From archaic legal obstacles to Antipodean path-clearing, litigation funding has come a long way. Today, the UK has one of the world’s most developed third-party funding markets and its growth looks set to continue.
As the industry has grown, different kinds of litigation funders have emerged. Until recently, such financing was reserved for high-net-worth private investors backing large-sum cases on a high-risk – but potentially high-reward – basis.
VWM Capital does things differently. We are pioneering the use of lawtech to help eliminate the administrative burden and make litigation financing available to more claimants in a range of case types and sizes. This means we can help investors looking for a risk-diversified, non-correlated asset class that supports ESG objectives.
- Litigation funding is now being used to help claimants pursue valid claims against deep-pocketed defendants.
- It can deliver social impact through enabling cases seeking redress in situations such as housing disrepair or undisclosed commission selling.
- It can provide funds for those who otherwise lack the means to take their case to court.
This timeline traces the development of third-party litigation funding from its origins to an ESG investment opportunity.
Archaic English law
Maintenance and champerty
Historically, third parties were prohibited from funding litigation under the doctrines of maintenance and champerty that remained in English common law until 1967.
Maintenance outlawed people who were not party to a legal case from funding it. Champerty explicitly dealt with maintenance for a profit. The related laws aimed to discourage outside interference in legal proceedings.
As the modern age emerged, these doctrines were gradually diluted and a number of significant exceptions were introduced.
1967
The Criminal Law Act decriminalises maintenance and champerty
By the late 1960s, it was clear that the ad hoc interventions to these doctrines had created a muddled and muddy law that needed to be clearly defined.
As a result, the Criminal Law Act of 1967 decriminalised maintenance and champerty, and overturned the tort liability originating from them.
In effect, the path was now clear for the introduction and development of third-party funding arrangements.
Australia in the 1990s
The first emergence of litigation financing in its modern form
The growth of litigation funding in the UK (and the creation of a setting in which it could develop) was enabled by its early adoption in Australia.
Here, enactment of insolvency legislation and the legalisation of class-action lawsuits in the early 1990s saw funding companies begin to emerge as a permanent part of the legal scene.
Insolvency practitioners were indisputably permitted to use third-party finance in litigation cases. At the same time, various states disregarded maintenance and champerty offences, including New South Wales in 1993 with the Maintenance, Champerty and Barratry Abolition Act.
Australian courts were also recognising that there needed to be an efficient way to handle group claims. This led to the legalisation of class-action lawsuits in 1992.
Litigation funders began to hesitantly enter the class-action area, although the real growth here occurred when it was clarified finally in 2006 that it was not just insolvency cases that were open to such funding.
The 2006 ruling on Campbells Cash and Carry Pty Limited v Fostif Pty Ltd clarified the issue of litigation finance. It stated that it was permitted in all jurisdictions that had abolished maintenance and champerty as crimes and torts, and it was even acceptable for a funder to influence key case decisions.
The court argued that:
“To ask whether the bargain struck between a funder and intended litigant is ‘fair’ assumes that there is some ascertainable objective standard against which fairness is to be measured and that the courts should exercise some (unidentified) power to relieve persons of full age and capacity from bargains otherwise untainted by infirmity. Neither assumption is well founded.”
Litigation funding now served a legitimate purpose in lawsuits and was not an abuse of process or contrary to public policy. The funding sector rapidly grew, and today nearly all major class actions in Australia are funded privately.
The UK in the 1990s
Parallel but distinct developments in the UK
Following on from the ground-clearing legislation of the Criminal Law Act of 1967, the UK Parliament passed the Courts and Legal Services Act in 1990.
This legalised conditional fee agreements (CFAs) between clients and lawyers. Popularly known as ‘no-win, no-fee’ arrangements, the removal of the ban on these introduced the concept of litigation funding into the UK’s legal sphere.
Lawyers could now fund litigations in exchange for a share of the recovery, and the door to modern legal financing was pushed further ajar by the Access to Justice Act of 1999.
This act:
- Excluded personal injury cases from receiving civil legal aid, as litigation funding offered all litigants the opportunity to obtain finance for bringing their case to court.
- Allowed litigants who won their case to pass any fees and insurance premiums associated with CFAs on to their opponents. This is known as the ‘loser pays’ rule.
- Introduced After The Event (ATE) insurance to allow litigants to insure against the possibility of having to pay their opponent’s legal fees under the ‘loser pays’ rule.
By combining ‘no-win, no-fee’ arrangements with ATE insurance, litigants could now have every aspect of their case funded by third parties – win or lose.
This was fertile ground for the rapid development of the UK’s litigation finance sector.
The first decade of the new millennium
The UK’s growing legal and public acceptance of litigation funding
By the start of the new millennium, it had been clearly established that litigation funding agreements did not interfere with the legal process and could actually improve access to justice.
The England and Wales Court of Appeals made several statements that supported this, such as in 2002 when it argued that public policy should not be used to deny agreements.
The Court of Appeals was keen to see that the client retained control of the case and the funder did not interfere. In 2005, it clearly stated that funding must “leave the claimant as the party primarily interested in the result of the litigation and in control of the conduct of the litigation”.
At the very end of the decade, there was sufficient momentum in the UK’s litigation finance sector for the establishment of the Association of Litigation Funders (ALF) in 2011.
This was the first of its kind in the world and a sure sign of how far things had developed. As a self-regulating body – authorised by the Ministry of Justice – it reflects the trust and respect that such financing now has.
On into the 2010s
The UK’s changing legal services
The Legal Services Act of 2012 created room for the development of alternative business structures in the legal profession.
Permitting non-lawyers to own providers of legal services allowed a closer relationship to be formed between funders and law firms. By 2016, for example, litigation funding company Burford Capital was founding its own law firm, and many others took advantage of the opportunities offered by confluence of litigation finance and alternative legal business structures.
Litigation funding in the UK today
PACCAR and beyond
The Supreme Court ruled on 26 July 2023, following the application of PACCAR Inc and others, that litigation funding agreements (LFAs) should be classed as damages-based agreements (DBAs). This, in effect, meant that litigation funding was no longer applicable to opt-out competition claims.
Immediately, concerns were raised, culminating in the Litigation Funding Agreements (Enforceability) Bill 2024, which although delayed until 2025, is expected to reverse the effects of the PACCAR ruling.
It clearly states that “an agreement is not a damages-based agreement if or to the extent that it is a litigation funding agreement.”
Litigation funding and investment opportunities
Today, the UK has one of the most mature litigation funding sectors in the world. Europe, America, and Asia are all still playing catch-up.
The growth of litigation funding over the last few years has seen it transform its potential to become a force for good. Investments can be used to support regular people and small businesses against large organisations that can afford the legal fees.
Find out more about our approach to litigation funding.