The history of litigation funding
25 Mar 2019
The worldwide rise of litigation funding began after the Global Financial Crises of 2008.
The transaction of funding litigation has, however, been around for millennia.
Before its scale into the main stream of both the litigation and investment arenas, it was more commonly known as the legal doctrine of “Champerty” and, until relatively recently, the underlying transaction of funding or investing in litigation was seen as an unlawful taboo.
This seems strange given that a litigation funding transaction is a commercially sensible one:-
A claimant with a meritorious claim, usually sounding in money, wishes to leverage the value of that claim on a non-recourse basis to a litigation funder who, in return for a share of the proceeds if the claim is successful, will fund the legal fees required, on risk, to enable the litigant to prosecute the claim.
If the claimant does not receive the funding he will either be unable to prosecute the claim, or be forced to accept a settlement offer far below the claim’s true value.
Law is a luxury, however, when a credible litigant is denied access to justice based on his financial position, it is, surely, the greatest injustice of all.
The question then is: why would the obvious commercial solution to the costly expense of litigation take thousands of years to become sanctioned by the majority of legal systems?
The answer lies in European history.
The bulk of our research into the history of litigation funding came from the California Law Review paper written some 80 years ago in 1935 by Max Radin as well as a further overview given at Harbour Litigation Funding’s First Annual Lecture given by Lord Justice Neuberger in May 2013.
Even in antiquity, the expense of litigation was a barrier to access justice.
Radin cites an example of champerty during this period, specifically of Apollodorus, a wealthy Athenian banker’s son, who purchased an interest in a current claim in ancient Greece.
Litigation in the ancient world carried status with it. Radin states that “it was disgraceful to appear unescorted to one’s trial as it would have been to go to one’s grave. It was not merely a suitor’s right to appear with his friends and kinsman. It was also the duty of the kinsman to attend him”.
This practice of attending trial with friends and kinsman ultimately spawned the legal profession. This “secta” would assist the litigant and its prosecution. The assistance would sometimes be driven by profit, prestige or political purpose. This led to abuse as the system could be manipulated by powerful men for an ulterior purpose.
It was also a practice for litigants to sell their claims to individuals with wealth or influence as these purchasers would have a higher prospect of success than the seller of the claim due to their status.
Later, the Romans put restrictions on traffic in litigation to curb such abuse. It was a valid defense to a claim if a right to litigate was sold whilst pending adjudication. They deemed it ‘contra bonos mores’ (against good morals) for a claim in an action to be transferred after it had already commenced, as it was held that the purchaser’s status could influence proceedings. An important distinction, however, is that such a prohibition was not placed on a claim which was sold prior to litigation.
Emperor Anastasius of 506 A.D. forbade such sale of claims in response to complaints from courts of “men who sought to devour the property or fortune of others” owing to claimants being intimidated to sell their claims below their value.
Emperor Antoninus Pius also placed further prohibitions on opportunistic litigants who gave or offered to give a share of his claim to the Imperial Treasury. The treasury of the time had certain power and privileges that ensured its claims were almost always successful. Plaintiff’s would donate a share of the claim to the treasury in order to tip the scales in favour of their potentially speculative or dubious claims.
Thus, the ancient legal systems were susceptible to abuse by men of status and influence. Champerty, therefore, was constricted in order to curb such abuse.
Owing to the rise of Christianity in the Roman Empire as well as the middle ages, a shift in attitude to civil litigation began to develop. The pursuit of claims for debt and the taking of oaths in court proceedings were both fundamentally opposed to Christian values, and therefore something to be discouraged in society. It was, however, replaced with the dogma of Christian forgiveness.
A litigation funder or purchaser of claims at the time would have been viewed with particular disdain because, as Radin puts it, “A man might properly protect his own interests or avenge his own wrongs, although Christian charity would limit even that. But he had no business to intermeddle with the interests of wrongs of someone else. It was no part of the ordinary citizen’s task to see that justice was done. That was the duty of the king and his officers who could, to be sure, command the assistance of anybody. But the voluntary instigation of prosecution, civil or criminal, by a person who had suffered no direct injury, was not in the public spirit, but dangerous officiousness, likely to be based on the worst possible motives.”
A notorious sin in medieval society was that of usury. During the 13th Century the purchase or funding of claims would carry the further concerns of the purchaser to drive a hard bargain, which meant that the transaction itself was speculative and therefore embodied the essence of usury.
Litigation and commerce in general was suppressed during this time and any transactions attached to litigation were unthinkable.
