Introduction
Third-party funding (TPF) is a legal financing mechanism wherein an independent entity provides financial resources to a litigant to cover legal costs in exchange for a share of any financial recovery from the case. This arrangement plays an important role in modern litigation, particularly in commercial disputes, by enabling parties to pursue valid claims that might otherwise be impeded by financial limitations. TPF operates within a specific legal framework that balances improving access to justice with regulating potential abuses, drawing from principles rooted in the doctrines of champerty and maintenance and shaped by statutory regulations and case law.
Understanding Third-Party Funding
Third-party funding involves a contractual agreement where a funder, unconnected to the dispute, agrees to finance a litigant's legal expenses in return for a portion of any successful judgment or settlement. This arrangement is prevalent in commercial litigation, arbitration, and international disputes. The funder's involvement is financial; they do not direct the legal proceedings or influence strategic decisions.
Legal Framework
Third-party funding is regulated to prevent misuse and ensure fairness in legal proceedings. The historical doctrines of champerty and maintenance, which prohibited third parties from interfering in litigation, have evolved to accommodate TPF under regulated conditions.
Champerty and Maintenance
Maintenance refers to the improper support of litigation by a stranger without just cause, while champerty involves such support with the intent of sharing in the proceeds of the litigation. Historically, these doctrines aimed to prevent frivolous lawsuits and protect the integrity of the legal system. However, modern legal systems recognize that, when properly regulated, TPF can improve access to justice without undermining legal integrity.
Statutory Regulation
In jurisdictions like England and Wales, TPF is subject to regulations and codes of conduct to ensure ethical practices. The Association of Litigation Funders (ALF) has established a voluntary Code of Conduct that sets standards for transparency, capital adequacy, and funder behavior. Funders must disclose their involvement and comply with principles that preserve the litigant's control over the case.
Benefits of Third-Party Funding
Access to Justice
Third-party funding improves access to justice by enabling parties with legitimate claims but insufficient resources to pursue legal action. It levels the playing field, particularly when facing opponents with substantial financial means.
Risk Management
By assuming the financial risk of litigation, funders allow litigants to mitigate the potential financial impact of an adverse outcome. If the case is unsuccessful, the funder absorbs the costs, shielding the litigant from significant financial loss.
Financial Planning
For businesses, TPF allows better allocation of financial resources. Legal costs can be unpredictable; utilizing TPF enables companies to manage budgets effectively without diverting funds from essential operations.
Risks and Challenges
Control and Influence
While funders are generally prohibited from controlling legal proceedings, there is a risk they may attempt to influence decisions. Funding agreements must clearly define the roles and ensure the litigant's autonomy over the case is maintained.
Confidentiality
Sharing sensitive information with funders raises concerns about confidentiality and privilege. Legal professionals must secure appropriate confidentiality agreements to ensure disclosures do not waive legal professional privilege.
Conflicts of Interest
The funder's financial stake may occasionally conflict with the litigant's objectives. Careful structuring of funding agreements and adherence to ethical guidelines are key to managing potential conflicts.
Relevant Case Law
Arkin v Borchard Lines Ltd [2005] EWCA Civ 655 is a major case in England and Wales addressing third-party funder liability for adverse costs. The Court of Appeal held that a professional funder could be liable for the opposing party's costs, but only to the extent of the funding provided. This principle, known as the "Arkin cap," significantly impacts both funders and litigants by affecting risk assessment and exposure in funding arrangements.
Practical Applications
Consider a small technology firm alleging patent infringement against a larger competitor. The substantial cost of intellectual property litigation may be prohibitive. Through third-party funding, the firm can pursue its claim without bearing immediate financial burdens. The funder, recognizing the case's merits and potential damages, invests in exchange for a share of the recovery.
In another scenario, a business engaged in international arbitration might lack the liquidity to finance prolonged proceedings. Third-party funding enables the business to enforce contractual rights and seek remedies without compromising financial stability.
Conclusion
Third-party funding represents a complex interplay of legal finance, ethics, and procedural law. Rooted in historical doctrines like champerty and maintenance, it has adapted to meet contemporary litigation needs within regulated frameworks. As demonstrated in Arkin v Borchard Lines Ltd, the relationship between funders, litigants, and the legal system necessitates meticulous compliance with regulatory standards and ethical considerations.
Understanding the aspects of TPF is essential. It requires managing principles that improve access to justice while safeguarding the integrity of legal proceedings. Legal professionals must carefully structure funding agreements to comply with regulations, preserve client autonomy, and protect confidentiality.
Third-party funding significantly influences modern legal practice, affecting how litigation is financed and how justice is pursued. Its strategic application demands a comprehensive understanding of legal principles, regulatory requirements, and the potential implications for all parties involved.
