Business of Law Firms​

Litigation Funding​


What do you need to know this week?

This week’s Business of Law Firms article looks at litigation funding in the context of the UK Supreme Court’s recent decision that many existing litigation funding arrangements are unlawful.

To understand the significance of this, it is helpful to determine what litigation funding is.

A litigation funding arrangement (LFA) is an agreement between a party to litigation (usually the claimant) and a third party without a direct interest in the claim (the funder). The funder is usually a commercial entity that views the agreement as an investment. The commercial premise behind LFAs is that if the claimant is successful, the funder obtains a portion of the damages.

From the claimant’s perspective, LFAs offset the financial risk if the claim is unsuccessful. This is because the LFA does not usually give the funder the right to demand repayment from the claimant if the claim is unsuccessful.

LFAs are highly regulated because they are the exception to the legal rule against champerty. Champerty describes any agreement where a disinterested third party maintains litigation, which the courts have refused to recognise as a matter of public policy. The notion is that such arrangements are prone to impropriety because the funder may seek to influence the outcome of the litigation through improper or unlawful means.

The recent Supreme Court decision effectively classifies many LFAs as damage-based agreements (DBAs). Essentially, all “LFAs” that entitle the representatives (i.e. the legal advisers) to a portion of the damages upon a successful outcome are in fact DBAs.

Historically, the law takes the view that a legal adviser’s remuneration for instruction should not be conditional upon the outcome of the case. The law more tightly governs DBAs, because of the close relationship between a claimant and the claimant’s legal advisers.

In the past couple of decades, the law has given effect to certain DBAs that fit narrow criteria. But any DBA that does not comply with the relevant regulations is unenforceable. Where this is the case, the litigation funder has no right to the proceeds of any successful damage awards.

Why is this important for your interviews?

The new position is that many LFAs are now legally unenforceable DBAs. This is a massive blow to the growing litigation funding market, which has attracted investments from large investment funds prepared to commit £10m+ to fund individual legal claims.

This has in particular affected the viability of funding collective actions, which describe large-scale claims whereby a few legal advisers together represent thousands of claimants. Known as class actions in the United States, collective actions have the potential to generate the legal advisers to the class-action extraordinary fees. However, English law greatly restricts the ability of legal advisers to enter into DBAs to fund collective actions. Specifically, representatives must demonstrate to the court that they have sufficient capital reserves to bring a collective action.

How is this topic relevant to law firms?

The comparative restriction on the ability of law firms and other specialist claims management businesses to fund collective actions is yet another example of how the litigation culture in the United States and the UK dramatically differs. No doubt, law firms in the UK would jump at the chance to bring class actions as easily as their peers across the Atlantic.

However, the Supreme Court’s decision, which concerned the lawfulness of the funding arrangements for a potential collective action, is a decided step in the opposite direction.