A Brief History of Litigation Finance

From The Practice September/October 2019
The cases of Australia and the United Kingdom

Third-party litigation finance is young—but not that young. Despite its relative novelty in the U.S. context, the practice of litigation finance as it is understood today goes back at least a few decades elsewhere in the world. For lawyers, investors, and jurists trying to make sense of the rise of litigation funding in the United States, this history can provide valuable insight. Victoria Shannon Sahani, a professor of law at the Arizona State University Sandra Day O’Connor College of Law and an expert on international arbitration and third-party funding, has extensively researched and written about the global history of litigation finance.

Maintenance is about people who are not party to a legal case providing funding for that case, and Champerty is Maintenance for a profit.

For those attempting to wrap their heads around the litigation finance industry today, Sahani points to its history in Australia and the United Kingdom as useful entry points. “If you are trying to understand how we got here, I would say start in the 1990s,” she says. “That’s where your milestones begin. The United States isn’t really a big player on the scene yet, but you’ve got Australia and the United Kingdom independently making moves in their legislatures that paved the way for litigation funding to become more prevalent.” By winding the clock back a few decades and taking a global perspective, Sahani suggests, one can see how courts and legislatures have handled litigation finance already, how markets responded, and what might be next for the United States.

Maintenance and Champerty

Two closely related legal doctrines have historically stood in the way of legalized third-party litigation funding (which we will continue to call litigation finance for the sake of clarity): Maintenance and Champerty. There is ample academic work expounding the larger histories of Maintenance and Champerty, as well as contextualized accounts of the doctrines in the United Kingdom and Australia, but Sahani offers the following simplified distinction: Maintenance is about people who are not party to a legal case providing funding for that case, and Champerty is Maintenance for a profit. Instances of both Maintenance and Champerty were largely illegal throughout the histories of the United Kingdom and Australia (among other countries) in an effort to prevent outside interference in legal proceedings. The stories of how litigation finance rose to prominence in Australia and the United Kingdom in many ways hinge on how jurisdictions in these two countries altered the effects of laws and regulations relating to Maintenance and Champerty.


A number of developments beginning in the 1990s helped position Australia as global innovator in litigation finance. By the mid-1990s, a handful of Australian states had already done away with Maintenance and Champerty offenses such that they were no longer crimes or torts. Whether this rendered litigation finance permissible, however, remained doubtful. One jurisdiction notably abolished Maintenance and Champerty offenses through formal legislation—see New South Wales’s 1993 Maintenance, Champerty and Barratry Abolition Act—that expressly “does not affect any rule of law as to the cases in which a contract is to be treated as contrary to public policy or as otherwise illegal.” These moves were particularly significant insofar as they produced ambiguity around the use of litigation finance arrangements where before they were more clearly prohibited.

Litigation finance was allowed in insolvency situations, but a lot of these cases did not involve insolvency.

Victoria Shannon Sahani, professor of law at Arizona State University

Another significant move was the legalization of domestic class action lawsuits in Australia in 1992. In addition to the potential subject matters and types of cases, Sahani stresses that it was the structure of class actions in Australia that lended themselves to litigation finance. Namely, Australia primarily uses an “opt in” (or closed) structure for class actions. In the United States, by way of comparison, most class actions are “opt out” (or open) insofar as anyone who meets the class definition is automatically included in the class unless they distinctly express they do not wish to be included. “Australia is the other way around,” says Sahani. “If you want to be in a class action, you have to say actively, ‘I want to be in your class action.’ What that means is that you can identify every single plaintiff. And if you can identify every single plaintiff, you can have them sign onto a litigation funding agreement.” This is significant because without the consent of each party to a class action, it is difficult to structure a litigation finance deal with the class directly in Australia. That is one reason, Sahani notes, that litigation finance directly to the plaintiff class has not taken off in the United States—potential funders cannot identify all the parties—whereas Australia has one of the largest litigation funding markets for class actions in the world.  Another possible solution to this challenge could be for the litigation funder to finance the plaintiff-side class action law firm instead, which is increasingly common in both the United States and Australia (for more on plaintiff firms and contingency funding, see “Risky Business”).

