Litigation Funding: Empowering legal professionals in the pursuit of justice

In the complex world of legal battles, the pursuit of justice often comes with a hefty price tag. Lawyers and their clients must navigate through intricate legal processes, bearing the financial burden of litigation. In recent years, a significant transformation has taken place with the advent of litigation funding. This article delves into the world of litigation funding, exploring its impact on legal professionals and their clients.

Martyn Day, Senior Partner, Leigh Day recalls that “It is not many years since litigation funding was frowned upon in many circles. That now seems a distant memory with such funding seen as being a fundamental part of the legal landscape not least in terms of providing routes to access to justice.”

Understanding Litigation Funding

Litigation funding, also known as third-party funding or legal financing, is a financial arrangement where a third party provides capital to cover the costs of legal action in exchange for a share of the potential financial recovery. This funding model has gained prominence as a strategic tool for levelling the playing field in legal disputes, enabling individuals and corporations to pursue their claims without the burden of upfront legal costs.

The Rise of Litigation Funding

Historically, the legal landscape has been dominated by the financial prowess of large corporations and well-funded entities. This power dynamic often placed individuals and smaller businesses at a disadvantage, forcing them to abandon legitimate claims due to financial constraints. Litigation funding emerged as a response to this inequity, offering a lifeline to those seeking justice.

In addition, Elena Rey, Partner at Brown Rudnick and industry group leader of Litigation Funding believes that: "The increased publicity of the Post Office scandal in recent weeks has shone a light on the importance of litigation funding to provide access to justice by allowing small businesses and individuals to take on well resourced, institutional defendants for wrong doing.

Empowering Lawyers

For legal professionals, litigation funding opens up new avenues to serve their clients effectively. The ability to secure funding for a case allows lawyers to take on complex and resource-intensive matters that they might have otherwise turned down due to financial constraints. This empowerment not only benefits clients but also enhances the professional growth and reputation of lawyers.

Mitigating Financial Risks

Litigation is inherently uncertain, with outcomes often unpredictable. Lawyers and clients face the risk of investing significant time and resources in a case only to come out empty-handed. Litigation funding serves as a risk mitigation tool, providing financial stability and reducing the impact of adverse outcomes on both clients and lawyers.

Leveraging decades of experience in finance law coupled with deep understanding of litigation and the courts, Elena Rey explains that her firm specialises in structuring litigation funding agreements, an area that has grown exponentially in the past 5 years. The high-profile PACCAR judgment handed down by the Supreme Court in July 2023 put the terms of litigation funding agreements firmly in focus and they have been advising funders and law firms on how to structure agreements that not only comply with the PACCAR decision, but that are also adaptable in the event of any new regulation or legislation. Brown Rudnick also advises on disputes arising out of the PACCAR decision that relate to litigation funding agreement terms.

The Dynamics of Litigation Funding Agreements

In a litigation funding agreement, the funding provider typically covers legal fees, court costs, and other associated expenses in exchange for a percentage of the final settlement or judgment. These agreements are non-recourse, meaning that if the case is unsuccessful, the funded party is not required to repay the capital provided by the litigation funder. This structure shifts the financial risk from the client and the lawyer to the third-party funder.

Ethical Considerations in Litigation Funding

As litigation funding becomes more prevalent, ethical considerations come to the forefront. Legal professionals must navigate the ethical landscape carefully, considering issues such as confidentiality, conflicts of interest, and the potential impact of the funder's involvement on the attorney-client relationship. Transparent communication about the existence of litigation funding is crucial to maintain the integrity of the legal process.

The Global Impact of Litigation Funding

While litigation funding has seen significant growth in jurisdictions like the United States and the United Kingdom, its impact is increasingly felt on a global scale. Countries around the world are exploring and adopting litigation funding regulations, recognising its potential to improve access to justice and enhance the efficiency of legal systems.

Charlotte Hill, London Solicitors Litigation Association [LSLA] Committee Member and Partner at Penningtons Manches Cooper LLP stated that “A lot of our international clients who are deciding on governing law and jurisdiction clauses in their contracts consider the UK’s access to litigation funding in the event of a dispute as part of the decision-making process. They like the safety net that the possibility of litigation funding brings, ensuring that they can access justice regardless of their financial position or risk appetite.” ).

Championing Access to Justice

One of the primary benefits of litigation funding is its role in promoting access to justice. By removing financial barriers, individuals and smaller businesses can pursue meritorious claims that would have otherwise been economically unfeasible. This democratisation of legal resources aligns with the fundamental principle of justice being accessible to all, not just those with deep pockets.

Martyn Day says that “as a law firm involved in around 30 funding agreements we find them invaluable in ensuring we can take on the might of the corporate world on behalf of our often impoverished clients and meet them with something like an equality of arms.”

Transforming Class Action Lawsuits

Litigation funding has particularly transformed the landscape of class action lawsuits. In these cases, where a group of individuals collectively brings a claim, the financial stakes can be substantial. Litigation funding enables these groups to pursue their claims without the fear of financial ruin, fostering a more balanced and equitable legal system.

“We have seen that litigation funding has really opened up class action lawsuits – which often involve consumers or individuals with limited pockets – to the masses. It affords those who would otherwise be likely to be prevented from accessing justice on an individual basis with the opportunity to team up with others to typically pursue deep-pocketed organisations.” (Charlotte Hill, London Solicitors Litigation Association [LSLA] Committee Member and Partner at Penningtons Manches Cooper LLP).

