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Control, disclosure, privilege, champerty and other legal finance ethics questions, answered

  • Case law & ethics
October 11, 2019
Danielle Cutrona

Commercial legal finance is increasingly recognized as an industry norm. In the US and the UK, according to 2018 research, a staggeringly high percentage of lawyers say they are aware of it, a majority say they expect their firms or organizations to use it in the next two years, and a small but steadily growing number say they have direct experience using it. It is embraced across the world’s leading dispute resolution centers, and Hong Kong, Singapore and Abu Dhabi have recently joined their peers in permitting its broader use.

Not surprisingly, the growth of commercial legal finance among law firms and large and small businesses alike has spawned an increase in commentary and questions—and regrettably, misinformation—about its use. And while there has been discussion by some about legislative and rules proposals in this regard, the vast majority of courts and legislatures have declined to impose unnecessary regulation—implicitly recognizing that legal finance already is regulated by the courts and adjudicating bodies before which parties litigate their claims.

The primer below provides basic answers to the most typical of the types of questions we are asked at Burford.

Does legal finance impact control of litigation and settlement decisions?

At Burford, it does not. We enter into carefully negotiated, multimillion-dollar transactions with law firms and corporations represented by sophisticated counsel. Our agreements state that we neither control nor will we seek to control strategy, settlement or other litigation-related decision-making, nor direct a counter-party to settle a case at all, or for a particular amount. We will not withhold contractually required funding for strategic reasons. We are passive investors and we do not control the legal assets in which we invest. These decisions remain entirely with the client.

In the United States, the vast majority of commercial legal finance providers will behave similarly, but those considering financing for their clients or firms should, of course, seek confirmation and counsel as they engage with a legal finance provider.

Are financing arrangements subject to disclosure?

The vast majority of courts do not require disclosure of legal finance arrangements in commercial matters. While the specific rules vary by jurisdiction, those that exist generally share the limited purpose of ensuring that adjudicators are not inadvertently deciding a matter in which they have a conflict. And any other concerns about conflicts or other ethical issues are adequately addressed by the U.S. justice system’s clear and robust discovery and professional conduct rules that have worked well for decades.

In declining to force disclosure or to add additional rules or regulations, courts and legislatures implicitly recognize that commercial legal finance arrangements are like any other type of corporate finance. It is also a recognition that forced disclosure could expose privileged or sensitive proprietary business information. Litigation is not an excuse for one party to conduct a fishing expedition into another’s finances, and overbroad disclosure requirements undermine the judicial goal of efficiency. Disclosure for disclosure’s sake simply is not a legitimate basis for sound public policy.

Following are some variations in disclosure requirements in jurisdictions in which Burford operates:

  • US: No federal rule requires disclosure, and 49 out of 50 states do not require disclosure in commercial matters. While a small group of advocates have lobbied for forced disclosure in proceedings involving multiple claimants such as class actions and MDLs, the reasoned approach to disclosure taken in May 2018 by Judge Dan Polster of the Northern District of Ohio in the opioids multidistrict litigation sets a sensible precedent: Among other things, he called for disclosure to be made ex parte and in camera to him, and stipulated that no discovery would be permitted.[1]
  • UK: There is no general requirement for a litigant to disclose a litigation finance agreement to either an opposing party or to the court.
  • Australia: Parties are not expected to disclose legal finance with the exception of class actions conducted in the Federal Court.
  • Hong Kong: In arbitrations, parties must disclose the existence and provider of a funding agreement. This requirement was put in place to prevent conflicts of interest between finance providers and arbitrators (in practice, however, no such conflicts have arisen).
  • ICSID: As it updates its rules in 2019 or 2020, ICSID may add an express requirement to disclose outside finance (which some parties already do voluntarily). Should a requirement be added, a reasonable approach would exclude any language requiring disclosure of arbitration finance directly to respondents. Disclosure can thus serve the stated purpose of avoiding conflicts without the associated procedural maneuvering once the disclosure is made to the respondent.

Are documents shared in legal finance transactions protected work product?

Most legal financing arrangements require sharing of some attorney work product: Since providers of finance do not control matters and typically provide capital on a non-recourse basis (meaning its investment is returned only if the underlying matter is successful), legal finance providers like Burford must carefully diligence the case. Happily, materials created for and provided to the potential financier as a consequence of the litigation are protected under the work product doctrine in the US and are considered privileged materials in other jurisdictions.[2] Similarly, deal documents embodying a finance transaction are protected because they were created due to the litigation, and the terms of such agreements reflect the information provided in work product protected documents, such as lawyers’ mental impressions, theories and strategies about the underlying litigation.[3]

Recently in the US, in Lambeth Magnetic Structures, LLC v. Seagate Tech., the court extended the work-product protection to communications with potential litigation financiers in the period of time leading up to litigation.[4] Unsurprisingly, the court found that the communications with litigation financiers were for the purpose of preparing for litigation. And because the communications “took place during a period when Lambeth actually and reasonably foresaw litigation,” the protection applied.

