What is litigation funding?
Third party litigation funding refers to the practice whereby an outside party funds a lawsuit despite having no prior interest in the case and, as its fee, takes a share of any amount extracted from the defendant (whether by a settlement or a judgment handed down by a court).
Why is litigation funding a threat to the UK justice system?
Prioritises Profit Over Justice
- Litigation funders, which tend to be hedge funds or financial services companies, take a substantial share – up to 50 per cent – of the compensation awarded to parties in whose claims they invest
- Allowing mechanisms for third parties to harvest profit from the justice system incentivises the pursuit of frivolous lawsuits, creating an added burden on courts that are already operating at capacity
Threatens the Lawyer-Client Relationship
- If left unregulated, funders have incentives to influence the course of lawsuits with a view to maximizing their returns, regardless of the justice of the case and the interests of the party they are funding
- Under the traditional lawyer-client relationship, clients are protected by the obligations borne by lawyers to serve only their clients’ interests. Where funders exert their influence over the claimants or the lawyers to pursue the funder’s own profit motives, this traditional protection is compromised, leaving clients exposed
Harms UK Businesses and Consumers
- Litigation funding could encourage a new wave of lawsuits, potentially overwhelming the British legal system
- Due to this increased threat of litigation, companies will be forced to pay higher insurance premiums, which will push up the cost of consumer goods and services
Alternative Business Structures
Historically, non-lawyers have not been allowed to own or manage law firms since non-lawyer ownership was seen as putting at risk lawyers’ professional duty to represent the interests of their clients above all else. However, in England and Wales, it is now possible for a law firm to be licenced as an “alternative business structure” (ABS) and to be owned by non-lawyer investors. In January 2012, the Solicitors Regulation Authority (the largest of the legal regulators in England and Wales) began accepting licensing applications for ABS.
ABS poses another threat to the British justice system, as it could further expand the role of third party litigation funders and could create conflicts of interest for lawyers between their duties to their clients and pressure from outside investors.