FEUDALISM, MAINTENANCE AND CHAMPERTY
It is posited that the word “Champerty” stems from the feudal “Champart” meaning ‘tenancy transaction’. It was a transaction where one party would fund the crops of a farm and the other would provide the land. Radin states that “In the champart, the grantor took the risk that a set of crops may fail and that there would, therefore, be no return at all. There was, however, an implied stipulation that the land must be cultivated and failure to do so was a ground for forfeiture”.
This Champart transaction was one transaction in a bundle of transactions under the banner of Maintenance that embodied the relationship between a feudal lord and his retainers. The first recorded mention of champerty was in the Statute of Westminster I of 1275 and Statute of Westminster II of 1285 although it has been speculated that these may have been reference to the “Champart” transaction and not a litigation funding arrangement, as the common definition would later embody.
Maintenance was specifically legislated against in the Star Chamber Act of 1487, and the Statute of Loveries of 1504. Maintenance included the practice of the feudal lord supporting all legal actions of individuals within his fiefdom without regard to their merit. The practice would be part of aggrandizing his estate and engaging in private war against other feudal lords. Should any dispute proceed to a court, the feudal lords would employ the same nefarious private war tactics of, inter alia, intimidation and bribery as means to justify and achieve their end.
Preceding formal legislation, King John’s Magna Carta of 1215 put an end to feudal barons abusing the justice system through maintenance, champerty, and barratry, by placing a formal obligation on the crown to secure due legal process, equality before the law, and access for all persons to that justice system.
Lord Neuberger points out that it was at this point in history that England became an inclusive society from an extractive society. Following this point marking the decline in influence of feudal lords and their resentment to their influence by society resulted in the declaration of their modus operandi, maintenance and champerty, being declared unlawful.
The answer to our initial question regarding the hostility toward litigation funding is, therefore, the public policy of the time. Feudalism, the sin of usury, and a general contempt for civil litigation, and legal systems that were susceptible to abuse during certain epochs of history are the reasons that champerty was contrary to public policy until relatively recently.
MODERN DAY LITIGATION FUNDING
It makes sense then that with the rise of robust judicial systems, and the ever increasing expense to access them, the attitude toward commercially sensible litigation funding transactions would change dramatically.
In the 1800s an intellectual pioneer of litigation funding, Jeremy Bentham, in A Defence of Usury, Letter XII, on Maintenance and Champerty opined on the feudal animus against champerty as follows:
“Whether, in the barbarous age which gave birth to these barbarous precautions, whether, even under the zenith of feudal anarchy, such fettering regulations could have had reason on their side, is a question of curiosity rather than use. My notion is, that there never was a time, that there never could have been, or can be a time, when the pushing of suitors away from court with one hand, while they are beckoned into. it with another, would not be a policy equally faithless, inconsistent, and absurd. But, what everybody must acknowledge, is, that, to the times which called forth these laws, and in which alone they could have started up, the present are as opposite as light to darkness. A mischief, in those times, it seems, but too common, though a mischief not to be cured by such laws, was, that a man would buy a weak claim, in hopes that power. might convert it into a strong one, and that the sword of a baron, stalking into court with a rabble of retainers at his heels, might strike terror into the eyes of a judge upon the bench. At present, what cares an English judge for the swords of a hundred barons? Neither fearing nor hoping, hating nor loving, the judge of our days is ready with equal phlegm to administer, upon all occasions, that system, whatever it be, of justice, or injustice, which the law has put into his hands.”
In the United States champerty was accepted relatively early and declared lawful in the New York Code of Civil Procedure of 1848. This coincides with an era which no longer viewed commerce, lending, and interest as vices, but rather the pillars on which a modern commercial economy would be built. It is also suspected that the Americans wanted to create their own jurisprudence distinct from English law. Accordingly, it would have been easy to depart from the animus against maintenance and champerty.
In jurisdictions which have English law as a foundation of their legal system, however, the aversion to champerty remained for another hundred years.
The first significant step in England toward champerty becoming lawful was the Criminal Law Act of 1967 that abolished champerty as a crime.
Some thirty years later, England relaxed regulated Conditional Fee Agreements and Damages Based Agreements in legislation in the 90’s and 00’s culminating in the Jackson Reforms. The lawfulness and desirability of third party litigation funding came together with these reforms and the change in public policy due to the robustness of the legal system and the expense of litigation has made the UK one of the leading jurisdictions in litigation funding.
This progress came from pressure on litigants in a modern capitalist economy and the low hanging commercial solution of litigation funding for the high cost and risk of litigation.
In South Africa, litigation funding is both lawful and encouraged by our courts since the Supreme Court of Appeal judgement in Price Waterhouse Coopers Inc and Others v National Potato Co-operative Ltd (448/2003)  ZA SCA 64;  3 All SA 20 (SCA).
Originally published by Taurus Capital(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)