All this notwithstanding, the existence of class action structures conducive to litigation funding would not by itself reverse a doctrine opposed to third-party financing of legal claims. Toward the middle of the 1990s, however, Australia’s Parliament passed legislation that allowed insolvency practitioners to enter into contracts to finance litigation characterized as company property. “That meant that if you had a company that was going bankrupt, the company was allowed to enter into a litigation funding contract to finance the pursuit of the company’s preexisting legitimate claims, which the company could not afford to finance itself due to the expense of insolvency proceedings,” explains Sahani. “This is how it really began. The largest and oldest litigation funder in Australia is now known simply as IMF Bentham (due to a merger), but its original name was Insolvency Management Fund Limited.”

For a brief period, litigation funders were left to finance cases at the risk that their financing arrangements would later be ruled as outside the bounds of what the insolvency statutes dictated. “Between 1992 and 2006, it was sort of the wild west of Australian law in the sense that if you engaged in litigation funding, you always ran the risk that your agreement might be challenged,” says Sahani. Some took that risk, such as IMF Bentham, founded in 2001 (today, its U.S. entity is similarly referred to as “Bentham IMF”) to finance both class actions and single cases. Sahani continues:

If they so desired, the court might have determined that a third-party litigation funding agreement was an abuse of process contrary to public policy along the lines of a Champerty and Maintenance argument. In insolvency situations it was allowed, but a lot of these cases did not involve insolvency. And so there was this cloud hanging overhead because the insolvency statute was really specific. At a certain point, funders went out on a limb and just started funding other types of cases in hopes that it would be allowed until eventually the court had to deal with the question in 2006.

In 2006 the High Court of Australia’s ruling on Campbells Cash and Carry Pty Limited v Fostif Pty Ltd, better known today as Fostif, ultimately provided clarity on the issue of litigation finance—it was permitted in those jurisdictions that had abolished Maintenance and Champerty as crimes and torts, and it was even acceptable for a funder to influence key case decisions. Indeed, the circumstances that surrounded the Fostif case were noteworthy. In Fostif, the plaintiffs were a group of tobacco retailers who had filed a lawsuit against their wholesaler counterparts over licensing fees. As Maya Steinitz highlights in a 2010 paper, a third-party funder not only paid all expenses associated with the case but actively sought out the plaintiffs to bring the lawsuit, selected the lawyer, settled with the defendants at an amount below the total damages claimed, and received a third of the recovery on top of cost awards. Perhaps in anticipation of potential ethical concerns, the court reasoned:

[T]o ask whether the bargain struck between a funder and intended litigant is “fair” assumes that there is some ascertainable objective standard against which fairness is to be measured and that the courts should exercise some (unidentified) power to relieve persons of full age and capacity from bargains otherwise untainted by infirmity. Neither assumption is well founded.

Thus, with the Fostif decision, the court removed much of the mystery surrounding its view of litigation funding. “All this was obviously a big deal for the industry,” emphasizes Sahani. “With that, you’ve essentially greased the wheels for massive third-party funding. And now Australia has some of the largest litigation funding markets in the world.” And, perhaps unsurprisingly given the country context, class actions comprise a significant piece of the Australian litigation finance market. According to one estimate, between 2001 and 2017 more than half of all class actions (63 percent) were supported by litigation funders. Per a 2018 Burford survey of 495 U.S., U.K., and Australian law firm and in-house lawyers, 83 percent of the 75 Australian respondents “are most likely to agree that litigation finance is a growing and increasingly important area in the business of law.”

