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15. Litigation Funding: Good or Evil?

The rise of third-party litigation funders (TPFs) over the past two decades has been a
source of vigorous debate, none of which is helped by the rapidly shifting market and its
increasingly complex playing field. In Aotearoa New Zealand, third-party litigation fund-
ing is a relatively recent phenomenon — in that short period of time, however, the global
market has exploded, leading to a rapid expansion and a flurry of related court cases. Pro-
ponents believe that TPFs will bring a bevy of benefits, such as increased access to justice
and an economically viable source of legal funding, while opponents raise valid concerns
about the undue legal influence that funders may gain as a result. This paper will argue
that TPFs are overall beneficial; however, due to the complexity of the field, there are also
significant risks which should be addressed as the law continues to develop.

What is Third-Party Litigation Funding?

As a rule of thumb, third-party litigation funders are private entities that allow plain-
tiffs to pursue a claim that they would otherwise not be able to, by funding some or all of
the costs involved. This can include living costs, legal fees, and also adverse costs if neces-
sary.1 Should the case be successful and a monetary award ordered, the TPF will receive its
costs back in full, as well as a commission fee for bearing the risk of litigation — this is the
profit that most funders have their eye on, and is what motivates the funding offer in the
first place. The size of this payout can vary depending on the stage at which resolution is
actually reached and the costs incurred by ongoing proceedings, but in general, the fee will
be large enough to allow the funder to profit handsomely. TPFs in New Zealand include
LPF Group, the largest based in New Zealand, Litigation Lending Services, an overseas-
based funder that mainly operates in Australia, and Harbour Litigation Funding, which op-
erates from the United Kingdom.2

Champerty and Maintenance

To understand the history of third-party litigation funding, it is first necessary to grasp

a matched set of common law prohibitions, the two ancient doctrines of champerty and
maintenance. 3

When someone with no interest in the subject of an action ‘undertakes to carry on the
suit at his own expense, or to aid in so doing, in consideration of receiving, in the event of
success, some part of the land, property, or money recovered or deriving some benefit
therefrom’,4 that person committs champerty. Champerty is a subset of maintenance, de-

1
Law Commission Class Actions and Litigation Funding; (NZLC IP45, 2020) at 14.2
2
Ibid. at 14.34-14.36
3
Douglas R. Richmond “Other People’s Money: The Ethics of Litigation Funding” (2005) 56 Mercer L Rev 2 at
652-653
4
14 C.J.S. Champerty and Maintenance § 2.a (1991)
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fined as ‘officious intermeddling in a suit that in no way belongs to one, by maintaining or

assisting either party with money or otherwise, to prosecute or defend it.’ 5

In essence, champerty and maintenance attempt to preserve the efficiency of the judi-
cial system by preventing frivolous suits and restricting the power of the wealthy to inter-
fere with vulnerable plaintiffs. The technical definition of champerty and maintenance re-
quires an ‘officious intermeddler’ or a disinterested person dedicated to ‘stirring up strife’
— and even with this dubious definition, champerty and maintenance usually serve as con-
tract defenses and not actions in tort. In the United States, even if a litigant did rely on
champerty to void a contract, it would have no effect on its adversary’s ability to prosecute
the associated action. It is for this reason that many jurisdictions have done away with
those doctrines altogether, preferring to rely on other, more well-developed principles. 6

These two doctrines, despite being relatively obscure and even arcane, served to bar
third-party litigation funding for many years. Singapore, a relatively modern legal hub in
many other aspects, refused to allow TPFs until the 2017 amendment of the Civil Law Act
precisely due to champerty and maintenance, and even after the reform, funding is only al-
lowed for international arbitration proceedings.7

Champerty and maintenance have not yet been abolished in New Zealand, as the Law
Commission recommended the retention of both doctrines in 20028 despite all advice to
the contrary, believing that they were required to protect defendants from ‘unruly corpora-
tions prepared to employ ruthlessly aggressive litigious processes against business rivals,
hiding behind nominal litigants if need be.’ 9 The courts have shown on multiple occasions
that the doctrines still exist and are applicable, even if this does not bar third-party litiga-
tion as such — in Waterhouse v Contractors Bonding Ltd the court was unwilling to con-
sider the question of the torts’ abolition and assumed their continued existence 10, while
PWC v Walker maintained the prohibition, stated in Waterhouse, of assignment of bare
causes of action, again assuming the continued existence of the torts of champerty and
maintenance. 11

