The American Bar Association’s House of Delegates adopted a resolution for “Best Practices for Third-Party Litigation Funding” by a vote of 366-10 on August 3, 2020, which established numerous national guidelines for legal funding companies, consumers, and law firms.
In 2012, the ABA addressed third-party legal funding when an alternative litigation finance informational report, known as the Commission on Ethics 20/20, was adopted by the House of Delegates. While the report provides a solid foundation for best practices, it predates the exponential growth in third-party legal funding. You can read the full 20/20 report in its entirety here.
The new Best Practices proposal updates the existing informational white paper on legal funding established in 2012 by the House of Delegates. The House established ABA’s Third-Party Litigation Funding Best Practices as a policy. It offers lawyers who are new to the practice, and more experienced attorneys, some guidance regarding third-party legal funding. It also recommends that lawyers detail their third-party legal funding arrangements in writing, along with the restricted or non-recourse nature of the financing, to ensure that the client-attorney relationship is protected and the client remains in control of the case. It does not take any sides regarding how practices use third-party financing, an industry that has grown exponentially over the past couple of years.
Several sections of the new guidelines are highlighted below.
Legal Funding Best Practices That Apply Across the Board
Although third-party legal funding can take many different forms, and there are numerous distinctions between them, some common best practices will apply::
- Arrangements must be made in writing.
- The non-recourse nature of the investment the funder makes in their claim should be made clear in the written arrangements, including the person who is responsible for paying the funder, how the funder will receive their compensation, the source of the settlement (recovery after settlement or trial), and when the settlement will be paid (time period after receipt of settlement funds or judgment).
- Any arrangements should be structured so that only the client remains in control of the litigation instead of the funder (or an attorney, if they are receiving the funds).
- Lawyers need to be cautious when making case-related predictions or reports.
Legal Funding Disclosure
At some point during the litigation proceedings, the attorney should assume that any legal funding arrangements may be examined by the other party or by a court.
In some contexts, a disclosure may be required in the following situations:
- Subsequent payment disputes
- Jurisdictions where loans to clients are not allowed
- Jurisdictions where disclosures are required by a discovery order or by court rule
- Jurisdictions where the arrangements may not be protected by the attorney-client privilege or by work product
Lawyers who allow clients to finance their fees must explain the third-party legal funding arrangements to them so they will be able to make more informed decisions about the funding they receive.
These explanations, depending on the facts, may include the following:
- Explaining to the client how the lawyer’s fee will be paid
- The attorney’s relationship with the broker or finance company
- The costs of legal funding and how it may benefit the client
- With respect to the funding company, the attorney’s duty to maintain the confidentiality of client information
- Whether the attorney will charge higher fees than usual due to the financing arrangement
Structure and Documentation of Legal Funding Agreements
When the funding agreement is drafted, it should ensure the following:
- The client remains in control of the litigation.
- The lawyer can continue to offer independent professional judgment.
Attorneys offering clients advice about legal funding should be careful about any arrangements that could give a majority of interest in the lawsuit to the funder. The funding company could argue that they have assumed control of the lawsuit, which is a role that strictly belongs to the client. Especially concerning the settlement, the client should control key litigation decisions, regardless of the circumstances.
The written funding agreements must include clear, unequivocal terms that reflect both parties’ intentions. The agreements should include the amount of funding provided, the method or amount used to calculate the return to the third-party legal funding company, and how, as well as when, the party’s recovery proceeds will be dispersed between the parties. Funding agreements should be independent, fair, and transparent dispute resolution processes. A recommendation from the agreement should also be included to obtain independent legal advice regarding how the legal funding will be used. If an agreement is terminated, the funding company should observe a confidentiality obligation.
Withdrawal or Termination of Agreement
Withdrawal and termination provisions are vital issues you should take into consideration in any funding agreement.
Concerns from all involved parties should be addressed, including:
- When and on what basis can either party terminate an agreement
- What impact a termination could have on funding that was already provided, including future funding and returns owed to the funding company
- When and whether notice of intent to withdraw or terminate must be included
- Whether there was a point to the proceedings after the precluded agreement was terminated
Legal Funding in the Future
The adoption of the House of Delegates ABA proposal embodies an implicit recognition that third-party legal funding is an integral part of a progressively broad range of litigation types. These Best Practices help guide and educate lawyers through a complicated and evolving area of legal funding. When followed, attorneys will be able to better represent their clients and safeguard against any problems they may face in these relationships and arrangements.
Trusted Financial Help with The Legal Funding Group
Plaintiffs looking for a trustworthy legal funding company that is transparent with clients should contact The Legal Funding Group. We have thoroughly reviewed the legal funding best practices report outlined by the American Bar Association. We can assure plaintiffs that our services are compliant with these guidelines and all laws and regulations.
Get in touch with one of our lawsuit funding specialists and apply today.