By Lisa Rickard
President of the U.S. Chamber Institute for Legal Reform
My home country, the US, is famous for many things, including a mythical 'Wild West' immortalised in numerous Hollywood movies. Less glamorously, it is also famed for a 'Wild West' legal culture that allows an enormous amount of frivolous and abusive litigation, such as lawsuits against restaurants for excessively hot coffee or cases against cruise liners for provoking seasickness.
From a distance, these lawsuits may be entertaining. But for businesses in the US, frivolous litigation brings severe costs, including lost jobs, increased costs and less foreign investment. In addition, consumers face higher prices as businesses are forced to cover these litigation costs.
No-one disputes that an open and fair justice system is absolutely necessary. The problem is the spread of practices that encourage litigation not out of necessity, but out of a desire to make money. In particular, one of these practices could facilitate the spread of US-style abusive litigation in the UK: third party litigation funding (TPLF).
Third party litigation funders are typically investment vehicles backed by hedge funds or other financial institutions. They buy into a lawsuit as an investment and recover that investment by receiving proceeds of any judgement or settlement. The practice, which started in Australia, has become especially prevalent in the UK, where studies estimate that funders have as much as 500 million pounds at their disposal.
The problems with TPLF are numerous. First, this model of funding skews the British legal system away from its core purpose of delivering justice and toward the profit incentive. Litigation funders are solely interested in getting returns on their investments, a goal incompatible with the values of the legal system.
Secondly, if left unregulated, funders will have the ability to direct the strategy and direction of cases - threatening to withdraw funding from clients at any stage they wish, or forcing the client to continue to court when they may wish to settle. This threatens the long-standing client-lawyer relationship, potentially breaking the bonds of trust which lie at the heart of the British legal system.
Furthermore, following a decade of criticism of 'no-win, no-fee' litigation, third party funding is likely to lead to a huge upsurge in litigation. As in the US, this litigation increase will hurt businesses - hindering job creation, discouraging investment and raising prices for consumers.
My organisation, the US Chamber Institute for Legal Reform, is concerned about TPLF because many US businesses have significant operations in the UK and could be dissuaded from further investment and job creation by a TPLF-driven litigation increase. As a result, we are encouraging the Ministry of Justice to move away from the current weak self-regulation model for the litigation funding industry and to adopt a robust system of statutory regulation, including requiring disclosure of funder contracts, ensuring cases are controlled by litigants and not funders, and banning formal business ties between law firms and funders.
The UK Government is taking important steps to promote growth and free businesses from the entangling web of red tape. At the same time, changes to the British legal framework, such as the rise of TPLF, risk undermining those positive developments. Therefore, the Government should act promptly to identify the problems with TPLF and introduce appropriate regulation. Only swift action can ensure that the contagion of "Wild West" abusive litigation does not spread across the Atlantic.