Understanding the ILR’s views on litigation funding

By | February 21, 2013

Third party funding is becoming increasingly popular for big businesses looking to fund multi-million pound law suits. More and more investors are showing interest in the possibility of backing litigation funding companies as well. The Association of Litigation Funders (ALF) regulates the litigation funding industry in the UK and has implemented a Code of Conduct. While this Code is voluntary, it is in litigation funding companies’ best interests to follow it, as it can help funders to be seen as more reputable.

The Code was set up by a Civil Justice Council working party and was chaired by Michael Napier QC. The main ethos behind its implementation was that it would help to monitor compliance in the industry, which has been an issue in the past. Despite this step forward, the US Institute for Legal Reform (ILR) has made claims against the Code and the UK’s funding world at large.

Some of the criticisms raised by the ILR include:

–          The Code is only followed by members of ALF, whereas the ILR believes it should be compulsory for all third party funding companies.

–          At present, litigation funding companies do not have to, by law, draft agreements in writing.

–          The ILR believes that all third party funding clients should have received independent advice on all of the funding options that are available before going down the route of litigation funding.

When analysing these claims and criticisms, the UK’s litigation funding companies expressed concern over the ILR’s misunderstanding of the funding process. One of the main oversights on the ILR’s behalf is that, in the UK, solicitors work for their client, not the funding company. With this in mind:

–          The Code of Conduct for solicitors working in England and Wales states that they must discuss all viable funding options with clients before suggesting the best route.

–          No solicitor would allow their client to enter into a verbal agreement with a litigation funding company. The solicitor is just as invested in the case as the client is, as they do not earn their keep without a winning case, meaning they will want to ensure the funding comes with a binding contract.

–          In England and Wales, litigation funding is only a viable option for big businesses due to the higher Return on Investment (ROI) that funding companies can benefit from. This means that their clients will invariably consist of experienced business men and women that are able to sensibly negotiate and understand funding contracts.

The ILR also criticised the ALF’s stipulation for funding companies to have at least 36-months’ worth of capital, as it believes this is not enough. The industry, however, has explained that no reputable litigation funding company would run the risk of running out of funds in the middle of a case, as this would ruin its chances of receiving any ROI.

Another of the ILR’s comments suggested that litigation funding companies ought to fund claims to completion and so must thoroughly research each and every funding application to assess its possibility of success. However, third party funders already carry out due diligence to the nth degree because of the high risks involved in taking on cases. Almost 85% of cases are actually dismissed as they simply do not meet the criterion, which includes having at least a 65% chance of success.

The litigation funding industry believes that the ILR has wholly misunderstood how third party funding works in England and Wales, where it is only currently available for commercial cases. Litigation funding is a burgeoning market, but as with all new industries there are sure to be more criticisms in the future.

This article was written by Aurora Johnson on behalf of Vannin Capital, a specialist corporate litigation funding company.