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Commercial Regulatory Issues

China’s Social Justice Approach to Litigation Finance

Former Communist China has not been known for access to justice. In fact, recent protests in Hong Kong sprung up due to China’s Fugitive Offenders and Mutual Legal Assistance in Criminal Matters Legislation. Yet Communist China is experiencing a Social Spring (a transformation from Communism to Socialism). What role will China’s Communist roots play in future access to justice?  Recently the Bank of International Settlements (BIS) discussed financial inclusion. For litigation finance to reach peak ‘high quality’ development, robust international standards are required. The United Nations Universal Declaration of Human Rights (UNDHR) is an example where 192 countries agreed on the common standards of achievement for all people and nations. There is no ‘regulatory arbitrage’ when dealing with human rights.   BIS is pioneering the social etiquette around litigation finance, according to Mr. Liu Guiping, Deputy Governor of the People's Bank of China. Mr. Guiping’s startling approach marks a historic milestone for access to justice in China. Guiping says China aims to pioneer social justice, and that litigation finance’s ultimate potential logically requires coordinated development of regulation innovation. China’s Social Spring Key Takeaways: 
  • Guiping remarks on China’s potential to harmonize the now clunky relationship between attorneys, third-party investors and claimants. 
  • China is a very large country with 31 provinces. The Social Spring in China must ethically address claimants in certain jurisdictions, while in others champion access to justice, reasonable disclosures and a standard for litigation finance regulatory innovation. 
  • The notion of a common cross-border regulatory standard for litigation finance is considered absurd by many. International funders have boosted litigation finance revenues by leveraging regulatory arbitrage structures. How will China play into all of this? Only time will tell… 
As an added bonus, we collated 39 highlights from Guiping’s speech, for reference. 
Commercial Deals

The Third Party Funding Market in Asia

Funding requests across Asia are on the rise, prompting exponential growth in third party investment. Paul Starr, co-head of arbitration at King Wood & Mallesons, is one of Asia’s third party funding pioneers. Starr underscores the various litigation costs that weigh heavily on investors' minds.  In a video produced by Conventus Law, Starr profiles Asia’s third party funding marketplace. Below are some key highlights from a corresponding report from Starr, also under the Conventus banner: Starr: “It’s at the point where clients have requested a review of already-agreed legal fees for ongoing cases. While discussing such things at the start of a case is not an issue, it becomes exponentially more difficult once a case is underway.” Starr added: “Some are even opting to settle disputes for far less than expected, rather than continue carrying the cost of the case. In some cases, settlements have been reached on the verge of a judgment being handed down.”
Commercial Legal Innovation

Business Litigation Finance – What You Need to Know

We know that Litigation Finance is an excellent tool for individuals or groups who have meritorious litigation that they cannot afford to pursue. But what about businesses looking for new ways to put their limited capital to good use? Curiam discusses the ways in which businesses can use third-party legal funding to monetize legal assets, transform legal departments into profit centers, and offset the risk and expenditure of pursuing litigation. Using legal funding allows claimants to choose the legal team they want—even if that team doesn’t work on contingency. Funding lowers risk for businesses and can free up capital that can be applied to recruitment, expansion, or operating expenses. When used in a case already in progress, legal funding affords plaintiffs a stronger bargaining position—making it more difficult for defendants to push through a low-ball settlement offer. Before seeking funding, it’s important to understand the process and what funders are looking for when vetting cases for potential funding.
  • First, a non-disclosure agreement will be executed. Then relevant details will be offered to the funder.
  • 1-3 Weeks, the potential investment is evaluated and financial due diligence conducted.
  • Next, a funding agreement is proposed. Terms are agreed upon, and funds are deployed.
  • Finally, the investment is monitored and progress assessed regularly. While funders do not control litigation strategy or decisions, it’s typical for funders to remain attentive to the case until an award or settlement is reached.
Commercial