The Evolving Regulatory Environment

As litigation funding gains prominence, regulatory frameworks are evolving to address the unique challenges and ethical considerations associated with this industry. Legal professionals need to stay informed about the changing landscape of litigation funding regulations to ensure compliance and ethical practice.

Strategic Considerations for Lawyers

For legal professionals considering litigation funding for their clients, a strategic approach is paramount. Evaluating potential funding providers, understanding the terms of the agreement, and assessing the impact on the attorney-client relationship are critical steps. Additionally, lawyers should communicate transparently with clients about the decision to seek external funding, managing expectations and addressing any concerns.

Future Trends in Litigation Funding

The landscape of litigation funding is dynamic, with ongoing developments shaping its future. Collaborations between law firms and litigation funders, increased use of artificial intelligence in case evaluation, and the emergence of specialised funding for specific legal sectors are trends to watch. These developments signal a maturing industry that continues to adapt to the evolving needs of legal professionals.

Common litigation funding models that lawyers and clients may encounter in the legal landscape:

1. Single-Case Funding:

• Overview: In this model, a third-party funder provides capital for a specific legal case. The funding covers legal fees, court costs, and related expenses associated with that particular litigation.
• Advantages: It allows clients to pursue a specific case without the financial burden, and the funder's return is contingent on the success of that case.
• Considerations: Lawyers and clients should carefully negotiate the percentage of the recovery that the funder will receive and ensure transparency in all aspects of the agreement.

2. Portfolio Funding:

• Overview: Portfolio funding involves a broader approach, where a funder invests in a range of cases rather than a single lawsuit. This model spreads the risk across multiple legal matters.
• Advantages: Diversification of risk makes this model appealing for both funders and clients, as losses in one case can be offset by successes in others.
• Considerations: Lawyers need to assess how the portfolio funding arrangement aligns with the overall legal strategy and goals of their clients.

3. Law Firm Funding:

• Overview: Law firm funding, also known as law firm portfolio funding, involves a funder providing capital to a law firm to cover its operating expenses or specific cases within its portfolio.
• Advantages: This model allows law firms to manage cash flow, take on larger cases, and expand their practice without taking on additional financial risk.
• Considerations: Lawyers should carefully negotiate the terms of the agreement, understanding the impact on the firm's autonomy and client relationships.

4. Hybrid or Blended Funding:

• Overview: In a hybrid model, the client and the third-party funder share the financial burden of litigation. The client covers some costs, and the funder provides additional capital.
• Advantages: This model allows clients to retain a stake in the financial outcome and can be attractive to funders looking to mitigate their risk.
• Considerations: Lawyers need to navigate the complexities of blending client contributions and third-party funding while ensuring the arrangement remains fair and transparent.

5. Post-Judgment or Award Funding:

• Overview: This model involves funding being provided after a judgment or award has been granted. The funder purchases the right to receive a portion of the monetary recovery.
• Advantages: Clients can access immediate capital to satisfy legal costs, appeal expenses, or other financial needs after a favourable judgment.
• Considerations: Lawyers should carefully assess the terms and conditions of post-judgment funding, as the risk profile differs from pre-judgment funding.

6. Contingency Fee Funding:

• Overview: Contingency fee funding is a hybrid between traditional contingency fee arrangements and litigation funding. The funder provides capital to cover costs, and if the case is successful, they receive a percentage of the recovery.
• Advantages: Clients benefit from reduced financial risk, and lawyers can secure funding for necessary expenses while maintaining a contingency fee structure.
• Considerations: Lawyers should ensure that the hybrid structure aligns with ethical guidelines and doesn't compromise the attorney-client relationship.

Understanding these various litigation funding models is crucial for lawyers navigating the complexities of financing legal cases. Each model has its advantages and considerations, and choosing the right one depends on the specifics of the case, the client's needs, and the strategic goals of the legal professionals involved.

Jon Felce, Partner at Cooke, Young & Keidan considers that “Litigation finance and related insurance solutions are constantly developing and evolving and this seems bound to continue. These products are not simply confined to financing the pursuit of claims and the costs risk if those claims go wrong, but have extended to cover many aspects of a dispute. This includes financing defences to claims, protecting against the risk of being found liable under a claim or a cross-undertaking in damages when losses have been suffered under an injunction. There are also products that seek to protect against enforcement risk, and rights under awards and judgments are also increasingly being purchased and traded.”

Litigation funding has emerged as a transformative force in the legal realm, reshaping the dynamics of legal practice and access to justice. For lawyers, embracing the possibilities offered by litigation funding can enhance their ability to champion their clients' causes and pursue justice without financial constraints. As the legal landscape continues to evolve, understanding and navigating the intricacies of litigation funding will be essential for legal professionals committed to delivering effective and equitable legal representation.

Elena Rey concludes that “The continued availability of legal finance in the UK is crucial to London maintaining its crown as an international disputes hub of choice and ensuring that claimants can continue to receive access to justice.”

Brown Rudnick are hosting a conference about Litigation on Thursday 14th March at the Langham in London, to attend, please visit this link: Brown Rudnick Litigation Funding Conference 2024.

Photos by M R Karim Reza - Own work, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=144968666 and Adrian Pingstone - Taken by Adrian Pingstone in November 2004 and released to the public domain., Public Domain, https://commons.wikimedia.org/w/index.php?curid=606695