Who can Afford that? - The Attorney and Third Party Funding of Lawsuits

Third party funding of litigious disputes is a modern disguise of a traditional contingency fee agreements. The commercial background for litigation financing lies in the remuneration of funding of an action for recovery in case the claim proves to be successful. In several ways, third-party funding shares characteristics with contingency fee arrangements. Contingency fee agreements and champerty have origins in common law countries. They had been inadmissible for a long time, but started to make their way into the legal practice at the beginning of the twentieth century. Contingency fee arrangements have become quite common over the course of the past several decades. Third party funding, however, has been gaining wider acceptance only in the course of the past few years. Notwithstanding this, the feasibility and the weighing of potential gains against the dangers of third party funding continue to form the subject of debate.

Undisputedly, third party funding offers an opportunity for parties who either (i) are risk-averse, i.e. unwilling to assume the risk (costs) associated with a (lost) lawsuit, or (ii) face financial shortcomings and cannot afford the funding of a lawsuit. Thus, at its foundation, third-party funding of lawsuits serves to pave the way for a party’s pursuit of justice, facilitating the enforcement of potentially viable claims which would otherwise not be pursued due to the costs associated therewith. While it is sometimes be argued that this effect is bound to cause a party to pursue even the most spurious of claims, in most cases it would appear difficult to find a funder who is willing to invest into a lawsuit which is unlikely to yield any return on the investment. At least most commercial funders seem to conduct a thorough due diligence before agreeing to “hop on the train”.

Further advantages cited by proponents of third party funding include, among others, additional financial backing which may prevent “bleeding” tactics by the financially stronger party, and the added expertise brought by experienced litigation funders in terms of assessing a claim and organizing the process.Notwithstanding this, one question arises: At what price does the opportunity of third party funding come?

The issue that lies at the core of most disadvantages held against third party funding is that the actual holder of a claim will have to cease some of its control over the dispute to the funder. It will be a rare occasion for a funder to simply “fire and forget”, making available funds for the financing of a lawsuit and then simply waiting for the outcome to be determined without further any further involvement. Although the intensity of the funder’s involvement Will vary from case to case, most often there will be at least a residual effect of a “stranger” with a vested interest in the outcome of the dispute, even if the lawyer acting as counsel as not in any direct contact with the funder.

The more intense the funder’s involvement becomes, the more seriously it may impact on the “sacrosanct” relationship between attorney and client. Next to issues of confidentiality and the attorney-client privilege, the (dominant) involvement of a third party funder can yield considerable conflicts of interest for a lawyer caught between the fronts. The attorney’s professional duty towards his or her client can be strained by interventions from the paying funder. After all, some might say, he who pays the piper calls the tune.

Thus, the question arises as to how an attorney can deal with a litigation or arbitration which, on his client’s side, is funded by a third party. Just like with many other questions, a universal answer will be lacking, as it depends on a number of factors, such as the disciplinary rules of the attorney’s bar, his or her legal background, the possible fee arrangements (for example contingency arrangements are still forbidden in a number of jurisdictions), or the legal details of the relationship between the client and the funder.

In the author’s view, the most preferable solution will be that of a clear separation of the attorney-client relationship on the one hand, and the client-funder relationship on the other hand. The funding of the process and counsel’s fees should be a matter exclusively between the client and the funder. Similarly, the mandate granted by the client to the attorney should be given and remain between the two of them, albeit confined in effect by the restrictions imposed on the client by its obligations towards the funder. This does not mean that there should be no contact whatsoever between the attorney and the funder, provided that such contact is sanctioned by the client. In the end however, for the attorney, the client must come first. Irrespective of whether the attorney’s fees are ultimately borne by the funder, the attorney should never expose him or herself to the risk of a conflict of interests.