Development Of Third- Party Funding in Dispute Resolution in Major Common Law Jurisdictions

Given the limitations of legal aid, it is not uncommon for claimants to give up the claim due to a lack of financial support even though there are sufficient grounds. Regrettably, litigation funding has been regarded as a criminal offence and civil tort in Hong Kong, and thus such agreements were not enforceable. Nevertheless, the Court has adopted a more lenient and pragmatic approach to this concept in recent years. This article seeks to analyse the evolution of litigation funding, its implementation in major common law jurisdictions and the evolution of its implementation in Hong Kong.

Litigation funding has existed as far back as in medieval England. It could be categorised into maintenance and champerty. The former involves a third-party officious intermeddling in litigation in which he has no legitimate interest, while the latter means a third- party with no previous interest in a lawsuit finances it with a view to sharing the disputed property if the suit succeeds. Litigation funding nowadays is closer to maintenance, which certainly has a positive effect on poor people’s access to justice. However, legislators at the time considered it more detrimental than beneficial to public interest. It is precisely because of this positive effect that maintenance revives more than a thousand years later.

Until the last century, maintenance and champerty were still regarded as illegal in most common law jurisdictions. At the end of the 20th century, a company called IMF Bentham in Australia specialised in financing practitioners on the edge of bankruptcy to file claims against debtors, and shared a portion of the debt returned. In the 21st century, more than 10 large-scale litigation funding firms have emerged. ARKIN V BORCHARD LINES LTD & ORS [2005] EWCA CIV 655 in the UK and Campbells Cash and Carry Pty Limited v Fostif Pty Limited [2006] HCA 41 in Australia were the turning points. In the latter, the High Court of Australia explained the relationship between the abuse of process and the access to justice: when considering the conflicts in public policies, plaintiffs’ access to justice should be afforded priority.

Champerty and maintenance as offences were abolished in the United Kingdom in 1967. As feudal lords disappeared, maintenance which could potentially help the poor but forbidden in the past, has eventually revived in the form of litigation funding. Its positive effects include: for individuals who are entitled to file a claim but cannot afford the litigation or arbitration fees, third-party funding can help them access justice; for companies facing financial difficulties, third-party funding can help them initiate valuable proceedings; third-party funding firms enhance economic efficiency by injecting more cash flow into economic activities through litigation or arbitration.

Third-party funding is charged under a "pay when succeed" basis, that is, a certain percentage can be charged as compensation after lawsuit is successful. Jurisdictions that allow this often set a cap on the maximum amount that can be charged. The following table sets out the cap or recommendation in each of the jurisdictions:

Various states in the US have different rules on maintenance. For instance, Ohio ruled in 2005 that third-party funding agreements cannot be enforced. The ruling was supported by the New York court, but was overturned by a state referendum a few years later. The situation in Nevada is similar to Ohio. In Texas, where maintenance is not prohibited traditionally, a legislative attempt was made in 2006 to define third-party funding with too high a profit as usury and illegalise it. The bill was passed by the State House of Representatives, but failed to deliver to the Senate for voting. Arizona and other states basically accept funding as an affirmative defense. In the 2014 Miller UK Ltd. et al v. Caterpillar, Inc., No. 1:2010cv03770 - Document 1097 (N.D. Ill. 2017) case, the respondent's submission stating that litigation funding was not legal in Illinois was rejected by the District Court of Northern Illinois.

In practice, third-party funding is sometimes accused of working like a de-facto usury because the remuneration is set too high in the funding agreements in some rare cases. A cap is set in same States, generally at one-third, but the percentage can vary greatly. This can indeed be a potential risk in third-party funding.

Although various States adopt different attitudes towards litigation funding, they are not rigid in practice. On the whole, the States hold an ambiguous approach but tend to accept it progressively. Today, about two-thirds of courts consider traditional third-party funding agreements effective. Some scholars have pointed out that the court should consider the following factors when deciding the effectiveness of an agreement: whether the legal proceedings are frivolous; whether the lawsuit has improper motives; and whether the third- party funder has control over the legal representative or forces the funded party to accept or reject settlement.

It was mentioned earlier that champerty and maintenance have always been regarded illegal in the UK since medieval times until the offence was abolished in 1967. The turning point on this issue laid in the Arkin v Borchard Lines Ltd Court of Appeal case in 2005. In the case, the Managers and Processors of Claim Ltd (MPC) funded Mr. Arki, the plaintiff who could not afford the lawsuit, by, for example, paying institutions such as Ernst & Young to obtain the necessary reports. Correspondingly, MPC would get 25 percent of the first five million pounds rewarded and 23 percent of any additional judgment amount. The judge held that commercial funders provided funding to those who could not afford the proceedings. However, the plaintiff eventually lost the case.

There are three aspects to third-party funding requirements under the UK law. First, the third-party funder has to have considerable funding ability and should bear all payables within the scope of the funding agreement for at least 36 months. Second, a third-party funder can only withdraw from the funding under specific circumstances with approval. Third, the third-party funder is not allowed to interfere in the litigation and with the judge's decision. The funder can only be informed of the progress to a limited extent.

Australia is relatively more open towards third-party funding in terms of both the level of acceptance and regulation. Its is permitted and rather common to see third-party funders having certain degree of control over the funded parties. In the internationally renowned Campbells Cash and Carry Pty Limited v Fostif Pty Limited [2006] HCA 41 in 2006, the High Court ruled by a five-to-two majority that funding arrangement of the case was accepted.

Third-party funding in Hong Kong has also gradually improved through legislative amendments in recent years. The general idea is to exceptionally exclude third-party funding in arbitration from the two torts, namely maintenance and champerty. After several revisions, the Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Ordinance 2017 took effect on 1 February 2019. The Code of Practice for Third Party Funding of Arbitration issued earlier sets out in detail the standards for third party funders and funded parties. Third-party funding in both arbitration and mediation are not prohibited by the rules on maintenance and champerty under the common law. However, unlike in Australia, funders are not permitted to influence the legal representatives of the funded parties in Hong Kong.

Generally speaking, as a major international trade center and arbitration hub in the Asia Pacific region, Hong Kong is in the forefront in terms of third-party funding. Hong Kong has to expedite the legislation on third-party funding (which is already the case) on the one hand, while on the other hand strengthen the training for legal professionals in order to transit from rejecting to accepting third-party funding in common law jurisdictions.

Although the attitudes towards third- party funding are different in various jurisdictions, the overall trend is evolving from rejection in the past to gradual acceptance and improvement by legislation. On the basis of Hong Kong’s relatively advanced development, relevant legislation should be optimised in Mainland China, drawing reference from various countries. Certainly, this requires a wide extent of discussions of exchanges.

Editorial note: This is a translation of the Chinese article.


Leung & Wan Solicitors (Principal)

Leung & Wan Solicitors (Consultant)