An unexpected contributor to the ongoing debate about the regulation of third-party litigation funders in the UK has been the US Institute for Legal Reform (ILR). Created by the US Chamber of Commerce in 1998 to address what it describes as America’s “litigation explosion”, the ILR has been actively lobbying parliamentarians and others in the UK.

It was behind a move to introduce statutory regulation of funders earlier this year, which the UK government rejected given that a new system of self-regulation had barely even begun. This is just as well – on closer examination of the ILR’s claims, it would appear that they have fundamentally misunderstood the nature of litigation funding in this country. For one thing, it is used by commercial companies and individuals with large-scale commercial claims, and not consumers with personal injury claims, as they suggest it might be.

Instead the market can now focus on the new Code of Conduct, and the creation of the Association of Litigation Funders to monitor compliance with it, approved by the Civil Justice Council, the government and by Sir Rupert Jackson, the Court of Appeal judge whose report into the costs of civil litigation recommended self-regulation.

The Code was drawn up by a Civil Justice Council working party and includes strict capital adequacy requirements – meaning funders need to have the resources to cover their funding liabilities for at least the subsequent 36 months – no right for the funder to terminate the agreement without good reason, and restricting the funder’s ability to control the litigation.

The ILR has claimed that litigation funders will fuel unmeritorious cases. This is a remarkable statement either showing a lack of understanding of how funders work or a deliberately one-sided and anti-funding view. It will come as no surprise to anyone apart from the ILR that actually we only invest in cases with merit. If we did not, we would not last very long – funders’ business model is to invest in good claims and make a return. Taking a punt on unmeritorious cases is the antithesis of how funders work.

Among other things, the ILR is opposed to funders having any influence on settlements. It suggests that the funders’ and the clients’ interests are not aligned. This ignores the old legal principles of champerty and maintenance.

Funders in England and Wales cannot and do not interfere with the process of litigation. They have a view on things and can make those views heard but the ultimate decisions in a case belong to the client who is guided and advised by their lawyers. The funder and the client have entirely aligned interests. In fact, a review of those interests will form part of the due diligence of the funder to ensure that is the case.

Quite obviously funders should be allowed to discuss settlement and the case generally with the clients and in most cases the clients welcome the extra input. Funders have to be aware of the limits to their involvement because maintenance issues and are mindful of the line over which they cannot step. A prohibition on funders being permitted to have input into the settlement discussions is impractical and unrealistic.

Anyone wondering what the ILR’s agenda is should have a look at its membership, which reads like a ‘Who’s who?’ of American big business. One could argue that their actions aren’t driven out of ignorance, maybe they understand the market only too well and are instead driven by the desire to reduce the ability of plaintiff’s to bring claims against big business.

A more sensible and balanced view from businesses would be to see the inevitability of litigation. Criticism that funding encourages poor cases is just plain scare mongering. Instead, the cash flow advantages and removal from the balance sheet of risk should not be overlooked.
The most significant risk of litigation to a business is that they incur significant costs in legal, counsel and expert fees with no guarantee of a successful outcome. Furthermore, there is the possibility that if the case is lost, they could face the prospect of paying their successful opponent's legal bill too.

Litigation funding removes these risks and is offered on a non-recourse, off-balance-sheet basis.  There is no liability for businesses to pay legal fees or adverse costs, allowing them to turn their legal claims into a valuable asset.Sadly, the ILR may have misunderstood the English market, litigation funding here is not prevalent at the consumer level it is a tool for businesses, either by choice or need. In any event, their attempts have failed for now, but no doubt we have not heard the last of this well-funded and high-profile US lobbyist.

Nick Rowles-Davies is a solicitor and consultant with litigation funder Vannin Capital.