenance and champerty were abolished in 1967. Further liberalisation has occurred and the dispute funding industry has been self-regulated since late 2011. There is a voluntary code of conduct promoted by the Association of Litigation Funders (ALF). Under the code, members of the ALF must not seek to influence the funded claimant’s lawyer “to cede control or conduct of the dispute to the funder”. This is said to include making decisions about the choice of counsel in the case. Even if a funder is not a member of the ALF, the code is likely to be influential in setting the standards expected of a funder by the courts in England.
In Hong Kong, the doctrines of maintenance and champerty have not been abolished but reforms were enacted in 2017 to permit third-party funding of arbitration and related mediation and court proceedings as an exception to the rules. This legislation came fully into force in February 2019 when a Code of Practice for Third Party Funding of Arbitration was issued.
The Code sets out the practices and standards with which dispute funders are ordinarily expected to comply in Hong Kong. It expressly prohibits funders from seeking to influence the funded party or its lawyers “to give control or conduct of the arbitration to the third party funder except to the extent permitted by law”.
The Hong Kong courts have validated third party funding arrangements for insolvency proceedings on a number of occasions. However, funding of commercial litigation unrelated to arbitration or insolvency proceedings remains restricted in Hong Kong.
In the United States, dispute funding has become much more accepted in the most active litigation jurisdictions. However, funders usually leave control over litigation strategy and settlement with the funded party and its attorneys. The possibility of active funder involvement is guided by each state’s rules of professional conduct for attorneys.
Funder involvement in Australia
In Australia, third-party dispute funding has been available since the late 1990s, originally in support of insolvency related claims and later expanding into class actions and single party commercial litigation. The Australian courts have generally adopted a supportive position of funder involvement.
In late 2004, in Clairs Keeley (A Firm) v Treacy & Ors  WASCA 277 (Clairs Keeley (No 2)), the Court of Appeal of the Supreme Court of Western Australia held that the funder in the case no doubt held a degree of control and said at :
“However, that will be inevitable in the case of any litigation funding of this kind. Without some degree of control the risk would be too great for the funder to undertake the funding, especially when the litigation is protracted, complex and expensive.”
In early 2005, in Fostif Pty Ltd v Campbells Cash & Carry Pty Ltd  NSWCA 83, the Court of Appeal of the New South Wales Supreme Court addressed the issue of funder involvement and said:
“The respondents contended that the control assumed by [the funder] Firmstone created the potential to lead to conflicts of interest. In my view this is a non sequitur. Judicial hostility to a funder’s “control” over litigation appears to be bottomed in the proposition that excessive control is tantamount to an assignment of a bare right to litigate, although there are statements suggestive of judicial concern for the economic interests of the “controlled” litigant per se (eg Clairs Keeley (No 2) at ). I have already indicated my doubts about such judicial paternalism in the present context. In any event, a measure of control is essential if the funder is to manage group litigation and also protect its own legitimate interests (Clairs Keeley (No 2) at ). The funder’s control in the present case is not excessive, especially since there is a solicitor on the record and since these are representative proceedings under judicial supervision.” (emphasis added)
Following these cases, the courts in Australia have accepted that a degree of control is acceptable and indeed necessary for funded litigation.
Funder assistance in Australian class actions
Class actions are often brought on behalf of hundreds, and even thousands, of group members. These cases are particularly complex and expensive to run. A representative applicant is required to represent all the group members and provide instructions to the lawyers. However, the representative will rarely, if ever, have been involved in a class action before or have in-depth knowledge about the relevant legal issues.
When a class action is funded by an experienced funder, the funder is able to provide not only capital to pursue the claim, but also substantive assistance to the representative applicant in instructing the lawyers and with strategic and case management decisions, including to ensure that the legal costs incurred are proportionate to the size of the claim. Some funders also assist in managing group member data and communications, which can be a significant task when the group is very large.
In recent years, a number of new dispute funders have entered the Australian class action market. Some of these funders have imported a hands-off approach to class actions. This approach not only leaves the funder less able to actively protect its own investment in the action, such as overseeing the legal costs being incurred, but it can also prevent the funder from being able to protect and enhance the value of the claimant’s and group members’ interests in the proceedings, for example, by assisting with strategy and case management decisions.
Experienced and knowledgeable oversight
In jurisdictions where it is permitted, Omni Bridgeway’s investment managers work with the claimant’s lawyers, not just at the beginning of the case but throughout the proceedings. Not only does this provide an experienced and knowledgeable second set of eyes on a case, but the defendant knows that an independent and objective commercial entity considers the claim to be of sufficient strength and merit to fund and that the claimant cannot be ‘outspent’ or worn down in a lengthy war of attrition.
In choosing a dispute funder, claimants should seek an experienced funder who has a firm grasp of what level of funder participation is appropriate in any given jurisdiction. When permitted and appropriate, there are many reasons why funder involvement in a case enhances the claimant’s chances of achieving the best possible result.
- For example, in Australia, the regulator, the Australian Securities and Investments Commission, has published a Regulatory Guide which sets out how litigation funders must manage conflicts of interest and requires them to have a Conflicts Management Policy.
- See the Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Ordinance 2017.
- Omni Bridgeway (then called IMF (Australia) Ltd).
- At paragraph 137. The Fostif case was appealed to the High Court of Australia, Australia’s highest court ( HCA 41), which confirmed the views expressed by the Court of Appeal in this passage.