(A bare cause of action is a right to claim damages explicitly divorced from any transfer
of property12 ; however, third-party litigation funders are not generally considered to be vi-
olating this rule, despite the fact that the concept itself is rather obscure and considered to
be opaque at best, and judges keep making appeals to it.13)

5
Ibid. at § 2.b.
6
Mercer at 653-656
7
https://www.lexology.com/library/detail.aspx?g=0f104d6a-d0f0-4a8e-a8d6-c3b06316236b
8
Colin Fife, Third-party litigation funding [2009] NZLJ 250, at 250
9
NZLC R72 at 10
10
Waterhouse v Contractors Bonding Ltd, [2013] NZSC 89 at [25]
11
Pricewaterhousecoopers v Walker, [2017] NZSC 151 at [78]
12
Jeremy Bamford and Peter Wiltshire, “Causes of Action - Realising Value and Balancing the Public Interest,”
(2007) Guildhall Chambers and Cameron McKenna
13
PwC at [116]
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It can also be argued that third-party litigation funding does not meet the require-
ments for champerty in the first place, as the funder is not technically relying solely on the
case’s success, but can be paid through other financial avenues or simply eat the costs with
existing funds — even then, a funder can further deflect charges of champerty by delaying
funding until the suit has been on file for a reasonable time, agreeing that the company
will not attempt to influence or control the attorney’s handling of the case, and making the
attorney agree not to pass along any of the fee to his clients. This effectively defuses the
charges of instigating litigation, officiously intermeddling, and acquiring a part of the mat-
ter being litigated. 14

When framed as an agreement between attorney and funder, as opposed to an agree-

ment between funder and client, many of the associated concerns vanish; whether or not
this three-pronged relationship is in fact that clear is a matter that will be discussed later
on.

Nonetheless, it is safe to assume that the torts of champerty and maintenance do not
pose a significant threat to the future of third-party litigation funding, and that they will
not be accepted as bars to funding by the courts unless a flagrant violation of the principles
behind them takes place.

Entrepreneurialism and the Profit Motive

A common criticism of litigation funders is that by allowing more litigation to take

place, they multiply the number of cases that would otherwise not make it to court due to a
lack of funding — the courts will thus crumble under a veritable flood of frivolous cases. In
effect, this is yet another instance of the venerable floodgates argument, and an extension
of the concerns addressed by champerty and maintenance.

However, data suggests that there is more than adequate reason to consider this criti-
cism moot — Avraham and Sebok have conducted statistical research on consumer TPF in
the United States, and found that the majority of funding requests (58%) were either
closed before review, denied after review, or refused by their clients.15 If litigation funders
were interested in sending as many cases for review as possible, then surely the number of
aborted cases would be much lower. While the study applies to consumer litigation fund-
ing and not commercial litigation funding (commercial funders usually take a percentage
of the award as their commission fee, while consumer funders often charge high interest
rates on top of their loan), the rigorous strictures used to vet all incoming cases should
largely the same for both consumer and commercial funders, because the motives behind
taking on cases is the same.

14
Mercer, at 664
15
Ronen Avraham and Anthony Sebok, “An Empirical Investigation of Third Party Consumer-Litigant Funding”
(2019), 104 Cornell L Rev 1133 at 1146, chart 2
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Litigation funders are companies, not charities, and because of that it is in their best
interests to pick cases that will have the highest likelihood of success. The action of the free
market and simple economics tends to have a much greater impact than legal concerns, at
least before the latter catches up to the former.

In many ways, third-party litigation funding is similar to venture capitalism, where seed
money is advanced to startup companies in the hope of future returns; in a similar manner,
TPFs speculate on the success of a case, hoping to benefit from the outcome. The industry,
like most other global industries, is essentially entrepreneurial in nature, and motivated in
large by the hope of profit.

This profit motive is a key feature of third-party litigation funding, and is an effective
counterargument to concerns about frivolous litigation. The fact that a bottom line exists
means that TPFs are extremely invested in the likelihood of a given case’s success, as at the
end of the day, they have to shepherd a case to completion if they wish to see a dime. Liti-
gation funders often operate on the ‘no win, no fee’ rule, where they will eat all costs in-
volved if they fail to win a particular case. Because of this, it is entirely in their interest to
prune out hopeless or unmeritorious claims.

