You Have to Spend Money to Make Money: The Rise of Third-Party Litigation Finance in International Litigation

Over the years, as international commerce has become the norm, there has been a corresponding rise in international litigation and arbitration. Given that many international lawsuits are expensive, parties are looking for ways to decrease risk in these suits. The private capital markets have responded by offering third-party litigation financing (“TPLF”).

TPLF is “a group of funding methods that rely on funds from . . . the capital markets instead of, or in addition to, a litigant’s own funds.”[i] It is a type of contingency fee where a specialist funding company or hedge fund pays some or all of the litigation costs by paying the attorneys’ fees—and sometimes the other costs—and then receives a percentage of the verdict, settlement, or arbitral award.[ii] This form of litigation financing is known as a “syndicated lawsuit” and has been gaining popularity in the international legal world.[iii] By utilizing TPLF, law firms are able to mitigate the cost of bringing a lawsuit while still reaping some of the reward.

The growth of the TPLF industry has been seen across the globe. Countries like Australia and the United Kingdom have taken substantial strides to allow and encourage TPLF.[iv] This movement has sparked an interest in international law firms to utilize this new funding technique.[v] For example, eight out of the ten major law firms in London were using some sort of TPLF in international litigation and arbitration cases.[vi]

While many counties have embraced, and in fact encourage, TPLF, others are still testing the waters by implementing systems where TPLF is allowed in narrow circumstances. Hong Kong is currently in the process of amending and establishing its approach to TPLF, both in international litigation and arbitration. In October of 2015, the Hong Kong Law Commission, led by the Third Party Funding for Arbitration Sub-Committee, published a Consultation Paper encouraging that TPLF be permitted in international arbitration taking place in Hong Kong.[vii] Previously, TPLF agreements were only allowed in arbitration conducted overseas.[viii] The court in Unruh v. Seeberger expressly raised the issue, but did not answer, whether TPLF agreements are barred within its borders.[ix] Ms. Kim Rooney, the Chairman of the Third Party Funding for Arbitration Sub-committee, noted that:

“[Hong Kong] is a major international financial and arbitration centre and that parties considering whether to resolve their disputes in [Hong Kong] by international arbitration are starting to take into account, among others, the potential financial options available to them in conducting such arbitrations. Accordingly, clarity and certainty of the relevant law concerning third party funding for arbitration will be desirable.”[x]

Given the recognized importance of this issue, the Law Commission held a consultation period to review the opinions of the public—which ended on January 18, 2016. Numerous organizations participated in this consultation period, including influential organizations such as the U.S. Institute for Legal Reform and Burford Capital.[xi]

While the U.S. market for TPLF is fairly small, when compared to other countries, it has been steadily increasing.[xii] Pressure for United States capital companies to enter the litigation market has emanated from foreign jurisdictions .[xiii] Recognizing the opportunities for potential profit in the TPLF market, as exemplified abroad, U.S. investment companies have begun to fall into step. There has been a “new wave” of litigation financing that has emerged from the shift toward utilizing TPLF.[xiv] However, this issue is complicated in the U.S. because some jurisdictions ban or limit the use of TPLF.[xv]

The influence of TPLF is evident, given the growth in the TPLF market and the reactions of different countries in adopting or preventing its use in litigation and arbitration. Many scholars support the use of TPLF as it provides a means of financing for those who may be otherwise prevented from filing suit due to financial reasons. However, others fear easy access to funding may lead to a rise in frivolous lawsuits. Either way, TPLF appears to be rising a part of international litigation and arbitration. It will be important for those likely to be involved in international litigation to track how different countries approach the use of TPLF.

 

John Rafferty is a 3L and an Articles Editor of the Journal of Law and International Affairs at the Penn State University Dickinson School of Law.


 

[i] Maya Steinitz, Whose Claim Is This Anyway? Third-Party Litigation Funding, 95 Minn. L. Rev. 1268, 1276-77 (2011).

[ii] Id. at 1277 (citing Baker & McKenzie LLP, Demand for Third Party Litigation Funding Rises as Supply Becomes Volatile (2008), available at http:// www.bakernet.com/NR/rdonlyres/427586D3-6891-4FC2-B926-B0181DB75595/0/ third_party_litigation_funding_ca&u score;oct08.pdf.).

[iii] Joshua G. Richey, Tilted Scales of Justice? The Consequences of Third-Party Litigation Financing of American Litigation, 63 Emory L.J. 489, 495-96 (2013).

[iv] Maya Steinitz, Whose Claim Is This Anyway? Third-Party Litigation Funding, 95 Minn. L. Rev. 1268, 1279-81 (2011).

[v] Id. at 1281.

[vi] Id.

[vii] IRL Responds to Hong Kong Law Commission on Risks of Third Party Litigation Financing, U.S. Chamber Institute for Legal Reform, http://www.burfordcapital.com/blog-burfords-comment-to-the-hong-kong-law-reform-commissions-third-party-funding-for-arbitration-sub-committee/ [hereinafter IRL].

[viii] Uhruh v Seeberger (2007) 10 H.K.C.F.A.R 31, 118 (H.K.).

[ix] Id.

[x] See IRL, supra note 7.

[xi] Burford Capital, Burford’s Comment to the Hong King Law Reform Commission’s Third Party Funding for Arbitraiton Sib-committee, Burford, http://www.burfordcapital.com/blog-burfords-comment-to-the-hong-kong-law-reform-commissions-third-party-funding-for-arbitration-sub-committee/.

[xii] Richard Lloyd, The New, New Thing; The American Lawyer (May 17, 2010), available at www.law.com/jsp/tal//PubArticleTAL.jsp?id=1202457711273&hbxlogin=1&login.

[xiii] Steinitz, supra note 4, at 1278.

[xiv] Steinitz, supra note 4, at 1277.

[xv] Jennifer Trusz, Full Disclosure? Conflicts of Interest Arising from Third-Party Funding in International Commercial Arbitration, 101 Geo. L.J. 1649 (2013).