The Global Evolution of Litigation Finance
Third-party lawsuit financing is not a new concept and dates back to medieval England when corrupt nobles used the legal system to their advantage by having their subjects act as proxies to litigate their own disputes or to enhance their wealth.i
In an effort to curb this misuse of the law, the doctrines of maintenance and champerty were enacted in England and spread to other common law jurisdictions to restrict third parties from aiding litigants. Maintenance refers to a third-party providing
financial assistance to help maintain litigation. Champerty occurs when maintenance is taken a step further and the third-party seeks a return for its financial assistance, usually in the form of a portion of the recovery from the lawsuit.
As the corrupt acts for which these doctrines were enacted began to subside and maintenance and champerty were relegated to law school textbooks, it was not until these doctrines were abolished in various jurisdictions around the world that the road
to accessible justice would begin to be paved.
The seed of the modern litigation finance industry was planted in Australia, where a confluence of factors fostered its growth.
Since 1995, insolvency practitioners have been permitted to use their statutory power of sale to sell the fruits of a legal claim where the claim can properly be characterized as ‘company property’. This enabled administrators, liquidators,
and bankruptcy trustees to enter into contracts to finance litigation designated as company property, thereby recognizing a company’s legal claims as a corporate asset. Subsequently, third party litigation funding materialized to help insolvent
entities finance the legal costs associated with pursuing their claims in exchange for a portion of the proceeds.
At this point in time, litigation finance was expressly permitted in the insolvency arena only. Any litigation finance firms outside the insolvency context ran the risk that their finance agreements would be deemed against public policy and thus,
rendered illegal and void.
Yet, the pressure to allow litigation finance firms in other proceedings, such as class actions, grew. Given Australia’s prohibition against contingency fee arrangements, coupled with the “loser pays” rule (where an unsuccessful
party is required to pay the successful party’s legal costs), it was extremely difficult for someone to accept the role as representative plaintiff in a costly class action due to the financial risks involved if the case was unsuccessful.
It was not until 2006 that a landmark ruling by the High Court of Australia (the highest court in Australia) paved the way for funding single and multi-party (class action) proceedings. In Campbells Cash and Carry Pty Ltd v Fostif Pty Ltd (2006) 229 CLR 386, the High Court found that sufficient safeguards were already in place to dispel abuse by a litigation finance firm and, further, that litigation finance firm was not contrary to public policy, but rather, in support of it as
it promoted access to justice.
By the time the High Court gave litigation finance the green light in Fostif, the doctrines of maintenance and champerty as crimes and torts had been abolished in many Australian jurisdictionsii. As legal barriers to litigation
finance fell in Australia, so began the birth of an industry that would spread across the globe.
Common Law Jurisdictions – England and Wales
In the United Kingdom, where the common law doctrines of maintenance and champerty were put in place primarily to curb unscrupulous practices by noblemen during medieval times, prohibitions to third-party funding would begin to thaw upon the abolition
of the crimes and torts of maintenance and champerty as a result of the Criminal Law Act of 1967. However, the Act continued to provide that if a litigation finance firm agreement was found to be against public policy, it would be deemed illegal
and therefore unenforceable.
Nevertheless, this opened the door for alternative fee arrangements. Prior to this, claimants would either personally fund the costs of their litigation expenses, use insurance, or seek help via legal aid. However, with the passage of new legislation
via the Courts and Legal Services Act of 1990 (CLSA)iii, claimants could alleviate the financial strain of bringing a claim by way of Conditional Fee Agreements (CFAs), also known as “no win no fee” agreements. Over a decade
later in 2013, Damages Based Agreements (DBAs) were enacted as another alternate financial arrangement for claimants to gain access to justice.
Essentially, a CFA allows a legal representative to recover his or her legal fees and expenses plus an ‘uplift’ on their fees only if the case is successful. On the other hand, a DBA is a form of contingency fee agreement and allows a
representative to recover an agreed percentage of any damages awarded to the claimant only if the case is successful. The Damages–Based Agreements Regulations 2013 define a representative as the person providing advocacy services, litigation
services or management services to which the DBA relatesiv.
