The History of Litigation Funding

Litigation funding began as a crime. For centuries it was illegal to provide financing for someone else’s lawsuit. Ancient English “champerty and maintenance” laws were designed to stop noblemen from meddling in each other’s quarrels. A more recent example would be the case of Hulk Hogan VS Gawker Media. The financier behind this lawsuit was Peter Thiel. Yes, he no doubt receive a strong return on his money but Peter has also been very critical of Gawker’s Journalism. We couldn’t possible comment on these motivations.

By the 20th century, legal and accountancy firms had started buying and selling insurance and bankruptcy claims informally. Champerty rules were however still in force. They remained a barrier to trading in legal claims.

Then in 1994 the case of Giles VS Thompson [1994] considered champerty and the correct question of whether in accordance with contemporary public policy, the funding agreement has in fact caused the corruption of public justice.

Then, during the late 1990s and early 2000s, a string of British and Australian court rulings held that it wasn’t a bad thing for claimants with legitimate grievances to get external financial help, even if the helpers were out to make a profit.

Lord Mustill stated: “The crimes of maintenance and champerty are so old that their origins can no longer be traced, but their importance in medieval times is quite clear. The mechanisms of justice lacked the internal strength to resist the oppression of private individuals through suits fomented and sustained by unscrupulous men of power.”

Then in Stocznia Gdanska v Latreefers [2001] funders agreed to finance commercial litigation in exchange for 55% of the proceeds.

In 2005 Arkin v Borchard Lines Ltd & Ors the English Court of Appeal decision explicitly endorses funding as part of its judgment. The judgement also finds that a funder is liable to the other side for costs only to the extent of its own funding.

Most early investors in lawsuits were hedge funds or wealthy individuals. Involvement was largely private and confidential. Utimately it suited the litigants perfectly. Concerns over spiraling legal costs were a thing of the past and lawers knew they would get paid regardless of the outcome.

IMF Bentham, located in Australia, was the first litigation funder to sell its shares publicly. They made litigation funding their focus. After going public on the Australian stock exchange in 2000, IMF raised $6.6 million ($4.3 million) but IMF remained a penny stock. Markets had difficulty valuing something that had not been traded before.

The financial crisis has forced investors to explore new options to find decent returns. Litigation funding has become an increasingly attractive asset class.

The interest in this industry is growing. Last year, Therium Capital Management, a London-based funder, secured £200 million ($303.5 million) in financing from a single company. It is only rumors but people have gussed that AmTrust Financial Services, a New York insurer with $21 billion in assets is the backer. (An AmTrust spokeswoman declined to comment.) Therium plans to raise more money. In June, Fortress Investment Group, a $70 billion alternative asset manager in New York, did a deal with London-based litigation funder Vannin Capital that gives Vannin access to a pool of as much as $500 million.

Litigation funding is also good news for lawyers. Harry Stockdale, a director at Haitong Securities in London estimates the amount of money committed to litigation finance has grown tenfold since 2009, to about $3.5 billion. If all those cases are successful, they could pay out as much as $30 billion.

Article originally appeared on our blog: http://funding-litigation.com/history-litigation-funding/

References:

[1] http://www.bloomberg.com/news/features/2016-11-22/big-bets-on-vw-lawsuit-could-yield-10-000-or-nothing

[2] https://en.wikipedia.org/wiki/Litigation_funding#Case_law

[3] https://harbourlitigationfunding.com/wp-content/uploads/2015/07/giles_v_thompson_ukhl_2_26_may_1993.pdf