Litigation Finance: Creating a Code of Conduct

Lee Drucker

In mature industries, there is usually a set of rules outlining best practices for individuals and organizations. In newly developing industries, however, best practices are less clear, and once established spread more slowly. In order to promote the development of best practices in litigation finance, we recently identified key aspects of a funding arrangement that we believe will lead to the best results for a claimholder. Companies considering a litigation financing offer should consider the following principles and their importance:

Settlement Authority

Where an investment agreement provides that the claimholder retains settlement control (which is customary), there should be no terms that limit or inhibit the claimholder’s exercise of that control right for its own economic advantage.  When a settlement offer is made or received, the claimholder should be free to accept or reject the offer without economically punitive consequences.

Reserve Capitalization

For each investment, the funder should keep in reserve 100% of the capital committed under the terms of the investment agreement. Committing to fund investments in excess of the amount of capital held in reserve leaves claimholders vulnerable to a funder mismanaging its risk and not being able to fulfill its obligations to the claimholder.

Diligence Process

A funder should conduct diligence expeditiously and inform a potential counterparty of a funding decision as soon as practicable.  Securing the capital necessary to sustain a business or litigation is often a time sensitive endeavor; the uncertainty caused by delay can damage a claimholder’s business.

Commitment to Fund

An investment agreement should not provide for a funder’s unilateral right to prematurely exit an investment based on any reevaluation of the merits of a claim.

Attorney Independence & Confidentiality

A funder should not take any steps to interfere with the independent professional judgment and the duty of undivided loyalty of the attorney(s) representing our investment counterparty.  A funder should also observe the confidentiality of information and documentation provided it to the extent that the law permits, and subject to the terms of any applicable court order or Confidentiality or Non-Disclosure Agreement to which it is a party.

We believe that these principles represent industry best practices and are important considerations for any party seeking litigation funding.  For more information, visit the Lake Whillans Code of Conduct.

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The best way for companies and their counsel to determine if litigation finance is an attractive option is to discuss it with us.