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Clarifying the Ethics and Responsibilities Inherent in Litigation Funding

The following is a contributed piece from Nick Rowles-Davies, Executive Vice Chairman of Litigation Capital Management. Along with Andrew Saker, CEO of Omni Bridgeway, and Neil Purslow, Co-Founder of Therium, Nick will be a panelist on LFJ’s upcoming special digital conference — an industry roundup of the major events impacting commercial litigation funding in 2020, and what to expect in 2021. 

Recently, there has been a lot of discussion around litigation finance. This is generally a good thing, as although litigation finance is no longer an unknown dark art, the industry still benefits from a heightened profile as it progresses on the journey from obscure to mainstream.

That said, recent theoretical musings have concerned the ethics surrounding a funder’s involvement in a case, some funders’ closer associations with law firms and the duties of the lawyers running funded cases. These are important issues that should be discussed and debated openly, albeit more usefully by practitioners and funders who have real experience of such matters in jurisdictions where funding is permitted, so as to avoid naïve commentary that betrays a lack of practical knowledge and understanding of how these matters actually work.

One issue raised recently is the concern that using funding can create a conflict between the duties of the lawyer to their client and any duty to the funder. There is a suggestion that in this regard, funders create a ‘practical difficulty’ for lawyers, who are torn between protecting the interests of their clients and pleasing investors.

The only duty of the lawyers in a matter which is financed by a third-party funder is always the one to their client. Professional funders invariably include a provision within their funding agreements that requires the lawyers to act in accordance with their professional duties and any regulatory requirements. That said, the practical reality is that any professional funder will wish to ensure that the interests of the client and the funder are entirely aligned. No funder wants to create a situation where the client has little or nothing to gain from the outcome of the case. The simple reason for this is that the funder does not influence or control the decision making in the litigation or arbitration. They cannot, and attempting to do so would put the funder’s investment at risk.

Funders provide passive capital and once they have decided to invest in a case there are only certain circumstances where a withdrawal from the case is permitted. In reality, given the experience of the established professional funding cohort, most clients are keen to discuss their case with the funder in a way that seeks out the funder’s views and gives the client the benefit of the many years of experience that the funders have gained.

Despite the suggested concerns, funders do only have a limited and pre-agreed role in any decision making, and the funding agreements reflect that position. It has also been suggested that clients should seek independent advice on the terms of the funding agreement, namely alternative advice from the lawyers running the actual case. That does happen, although it is not mandatory given that the parties are commercial entities seeking to enter into a commercial agreement, but then neither is it mandatory for a client entering into a DBA/contingency fee agreement with their lawyers in England and Wales.

It has been observed that there are law firms who are forging closer links or associations with funders and whether that, also, raises questions of duty or loyalty. The commentary above is equally applicable to this. Lawyers know where their duty lies, and professional funders have no interest in interfering in that. Perhaps a more pertinent question is to ask why these associations are happening.

Since the last financial crisis, the law firm model has been changing with corporate clients insisting on higher value and better predictability on fees. In a downward trend since 2008, law firms have been losing out on collections on billable time. Moreover, the most important issue and the area that in house legal teams believe needs the most attention is the provision of more creative and alternative billing solutions.[1]

One way in which law firms can offer an alternative is by the provision of litigation finance. Law firms that are forging closer associations with funders are showing that they understand their clients’ needs and are reacting to their clients’ requests by offering an alternative. The legal market is extremely competitive. It should be assumed that all the lawyers pitching commercial clients for work are very good lawyers. Law firms, particularly in the current financial climate, not only have to address the requirements of those commercial and corporate clients, but they need to set themselves apart from the competition. They need to change the narrative and distinguish themselves in a crowded market. The firms that have made such arrangements are benefitting from the ability to do this and are gaining more work from existing clients and winning new clients with the benefit of their associations with litigation funders. Used intelligently, litigation finance is an excellent business development tool for law firms.

However, these associations go much further than simply being a response to in house corporate demands or the business development needs of law firms. The benefits to the law firms and to their clients are numerous, as they are of course to the funders. Nothing in these arrangements is, should be, or indeed could be, exclusive. The law firm should always act in the client’s best interests.