The United Kingdom

In the United Kingdom, one can trace the process for allowing litigation finance back to the 1967 Criminal Law Act. Similar to the Australian jurisdictions that rendered Maintenance and Champerty offenses as neither crimes nor torts, the Act added a virtually identical caveat with respect to public policy. Thus, while the 1967 Act raised the possibility that litigation finance was suitable for certain contexts, uncertainty around which contexts those were likely contributed to postponing the rise of litigation finance. Indeed, many forms of damages-based agreements (comparable to contingency fees) were not explicitly legalized in the United Kingdom until decades later.

By the early 2000s U.K. courts had generally interpreted that litigation funding agreements were not in conflict with public policy.

In the 1990s a wave of legislation aimed at improving access to justice precipitated key developments that helped bridge the gap between the abolition of Maintenance and Champerty as crimes and torts and the mainstreaming of litigation finance. In an effort to serve potential litigants unable to access legal aid—such as middle-income individuals who neither qualified for legal aid nor could afford representation suited to their legal needs—Parliament enacted laws to improve conditional fee arrangements that largely spared clients from necessary legal fees they could not afford and enabled lawyers to earn “success fees” on top of their typical rates. “And when you start to have these conditional fee agreements, you get to questions like, OK, can only lawyers foot the bill or can others come in with that funding?” Sahani notes. “And by the end of the decade litigation funding really starts to take off in the U.K.”

By the early 2000s U.K. courts had generally interpreted that litigation funding agreements were not in conflict with public policy—or at least that being in line with public policy was a moving target. Citing the above legislation from the 1990s, in 2002 the England and Wales Court of Appeals reasoned that public policy was no longer opposed to alternative funding agreements outright, and therefore “public policy” was not necessarily sufficient for striking such agreements down. Notably, however, restrictions also came into focus. In 2005 that same court found that “[s]uch funding will leave the claimant as the party primarily interested in the result of the litigation and the party in control of the conduct of the litigation.” In other words, the funder is not allowed to commandeer the case—the client must retain control.

Since then, the litigation finance industry in the United Kingdom, like in Australia, has developed significantly. Indeed, a number of today’s major U.K.-based litigation finance firms were founded not long after, such as Burford Capital (whose IPO was in 2009), Therium Capital Management (founded in 2009), Vannin Capital (founded in 2010), and Woodsford Litigation Funding (founded in 2010). Apart from the success of numerous litigation finance firms (for more, see “Investing in Legal Futures”), Sahani points to the establishment of the Association of Litigation Funders (ALF)—which includes in its membership the four firms listed above in addition to a litany of others—as an indicator of how far litigation finance has come in the United Kingdom. “ALF is the first of its kind in the world,” she explains. “Essentially there was a question about whether the U.K. government should regulate third-party funding organizations or allow them to self-regulate. And they came down on the side of self-regulation through ALF with the understanding that if self-regulation fails, then the government will step in and regulate.” As an independent body that derives its self-regulatory authority from the Ministry of Justice, ALF maintains a membership that must adhere to its code of conduct, which, among other things, includes taking steps to ensure clients have access to independent advice about proposed litigation funding agreements and not attempting to influence the client’s counsel in the dispute. “So far, no one’s been kicked out to my knowledge,” says Sahani. “But then again that’s a pretty drastic penalty, and I think the funders that are in the organization want to protect each other and their industry because they’re making a ton of money.”

The United Kingdom’s passage of the Legal Services Act, which took effect in 2012, created regulatory room for the development of “alternative business structures” (for more, see “How Regulation Is—and Isn’t—Changing Legal Services”). These alternative business structures permitted nonlawyer ownership of legal services organizations, thus allowing funders and law firms to form closer relationships, including funders investing in law firms and even starting law firms, as Burford did in 2016. For example, whether or not courts interpret the funding of a law firm’s litigation or portfolio of litigation as an equity stake in the firm’s business is no longer a regulatory roadblock. And as opportunities arose from the confluence of litigation finance and alternative business structures, Steinitz notes, U.K. law firms began to take advantage—putting pressure on U.S. firms to keep up.

The establishment of the Association of Litigation Funders is one indicator of how far litigation finance has come in the United Kingdom.

