Third-Party Funding Of Litigation: A Perspective On The International Landscape

Jonathan Wood and Daniel Hemming of Reynolds Porter Chamberlain take an in-depth look at third-party funding in the global litigation landscape:

"If the availability of funding means that more good claims are litigated and won, then, subject to the proper scrutiny and management of the funder’s role, this continued growth should be welcomed."

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In 1787, Jeremy Bentham ventured, as part of a famous attack on “the antique laws against what are called Maintenance and Champerty”, that:

No man of ripe years, and of sound mind, ought, out of loving kindness to him, to be hindered from making such bargain, in the way of obtaining money, as, acting with his eyes open, he deems conducive to his interest.  

Over 220 years later, most of the major common law jurisdictions have taken his criticisms on board by removing or limiting the old common law restrictions on the third-party funding of litigation and are catching up with some of the civil law jurisdictions that embraced it a little earlier.

The remaining restrictions

Despite the lowering of barriers, they nevertheless remain and the “antique laws” of champerty and maintenance continue to exert significant influence in many jurisdictions. For example, many common law jurisdictions where third-party funding is now permitted (including England and Wales) continue to prevent funders exerting control and influence over the conduct of litigation and most prevent the purchase of claims by third parties without an existing interest. 

For example, in July 2013, the Ontario Superior Court of Justice expressly approved the use of third-party funding in Bayens v Kinross Gold Corporation, 2013 ONSC 4974. However, the court maintained significant restrictions, deciding that in any proceedings to be funded by a third party the funding agreement must be disclosed to and approved by the courts, and approval should only be given where, first, the funder cannot interfere with the conduct of the proceedings or the lawyer/client relationship and, second, the funding is necessary to provide access to justice. So it remains the case that litigants who can pay must pay.  

Earlier this year – in a rare event in the US – the New York County Supreme Court dismissed a claim on the ground of champerty in Justinian Capital v WestLB, 2014 NY Slip Op. 24046.  Deutsche Pfandbriefbank AG (DPAG) had purchased mortgage-linked notes issued by two special purpose companies (SPCs) sponsored and managed by WestLB. The SPCs collapsed. For political reasons DPAG was reluctant to sue WestLB. DPAG therefore entered into a “sale and purchase agreement” with Justinian Capital, under which Justinian agreed to pursue a claim against WestLB, take 15 per cent of any recovery and pass the rest to DPAG. 

Although the agreement provided for US$500,000 to be paid for each of the two notes, no payments were in fact made. In the light of that, and the fact that Justinian would only retain 15 per cent of the proceeds despite purportedly purchasing the notes outright, the court decided that Justinian had not purchased the securities and dismissed the claim on the ground that it was champertous. It noted that “it is not champerty to sue on behalf of debt that you buy for yourself, but it is champerty to sue, on behalf of another and for a fee, for a debt that is not really your own.”  (Note that, if an actual purchase had taken place, then Justinian could have made use of a legislative “safe harbour” precluding a champerty defence where securities are purchased by a third party for at least US$500,000.)         

Regulation stepping in

In anyone’s view, investing in litigation is high-risk, so it is inevitable that litigation funders will expect to receive a substantial return on their investment in cases that are successful. It is therefore a real possibility that a successful, funded litigant will end up giving away a significant proportion of its recovery to the funder. In light of that, as well as other potentially contentious issues, it is not surprising that the lowering of common law barriers to third-party funding has led to consideration of whether other regulation is necessary to protect actual and prospective funded litigants. 

The Australian example is instructive (at least as an example of how this process can go wrong). Since the well-known 2006 High Court decision in Campbells Cash and Carry Pty Ltd  v Fostif Pty Ltd [2006] HCA 41 (in which it was held to be permissible for a funder to fund and control a class action in exchange for a third of any damages) Australia has been a very permissive jurisdiction for third-party funding.  

Between 2009 and 2012, litigation funders were then subjected to rapidly shifting regulatory sands as the Australian courts (in the cases of Brookfield Multiplex Limited v International Litigation Funding Partners Pte Ltd [2009] FCAFC 147 and Chameleon Mining ML v International Litigation Partners Pte Ltd [2011] NSWCA 50 and [2012] HCA 45), the Australian Securities and Investments Commission and the federal government imposed, varied and removed (not always in that order) regulatory obligations on litigation funders. The net cumulative effect of these was (to cut a long story short) significant confusion and a possible split between the rules applicable to the funders of class actions and the funders of other claims. In response to this, in December 2012 the federal government enacted regulations that, in effect, exempted all litigation funding from regulation,                 re-instating the pre-2009 position (subject to a requirement adequately to manage conflicts of interest). Its principal motivation was to protect funded class actions, which it considered a fundamental part of access to justice, from regulatory constraints.