Whilst the funder may see all of a firm’s potential funding opportunities, it is incumbent on the funder to create an arrangement that is always going to be competitive for the law firm’s clients. That is a significant benefit to all parties. The established professional funders consider every case on its own merit and risk profile and could not guarantee that they will always offer the cheapest terms – to do so would undermine one of the cardinal rules practiced by real funders, namely the pricing of risk. Accordingly, there will be occasions where the funder with whom the firm has an association cannot provide terms that meet the client’s demands for a particular case.

Whilst the regular referral of cases is a benefit to the funder, there is real value to both funder and law firm in the knowledge and experience gained by working closely together, understanding the methodology and then adopting the processes and the thinking undertaken by the funders, even using similar terminology and document precedents.

This exchange of information means that the law firm really understands what it takes to obtain approval for funding. That leads to a better result for clients. There is no time and money wasted in hopeless applications and cases that can be funded are executed more swiftly whilst those that cannot be funded rejected swiftly, or do not make it past the law firm’s triage process which has been honed by continued education from the funder.

It is incumbent on any new industry to listen to concerns, ethical or otherwise, and respond with appropriate understanding and professionalism to address those concerns. All of the issues raised recently have been asked and answered many times before. The litigation finance industry has matured significantly in the last 10 years and is now treated, rightly, as a useful and often necessary tool in any disputes lawyer’s toolbox. The general international trend is one of growing acceptance, increasing adoption of, and accelerated adaptation to, litigation finance—particularly in sophisticated international hubs for dispute resolution.

 

[1] (2019 Report on the State Of The Legal Market by the Georgetown University Law Centre and Thomson Reuters Legal Executive Institute & Peer Monitor)

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Community Spotlight: Guillermo Ruiz Medrano, Attorney, CUATRECASAS

By John Freund |

Guillermo Ruiz Medrano is a Spanish lawyer based in Barcelona, specializing in advising local and international clients on litigation finance deals and restructuring transactions, with a focus on international and cross-border deals, and engaged in the implementation of cutting-edge litigation funding structures.

Company Name and Description: CUATRECASAS - a leading multi-disciplinary Spanish law firm, providing comprehensive legal services to clients across various industries. With a strong presence in Spain, Portugal, and Latin America, among others, the firm is recognized for its innovative solutions and commitment to excellence.  

Company Website: https://www.cuatrecasas.com/en/spain/

Year Founded: 1917

Headquarters: Barcelona and Madrid (Spain).

Area of Focus: Litigation Funding and Restructuring

Member Quote: Litigation funding in Spain is experiencing a dynamic transformation, making it an exciting jurisdiction for both national and international players. With the market expanding rapidly and new regulations on the horizon, particularly for consumer cases, Spain offers a fertile ground for innovative funding solutions. This burgeoning landscape ensures that litigation funding here is not only robust but also poised for sustainable growth, making Spain a premier destination for legal investment.

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GreensLedge Capital Markets LLC played the role of Placement Agent for Pegasus. GreensLedge Senior Managing Director, Douglas Lipton, added, "We are delighted to continue expanding Pegasus' investor base through their second securitization issuance and assisting them in creatively developing their platform."

Headquartered in Deerfield Beach, Florida, Pegasus was founded in 2008 as a pre-settlement litigation finance company. Since its inception, the company's management team has successfully sourced, underwritten, and serviced over half a billion dollars through more than 30,000 advances. While Pegasus has traditionally focused on the New York market, it has established a strong presence in the Southeast and Texas markets as well.

Pegasus is a proud member of the American Legal Finance Association (ALFA), a national organization comprising companies that provide non-recourse funds to personal injury victims. ALFA's primary objective is to establish industry standards for transparency in legal funding transactions, ensuring upfront and clear disclosure to consumers.

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Colantonio joined LLS in 2021 as an investment manager and served in that role for two years before being promoted to senior investment manager in May 2023. Prior to joining LLS in 2021, Colantonio had also spent five years at MinterEllison as a senior associate, as well as having served as a senior legal counsel at Commonwealth Bank. 

In her own post on LinkedIn, Colantonio provided the following comment: “Excited to step into the role as Chief Investment Officer at Litigation Lending Services Limited! A big thank you to the leadership team for their trust and support. Looking forward to driving our mission forward and exploring new opportunities in litigation funding.”As LFJ reported in August of this year, Colantonio was recently appointed to the board of The Association of Litigation Funders of Australia (AALF) as a non executive director, replacing LLS’ own Stephen Conrad in that position.