Litigation funders under scrutiny in US – will UK Parliament follow suit?

19th Nov 2015

Two leading US Senators have sent letters to the largest third party litigation funders asking detailed questions to assess their impact on the American civil justice system.  “Third party litigation financing pumps millions of dollars into our justice system, and the current lack of oversight makes it difficult to track this money’s influence on the actions of litigants and the outcomes of litigation.  These letters will give us insight into where this money is going and will help us craft effective protection to keep the civil justice system honorable and fair,” Senator Cornyn said.

Senate Judiciary Committee Chairman Charles Grassley (Republican, Iowa) and Senate Assistant Majority Leader John Cornyn (Republican, Texas) wrote to Burford Capital, Bentham IMF and Juridica Investments.  The Senators are concerned that this “burgeoning industry is largely unregulated and operates with no licensing or oversight”.  Therefore, they requested details on the cases these funders finance, how much they invested, the terms of their funding agreements, and their returns on investment.  The Senators also wanted information on the funders’ practices, such as whether the court or interested parties are made aware of the funding agreements.  Of note, Burford is a member of the Association of Litigation Funders of England & Wales and Juridica is an Associate Member; Bentham IMF’s subsidiary Bentham Europe says it has applied for membership.

As in the UK, where the global assets under management of key funders have exploded by well over 700% in the last six years, the US Senators note that in the US “litigation speculation is expanding at an alarming rate”.  They want to assess the impact on the legal system because the existence and terms of the funding agreements lack any form of transparency.

In the UK, the assets that litigation funders have available have grown to at least GBP 1.5 billion, although only few funders openly publish their account figures.  Litigation funders have no direct interest in the collective or individual cases they invest in, but take a considerable share of the settlement, often between 20 – 40%.  Australian funder Bentham IMF has stated that it “has historically generated an average 298% gross return on funds invested”[1].  Therefore, funders have every interest to push defendants to pay-out disproportionate settlements, even in cases where there is no damage to the claimants.

Currently, neither defendants nor judges are required to be made aware of litigation funding arrangements, and it appears that the funders would like to keep the nature of the arrangements a secret.  Secrecy allows the funders to promote their own interests rather than that of the claimants, whether they are involved in a competition, securities or product malfunction case.  Control of strategy and settlement decisions, however, should reside with claimants, not funders.  Secrecy also masks actual and potential conflicts of interest for judges, and denies defendants the knowledge of who their adversaries are in the litigation.

Funders state that they always carefully assess cases before they invest, but this assertion is challenged by two high profile examples.  In the infamous Chevron/Ecuador case, funded by Burford Capital (which has now exited the case), the claimants were only to receive payment from the settlement after eight different groups of lawyers, funders, and advisors received their pay-outs.  By the time Burford took on the case, four US courts had already found that there was evidence of fraud in the case.  In England, the Excalibur case stands as a stark example of a funder promoting abusive litigation.  In deciding liability for costs, the court chided the funder for supporting “speculative and opportunistic” litigation.

A 2014 study in the US by George Mason University found that 93% of US federal judges surveyed were not aware of litigation funding being used in cases coming before them.  Furthermore, the study found that two thirds of state and federal judges involved in the study think litigation funding is an unacceptable practice.

Should the British Parliament not submit litigation funders to a similar level of scrutiny over their unregulated financial products as their US counterparts?

[1] Submission of Bentham Europe Limited to the Dutch Ministry of Security and Justice of 14 October 2014.