During this period, England and Wales actively sought avenues to make justice accessible for their citizens. However, it was not until the decision in Arkin v Borchard Lines Ltd  EWCA 655 that spurred the rise of the litigation finance
industry. The decision in the Arkin case was notable for resulting in the so-called ‘Arkin Cap’, whereby the risk to litigation funding firms to pay the full amount of an adverse costs ruling (the other side’s costs
if the case was unsuccessful) was “capped” to the amount of funding that had been paid by the funder. As funders were able to assess their risk of financial loss more readily due to this cap, it helped foster the creation of litigation
funding firms to meet market demand.
However, the recent decision in Davey v Money and others  EWHC 997 changed this reliance on the Arkin Cap. In Davey, the court found the Arkin Cap should instead be applied in a discretionary, rather than an absolute, manner,
with a determination of liability for adverse costs between a funder and claimant to be left up to the court to apportion as appropriate. Despite this ruling, this development is unlikely to curb the litigation finance industry as funders can
utilize after-the-event (ATE) insurance to guard against litigation risk.
As reception to alternative fee agreements and litigation finance industry became accepted in England and Wales and litigation finance firms proliferated the market, questions surrounding regulation of the industry came into play. In 2009, Lord Justice
Rupert Jackson spearheaded a government review of legal financing, including a review of third-party litigation funding. His final report,
released in 2010 lead to significant amendments to the costs procedures in England and Wales, known as the Jackson Reforms. Lord Justice Jackson supported the concept of funding and recommended a voluntary code of conduct to oversee litigation
finance activity in the country. The Association of Litigation Funders (ALF) of England and Wales, a self-regulated body, was later established in 2011.
Civil Law Jurisdictions
European countries operating under civil law systems and civil lawsuits were not faced with barriers to the use of litigation finance as the common law doctrines of maintenance and champerty did not exist within these jurisdictions.
Litigation finance commenced in Germany in 1999 and provided claimants, who otherwise would not have the means for lawsuit financing, with an avenue to justice. Funding helped to fill a
gap between credit facilities provided by banks (which are typically denied unless appropriate securities are provided by the claimant) on one side and the prohibition against lawyers to work on a contingency fee arrangement on the other. Because
commercial litigation funders can finance a claimant without requiring the provision of securities, and because they are not considered legal services providers, it became possible for funders to finance litigation on a non-recourse funding basis
in return for a share of the proceeds.
Litigation finance is not regulated in Germany and there are no restrictions on entry into the commercial litigation funding market. Funding agreements in Germany are governed by contract law and therefore the terms must be fair.
Litigation funding itself has never been legally challenged in Germany. In fact, a small number of court decisions have confirmed the legal structure of funding agreements as a claimant-funder partnership organized under the laws of the German Civil
Code. In addition, the Higher Regional Court of Cologne recently confirmed that lawyers should advise their clients about litigation finance (Az.: 5 U 33/18 [11 November 2018]).
Following recent publicity about consumer claims funded in Germany, there has been an increasing awareness and acceptance of the commercial litigation finance industry. As a result, the litigation finance market continues to grow in Germany.
The Netherlands has not had any restrictions on litigation finance, nor did it place restrictions on the amount of control funders could assume. As the common
law doctrines of maintenance and champerty were never introduced into the Dutch Civil Code, funding agreements are governed by contract law and are in principle binding unless the agreement violates public policyv or the principles
of reasonableness and fairness.
Litigation finance in the Netherlands is presently used predominantly for large multi-party claims, including shareholder claims, cartel claims, and more recently for GDPR/data breach claims. It is also used for funding the enforcement and recovery
of high value unpaid claims, often originating from exports to emerging markets and cross border arbitrations.
In Switzerland, litigation finance is permitted provided funders act independently of a claimant’s attorney (BGE 131 I 223/2004). In a nod to its widespread
acceptance, the court also found that it is a lawyer’s duty to inform their clients about their funding options (Supreme Court decision 2C_814/2014). Particular benefits for Swiss litigants include the funding of money that plaintiffs are
required to deposit with the court for anticipated costs at the outset of litigation (under the Swiss Code of Civil Procedure of 2011).
