Time to get a grip on lit funding

Third-party funders must accept statutory regulation to protect the integrity of the justice system

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Mary Terzino, consultant, the US Chamber Institute for Legal Reform

Claire Madden of Connection Capital recently wrote an opinion piece on third-party litigation funding for TheLawyer.com in which she detailed the potential for investment in litigation by third parties that seek to profit from it but are otherwise strangers to disputes.

Funding a lawsuit as an investment is well-established in its ‘home territory’ of Australia – where it has encountered much criticism – and is growing rapidly in the UK and US. Hundreds of millions of pounds are now available for investment in the UK and funders have backed cases in the US, New Zealand, Australia, the Netherlands and even Ecuador.

The US Chamber Institute for Legal Reform (ILR) is watching the industry with concern. Decisions of UK policy-makers will reverberate around the world.

A particular concern is that third-party funding skews the legal system away from its purpose of delivering justice and towards a model that places profit at its centre, as described by Madden. Funders will hedge investments against their portfolios, encouraging cases that are weak on the merits but have the potential for a large reward.

In addition, adding a funder undermines the client-lawyer relationship and undercuts the claimant’s ability to control strategies and settlements. While some funders claim they do not interfere, this strains credulity as they have an investment to protect. In one agreement, the funder even selected the lawyer. This threatens the client-lawyer relationship that is at the heart of the British legal system.

Moreover, funders keep confidential the identities of the cases on which they are involved. This prejudices the rights of parties, who ought to be told who has a financial stake in their lawsuit. It also lets funders operate without the engagement of the judicial system, which is bad not only for opposing parties, but for consumers as well.

The costs of litigation are high and rising in the UK. The Centre for Policy Studies has stated that the culture of litigation is “bleeding the health and education services dry”, and warned that this is diminishing “the quality of services, the experiences of those who use them, and the role of professionals”.

Businesses similarly suffer from excessive litigation, nowhere more so than in the US. ILR has studied the impact of the US tort system, documenting increased costs, lost jobs and falling foreign investment as a result of meritless litigation. Consumers pay a higher price as a result. Encouraging litigation by converting it into an investment is bad for business and for consumers.

The Civil Justice Council recently introduced a code of conduct for a voluntary association of the third-party funding industry in the UK. Although self-regulation is better than none, the code is vague and lacks meaningful sanctions. No wonder – it was drafted by a group dominated by third-party funders.

The code was promoted as a first step for an industry in its infancy, but with hundreds of millions at stake it is rapidly approaching adulthood. For too long, funders have tried to exclude policy-makers from the debate on funding and the wider justice system.

It is time for funders to accept statutory regulation. Politicians could thus signal that the UK justice system still values justice over cash.