Litigation Funding Matures in 2021

Litigation finance picked up steam in the U.S. in 2021. Notably, the largest litigation funder in the world, Burford Capital, announced that corporate business outpaced direct law firm earnings for the first time.   Law.com reports that the litigation funding marketplace was generally crisis free in 2021, foreshadowing that year over year growth in 2022 may continue to trend up. While all signals seem positive, some critics highlight the concern of social inflation being a red flag for the industry, along with some debate over the disclosure of funding agreements.   Disclosure will be a hot topic for the industry going forward. Many legal reform initiatives have focused on litigation finance regulation as a marquee accomplishment. Overall, the industry does not seem to be rushing to find common ground on funding agreement regulatory considerations.  2021 also saw law firm investment schemes evolve in novel and unique ways. For example, Arizona lawmakers now allow non-attorneys to invest in law firms. The pace of these types of transformations are expected to increase as the litigation finance industry matures.  The emergence of hedge fund investment into the litigation finance sector continues to draw robust attention. The prospect of large funds entering the space is expected to accelerate, as litigation finance continues to grow exponentially on the international stage. 
Commercial Regulatory Issues

The Dawn of Litigation Finance in South Africa

South Africa is experiencing the emergence of litigation funding as a key driver of access to justice. Regulation, however, figures to be the burning issue foreshadowing thorny ethical debates regarding the country’s nascent litigation funding marketplace.  Cms-lawnow.com profiles insights across continental Africa, highlighting South Africa as a prime market for investment in litigation finance. The future of the industry depends on the actions of attorneys who engage third party investment in client litigation. South African lawyers must embrace pure intentions when parties enter into funding agreements. Without such stewardship, litigation finance stands to be banned by South African lawmakers.  Conflicts of interest are obviously a must to avoid. In the United States, third party funders hold a passive role in the litigation process. South Africa’s market is still budding, thereby generating concerns over who will be making strategic decisions.  Similarly, ownership of the overall work product in South African litigation funding agreements is vague. Regulatory guidance can solve such matters, but until then, funders and attorneys must strive to promote and embody avantgarde ethical standards to protect claimants. 
Commercial Legal Innovation

LegalPay Aims to Democratize Litigation Finance

Legal Pay is a standout across India, championing the goal of access to litigation finance tools and services. Traditionally, many in India were forced to rely on friends, relatives and/or personal loans to fund litigation if they did not have access to adequate capital. Today, Legal Pay is not only spearheading litigation funding, but also bespoke insolvency products.  Recently, Asia Tech Journal’s Ashu Agrawai (AA) sat down with Kashish Grover (KG), Legal Pay’s Chief Investment Officer, for a video interview on the future of litigation finance in India. Here some key takeaways from the conversation:  AA: What is the construct of Legal Pay? What kind of products are you doing? You basically rate and assess the quality of an asset and open it up for people to invest, right?  KG: You have actually summarized what we are doing in a very plain way. I think that the vision or idea is to help structure the entire litigation finance funding market to help plaintiffs who do not have money… You create wealth and diversify.   AA: What is the role that you play?  KG: It can take ages for cases [to mature]. That is where our filtering criteria comes into play… We only take a cut or receive any money once you win a case or receive the money. The idea is pretty simple, but we have our own proprietary algorithm that rates each case on scoring criteria.  AA: Is the money coming from your coffers? Is the money coming from partners? Because financial institutions have continued to stay away from [litigation finance].  KG: Imagine this: We have a pool or different basket of funds. If this case fits in, we allocate the case. We have investors who can invest $20,000 - $25,000. Basically, digitizing a VC model.  The interview with Legal Pay extends nearly an hour. Follow the link above to check out the entire video. 
Commercial