Other civil law jurisdictions
Germany, the Netherlands, and Switzerland are not the only civil law jurisdictions that allow litigation funding. Dispute finance is gaining in use and popularity in several jurisdictions, including
Italy, France, and Spain.
The American legal system stands on a body of law that is a melting pot of common law principles, case law, statutes, ordinances, and regulations. Early acceptance and wide use of contingency fee arrangements coupled with the default of the “American
rule” on attorneys’ fees—whereby each party bears its own respective legal costs regardless of outcome—meant the development of the litigation finance industry in the US trailed some common law jurisdictions around the
However, as the legal fees and expenses associated with getting a lawsuit through trial became increasingly prohibitive for all but the largest corporations, the need for litigation finance and its benefits became more obvious to the American legal
market, particularly in the years following the Great Recession. Out of the ashes of the 2008 fiscal crisis arose an industry that could deliver what claimants, law firms, and companies needed—better access to the American justice system.
As the core of dispute financing is the provision of non-recourse funding, the industry could not have come into vogue at a better time in the United States.
Litigation funders were not met with open arms by any means. Large corporate defendants that once enjoyed the privilege of engaging in delay tactics to run out their adversaries’ more limited legal budgets were not delighted to now be placed
on equal footing. To combat this emerging industry, critics of litigation finance pointed to the archaic doctrines of maintenance and champerty to denounce the viability of its use. Supposed ethical concerns (quite similar to those raised for
the past century around contingent legal fees and expenses) were raised. Yet courts were not dissuaded and slowly but surely, uneasiness over the legality of litigation finance started to wane as a body of modern case law gradually developed in
favour of its use, noting the access-to-justice benefits it could provide. Indeed, Americans have long had a more egalitarian view of access to courts and legal counsel than their English brethren. The right to counsel in criminal trials is enshrined
in the Sixth Amendment to the US Constitution—the English did not adopt this right until almost 100 years later.
For example, in what has become a seminal decision for modern litigation finance, the federal district court in Miller UK Ltd. v. Caterpillar, Inc., 17 F. Supp. 3d 711 (N.D. Ill. 2014) dismissed the notion that the use of litigation finance
was prohibited by the Illinois maintenance and champerty statute, finding instead that the statute was penal in nature and must be strictly construed as such. As the funding agreement at issue in Miller was not what the legislature intended
to prevent, the funding agreement was determined to be legal and binding.
Some states, like California, simply never adopted statutes prohibiting champerty and maintenance. (See In re Cohen’s Estate, 66 Cal. App. 2d 450, 458 (1944).) In the California decision of Pac. Gas & Elec. Co. v. Bear Stearns & Co.,
50 Cal. 3d 1118 (1990) the court stated:
“In fact we have no public policy against the funding of litigation by outsiders. […] Our legal system is based on the idea that it is better for citizens to resolve their differences in court than to resort to self-help or force.
It is repugnant to this basic philosophy to make it a tort to induce potentially meritorious litigation.”
And other states, like New York, recognized that while they technically held maintenance and champerty statutes in the books, the statutes should not act to prohibit the use of commercial litigation finance generally. (See, e.g., Justinian Capital SPC v WestLB AG, N.Y. Branch, 28 N.Y.3d 160, 167 [N.Y. 2016]). Put simply, "the champerty statute does not apply when the purpose of an assignment is the collection of a legitimate claim." (Trust for the Certificate Holders of the Merrill Lynch Mortgage Investors, Inc. v Love Funding Corp.,
13 NY3d 190, 200, 201 ). The court in Justinian further recognized that “the ancient prohibition of champerty must be reconciled with modern financial transactions.” (citing Bluebird Partners, L.P. v First Fidelity Bank, N.A.,
94 NY2d 726 .) As the court in Bluebird Partners, 94 NY2d at 739, stated, “To say the least, a finding of champerty as a matter of law might engender uncertainties in the free market system in connection with untold numbers
of sophisticated business transactions—a not insignificant potentiality in the State that harbors the financial capital of the world."
