Fiduciary Duty in a Funding Setting: Has Its Time Come?

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Is Third Party Funding of commercial claims ready to have across the board general fiduciary duties imposed on it as a basic contract standard or as a matter of law? The best answer is not now, maybe later.

The industry is still young with its operations and related rules and guidelines evolving, including its duties to claimants.   As the evolution progresses, obligations and rights that arise depend on other obligations and rights that exist or are created.

Currently the typical funding contract has clauses relating to good faith, cooperation, candidness, integrity, and so on, that are used to define the parties’ rights and obligations.  They are enough as a starting point. More or less may be negotiated. This is particularly so when commercial parties are involved and they use neutral, independent advisors and information to assist in protecting themselves in the contract negotiations.

Having said that, there is a place for fiduciary duties here, in some situations.  If the funder wishes to have certain extra or extraordinary rights (perhaps control over the claim, and/or receiving the lion’s share of the proceeds of success, and/or being a partner with the claimant in a true sense of the word), it must consider whether this will create a relationship that the contract will embrace, or the law and equities view, as a fiduciary one. There is a price to pay by the funder depending on the rights the funder receives that are out of the ordinary.   Equally important, and often overlooked, is the fact that there are duties the claimants and its lawyers owe to the funder, including candor, cooperativeness, and integrity.  They must be part of the overall mix of factors that go into negotiating a contract.

In sum, while the starting point of contract negotiations should as a general matter assume no fiduciary relationship, the parties can negotiate one in or construct another relationship.

Over time, the industry and market will grow and gain experience, and at that time, everyone can come back to the question of whether fiduciary duties should be imposed in general, in specific areas under law and equity, as a standard contract provision or in the contract on a case by case basis through negotiations.  Right now it is premature.

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