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Clarifying the Ethics and Responsibilities Inherent in Litigation Funding

December 7, 2020

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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Commercial Regulatory Issues

Australian High Court Limits Recovery of Litigation Funding Costs

By John Freund |

The High Court of Australia has delivered a significant decision clarifying the limits of recoverable damages in funded litigation, confirming that claimants cannot recover litigation funding commissions or fees as compensable loss, even where those costs materially reduce the net recovery.

Ashurst reports that the High Court rejected arguments that litigation funding costs should be treated as damages flowing from a defendant’s wrongdoing. The ruling arose from a shareholder class action in which claimants sought to recover the funding commission deducted from their settlement proceeds, contending that the costs were a foreseeable consequence of the underlying misconduct. The court disagreed, holding that litigation funding expenses are properly characterised as the price paid to pursue litigation, rather than loss caused by the defendant.

In reaching its decision, the High Court emphasised the distinction between harm suffered as a result of wrongful conduct and the commercial arrangements a claimant enters into to enforce their rights. While acknowledging that litigation funding is now a common and often necessary feature of large-scale litigation, the court concluded that this reality does not convert funding costs into recoverable damages. Allowing such recovery, the court reasoned, would represent an expansion of damages principles beyond established limits.

The decision provides welcome clarity for defendants facing funded claims, while reinforcing long-standing principles of Australian damages law. At the same time, it confirms that litigation funding costs remain a matter to be borne out of recoveries, subject to court approval regimes and regulatory oversight rather than being shifted onto defendants through damages awards.

Case Developments Commercial

Janus Henderson Affiliates Lose Early Bid in Litigation Finance Dispute

By John Freund |

Janus Henderson Group affiliates have suffered an early procedural setback in a closely watched litigation finance dispute that underscores the internal tensions that can arise within funder-backed investment structures and joint ventures.

Bloomberg Law reports that a Delaware Chancery Court judge has refused to dismiss claims brought by Calumet Capital Partners against several entities linked to Janus Henderson. The ruling allows the case to proceed into discovery, rejecting arguments that the complaint failed to state viable claims. Calumet alleges that the defendants engaged in a concerted effort to undermine a litigation finance joint venture in order to force a buyout of Calumet’s interests on unfavorable terms.

According to the complaint, the dispute centers on governance and control issues within a litigation finance vehicle that was designed to deploy capital into funded legal claims. Calumet contends that Janus Henderson affiliated entities systematically blocked proposed funding deals, interfered with relationships, and restricted the venture’s ability to operate as intended. These actions, Calumet claims, were aimed at depressing the value of its stake and pressuring it into an exit at a steep discount.

The defendants moved to dismiss the case, arguing that their actions were contractually permitted and that Calumet’s allegations were insufficient to support claims such as breach of contract and tortious interference. The court disagreed at this stage, finding that Calumet had plausibly alleged misconduct that warrants further factual development. While the ruling does not determine the merits of the case, it keeps alive serious allegations about how litigation finance partnerships are managed and unwound when commercial interests diverge.

Commercial People Moves

Red Lion Chambers Hires Former Harbour Director for Client Role

By John Freund |

Red Lion Chambers has taken a notable step in strengthening its engagement with litigation funders and commercial clients by appointing a former senior figure from the funding industry into a newly created client-facing role. The move reflects the increasingly close relationship between the UK Bar and third-party litigation finance, particularly in complex commercial and group actions where funding strategy and legal execution are closely intertwined.

An article in Global Legal Post reports that Red Lion Chambers has appointed James Hartley, formerly a director at Harbour Litigation Funding, as its first director of client relationships. In this newly established position, Hartley will be responsible for developing relationships with solicitors, funders, and other clients, as well as helping to align the chambers’ barristers with funded opportunities across commercial litigation, arbitration, and competition claims.

Hartley brings several years of experience from the funding side of the market, having worked at Harbour Litigation Funding where he was involved in evaluating claims, structuring funding arrangements, and working closely with law firms and counsel on strategy. His move to Red Lion Chambers underscores the value chambers are placing on individuals who understand both the legal and financial dynamics of funded disputes, as well as the commercial drivers behind claim selection and case management.

According to the report, Red Lion Chambers sees the appointment as part of a broader effort to modernise how barristers’ chambers engage with the market, particularly as clients and funders increasingly expect a more coordinated and commercially aware approach from counsel. The role is intended to complement, rather than replace, the traditional clerking function, with a specific focus on strategic relationships and long-term growth areas.