Litigation Finance – When did it all begin?
Whilst Litigation Finance appears to be the new kid on the block for many investors, in truth, its rise to prominence dates back to the 1990s, so not as new as some may think. Since then, Litigation Finance is rapidly evolving into a global phenomenon.
Prior to the 1990s both Maintenance*1 and Champerty*2 were illegal in the UK and Australia; thus, preventing outside involvement in legal proceedings. Changes to the laws and regulations in these two jurisdictions has paved the way for Litigation Finance to become the asset class of choice for many High-Net-Worth Individuals (HNWI) along with other interested parties who are searching for investments which are uncorrelated to volatile markets.
Litigation Finance in the UK
The rise of litigation financing in the United Kingdom and Australia was almost simultaneous; but followed different directions. The Criminal Law Act of 1967 in the UK decriminalised Maintenance and Champerty, which resulted in tort liability being renounced. Then in 1990, the Courts and Legal Services Act was passed, which meant that lawyers were able to enter into conditional fee agreements (CFAs) including ‘no-win, no-fee' contracts. Once the prohibition of CFAs had been lifted, it meant that lawyers were able to ‘fund’ litigations with their expertise and time, in exchange for a share of the damages. Not only did the 1990 Act unlock the door to the litigation financing of today, but more importantly, it allowed potential litigants, who’d previously been unable to afford to sue for any wrongdoing, or did not qualify for access to legal aid, the possibility of justice. In 1999 the Access to Justice Act was passed in the UK. The Act provided alternatives to CFAs in three ways:
- Personal injury cases were excluded from civil legal aid
- Successful claimants could pass any insurance premiums, and other fees associated with CFAs, onto their adversaries under the UK’s ‘loser pays’ rule
- After the Event (ATE) insurance was introduced, which meant that litigants could insure against having to pay opposition legal fees if the claim was unsuccessful; furthermore, all aspects of their suits could be funded by third parties whatever the outcome.
In a 2002 decision, Litigation Finance was implicitly endorsed; only funding arrangements that were intended to undermine justice would be viewed as unlawful. And so, with the door to Litigation Finance now firmly open, a vibrant market for claim funding galvanised.
Litigation Finance in Australia
In Australia, during the mid-1990s, sanctioning of legislation allowed insolvency practitioners to engage in contracts to finance litigation recognised as company property. Ergo if a company was in the process of becoming bankrupt, litigation funding could be sought in connection with any pre-existing claims, since they were not able to self-finance due to insolvency expenses. The legislation served to recognise legal claims as a corporate asset.
Class-action lawsuits were legalised in Australia in 1992, which afforded courts a more efficient way of dealing with group claims. A further decision was passed in 2006 when the Australian High Court held that litigation funding was not an abuse of process nor contrary to public policy. And so, Litigation Finance became fully sanctioned; class-action suits started to become the new normal. Indeed, in Australia at least, litigation funding is used in virtually all major class actions.
Litigation Finance in the United States
Personal Injury Cases were the cornerstone of Litigation Finance in the United States (US) prior to the mid 2000s. Since then, even though the Litigation Finance market is still relatively new, the market continues to expand; nowadays it is not unusual for law firms and companies to use Litigation Funding to raise capital, finance lawsuits and mitigate risk from their bottom line.
The majority of Class Actions in the US are generally on an ‘opt out’ basis, which means that unless an individual claimant specifies that they do not want to be included, they will automatically be incorporated into the action. The difficultly here is that not all claimants can be identified. In Australia the reverse is true; individuals must ‘opt in’ and sign into the litigation funding agreement, this means that potential funders can identify all interested parties.
The laws surrounding Litigation Finance in the USA has generally been left to individual States. Not since early 2015 has Congress taken an interest in the asset class.
Litigation Finance isn’t new. It is, however, an asset class that is outperforming all other traditional assets and is proving to be unaffected and uncorrelated to volatile markets. If you are interested in finding out more, then look no further. Greenpark Platinum, Proven Performance.
1Maintenance - is where individuals or groups, who are not connected in any way to a legal case, provide funding to enable the case to be tried.
2 Champerty - Champerty is Maintenance for profit.