Need for a Regulatory Framework
Litigation funding, is a mechanism by which a third-party provides financial support to a plaintiff or a law firm for a legal dispute in exchange for a portion of the settlement or judgment award. In other words, litigation funding is an agreement between a funder and a litigant or a law firm to cover the legal costs associated with pursuing a case, such as attorney fees, court fees, and other litigation expenses. The funder typically, receives a percentage of any settlement or judgment amount awarded to the plaintiff in the case.
Litigation funding is typically used in complex or high-stakes litigation, where the cost of pursuing a case can be prohibitively expensive for the plaintiff or law firm. It is also very relevant in class or collective or consumer actions. It allows plaintiffs to access legal representation and pursue justice without the financial burden of paying for legal fees themselves. However, it also means that the funder takes on a significant risk in financing the litigation, as the outcome of the case is uncertain. This causes funders to use a variety of methods to mitigate or factor in risks, including:
- Conducting thorough Due Diligence on a case before investing, including analysing the legal merits of the case, the likelihood of success, and the potential damages or settlement amounts. This helps the funder determine the strength of the case and the potential risks involved.
- Limiting their exposure by investing only a portion of the legal fees required for the case or by setting a cap on the total amount they will invest. This reduces the risk of losing a large sum of money if the case is unsuccessful.
- Spreading their risk across a portfolio of cases rather than investing in a single case. This diversifies the funder’s risk exposure and reduces the potential impact of an unfavourable outcome in any one case.
- Investing in strong cases with a high likelihood of success, such as cases with strong legal precedent or where liability is clear. This increases the chances of a favourable outcome and reduces the risk of losing money.
- Utilising experienced counsels, lawyers and law firms who have a successful track record in the relevant area of law. This reduces the risk of investing in an unqualified or inexperienced legal team.
- Charging high fees for their services, which can range from 20-50% of any settlement or judgment amount. These fees help the funder mitigate their risk and ensure that they are adequately compensated for the risk they take on.
Traditionally the main objections to third party funding related to public policy grounds as well as the application of the equitable principles of champerty and maintenance. It can be said that today’s state of common law is that litigation funding is considered an accepted and judicially sanctioned activity perceived to be in the public interest. Also, it is recognised that litigation funding agreements do not violate EU competition law provided they do not restrict competition. It should be highlighted however that funding is and must be distinguished from assignment of a claim for which different rules apply but detailing them is not the target of this brief article.
Overall, there is currently no specific legislation governing litigation funding in Cyprus. Yet, people involved in such activity, funders, lawyers, and parties may be subject to ethical and professional standards and may also be subject to regulation by relevant regulatory bodies such as the Cyprus Securities and Exchange Commission, depending on the funders’ activities. This causes uncertainty of rights and responsibilities and leaves space for protracting litigation on procedural objections. To avoid this uncertainty and unnecessary costs, Cyprus needs to implement a specific regulatory framework, either in the form of a statute or a procedural rule. It is only within this regulatory framework that professionals may develop the practice of litigation funding so that litigants and the wider administration of justice can benefit from it.