Because of the profit motive, a funder will examine prospective cases with an eye to-
wards four things: 16

a) The merits of the case; that is, the likelihood for the case to succeed and any applica-
ble legal principles.
b) Estimated quantum of the case; that is, the estimated costs of the proceedings as op-
posed to the estimated value of the claim.
c) Enforceability against the defendant; the defendant’s ability to pay any damages will
be assessed as well as the enforceability of any such order.
d) The plaintiff’s legal representation; that is, the quality of the advice which has al-
ready been given on the actual chance that the case will succeed.

These allow TPFs to determine which cases are worth their time, and which are doomed
to failure or too potentially fraught with complication to be worth pursuing.

The related concern, that TPFs will likely prolong litigation and discourage settlement
in the hopes of getting a bigger profit at the end of the day, is likewise misplaced. The argu-
ment is that the funder, motivated by the prospect of a higher payout, will force the client
not to settle as soon as they might have otherwise, in order to push for more money.

This is an immediately intuitive argument on its surface, and will be discussed in more
detail in the third section of this essay, but there are several strong factors that weigh
against it.
16
NZLC IP45 at 14.19
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Firstly, the benefits of allowing access to litigation to otherwise incapable plaintiffs out-
weigh the potential abuses of the system, as it is surely better to encourage fair and just set-
tlements rather than unfair or unjust settlements brought on by economic desperation.
Secondly, the merits of a case exist independently of a plaintiff’s ability to afford litigation,
and prohibiting litigation funding will in many cases discourage meritorious lawsuits that
might otherwise have been heard. Thirdly, litigation funding can force defendants to ap-
proach a case reasonably and pragmatically, knowing that the plaintiff has the resources to
push beyond attempts at trite resolution — this might in fact encourage settlement. 17

The enterpreneurial nature of litigation funding is in many cases a self-regulating

mechanism, rather than the albatross its critics portray it as. As the market grows, compe-
tition between litigation funders will no doubt force them to vie for the most economical
and efficient behavior, aiding potential litigants and providing more benefits for them.

However, these answers only raise additional questions. Is economic benefit the only
concern that we should be considering? Or is the reality of legal practice slightly more
complicated than that?

The next two sections of this essay will address these concerns.

Access to Justice

The recent global trend is to assume that third-party litigation funding will do more
good than harm, and that unless they explicitly violate the public interest, that they should
be permitted to operate. Many jurisdictions around the world have thus abolished or mini-
mized the traditional torts of champerty and maintenance in order to allow third-party liti-
gation funding, hoping to serve the interests of what is known as access to justice.

Access to justice has come to the forefront of legal thought in recent years, especially in
regard to litigation funding. The term has been defined in many different ways in various
contexts, but for the purposes of this essay, we will adopt Sahani’s version of the term 18 ; ac-
cess will mean the financial ability to proceed in court, as opposed to non-financial barri-
ers such as adequate representation and certifiability, and justice will mean the ability to
have a claim heard as opposed to its specific merits. Our version of access to justice is thus,
put simply, the ability to bring a case before a judge without undue financial stress.

Based on the cursory analysis given in the previous section, one might readily assume
that access to justice would be wholly improved by litigation funders. They allow claims to
be brought, especially in class actions or mass litigation, that would not otherwise be able
to proceed. On the most obvious level, this is clearly the case, and so one would be

Mercer, at 661
17

Victoria Shannon Sahani, “Rethinking the Impact of Third-Party Funding On Access To Civil Justice” (2020) 69
18

DePaul L Rev at 619

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tempted to say that litigation funders do bring increased access to justice and then dust
one’s hands off with aplomb. However, there are several layers to this that bring this imme-
diate reaction into question.

Litigation funders are driven by the profit motive to pick winning cases. Unfortunately,
with every selection comes multiple corresponding rejections; funders do not have infinite
time or money. In the United States, it is estimated that one industry-leading funder takes
around sixty to ninety days to evaluate an investment, spending nearly $100,000 for each
screening19, and recently, one funder reported investing in only 6% of funding requests re-
ceived.20

This means that there are several classes of plaintiff which a funder will be less inclined
to service.

