The History of Litigation Funding

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History of litigation funding

Lawsuit funding, pre-settlement cash advance, or legal financing, whatever it may be named, has risen to popularity globally throughout a relatively short period. The structure of how lawsuit funding companies work is a thriving business model entirely relying on professional efficacy and efficient legal speculation. This lending business is based on buying risks, which can only be minimized through careful ascertainment of bad risks and lucrative choices.

On the customer end, plaintiffs tend to see litigation funding programs as an offer to buy instant relief from indebtedness and financial hardships. Most plaintiffs fear undergoing severe struggles while fighting legal battles. This is why plaintiffs choose to avoid such financial challenges by obtaining legal funding to share future incomes through settlement. This culture of obtaining legal financing can now be seen as immensely popular in the West. Litigation financing initially originated from Australia but evolved quickly far and wide across the world in a short span of twenty years.

The beginning of litigation financing: Australia

Legal funding saw its birth in Australia between the 1990s when insolvency practitioners were permitted to enter into contracts with insolvent individuals and finance their litigations. This permission was granted by the then Australian parliament and required such financed litigations to be recognized and mentioned in the company’s books as an asset. More and more financing companies emerged due to the passing of this law, making legal funding a known thing in the region back then. Another boost was received by the industry when an Australian court in one of its 1992 case decisions declared class-action lawsuits an efficient way to deal with claims coming in groups. This created a novel market for the insolvency litigation financing entities to offer their services.

In the succeeding years, capital groups were seen launching dedicated windows for litigation funding to the plaintiffs in Australia. The industry received official encouragement by the judiciary when the Australian High Court recognized third-party litigation funding to be serving a bonafide purpose of facilitating the cause of justice. Assertions holding litigation funding to be contrary to the public policy were also negated in the decision declaring the same to be in line with due process requirements.

Litigation funding in the United Kingdom

Since the beginning, conditional fee agreements (CFAs) have been banned in the UK, preventing clients and attorneys from entering into variable and contingency fee arrangements. The ban was removed in 1990, allowing attorneys to sponsor litigations they handle with the time and skill they put in return for a portion of the final settlement or jury award that is secured at the end of the case. This further gave rise to third-parties intervening in a person’s case and providing them cash to meet their needs in return for a part of the recoveries. This rise in third-party financing was witnessed simultaneously in Australia and was seen spreading massively after the enactment of the Access to Justice Act 1999. This act supplemented the means of financing litigations in the US with methods other than lawsuit funding. 

The act removed plaintiffs with personal injuries from the list of eligible applicants for civil legal aid. This policy’s premise is that personal injury plaintiffs can opt for third-party litigation funding. 

In another attempt, the act allowed successful litigants to pass over their attorney fees and legal charges upon losing the party. Also, After The Event (ATE) insurance was introduced to allow the litigants to safely insure against the possibility of paying their opponent’s legal fees under the “loser pays” rule if a case ends up unsuccessful. This has allowed plaintiffs to run for litigations without the need to worry about the outcome since attorney fees, being the principal cost of a lawsuit, will eventually be paid by the other party.

Since the above action by the parliament and some subsequent rulings by the national courts openly favoring the litigation funding culture, the industry has witnessed a constant boom. More and more companies from the generic capital market have joined the industry, catering to ordinary people stuck in litigations with immediate financing available to their disposal.

The arrival of litigation funding in the United States

Out of the three regions discussed, the US received its first exposure to the litigation funding culture at last. At the very beginning, the industry only catered to plaintiffs with personal injury lawsuits for lawsuit funding. Hence, the quantum of people availing it remained very limited until 2006, when Credit Suisse Securities started operations providing litigation risk speculation. Availing, this facility encouraged market leaders to increase the scope of finances they provide and reach out to more and more plaintiffs seeking financial assistance. 

Today, the litigation funding industry has grown exponentially, with multiple independent firms and financial groups providing pre-settlement compensation advances to individuals. Moreover, companies and law firms unable to assail legal battles effectively are provided with grants to help them with expenses during the pendency of their litigations. As opposed to conventional loans, lawsuit funding stands equally safer to companies as well, whereby they are not obligated to repay their finances even when the case ends up unsuccessful.

Affairs pertaining to litigation funding and regulation of the industry primarily belong to the states, whereas the federal authorities have been reluctant to dictate the policies as a whole. Even at a bird’s eye view, it can clearly be seen that the executive and the judiciary hold an inclination towards litigation finance in commercial litigations and even in arbitrations. Most of the states have a free-hand policy for lawsuit funding companies, encouraging the culture more and more. Certain states, however, have adopted censure towards litigation funding, altogether banning all of its forms. These states include Maryland, Colorado, and Tennessee.

Even the US courts have expressed appreciation for these funding programs and have also recognized the need for effective communication between funders and litigants. The doctrine of lawsuit funding can hence be seen to have significant tendencies of further expansion and recognition.

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