The Law Reform Commission (LRC) has published a consultation paper that sets out the arguments for and against a liberalisation of the rules governing the third-party funding of litigation.

Third-party funding occurs when an entity that is otherwise unconnected to a party in a legal dispute finances the cost of settling that dispute.

If the funded party wins the case, the funder is repaid its initial investment, as well as additional payment as a return on its investment.

The law in Ireland currently prohibits the funding of legal cases by outside parties who do not have a legitimate and independent interest in the dispute, subject to the certain exceptions.

Maintenance and champerty

The prohibition is founded on the ancient concepts of maintenance and champerty, which determine such activity as torts, and offences under Irish law.

The Supreme Court has held that maintenance and champerty also prohibit the assignment of a ‘bare’ cause of action – the transfer of the right to litigate a claim to a party who has no direct interest in that claim.

The LRC paper published today (17 July) sets out the up-to-date position, in view of the liberalisation of the rules on third-party funding in many other countries.

According to the commission, a fundamental question is whether third-party funding and the assignment of actions promotes the commodification of justice.

Arguments for and against

Its paper identifies five arguments against the legalisation of third-party funding:

• It might encourage the bringing of vexatious and meritless disputes,
• It causes funded parties to be under-compensated, as the funder may take their return on investment, with the result that the funded party is not fully compensated for any harm suffered,
• Legal costs may increase,
• The price of insurance premiums may increase, and
• It is not appropriate in all types of disputes.

The commission also, however, lists four arguments in favour of legalising third-party funding:

• It will help expand the access to justice in Ireland,
• It will improve equality of arms between the parties in cases where one party has the benefit of significant financial resources compared with the other, and can force the weaker party to accept an unsatisfactory settlement,
• It can help increase the pool of assets available to creditors in insolvency proceedings, and
• It will address an inconsistency in the law, whereby corporate entities can effectively engage in third-party funding under another name by issuing shares, or transferring ownership of the company to fund its participation in dispute resolution.

The LRC report looks at a number of ways in which third-party funding could be legalised in Ireland – including the abolition of maintenance and champerty – but decides that the best way of doing this would be through a statutory provision allowing third-party funding in some cases as exceptions.

Regulation

The paper says that any future regulatory system for third-party funding would include a mix of approaches, with the aim of reducing the financial risks and protecting the “proper and efficient” administration of justice.

The LRC examines five possible regulatory models for third-party funding, on which an Irish framework could draw:

• A voluntary self-regulatory regime, as in England and Wales,
• An enforced self-regulatory regime, as in Hong Kong, with the state reserving a supervisory role to regulate the sector more intrusively should self-regulation prove insufficient,
• A regulatory regime structured around certification by the court as to the reasonableness of the funding agreement,
• A licensing regime administered by an existing regulatory authority, such as the Central Bank of Ireland, or the Legal Services Regulatory Authority, and
• A licensing regime administered by a new, specialist regulator.

Disclosure

One chapter of the LRC report considers the issues that lawmakers should consider when regulating any system that allows third-party funding – including disclosure.

The commission says that it “sees value” in the mandatory disclosure of funded disputes.

“At the very least, funded parties should be required to disclose that they are in receipt of third-party funding, and the funder’s identity, to both the opposing party and the court,” the report states.

The paper also looks at whether such funding should be prohibited in certain cases, such as personal-injury disputes, and at what measures could be taken to prevent third-party funders having “excessive control” over funded disputes.

It suggests expanding the definition of misconduct in section 50 of the Legal Services Regulation Act 2015, to include a specific provision that ceding control of a dispute to a third-party funder subjects the practitioner to the complaints and disciplinary provisions of the act.

The commission is seeking views on the consultation paper by 3 November 2023.

Responses can be submitted by email to ThirdPartyFunding@lawreform.ie, or by post to the Law Reform Commission, Styne House, Upper Hatch Street, Dublin 2 D02 DY27.