Funders as Lawyers: A Response

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Ultimately, I agree with your conclusion that the parties to a litigation funding agreement must contractually negotiate the scope of their respective duties. I believe, however, that for several reasons those duties should be contractual and tailored to the specific transaction rather than a blanket application of common law fiduciary duties.

First, let me say that at Themis, while we consider our company to be an active funder, we fully acknowledge that the ultimate decision making authority for directing the conduct of the litigation, including particularly settlement, resides with the claimant and that counsel has a duty and obligation to develop and to offer its independent advice to guide the claimant. When we say our investing approach is active, we mean that we develop and share our insights about the case strategy with the claimant and counsel with the expectation that they will consider our advice and that we have a developed network of expert witnesses, damages assessment experts and other litigation support providers that we can refer to the claimant and its counsel where we see a competence or experience that will help support the dispute resolution process. With the benefit of our input and the advice of counsel, the claimant ultimately decides how to direct counsel and what other litigation support resources to retain.

Across the litigation funding industry, any funder’s level of “activeness” varies from transaction to transaction and among funders the meaning of being “active” is different. Moreover, it is hard to imagine any funder being entirely passive. Accordingly, it is is hard to generalize about imposing a general fiduciary or other contractual standard of conduct broadly on all “active” funders.

You raise an interesting question about the unauthorized practice of law. My observation is that claimants are likely to seek advice from a broad range of advisors during the course of litigation to test their own thinking or the advice of their lawyers. The advisors may be friends with no financial interest in the outcome, at one end of the spectrum, but advisors will also include bankers, investors, accountants, customers and suppliers, all of whom have at least an indirect interest in the outcome and, even more importantly, varying degrees of leverage over the claimant. The bankers and investors often have a contractual right to information about the litigation and a forum in which to express their opinions. Are those advisors engaged in the unauthorized practice of law? Would the answer be different if the banker or investor had a law degree and practiced law before entering a new career in finance? While the funder is closer to the case, has a direct interest in the outcome and its principals are likely to have law degrees, the nature of non-binding advice offered by the funder seems no different from that offered by other friends and interested parties.

The biggest challenge to imposing a general fiduciary duty on the litigation funder is that the litigation funder already has a fiduciary relationship with, and is subject to a pre-existing fiduciary duty to, its investors or shareholders. It would create an impossible conflict to view the funder as a fiduciary for both the investors and the claimant where they are the counterparties to the same transaction. The funder must serve one master and that master is, in fact, the funder’s investors.

At Themis we believe that it is essential that the funder, claimant and counsel enter into the funding transaction with a commonly shared view of the plan to prosecute the case, the expected range of a fair recovery and the potential pitfalls so that their expectations and interests are aligned. At the same time, we also believe that the claimant needs to understand that the funder is motived to earn a profit from the investment transaction and that the funder has no general fiduciary duty to the claimant.

With a clearly articulated disclaimer of any fiduciary relationship with the funder, the claimant with the advice of counsel can negotiate contractual rights and duties with the funder to establish an appropriate balance between the degree of “activeness” that the investment contract cedes to the funder and the corresponding protections reserved to the claimant. A clear contractual set of ground rules will define the funder’s, claimant’s and counsel’s rights, restrictions, duties and expectations. This approach will protect the funder’s pre-existing fiduciary obligation to its investors and protect the claimant’s interest.

I believe that a Chinese menu of affirmative and negative covenants governing the claimant’s and the funder’s rights and duties can be assembled. The claimant and the funder can tailor those covenants to a specific transaction in relation to the degree of control that may be ceded to the funder. That contractually negotiated approach seems the best way to address this issue in the Model Litigation Finance Contract.

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