More recently, on June 3, 2020, the Minnesota Supreme Court in Maslowski v. Prospect Funding Partners, 944 N.W. 2d 235 (Sup. Ct. Minn. 2020) abolished the common-law prohibition against champerty altogether. In conducting a historical review of the centuries-old doctrine of champerty, the court concluded that the principle behind the champerty doctrine outlived
its utility: “Our review of changes in the legal profession and in society convinces us that the ancient prohibition against champerty is no longer necessary.”
Public policy concerns surrounding accessibility to the courts also helped boost approval of funding. In Hamilton Capital VII, LLC, I v. Khorrami, LLP, et al., New York Supreme Court Justice Shirley Werner Kornreich observed that:
“Providing law firms access to investment capital where the investors are effectively betting on the success of the firm promotes the sound public policy of making justice accessible to all regardless of wealth. Modern litigation is expensive,
and deep pocketed wrongdoers can deter lawsuits from being filed if a plaintiff has no means of financing her or his case.”
The development of case law in favour of commercial litigation funding in the United States helped warm its embrace by claimants as an alternative fee solution that served to dissolve financial barriers to the courts. For law firms and companies looking
to utilize this new resource, litigation finance has become an attractive choice to help improve cash flow, spread the risks of litigation, and offer flexible fee arrangements to new and current clients.
Similar to regimes with common law roots, Canada also prohibited maintenance and champerty. While Canada took steps to abolish these doctrines as crimes in 1953, they remained intact as torts in most provinces, though notably not in Quebec, which
is a civil law jurisdiction. The torts prohibited the use of contingency fee arrangements until the groundbreaking case of McIntyre Estate v. Ontario (Attorney General), 2002 CanLII 45046.
In McIntyre Estate, the Ontario Court of Appeal found a contingency fee arrangement was not per se champertous. The court reasoned that:
“One way to make justice more accessible is to provide a flexible approach to the payment of legal services by permitting contingency fees. The common law regarding contingency fee agreements has begun to evolve so as to conform to the widely
accepted modern public policy norms recognizing the advantages in permitting contingency fee agreements in some circumstances….”
While this decision relaxed strict adherence to maintenance and champerty provisions, it recognized that safeguards should remain in place to protect a claimant from unreasonable fee agreements. Subsequently, Ontario enacted a Contingency Fee Agreements
regulation, which placed a 50% cap on lawyers’ contingency fees, leaving room for lawyers to obtain a higher percentage only with leave of the court.
Litigation financing firms used the precedent of McIntyre Estate to argue that third parties should be allowed to fund litigation without running afoul of the torts of maintenance and champerty. Several decisions in the decade following McIntyre Estate culminated
in Houle v. St. Jude Medical Inc., 2017 ONSC 5129, which saw the Houles as representative plaintiffs in a proposed product liability class action. They were not in a financial position to fund the costs of litigating the class action,
nor were they (or their lawyers) prepared to take on the risk of paying any adverse costs awards in the event the litigation should fail. In that context, the plaintiffs entered into a litigation finance agreement with Omni Bridgeway (f/k/a Bentham
IMF), and sought approval of the agreement from the Ontario Superior Court.
In providing its conditional support of the litigation finance agreement, the Court recognized that:
“The law in Ontario … has developed and evolved so that supporting another’s litigation is not categorically illegal and, thus, contingency fees and third-party funding of litigation became a possibility. The policy change was the
recognition that the financial assistance of a third-party funder might be the only means for a litigant to achieve access to justice.”
The Court also noted that the approval of a litigation finance agreement in a class action matter must be done on a case-by-case basis and the general test for determining whether a third-party agreement was champertous was whether it was a “fair
and reasonable agreement that facilitates access to justice while protecting the interests of the defendants.” Other factors to be considered include whether a funding agreement compromises the principles of independence of counsel and whether
the confidentiality agreements between the parties are observed and remain intactvi.