In England and Wales, the third-party funding of litigation is not currently subject to any statutory regulation, although a voluntary code does exist. In November 2011, the Association of Litigation Funders (which currently comprises seven of the largest and most respected litigation funds operating in England and Wales) published (in collaboration with the Civil Justice Council) the Code of Conduct for Litigation Funders, by which its members must abide. This was updated in January 2014. The code, among other things, prescribes standards for capital adequacy (currently “access to a minimum of £2 million of capital”) and sets out the key matters which a litigation funding agreement must provide for, such as the circumstances in which the funder may withdraw from a case.

Lord Justice Jackson’s Review of Civil Litigation Costs, published in December 2009 (which has been followed by the most significant changes to civil litigation in England and Wales since the late 1990s), while recognising that a voluntary code would be sufficient in the short term, recommended that: “The question whether there should be statutory regulation of third party funders by the [Financial Conduct Authority] ought to be revisited if and when the third party funding market expands.” The FCA is currently on a “watching brief” of the industry.

According to one argument, there is less of an imperative for statutory regulation of third-party funding in England and Wales than, for example, in the United States or Australia, because of the more limited scope for class actions and the resulting fact that the focus of the funders has been on large, high-value cases between sophisticated commercial counterparties less in need of protection by a regulator. Against that, if, as a result of the different focus, the purpose of funding is not principally to provide access to justice for consumers, then the social justification for leaving the industry unregulated is, arguably, reduced.   

Either way, as the industry continues to grow, in England and Wales and in other jurisdictions where there has been no or limited regulation to date, and as third-party funding is increasingly seen as a mainstream financial service or product (which we turn to below) increased regulatory scrutiny is inevitable.    

International arbitration

In passing, it is relevant to note that the effect of third-party funding is also being felt in international arbitration. The increased availability of third-party funding for high-value claims has been identified as a factor in the spike in certain types of arbitration, such as investment treaty claims. In turn, this has been identified as prompting, for example, Argentina’s threats to leave the International Centre for Settlement of Investment Disputes. In the light of all this, arbitral institutions have been considering whether new rules are required to regulate, for example, the role of funders in arbitration, disclosure of funding arrangements and conflicts of interest, among other issues.           

Access to justice v managing litigation risk

The acceptance and growth of third-party funding in common law jurisdictions has, in general, been driven by a desire to improve access to justice for the impecunious litigant. The next phase, which is now beginning in England and Wales but has been under way for some time in other jurisdictions, involves an increasing recognition of third-party funding as a risk-management tool, which, at least arguably, all prospective litigants should consider. 

In many respects this shift is both uncontroversial and inevitable. After all, going by one description, a claim is simply an asset; it is a future revenue stream, the existence, amount and timing of which are uncertain. In jurisdictions with cost-shifting, a claim can end up being a significant liability, potentially in excess of the original value of the claim. In the light of that, a sophisticated litigant will wish to consider the options available to manage its exposure to that asset. Third-party funding is one way to achieve that. Moreover, all litigation has to be funded somehow, whether via a bank loan, raising funds from investors or self-financing from existing funds. All of these funding options involve a litigant giving up some of its “upside”, albeit less transparently than with a third-party funding arrangement where the funder receives a share of the damages or a multiple of its investment.

However, it is important that litigants and funders do not lose sight of the fact that a claim remains a special type of asset. Litigation is a demanding and time-intensive process that requires dedication and effort from the litigant. The promise of a substantial upside (and the threat of a substantial downside) is therefore a necessary motivator, beneficial to it and to the funder.


Third-party funding is already an established part of the litigation landscape internationally and its continued growth over the next five years is inevitable. Many who feared a flood of unmeritorious claims have accepted the logic that funders invest to win and that they are often better placed to form a dispassionate view of the merits than the litigant itself. If the availability of funding means that more good claims are litigated (either because the litigant could not otherwise pay the costs or could not justify them commercially without some risk mitigation) and won, then, subject to the proper scrutiny and management of the funder’s role, this continued growth should be welcomed.

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