Firstly, even if a plaintiff’s claim does indeed have merit, a funder might reject it be-
cause the claims are too expensive to pursue relative to claim value.21 In New Zealand, the
minimum settlement value for general funders to consider a claim varies from $200,000 to
$5 million22, an amount decidedly difficult to reach unless one is involved in a class action
or happens to have a remarkably expensive grievance. Long-shot winners, or claims too
risky for a third-party funder, will also be thought of as too financially imprudent to fund,
as well as non-financial winners, who seek non-monetary awards, and controversial politi-
cal cases. 23

As noted by Sahani, this fact raises potential doubts as to the accuracy of the simple
idea that third-party litigation funders provide increased access to justice. She refers to this
as the cost component; the willingness of the financier to pay the costs of litigation, which
is predicated on many different things. Third-party litigation funders expect to be renu-
merated in some form or another, and might even require an alternative form of reim-
bursement before they will enter into their financing agreement.24

It is impossible to adequately estimate the exact costs of a case, unless the funder de-
cides to include a definite cap on monetary aid or specify a particular percentage of costs
that it will pay. Funders will pick winners, or ‘unfunded winners,’ who were already going to
have a high chance of succeeding in court anyway25 — but by definition, not everyone can
be a winner. Because of this, it is perhaps more adequate to say that litigation funding al-

19
Ralph Lindeman, Third-Party Investors Offer New Funding Source for Major Commercial Lawsuits, FULBROOK
CAPITAL MANAGEMENT (Mar. 5, 2010), https://fulbrookmanagement.com/third-party-investors-offer-new-funding-
source-for-major-commercial-lawsuits
20
BURFORD CAPITAL, The Burford Annual, 10, http://burfordcapital.com/media/1270/burford-annual-client-report-
2018.pdf at 13
21
Sahani at 614
22
NZLC IP45 at 14.38
23
Sahani at 614
24
Ibid. at 622-623
25
Ibid. at 627
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lows increased access to justice for the select few who were probably already going to win,
and does nothing to provide access to justice for those plaintiffs who are deemed to have a
lesser chance, or are otherwise undesirable. This can in many cases include minority
groups, special interest groups, or underprivileged members of society — in other words,
precisely the types of groups who when given the funding to present their cases before the
court, have changed the course of legal history.

It is worth noting, however, that Sahani explicitly excludes class actions from her
thought experiment.26 The time, effort, and sheer expense involved in class action lawsuits
means that the financial and legal projections are both extended and stretched over a great
many years, perhaps even decades, and the nature of class action lawsuits means that the
defendants will often seek to wear down the plaintiffs with sheer legal attrition, as corpo-
rate defendants usually have more resources than any individual plaintiff. It seems the
wonder is not so much that only the class actions with the best likelihood of succeeding are
heard, but that any class action is heard at all, given the sheer contortions involved. Not
only that, but the vast majority of plaintiffs under the class will not have detailed knowl-
edge about the case or the wherewithal to present it even if they did, and the number of
people involved only serves to complicate matters further, making it more or less impossi-
ble for any given plaintiff to organise on his own as the number of litigants increases.
Third-party litigation funders are often the only organisations with the means and knowl-
edge to back class action lawsuits and provide aggrieved consumers with the ability to
bring their claims before the judicial system. In such cases, it could be argued that any ac-
cess is better than no access at all.

Increased access to justice is a key factor in creating a fairer and more just society, and
third-party litigation funding is one of the many avenues that help to improve this. How-
ever, it would be naive to think that improving access to justice is in fact the primary aim of
funders, even though many of them might state otherwise. The idealistic goal and the
practical aim must, as in all things, be considered separately.

Conflicts of Interest; Relations In Litigation Funding

Thus far we have established that third-party litigation funding should not violate the
torts of champerty and maintenance, that funders will mostly self-select in order to avoid
the concerns of frivolous and prolonged litigation, and that funders will most likely in-
crease access to justice, even if in a highly selective fashion.