With litigation finance being allowed in class actions, the demand for funding in single-party commercial cases would soon follow as claimants sought help to alleviate the high costs and risk associated with bringing suit. Decisions surrounding the
use of dispute funding in these types of cases by the Federal Court of Canada and the Ontario Superior Court have determined that litigation financing is not unlawful per se, that the litigation privilege attaches to certain aspects of funding
Seedlings Life Sciences Ventures LLC v. Pfizer Canada Inc., unreported Order of July 17, 2017, Court File No. T-608-17), and that while funding arrangements require approval in the context of class actions, outside class actions no such
approval is required for simple commercial cases (Seedlings Life Sciences Ventures LLC v. Pfizer Canada Inc., 2017 FC 826; see also Schenk v. Valeant, 2015 ONSC 3215).
More recently, in a positive sign forward for the litigation finance industry, the Supreme Court of Canada in 9354-9186 Québec Inc. v. Callidus Capital Corp., 2020 SCC 10 (commonly referred to as Bluberi) affirmed the decision by an insolvency court to approve a litigation finance agreement by Omni Bridgeway (f/k/a Bentham IMF) as a form of interim financing to an insolvent
debtor company. In so doing, the Court recognized that litigation can be a “pot of gold” from which funding can help claimants retrieve value. With this stamp of approval from Canada’s highest court, cash-starved litigants looking
to secure their rights in court will have an easier time turning to litigation funding firms for help in lawsuit finances.
* For an overview of the early treatment of maintenance and champerty as they pertain to third-party funding agreements in Canada, click here. And for a compilation of relevant Canadian decisions surrounding litigation finance, including recent case law, click here.
With the rising use of litigation funding in multiple countries around the world, it would come as no surprise that the international arbitration community would soon follow. The use of litigation finance in international arbitration has grown in many jurisdictions,
including England, the US, continental Europe, Singapore and Hong Kong.
In August 2014, the International Council for Commercial Arbitration (ICCA) and Queen Mary, University of London established a joint taskforce on litigation funding that aimed to create consistent rules and procedures relating to funding of international
arbitration. In April 2018, the ICCA-Queen Mary taskforce released its final report during the ICCA Congress in Sydney. The report dealt with the principal issues that arise in the context of litigation finance, including disclosure, conflicts of interest, costs and security
for costs and provided detailed commentary on each area.
In October 2014, the International Bar Association guidelines on conflicts of interest were revised and included provision to the effect that litigation funding firms and insurers were effectively equivalent to a party to an arbitration.
To remain competitive against other jurisdictions that allowed litigation finance, Singapore and Hong Kong—both key hubs in Asia for arbitral claims—adopted legislation in recent years to facilitate the use of dispute funding also called litigation funding.
In early 2017, Singapore passed legislation that abolished the torts of maintenance and champerty which had previously acted as a barrier to the funding of commercial litigation and expressly endorsed litigation finance of international arbitration
seated in Singaporevii. For a funding agreement to be enforceable, the litigation funding firm must be a ‘qualifying third-party funder’ and comply with any prescribed regulationsviii. Under the prescribed regulations,
the funding of international arbitration proceedings is permitted, as well as any connected court and mediation proceedings (including enforcement proceedings)ix. The litigation funding firm must also meet certain capital adequacy requirements.
Following recommendations made by the Law Reform Commission in 2016, Hong Kong enacted similar legislation to Singapore in 2017 in relation to the funding of arbitration and related proceedingsx. However, the crimes and torts of maintenance
and champerty were not abolished in Hong Kong. The legislation came into force in February 2019 when a Code of Practice was issued. The Code of Practice provides guidance to in relation to arbitrations seated in Hong Kong and services provided
in Hong Kong on arbitrations seated elsewhere.
Omni Bridgeway was one of the first litigation funding firm to finance international arbitration matters in both Singapore and Hong Kong under
the new legislation in each jurisdiction.
Many courts and tribunals around the world have acknowledged that the common law doctrines of maintenance and champerty are antiquated and no longer relevant in today’s modern society. As access to justice is becoming increasingly cost-prohibitive,
courts recognize the need for litigation finance as a means to alleviate the high fees and expenses as well as risks associated with bringing a legal claim. By relieving these financial pressures, equal justice under the law can be achieved, as legal disputes will truly
be decided on the merits.