Financing The Cost Of The Asset Recovery Process - Part 2

Article by Martin Kenney

& Elizabeth


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


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


"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".


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.


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.


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


"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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