REUTERS | Dylan Martinez

Disclosing litigation funding arrangements: a debate worth having

As the global litigation funding industry has grown exponentially over the years, so have the critics, driven and funded by those with most to lose. Unsurprisingly then, various battles have been waged by these critics seeking to undermine the integrity, credibility and viability of litigation funding as a whole.

One such battleground globally has been over the disclosure of funding arrangements. Given champerty and maintenance has always been a fine line that litigation funding has been careful not to cross, it is only natural that some latent concerns of potential conflicts remain, providing fertile soil for a fruitful battle. But, whereas the real issue is one of conflicts and ensuring integrity of the legal process, defendants have attempted to use this guise to gain insight into, and a tactical advantage over, their opponents.

This obviously feels instinctively wrong but business is “give an inch and take a mile” ruthless and defending a litigation is largely a transactional process, so it’s no surprise that defendant businesses, especially those typically on the receiving end of third party funded litigations, test the boundaries as part of their fiduciary and commercial obligations to their stakeholders. In simple terms, it’s well worth a small spend to get that disclosure.

So when on the 18 April 2022, Chief Judge Connolly for the District of Delaware issued a standing order for any party in cases before him to disclose the existence and identity of any third-party funder, it was perceived as another dent to the global litigation funding industry on the disclosure battleground, edging the disclosure of funding arrangements closer to being the norm. But was it really a dent and should we be so concerned?

On closer inspection of the standing order, it was similar to previous orders and trends seen in the disclosure of funding agreements. Only a year earlier in June 2021, Chief Judge Wolfson for the District of New Jersey issued a similar standing order. Across the border in Canada, litigation funding agreements must be disclosed and/or may be court-approved in certain provinces. Internationally, various arbitral institutions, including HKIAC, MARC, and the Milan Chamber of Arbitration amongst others, have adopted funding-related disclosure requirements and the biggest arbitration forums, the ICC in 2021 and ICSID this year, have followed suit.

Across all these cases, the relevance was the consistency in what was being disclosed and by whom disclosure was sought. The ‘what’ is the existence and identity of the funder, any potential controlling interests, for example in the settlement process and the nature of the financial interest, while the ‘by whom’ is the courts and tribunals. It certainly wasn’t just a blanket disclosure that would needlessly give defendants an unfair tactical advantage. The clear objective was to ensure judges and arbitrators could satisfy themselves that there was no conflict or dynamic that would prejudice the pursuit of justice.

As a case in point, rewind two years back in Delaware to United Access Technologies LLC vs AT&T Corp et al, where AT&T’s attempts to compel full disclosure of UAT’s litigation funding arrangements was denied because they failed to show “that the litigation funding-related discovery it seeks here is relevant”. Similarly, in Canada, the Federal Court questioned its necessity in Seedlings Life Sciences Ventures LLC vs Pfizer Canada Inc, confirming “a defendant has no legitimate interest in enquiring into the reasonability, legality or validity of [the plaintiff’s] financial arrangements…”.  Closer to home, the Competition Appeal Tribunal denied Apple and Google sight of certain ATE terms in the context of general disclosure of funding arrangements but with specific reference to the fact that disclosure might lead to an unfair tactical advantage.

Globally, there is therefore awareness by courts and tribunals that the push for disclosure of funding arrangements is often motivated, as far as defendants are concerned, by gaining a tactical advantage. With this awareness, and in the knowledge that disclosed funding arrangements have not actually led to any reported adverse findings as to its credibility or integrity – a validation of the industry globally and of litigation funding as a product – perhaps it is time for the industry to consider embracing disclosure, provided defendants are unable to gain any tactical advantage?

Possible benefits of embracing disclosure

As far as England and Wales are concerned, it is not common yet for funding arrangements to be disclosed unless required, unlike in Canada where some funders have voluntarily disclosed funding agreements even when not required. But whereas in Canada, it is to err on the side of caution knowing that disclosure will not prejudice the strength of the claim they support, what would the other benefits be of such a disclosure here?

The most obvious benefit is a better-informed judiciary on litigation funding arrangements (including after the event insurance), which can only be a positive. At times the role of funding arrangements and ATE insurance have been heavily contested in specific matters. However, a universally developed understanding of what these arrangements do or should do in the eyes of the courts would make these proceedings easier (or even unnecessary) by shaping funding arrangements into a more standard form that is universally accepted by both the markets, the legal industry and the courts. This would not only have significant cost-saving benefits for claimants (thereby lowering the hurdles to justice) but it would also generate significant savings in respect of time (which in itself has significant value for businesses) from unnecessary ancillary proceedings around funding that would also lighten the burden on the courts.

This could also form a good basis to re-open the debate on the recoverability of CFA success fees, ATE premiums and funder returns which I previously wrote about. Notwithstanding that non-recoverability stemmed from Jackson LJ’s 2010 Review of Civil Litigation Costs (Jackson Review), which largely preceded the establishment of the commercial litigation funding market (it is worth repeating again that only 7 of the 584-page Jackson Review covered commercial litigation funding), a greater understanding of a more uniformed litigation funding market would help the judiciary understand the benefits of costs shifting on success fees.

If this seems unrealistic, it is no surprise that in arbitrations, where disclosure of funding arrangements has been more commonplace, recoverability of success fees and funder returns has also been more commonplace (beyond the well-reported Essar Oilfields Services v Norscot Rig Management and Tenke Fungurume Mining SA v Katanga Contracting Services SAS). With many cases being outside the public domain, we can only speculate, albeit reasonably so, that knowledge of funding arrangements can often better contextualise to a tribunal the extent of the injustices caused by a losing defendant, the principle which ultimately justifies the recoverability of success fees. Perhaps as a case in point, even in Delaware where there is no default costs shifting regime, did the Court of Chancery, very recently in Shareholder Representative Services LLC v. Shire US Holdings, Inc., allow for the winning party to recover the full c. $20m of the law firm’s contingent fees including the uplift, precisely because it had visibility of the funding arrangements and the context of why it had to be put in place.

Lastly, perhaps giving disclosure would also encourage courts to be more demanding of disclosure from the defendants. On the principle that there is never anything to hide if they have done no wrong, a disclosure of a defendant’s corporate funding and insurance arrangements would no doubt benefit the courts in arriving at a better-informed decision also. In fact, in cases where a defendant’s insurer and the lawyers instructed by them are running a defence (such as in professional negligence claim), insurers are no different to third-party litigation funders in that there is no difference between funding a claimant for a monetary gain in the form of claim proceeds and funding a defendant for a monetary gain in the form of cost savings on an insurance claim payout.

A debate worth having

The battleground for disclosure exists, not because of any fundamental objection to courts being aware of funding arrangements to ensure integrity of the process, but because of the abuse of those good intentions by defendants seeking to gain a tactical advantage. Canada has already shown that some funders are happy to disclose funding arrangements to the courts, if they know that those details cannot be used by the defendants to gain a tactical advantage.

With courts and tribunals increasingly showing they are not being swayed by the potential abuse of the disclosure process by defendants, perhaps it is an opportunity for the litigation funding industry to be proactive and initiate a standard disclosure template for courts and tribunals globally to address this battleground once and for all.

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