Texas Wrestles with Backlog as Energy Market Bounces Back

It’s estimated that the state of Texas will be dealing with case backlogs for the next 3-5 years—particularly for in-person jury trials. Before COVID, Texas saw more than 10,000 jury trials per year. In 2020, jury trials numbered 222. While the energy market is bouncing back, it will take a long time before it reaches pre-COVID levels. With all that in mind, litigation funding can offer low-risk solutions that can be highly profitable and beneficial. Validity Finance explains that as of June 2020, COVID created a bleak landscape, especially with regard to key industries. At that time, the price of oil was below the zero mark, unemployment hovered around 13%, and revenue losses were plaguing the healthcare system. Months later, bankruptcies were piling up at an alarming rate—with the energy sector being among the hardest hit. At the same time, the Texas court system ground to a halt. In 2019, it was common to have an average of 186 jury trials per week. Between March–December 2020, that number fell to just four trials a week. COVID continues to negatively impact the global economy, causing rampant uncertainty as to when, if ever, things will return to normal. Legal services, however, have enjoyed boom times during the pandemic. Legal funding in particular has grown by leaps and bounds. COVID has inspired creativity and adaptability in the legal field, while third-party legal funders are managing record sums of cash from investors clamoring for uncorrelated assets with the potential for high returns. Legal firms and clients alike are making use of Litigation Finance to share risk, bring in revenue, and pursue cases that would otherwise not be economically feasible. Legal funding also allows firms to engage in alternative fee agreements, providing greater flexibility to clients. As the world continues to address the impacts of COVID, litigation funding stands by to assist.
Commercial Regulatory Issues

Tribunal Award for Costs Upheld by English High Court

Is an award for costs of legal funding an excess of power? Not according to the English High Court. The High Court recently affirmed that tribunals may award costs for litigation funding. This is the second High Court ruling rejecting challenges to an award of funding costs. Burford Capital explains that “other costs,” as defined by section 68 of the English Arbitration Act, can indeed include costs associated with obtaining legal funding from a third party. The first case to affirm this was Essar Oilfields Services v Norscot Rig Management. Earlier this month, the issue of arbitrators awarding funding costs was affirmed in Tenke Fungurume Mining SA v Katanga Contracting Services. Both cases confirmed that awards for funding costs cannot be challenged under section 68. The challenge from TFM asserted several grounds of irregularity that impacted the proceedings in an unfair way. Ultimately, TFM argued that awarding funding costs was an excess of power—but was not able to demonstrate that the tribunal exercised a power it did not have. Thus, the argument was dismissed. TFM further argued that the award of funding was inappropriate under public policy grounds—owing to the established public policy in favor of award enforcement. Unsurprisingly, third-party legal funders found this ruling welcome. It appears to foreshadow the widespread acceptance of allowing parties to recover the costs of obtaining third-party funding. It’s also probable that more cases have contained similar rulings—but aren’t known publicly, as they are confidential. Arbitrators have long had the authority to award “other costs” associated with a case—and therefore awarding costs associated with legal funding cannot be an excessive use of power. English courts have long supported litigants recovering costs they undertake to defend their rights. This could apply not just to funders, but to expert witnesses, research, and other costs associated with a case.
Commercial Regulatory Issues

Litigation Finance a ‘Sleeping Beauty’ in Germany

Access to justice in Germany is awakening a ‘Sleeping Beauty’ (that being litigation finance), according to a new report. Heavy hitters such as Roland, Foris, Allianz and Legial dominated the German litigation finance market for well over a decade. Now, new opportunities are sprouting up across Germany, as tech-savvy investors help claimants ‘beat Goliath.’  The German publication Deutscheranwaltspiegel.de released a new essay outlining litigation finance as one of the most discussed legal instruments in German civil law. The report highlights a mood of accommodation to litigation finance as an import of ‘American Conditions.’  Litigation finance in Germany is being sought as a tool of opportunity to tackle thorny insurance cases. According to the report, one German hotel proprietor purchased business interruption insurance before COVID-19, only to be left empty-handed when the insurance company ran out of cash. He turned to a litigation finance investor to help save his hotel business from ruin.  Deutscheranwaltspiegel.de shares that regulation is coming into focus, as one-off litigation wins can cost consumers more than they bargained for. Similarly, some critics speculate that savvy litigation financiers could extort frivolous lawsuits.  Germany appears to be evolving from the ‘rights of the fittest,’ to justice for all. As such, the German litigation finance market will be one to watch over the coming year.