Litigation Funders: Scoundrels or Saviors?

ScoundrelIn the 18th and 19th centuries, litigation funders were considered ruthless scoundrels. Historically, common law ruled that litigation funding was illegal. Champerty, which is an agreement between a plaintiff and a third-party who agrees to finance the plaintiff’s lawsuit in return for a percentage of the recovery, was outlawed.

Making champerty illegal was thought to be a way to protect the less powerful and less wealthy from their more powerful rivals who would finance litigation in which they had no legitimate interest. The wealthy financed litigation solely for the purpose of harassing and ruining their rivals.  Funders were considered unscrupulous, with onerous contracts that might subordinate the funded litigant’s interests to that of the funder. It was also felt that litigation funding would increase the number of cases brought to the courts because funders would encourage plaintiffs to bring cases that they would not otherwise have done so.

Today’s world is different.  Judicial attitudes toward champerty have been relaxed and with some exceptions, alternative litigation funding has become internationally accepted.  Commercial litigation funders are seen as saviors. In the 21st century, commercial litigation funding gives access to justice and is a means of controlling and managing litigation.

Justice StatueThird party litigation funding provides access to the courts.  In some cases, much like a David v. Goliath scenario, litigation funders help a single claimholder bring a commercial claim against a defendant with greater financial resources.

A class action might bring together thousands of very small claimholders who join in a claim that is funded by a commercial litigation funder. On other occasions, even when corporations do have money in their budget to cover litigation, they choose to spend it on building their business, and use alternative litigation funding to pursue claims. "We have and will continue to entertain the use of third-party funding under the appropriate circumstances," says Tom Sager, general counsel of chemical maker DuPont Co., who cites the rising cost of litigation in the U.S.

The courts have not been deluged with cases that have been funded by third parties. Commercial litigation funders do not seek frivolous lawsuits.  Litigation funders do extensive due diligence before they fund a case.  The funding is a non-recourse loan to the litigant and only cases which litigation funders deem to have a high probability of obtaining a positive verdict or settlement are funded. For the large litigation funders, the number of cases that they actually fund is very small in relation to the number of cases that is brought to them.  For example, in the past twelve years since its founding, Bentham IMF Ltd has reviewed more than 1500 cases and funded only 179.

The initial term sheet and the eventual contract that a claimholder signs with a funder are the result of negotiations between the funder and claimholder, with advice from his independent counsel.  Once a term sheet is signed, often times the claimholder will seek the advice of the funder on choosing additional counsel and expert witnesses, and as with cases funded in Australia, the claimholder might ask the funder to manage the budget on the case.