Litigation Funder's Woes

The below long running saga, involving a civil war, a conflicting Liberian judgment and the long arm of US law, shows that litigation funders cannot back a case without risk. Increasingly, internationally, as this case and the position in England demonstrate, funding a losing case, even though not being a party, can result in serious liabilities. Funders are well advised to conduct rigorous and extensive due diligence, particularly those inexperienced and seeking returns from alternative investments. Independent lawyers should conduct an ongoing review.

War claim

At the height of the boom in 2006, an Irish property developer funded ultimately unsuccessful efforts to enforce a Liberian judgment for civil war related losses in the Cayman Islands, against an insurer there. An earlier US ruling prohibited enforcement of the Liberian judgment anywhere in the world. The US courts have ruled the unsuccessful claim “outrageous behaviour [that] is an affront to the courts of the United States". Importantly, the funder was declared to be in contempt of court, as distinct from the funded party to the litigation, and liable for damages, being up to USD14m of the insurer's costs. This dwarfs the funder's original investment. Most recently, the US judge stated he would consider asking the US attorney’s office to issue arrest warrants against the funder for criminal contempt. It is doubtful that the funder foresaw these risks.

Rigour

In England, funders’ liability has also been extended. In a case that is found to be outside the ordinary run of cases where parties litigate for their own benefit and at their own expense and where it is just to do so, funders can now be liable to pay a successful defendant’s costs on a penal basis.  This will apply whether they are advancing funds to pay legal fees, or to pay court-ordered security for costs.  It will also apply to a person who has provided funding and who, in reality, will receive the benefit of the litigation, even if they are not a party to the funding agreement, for example a parent company of the funder.

In the opinion of the English courts, a funder chooses which claims to back and therefore cannot dissociate itself from the conduct of those it funds. Funders should carry out extensive due diligence involving rigorous analysis of law, facts and witnesses. In addition, an ongoing review by independent lawyers will often be essential. In contrast, in the leading case, such due diligence had been "superficial, feeble and rushed".

The good new is that such liability is usually capped.

The Liberian judgment case has taken a breathtaking 25 years. As to the speed of justice internationally, see my previous post:

http://insights.howardkennedy.com/post/102dgp5/speed-of-justice