Financing The Cost Of The Asset Recovery Process - Part 2
Article by Martin Kenney
& Elizabeth
O'Brien
Third Party Finance of Claims.
The assignment of a partial interest in a claim to an owner
of capital is a risk-sharing device, where part of the
potential award from a lawsuit is exchanged for money or
services. It is thus not dissimilar from a typical contingent
fee type arrangement, whereby the fee is calculated by a
professional service provider by way of a percentage of the
economic benefits of the successful outcome of the case. The
ability to assign all or part of the fruits of a cause of
action provides an effective method of finance of litigation,
assuming the availability of access to capital. That access,
however, must be fostered, not fettered. For many victims of
economic crime, access to venture capital represents the only
viable method of financing multi-jurisdictional, complex and
expensive litigation. While conditional fee type arrangements
theoretically provide a method of financing a portion of the
litigation aspect of such an action, 'extra-litigation'
costs are largely ignored. In large-scale fraud cases, the
'extra-litigation' aspect can be of greater fundamental
importance (or more expensive) than the litigation element.
Moreover, such 'non-lawyer financiable' costs come into
play at the beginning of the process - to find and freeze
concealed assets. This is where the most risk lies. There can
be no meaningful recovery for victims if the necessary
groundwork in terms of asset-location, forensic analysis and
intelligence work is not carried out competently. Millions of
pounds of security may have to be posted. The finance of these
aspects of multi-jurisdictional proceedings does not come
within the ambit of conditional fee arrangements with
professionals, nor does it come within the ambit of the typical
plan of litigation costs insurance. This is where access to
capital markets is of most crucial importance.
At present the market for claims worldwide is at best
inefficient. In many countries, outmoded laws derived from the
doctrines of champerty and maintenance prohibit the free trade
in claims either outright or make such trade subject to
stringent conditions. A development which could make the
funding of large asset recovery actions considerably easier
would be a practice which would permit regulated access to the
capital markets for claims in which venture capitalists would
be free to invest and compete, with the concomitant
availability of capital for meritorious claims, and at
competitive rates. A valid view is that there is no rational
reason to permit ancient laws to uncritically quash an
otherwise viable market — a market that would help
victims, defendants, the courts, and society at large.
Champerty and Maintenance.
In England, the torts of maintenance and champerty were
abolished in the 1960s upon the recommendation of the Law
Reform Commission which concluded that an action for damages
sounded in maintenance and champerty no longer served any
useful purpose. Maintenance and champerty were also abolished
as criminal offences in England in the 1960s. However, the
common law doctrine rendering champertous contracts
unenforceable continues to exist.
A number of different approaches have developed in the
United States to deal with maintenance and champerty. Some
states such as Pennsylvania have maintained the common law
prohibitions against champertous agreements, while the courts
of other states like California have held that champertous
agreements may be contrary to public policy. Yet other states
such as New York have adopted statutes declaring champertous
agreements void.
Civil law jurisdictions including Puerto Rico and Louisiana
have adopted an approach whereby if a plaintiff sells all or a
portion of a lawsuit to a third party, the defendant may settle
the litigation with the plaintiff by reimbursing the third
party for the amount paid by him or her with interest and
costs.
There are three routes by which one person may seek to
dispose of, and another person may seek to acquire, the
prospect of benefiting from current or future litigation
against a third party. "The first is the transfer of
property carrying with it the right to prosecute any cause of
action closely related to that property, such as the assignment
of a debt." Such a transfer and any action brought by the
transferee to enforce that right are not champertous.
