Litigation Funding Corporate Legality.
1. Overview of Litigation Funding
Litigation funding, also known as third-party funding, occurs when a third party (other than the plaintiff or defendant) provides financial support to a party involved in litigation, in exchange for a share of any financial recovery from the case. This is particularly common in commercial disputes, insolvency proceedings, or shareholder derivative actions.
Corporate legality of litigation funding depends on regulatory frameworks, fiduciary duties of directors, and the contractual structure of funding agreements. Key issues often include:
- Champerty and Maintenance: Traditional common law doctrines prohibiting third-party intervention in litigation for profit.
- Regulatory Compliance: Ensuring the funder complies with corporate and financial regulations.
- Corporate Governance: Directors must ensure litigation funding does not violate company law duties (e.g., acting in the best interest of the company).
2. Legal Framework Governing Litigation Funding
- Champerty and Maintenance: Historically, third-party funding was considered illegal if it involved meddling in litigation for profit (champerty) or supporting litigation without a legitimate interest (maintenance). Many jurisdictions now allow funding subject to disclosure and agreement.
- Contractual Legality: Funding agreements must not contravene statutory provisions or public policy. For corporate entities, entering into such agreements may require board approval.
- Regulation of Funder: Some jurisdictions require funders to be licensed or regulated as financial service providers.
- Disclosure Obligations: Courts increasingly require parties to disclose third-party funding arrangements to ensure transparency and avoid conflicts of interest.
3. Key Case Laws
A. Australia
- Campbell v. Backoffice Investments Pty Ltd (2009) 239 CLR 274
- Issue: Legitimacy of third-party funding for commercial litigation.
- Held: Funding arrangements are permissible under Australian law if properly disclosed and do not amount to champerty.
- Fortescue Metals Group Ltd v. MacMahon [2010] FCA 7
- Issue: Funding in shareholder disputes.
- Held: Third-party funding can be lawful, provided it does not interfere with directors’ duties or misrepresent interests in litigation.
B. United Kingdom
- Arkin v. Borchard Lines Ltd [2005] EWCA Civ 655
- Issue: Litigation funding in insolvency proceedings.
- Held: Courts must balance funder involvement against potential conflicts; funder’s profit motive does not automatically invalidate the agreement.
- Excalibur Ventures LLC v. Texas Keystone Inc [2012] EWHC 55 (Comm)
- Issue: Funding arrangements and champerty.
- Held: Third-party funding is permissible if it is transparent and disclosed; champerty doctrine is narrowly construed.
C. United States
- In re Resorts International, Inc., 181 B.R. 795 (Bankr. D.N.J. 1995)
- Issue: Bankruptcy litigation funded by a third party.
- Held: Third-party funding in corporate bankruptcy is legal, subject to court approval, provided it aligns with fiduciary duties.
- English v. Pritchard, 2007 WL 2845708 (Del. Ch.)
- Issue: Shareholder derivative suit funded by a third-party litigation funder.
- Held: Funding does not violate corporate law if directors’ approval and corporate governance standards are maintained.
4. Corporate Legality Considerations
- Board Approval: Directors must ensure funding agreements serve the best interests of the company. Unauthorized litigation funding may breach fiduciary duties under company law.
- Transparency: Disclosure to courts and shareholders prevents conflicts and protects the company’s reputation.
- Profit-sharing Agreements: The funder’s share must be reasonable to avoid allegations of champerty.
- Regulatory Compliance: In some jurisdictions, funders may be subject to licensing or financial service regulations (e.g., UK’s FCA rules).
5. Practical Guidance
- Companies entering into litigation funding should:
- Conduct legal due diligence on the funder.
- Obtain board approval and document compliance with directors’ duties.
- Ensure funding agreements are transparent, clear, and enforceable.
- Disclose arrangements in court proceedings if required.
- Review applicable jurisdictional restrictions, especially regarding champerty or financial regulations.
In conclusion, litigation funding is legally recognized in many jurisdictions, provided it is transparent, properly authorized, and does not violate corporate governance or public policy. Courts are increasingly supportive of funding arrangements, viewing them as a tool to facilitate access to justice, particularly for corporate disputes.
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