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Commercial Regulatory Issues

Reinsurers Clamor for Regulation of Litigation Finance

It’s fewer than two decades old, but Litigation Finance has blossomed into an industry worth $17 billion across the globe. Just over half of that money, 52%, is being spent in the United States. One reinsurer places blame on legal funding for enabling more large legal awards in cases involving medical malpractice and various types of liability. Calling it “social inflation,” reinsurers decry the industry currently hard at work increasing access to justice for those who can afford it least. Insurance Journal explains that over the past ten years, commercial auto lawsuits and general liability cases are ending in multi-million dollar awards far more than in previous years. For claims involving vehicle negligence, the percentage of outsize awards rose from 21% to 30%. Insurers complain that larger verdicts lead to higher loss ratios and larger premiums for all clients. But surely that’s a reason for businesses to behave better, rather than restrict access to judicial relief for those who have been victimized? We hear insurance providers lamenting their losses, as well as the fact that third-party funders are enjoying high returns on their investments. Could that be because funders use their talents to help clients and businesses, while insurers spent much of the pandemic looking for reasons to not make good on their policies? Not everyone agrees that Litigation Finance is the problem. Michael B McDonald of Morning Investments Consulting, explains that funding is used for meritorious claims—so while this may increase the number of lawsuits overall—it does not make individual lawsuits more expensive. McDonald also points out that legal funding can be used by law firms who are typically barred from raising equity as other businesses can. Debate over funding issues like disclosure, percentages, and security for costs are bound to continue. But the evidence that further regulation is necessary appears to be lacking.
Case Developments Commercial

Award for TPF Costs Upheld by English High Court

International arbitration cases are utilizing third-party litigation funding at increasing rates. As this industry grows, thorny legal issues often arise. One such decision in Tenke Fungurume Mining v Katanga Contracting Services is being hailed by funders and the clients who work with them. Overall, the decision affirms that an arbitration taking place in London is authorized to award costs for expenses relating to third-party funding. MONDAQ details that the arbitration involved commercial agreements regarding a mine in the Democratic Republic of Congo. The arbitration was seated in London and governed by ICC rules. After the hearing, submissions on costs and interest were exchanged by the parties. At which point, Katanga Contracting Services revealed that they had a litigation funding agreement. Some disclosure was ordered, while a request from Tenke Fungurume Mining to cross-examine witnesses in the cost claim was denied. Ultimately, TFM was ordered to pay all expenses claimed by KCS. Counterclaims were dismissed. The litigation funding portion of expenses is estimated at about $1.7 million US dollars. The two challenges were brought under section 68 of the Arbitration Act 1996. This rule states that a party may challenge an award where there’s a “serious irregularity” resulting in an intolerable injustice. The grounds for this challenge were that the tribunal was remiss in not adjourning the arbitration to permit a visit to the construction site, and failing to adjourn the arbitration due to a lead counsel getting COVID. The courts eventually determined that the tribunal considered all relevant factors before rendering a decision, as required. It was suggested that some tribunal decisions were made specifically to hasten the case’s resolution. In fact, the arbitration agreement contained a specific clause that the proceedings should be done as expeditiously as possible. In addition to clarifying costs associated with funding, this ruling affirmed a non-interventionist trend in the courts.
Commercial Fundraising

ESG Investors Enable Discrimination and Racial Harassment Litigation

As the Litigation Finance industry matures, leading funding groups have been vocal about the importance of ESG investing. This is investing in support of Environmental issues, Social Justice, and Governance that works for the greater good. With that in mind, a new fund has been made available specifically for racial discrimination and harassment cases. Black Wall Street details that when funding is used in support of ESG cases, there is more deployable cash for cases involving social justice—such as racial harassment and discrimination litigation. This facet of responsible investing is gaining popularity among third-party litigation funders and LPs who invest with them—leading to positive outcomes for those impacted by environmental and social justice failures. In discrimination and harassment situations, it’s vital that the victims have a path toward justice against their abusers. It’s equally important that employers and services providers are brought to account when they do not follow the law. In a recent video, George the Poet eloquently explains that we all have a responsibility to further the interests of justice. In this context, justice refers to public empowerment on ESG subjects that ultimately impact us all.
Announcements Commercial Fundraising

Forbes Ventures Plc – Update on Litigation Funding Securitisation

Forbes Ventures provides a further update on its first Litigation Funding Securitisation and an update on the suspension of trading in its shares. Litigation Funding Securitisation Update Forbes is advised by its Maltese Corporate Advisors that Forbes Ventures CC 1 (the “Issuer”) for which the Maltese Corporate Advisor acts as manager, did not receive the expected binding commitments for the First Issue by 17 December 2021. The Issuer is continuing its discussions with multiple investors and the Company is continuing to work on the First Issue during the last week of December 2021. The Company will make further announcements upon receipt of relevant information. Publication of Results and Restoration of Trading The Directors expect that the Company’s audited accounts for the year ended 31 December 2020, and the interim accounts for the period to 30 June 2021, will be published on 31 December 2021, and that trading in the Company’s ordinary shares on the Access segment of the AQSE Growth Market will be restored following those announcements. CC Capital Limited (formerly MEGH UK Limited), the Company’s principal shareholder, has confirmed that it will continue to provide funds to meet the operating costs of Forbes Ventures, pending receipt of funds by the Company from Litigation Funding Securitisations. The Directors of Forbes accept responsibility for the contents of this announcement. For further information, please contact:
Forbes Ventures Peter Moss, Chairman Rob Cooper, Chief Executive Officer01625 568 767 020 3687 0498
AQSE Corporate Adviser Peterhouse Capital Limited Mark Anwyl020 7469 0930
Market Abuse Regulation (MAR) Disclosure This announcement contains inside information for the purposes of Article 7 of the Market Abuse Regulation EU 596/2014 as it forms part of retained EU law (as defined in the European Union (Withdrawal) Act 2018).
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.