9 The second is the assignment of a bare cause of
action or bare right to litigate. Such assignments offend
public policy. 10 The third is the assignment of the
damages or other monetary compensation that may be awarded in
an action in which judgment has not yet been given. Such an
assignment, being an agreement to assign future property
(damages if and when awarded), operates in equity. If it is
supported by consideration, it will be valid and no question of
unlawful maintenance or champerty will arise (so long as the
assignee has no right to influence the course of the
proceedings). 11
From earliest times, the English legal system prohibited
maintenance (the funding or other support of someone else's
litigation), and champerty (the taking of a share of the spoils
of litigation). Both maintenance and champerty gave rise to
criminal and tortious liability. In 1993, Lord Mustill giving
judgment in the House of Lords in Giles v Thompson
said:
"Since the middle ages in England, those who offered
to assist or assume the pleading of the legal claim of a
stranger for a reward were barred from doing so both by penal
statutes and the common law doctrine of champerty. Champerty
has been defined as "a bargain by a stranger with a
party to a suit, by which such third person undertakes to
carry on the litigation at his own cost and risk, in
consideration of receiving, if successful, a part of the
proceeds or subject sought to be recovered".
12
The doctrine was historically intended to remedy the
practice whereby rich and powerful men sought to acquire
additional wealth and power by aiding those with claims of
others, stirring up suits and "oppressing the
possessors" in exchange for a portion of that property.
13
This was a time when officious interference in litigation
was a widespread evil practiced by powerful royal officials and
nobles to subvert justice and oppress vulnerable litigants.
14
The doctrine evolved throughout the centuries, and by the
early 1840's at least, one of England's leading jurists
seemed impatient with the rule that prevented attorneys from
assisting those without the means to advance attorney costs and
fees in order to seek justice. Lord Abinger, author of the
"Assumption of Risk and Fellow Servant Rules,"
offered this dicta in 1843:
"If a man were to see a poor person in the street
oppressed and abused, and without the means of obtaining
redress, and furnished him with money or employed an attorney
to obtain redress for his wrongs, it would require a very
strong argument to convince me that that man could be said to
be stirring up litigation and strife." 15
The public policy concerns stimulated by champerty and
maintenance have evolved considerably since the mid-19th
century. However, the policy underlying the prohibition of
champertous agreements, to prevent wanton and officious
intermeddling in the disputes of others without justification
or excuse, remains valid.16
Halsbury's Laws of England, 4th Edition,
gives the following definitions of maintenance and
champerty:
"Maintenance may be defined as the giving of
assistance or encouragement to one of the parties to
litigation by a person who has neither an interest in the
litigation nor any other motive recognized by the law
as justifying his interference. Champerty is a
particular form of maintenance, namely maintenance of an
action in consideration of the promise to give the maintainor
a share in the proceeds of the subject matter of the
action."[emphasis added]
Maintenance can be described as a doctrine of public policy
which is "directed against wanton officious intermeddling
with the disputes of others in which the [maintainor] has no
interest whatever, and where the assistance he renders to the
one or the other party is without justification or
excuse," per Fletcher Moulton L.J. in British
Cash and Parcel Conveyers Limited v. Lamson Store Service
Company Limited. 17 This statement was cited
with approval by Lord Mustill in Giles v.
Thompson, supra.
The evolution of the law of maintenance and champerty is
perhaps best described by Lord Mustill in Giles v.
Thompson where he states at page 152:
"My Lords, the crimes of maintenance and champerty
are so old that their origins can no longer be traced but
their importance in medieval times is quite clear. The
mechanisms of justice lacked the internal strength to resist
the oppression of private individuals through suits fomented
and sustained by unscrupulous men of power. Champerty was
particularly vicious, since the purchase of a share in
litigation presented an obvious temptation to the suborning
of justices and witnesses and the exploitation of worthless
claims which the defendants lacked the resources and
influence to withstand. The fact that such conduct was
treated as both criminal and tortious provided a valuable
external discipline to which, the records show, recourse was
often required. As the centuries passed, the Courts became
stronger, their mechanisms more consistent and their
participants more self-reliant. Abuses could be more easily
detected and forestalled, and litigation more easily
determined in accordance with the demands of justice, without
recourse to separate proceedings against those who trafficked
in litigation.... It therefore came as no surprise when
Parliament, acting on the recommendation of the Law
Commission's Report on proposals for a reform of the law
relating to maintenance and champerty (1966) (Law Com. No.)
abolished the crime and torts of maintenance and champerty in
section 14 of the Criminal Law Act (1967). Section 14(2) of
the Act of 1967...
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