As a first step of Burford’s diligence process, parties execute a confidentiality agreement that protects communications between Burford and its counterparties from discovery. Nonetheless, out of an abundance of caution, despite the strong caselaw, we are circumspect about what we request in the diligence process to avoid any risk of waiver.

Is legal finance tantamount to fee-splitting?

A heavily criticized non-binding advisory opinion by the New York City Bar ethics committee in July 2018[5]raised an issue with respect to fee-splitting, which has garnered some attention. The opinion, which breaks from substantial caselaw precedent and the overwhelming opinion of legal scholars and ethicists, asserts that any non-recourse financing arrangement between a law firm and a professional legal finance provider constitutes a violation of Rule 5.4(a) of the New York Rules of Professional Conduct, which prohibits fee-sharing between lawyers and nonlawyers. Legal ethics scholars have rejected this argument, noting that Rule 5.4(a) is meant to ensure professional independence of lawyers. They have also noted that the non-binding opinion, if applied, would restrict not only non-recourse legal finance but also traditional recourse loans provided to law firms by financial institutions, which give creditors broad control over law firms’ legal budgets, and on which many law firms rely.[6]

Notably, the committee acknowledged that it had taken an opposing view to the New York courts, which have uniformly accepted and enforced precisely the kinds of non-recourse financing arrangements that the opinion addresses. In the wake of the non-binding opinion, the New York City Bar formed a working group to reconsider the issue. Indeed, it is possible that the July 2018 opinion will ultimately lead the relevant authorities to assert more clearly what the courts have already stated: That properly structured legal finance arrangements do not interfere with a lawyer’s independent professional judgment or attorney-client relationship and are not fee-splitting.

What about champerty, maintenance and barratry?

The ancient common law doctrines of champerty, maintenance and barratry are of decreasing relevance in modern legal practice, having been completely abolished in many jurisdictions, and become mostly obsolete in those where they still exist.

Originating in ancient Greece and assimilated into medieval English law, champerty, maintenance and barratry do not exist in modern legal practice in the jurisdictions in which Burford operates, with very few exceptions—and even in those jurisdictions, these ancient issues do not interfere with legal finance as practice by Burford.

First, a definition of terms: Maintenance is the practice of helping another to maintain a suit, generally by providing financial assistance. Champerty is the practice of maintaining a suit in return for a financial interest in its outcome. Barratry is the continuing practice of maintenance or champerty.

  • US: Rulings in the US Federal courts suggest that laws concerning champerty, maintenance and barratry are outmoded and have no bearing on complex commercial litigation finance. A limited number of states have statures emulating common law champerty that do not apply to commercial legal finance as practiced by Burford. Most other states either never adopted champerty prohibitions or have explicitly abolished their champerty rules.
  • UK: By the 1900s, maintenance and champerty were effectively obsolete, and were abolished as crimes and torts by ss.13 and 14 of the Criminal Law Act 1967 (CLA 1967).
  • Singapore: In March 2017, Singapore abolished civil liability for the common law torts of maintenance and champerty and established a new regulatory framework to allow third-party funding for international arbitration and related proceedings.
  • Hong Kong: Principles of maintenance and champerty still apply, but since the Law Reform Commission undertook a review of the policy on outside funding in 2013, several judicial pronouncements have narrowed the scope of the doctrines and confirmed they do not apply to insolvency or to international arbitration proceedings.
  • Australia: The passing by New South Wales of the Maintenance, Champerty and Barratry Abolition Act in 1993 enabled Australia’s first foray into litigation funding.

 Answering “peace of mind” questions about legal finance

Clearly, a broad trend in caselaw and in legislatures recognizes the benefits of commercial legal finance to businesses, lawyers and the legal system. We thus anticipate that, in the years to come, with the continued growth and widespread use of commercial legal finance, questions about use will be replaced by questions about how to secure the best quality legal finance partner. We stand ready to discuss all these issues in more detail.

[1] See In re: Nat'l Prescription Opiate Litig., No. 1:17-MD-2804, at *2 (N.D. Ohio May 5, 2018)

[2] For an overview of caselaw affirming work product protection for communications with outside providers of litigation finance, see “Work product protection for legal finance” on Burford’s blog, available at: burfordcapital.com/blog/work-product-protection-for-legal-finance/.

[3] See Carlyle Inv. Mgmt. v. Moonmouth Co., No. 7841–VCP (Del. Ch. Feb. 24, 2015).

[4] Lambeth Magnetic Structures, LLC v. Seagate Tech. (US) Holdings, Inc., No. CV 16-538, 2018 WL 466045.

[5] Formal Opinion 2018-5: Litigation funders’ contingent interest in legal fees.

[6] Anthony E. Davis and Anthony J. Sebok, “New Ethics Opinion on Litigation Funding Gets It Wrong,” New York Law Journal, August 31, 2018.