Today, the U.K. litigation finance market appears poised to continue growing. While data can be hard to come by, according to the 2018 Burford survey of law firm and in-house lawyers, 63 percent of U.K. respondents report “their organization’s use of legal finance has increased in the last two years.” One estimate places its size at 5 percent of the global market with the large number of top firms located in the country providing additional upside. The largest potential market for litigation finance of civil litigation, however, remains the United States.

The future of litigation finance in the United States

Throughout this time, regulations in the United States have presented a challenge for litigation finance despite the size of the U.S. legal market. For instance, prohibitions on Maintenance and Champerty are left to individual state bars, legislators, and courts. Some have no prohibitions while others have some with exceptions favorable to litigation finance. “Basically, the U.S. is this laboratory with 50 different science experiments on third-party funding going on around the country,” Sahani says.

And there have been experiments. In 2006 Credit Suisse opened its Litigation Risk Strategies group—a litigation finance entity—in the United States. According to the group’s cofounder Ralph Sutton, it was the first commercial litigation funding group in the United States. “A few years later, the financial crisis made a global bank the wrong place for a litigation funder to call home,” he wrote in a 2018 article. Nevertheless, the seed of large-scale, commercial litigation finance had been planted in the United States. Numerous litigation finance firms have since followed the lead of Credit Suisse’s former litigation finance arm, including one founded by former members of that same group (for more on these types of firms, see “Investing in Legal Futures”). Likewise, the above mentioned Australian and U.K. litigation funding firms now all have offices in the United States. Many of these funders are more than dipping their toes in the burgeoning U.S. litigation finance market, and while the industry does indeed appear to be growing, the future of litigation finance in the United States remains unclear.

“While in some ways it’s an uncertain future, it’s also a very exciting future in the sense that funders are fundamentally innovators,” Sahani says. The key going forward, she explains, will be how regulators (or potential regulators) approach the industry. “Right now, regulators are looking for a box to put the funders in, but a lot of funders to this point have been able to morph the structure of their transactions to fall outside of regulatory frameworks,” she continues. However, by Sahani’s estimation, this is not likely to go on. She explains:

Eventually there are going to be enough big players in the U.S. to push regulation. The folks who used to be the startups—Burford and a lot of the bigger players today used to be startups—now they’re getting to be the big fish. And as the big fish grow and become more worried about reputation and competition, that’s when they will try to push more regulation because they’re big enough to be able to comply. They’re going to try to squeeze out these smaller, newer companies because they won’t want the little startups messing it up for them or creating too much competition.

There are serious ethical implications to any such regulation, to be sure. Indeed, the American Bar Association’s 20/20 Ethics Report was highly critical of the practice. (For a more prospective look at litigation finance from a policy perspective, see “Follow the Money.”) “They might eventually be able to legislate what you might call ‘classic’ or ‘traditional’ third-party funding—funding individual claims for a share of the potential damages,” Sahani concedes. “But what about these innovative transaction structures that third-party funders keep coming up with every other month? That’s going to be a challenge for the future.”

These innovative transaction structures may well include financing organizations rather than claims. Indeed, as Sahani notes, the future will almost certainly include financing for corporations and even law firms. “I’m sure some of the bigger players want to be financiers just like every other financier out there,” she says. “They want to be a Goldman Sachs or a Morgan Stanley that just happens to be able to invest in litigation.” (For more on how litigation finance firms operate, see “Investing in Legal Futures.”) And change may indeed be close on the horizon. The state bar of California’s Task Force on Access Through Innovation of Legal Services, for example, recently proposed reforms “including consideration of multidisciplinary practice models and alternative business structures.”

Amid all the uncertainty, one thing is clear: third-party litigation finance has taken root in the United States. Whether through Australia’s class-action structure or on the heels of the United Kingdom’s access-to-justice legislative reforms, litigation finance has found ways into the mainstream to suit the given jurisdiction. The question now is: What will its path to the mainstream look like in the United States?