The next issue to consider is the potential influence that litigation funders can exert on
court proceedings. As noted by Waye, there is a tripartite relationship between claim
holder, litigation entrepreneur, and legal practitioner. 27 The legal practitioner receives fees

26
Ibid. at 624
27
Vicki Waye, “Conflicts of Interests between Claimholders, Lawyers and Litigation Entrepreneurs” (2008) 19 Bond
L Rev 1 at 234
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from the litigation entrepreneur, but works in the interests of the claim holder. This has
the potential to create several conflicts of interest, including but not limited to:

-The strategies employed to pursue the claim, which may differ between the various
parties involved.
-Settlement; litigation funders may push for a reasonable settlement contrary to the
wishes of the client, who may insist on pursuing. This may leave the funder open to an ad-
verse costs order, irrecoverable costs, and reduced profit. In addition, the client may simply
wish to settle too cheaply for the funder to make sufficient profit.
-Settlement in kind rather than in cash; the client may accept a settlement in products
or assets, which cannot be converted to cash and are thus of no value to the funder.
-Withdrawal; a client may wish to withdraw from the proceedings, which will effectively
end the funder’s hopes of recovering its investment.
-Confidential information; lawyers could pass on information that would cause the
funder to withdraw funding, breaching client confidentiality, or alternatively, disclose the
results of funder investigations in a bid to make the client settle early, breaching commer-
cial confidentiality. 28

It goes without saying that this web of potentially contradictory interests can pose se-
vere ethical problems to the lawyers involved. This is usually resolved by an agreement be-
tween lawyer and funder, in which the funder asserts the right to receive progress reports,
information about any settlement proposal, and to have access to the client’s file, among
other rights such as the unilateral withdrawal of funding. However, this is usually con-
strained by public policy considerations: it is important to maintain a certain standard of
legal ethics in order to ensure that legal practitioners can act in the best interests of their
clients and maintain their fiduciary duties, and the invisible financial pressure that a fun-
der has on hand at every stage of the legal process will no doubt affect this.

The relationship between client and funder is also important. There are typically two
kinds of relationship: one where complete control of the case is assigned to the funder, and
another where the claim holder maintains control of the conduct of the claim, directly re-
taining and instructing the legal practitioner.29 If the claim holder is sophisticated enough,
the second is usually preferable, as invested claim holders have more of an interest in see-
ing the claim through; however, there are also good reasons for the claim holder to delegate
this to the funder, who will undoubtedly have more experience in handling claims in an
efficient manner. The first option, however, creates an information assymmetry between
client and funder, effectively assigning more invisible power to the funder which could be
used to steer the case in a direction contrary to client wishes or best interests.

Steinitz suggests that funder-client relationships be reformed to solve this. In effect,

some of the protections of the attorney-client relationship will be assigned to the funder-
client relationship. Most radically, she suggests the extension of a fiduciary duty from fun-
28
Ibid. at 238
29
Ibid. at 249
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der to client — once the funder is viewed as a fiduciary of the client, then the funder will
have to consider the client’s best interests, which can include non-monetary settlement
and settling for less than the funder might actually want. To offset the potential loss of rev-
enue, she also proposes a revised fee structure, perhaps a reduced hourly rate or flat fee for
the attorney’s services on one hand, and a performance bonus or reduced percentage of the
recovery on the other, to align the interests of the funder more closely with the client and
give the lawyer some counter-leverage.30 This proposal seems reasonable, but also radical,
and it is difficult to determine the impact that it would have on the funders’ willingness to
operate, as they might not want to take on the responsibility of a fiduciary duty.

The tripartite relationship is a source of potential conflict that cannot be lightly dis-
missed, but it is also necessary, as all three members are essential to a successful legal
process. It is important for legislators to be aware of the dangers of potential abuse and act
accordingly.

Conclusion

Third-party litigation funding opens up the prospect of litigation for parties who would
otherwise not be able to be heard. They are economically self-sustaining, fiscally efficient,
and automatically select cases with a high chance of success. However, their benefits are
not universally spread and may not apply to the underprivileged plaintiff or unattractive
claim, and the spectre of undue influence will always lurk over their dealings with client
and lawyer. It is safe to say that they are generally beneficial, but caution must nonetheless
be kept alive.

30
Maya Steinitz, “Whose Claim Is This Anyway? Third Party Litigation Funding” (2011) 95 Minnesota Law Rev 4,
at 1329-1330