Funding options for legal services - Third-party funding

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Overview

Third-party funding (TPF) in legal services offers a strategic way to manage litigation costs, especially for high-value claims. This article provides advanced SQE1 FLK1 students with a comprehensive examination of TPF, covering its benefits, legal principles, risks, and practical applications in legal practice.

Understanding Third-Party Funding

Third-party funding involves a non-party financing a litigant's legal expenses in return for a portion of any financial recovery. It is particularly prevalent in commercial litigation with strong success prospects.

Legal Framework

Third-party funding originates from doctrines like champerty and maintenance, which restrain unwarranted interferences in lawsuits. While historically disfavored, modern legal systems have adapted to regulate these interactions.

  • Champerty and Maintenance: Historically, these doctrines prohibited third-party intervention. However, regulation now permits TPF under strict legal and ethical rules.
  • Statutory Regulation: Jurisdictions such as England have codes governing third-party funders' conduct, ensuring transparency and accountability.

Benefits of Third-Party Funding

Risk Mitigation

Clients benefit by shifting financial risks to funders, enabling litigation pursuit without incurring substantial costs.

Access to Justice

TPF broadens judicial access for individuals or businesses unable to independently fund litigation, democratizing legal participation.

Financial Management

By externalizing costs, organizations maintain liquidity, allocating resources more strategically across business functions.

Risks and Challenges

Potential Conflicts

Introducing funders can cause disputes over control of litigation tactics. Clear agreements are essential to manage funder influence and align interests.

Confidentiality Concerns

The necessity to share sensitive information with funders can pose confidentiality threats, necessitating robust preventive measures.

Control of Litigation

Funders may influence litigation strategies, potentially impacting the client’s autonomy. Transparent communication is key to mitigating this risk.

Relevant Case Law

Arkin v. Borchard Lines Ltd ([2005] EWCA Civ 655): This landmark case outlines the extent of liability for third-party funders, emphasizing proportionality in cost-sharing and highlighting funder responsibilities.

Example: A technology start-up with a viable patent claim engages a third-party funder. The funder examines the case merits and agrees to finance litigation, reducing the start-up's financial exposure while sharing in potential recoveries.

Another Example: An export company facing breach of contract claims opts for TPF. This allows them to preserve cash flow while pursuing a favorable legal outcome, with the funder entitled to a share of any successful result.

Conclusion

Third-party funding is a transformative tool in legal finance, offering innovative pathways to manage litigation risks and accessibility. By understanding its legal principles, benefits, and challenges, students can adeptly incorporate TPF into their practice, optimizing client outcomes and enhancing legal strategies.