As we discussed in our article on the process of securing commercial litigation finance, the first step in the litigation finance process typically involves a decision by a company, perhaps with its counsel, that it makes sense to explore whether litigation finance is an attractive option. Let’s view this from counsel’s perspective. Imagine the following scenario: Eighteen months into a litigation, a current client has fallen into arrears on paying its legal bills and — due to adverse business circumstances, legal bills that are higher than anticipated, or litigation fatigue — is unable or unwilling to fund the litigation to optimally prosecute the claim. Can counsel raise the prospect of litigation finance to its client? If so, can counsel refer its client to particular litigation funders?
Yes — as the American Bar Association’s Commission on Ethics 20/20 put it in its informational report on litigation finance, “if it is legal for a client to enter into the transaction, there would appear to be no reason to prohibit lawyers from informing clients of” the existence of litigation finance companies or referring clients to particular litigation funders. If, as in the situation outlined above, the lawyer stands to benefit from the transaction (here, it would get its outstanding bills paid and ensure future legal fees), the lawyer should inform the client of the potential conflict of interest and obtain informed client consent (in writing if appropriate). If a lawyer does refer a client to a particular litigation funder, the lawyer should disclose to the client any long term or close relationship the lawyer or law firm has with the funder; and in any event the lawyer must maintain professional independence.
Ethical Considerations in the Negotiation of Litigation Funding Terms and Contracts
Oftentimes companies will ask their current (or potential) counsel to assist them in negotiating the terms of, and transaction documents associated with, litigation funding. Can counsel do so? Yes, provided that counsel is competent to advise the claimholder in this area; capable of maintaining independence; and obtains informed consent from the claimholder respecting any potential conflicts of interest.