The Ancient Origins of Third-Party Litigation Funding

04 Giugno 2021

The current expression third-party litigation funding indicates a widespread phenomenon, especially in common law countries, in the field of legal disputes. It consists in the provision by a third party, the so-called funder, of the economic means necessary to support a legal dispute, in exchange for a percentage of the hypothetical future victorious outcome.

However, today’s English expression does not do justice to the ancient origins of litigation funding. In fact, the practice whereby a person, who is not actually involved in the litigation, becomes the financier of a dispute between two parties in exchange for a commission originates in ancient Greek and Roman civil trials.

Even then, in order to see one’s rights protected, it was necessary to be assisted by professionals who carried out the defensive activity in court, and in exchange for the payment of a large sum of money, which not all ordinary citizens could afford. Consequently, the so-called sykophantes and calumniatores started their business respectively in Greece and in ancient Rome. They were representatives of the wealthiest social classes that, in return for a percentage on the outcome of the dispute, made it their own and anticipated the expenses necessary to go to court[1].

However, it should be noted that often such sykophantes and calumniatores leveraged the financing of litigation for their own economic or political interests: hence, the social disapproval of their practice and the consequent adoption of regulations aimed at preventing or limiting their activity[2]. Their bad reputation has continued to the present day, so much so that the word sycophant has become synonymous with spy, or someone who speculates on the wrongdoing or the disputes of others.

The practice according to which a third party asserts a right of others by financing the litigation in order to obtain a part of the possible victorious outcome was maintained until the Middle Ages. In feudal England, the notorious phenomenon of champerty became widespread, i.e. the contract that, in case of a positive result of the financed cause, attributed to the financier the property of a portion of the disputed land and to the financed body a right substantially similar to the emphyteusis on the same portion[3]. This phenomenon became more extensive as the feudal lords, progressively deprived of military power and taxation, resorted to champerty in order to increase their possessions[4]. In parallel, there was the more general phenomenon of the so-called maintenance, that is favoring other subjects in the establishment of a dispute.

In 1275 with the promulgation of the First Statute of Westminster by King Edward I, both practices were declared civil and criminal offenses. The scope of these prohibitions was further extended during the colonial era, when any practice consisting in the financing of litigation by a third party was made illegal, even outside of England.

However, it is necessary to underline how the need to contrast the phenomena of litigation financing, which resulted in the bans described above, was not a consequence of the intrinsic reprehensible nature of such conduct – indeed, absent – but rather of the undesired effect it created. Proliferation of reckless, often groundless judgments, brought, moreover, by third parties who had no original interest in the litigation other than that of obtaining a percentage conditional on a successful outcome.

Around the Nineties, it was the awareness of the actual reasons that led to the prohibition of the phenomena of financing litigation that contributed, ultimately, to their decriminalization. Thus, the modern phenomenon of third-party litigation funding was born, which spread first in Australia[5] and then progressively in other common law countries.

Far from being a purely speculative practice – as it may have been in the past – third-party litigation funding today represents an important tool that makes access to justice possible even for those who would otherwise lack the economic means to bear the expenses. Recent history teaches us that litigation funding is a tool that has had a very positive impact, particularly during periods of economic crisis. For example, the credit crunch that followed the 2008 crisis prompted many companies to find alternative methods of litigation financing to preserve their cash flow in order to facilitate a gradual recovery. It is precisely in this circumstance that there has been an exponential increase in resort to third-party litigation funding[6].

The general increase in the cost of justice, including arbitration, together with the prohibition for lawyers to anticipate their clients’ costs have also contributed to the spread of third-party litigation funding[7]. In addition, thanks to the adoption of recent regulations introducing so-called class actions, or the growing phenomenon of private antitrust enforcement, many EU countries are facing the problem of providing economic incentives to start collective actions, identifying third-party litigation funding as a valid resource for companies[8]. In this regard, the European Parliament has recently highlighted the added value for European businesses generated by this tool, amounting to around 229 million euros[9].

From a closer point of view, it can be stated not only that in Italy the phenomenon is not practiced at all, but rather that it raises a certain skepticism on the part of the courts. For the reasons set out above, it must be considered that third-party litigation funding should first of all be exonerated and then strongly encouraged because, far from having a speculative nature, it constitutes an incomparable tool for social equality, which makes access to justice possible and easy for every citizen and business, even those who couldc not afford to bear the costs of or its potentially unfavorable outcome. In fact, it allows for the transfer of the risk, necessarily connected to any dispute, to the funder; it also guarantees more reasonable and predictable costs of justice and at the same time discourages groundless actions, given that it is the merits and the foundation of the right that allow to obtain the support of the funder. In short, contrary to what is currently the most widespread thinking, recourse to instruments for financing litigation can represent a valuable opportunity for all Italian companies, also with a view to increasing competitiveness on the market[10].

[1] Radin Max, Maintenance by Champerty, in California Law Rev., XXIV, 1, 6, p. 49.

[2] De Marini Avonzo Franca, I limiti alla disponibilità della ‘res litigiosa’ nel diritto romano, 1967.

[3] Castelli Luciano and Silvia Monti, Third Party Litigation Funding: quali prospettive in Italia?, in Contratti, 2019, 5, 580, p. 1.

[4] It should be noted that the champerty owes its name precisely to the right to use attributed to the financed body, namely tenancy by champart.

[5]Australian Supreme Court, Campbells Cash and Carry Pty Limited v Fostif Pty Ltd (2006), 229, CLR, 386.

[6] Steinitz Maya, Whose Claim Is This Anyway? Third Party Litigation Funding in Minnesota Law Review, 95, 2010-2011, p. 1283.

[7] Shannon Victoria A., Harmonizing Third Party Litigation Funding Regulation, in Cardozo Law Review, 36, 2015, pp. 869 e ss.

[8] Rodger Barry, Competition Law: Comparative Private Enforcement and Collective Redress across the EU, Wolters Kluwer, 2014, p. 59.

[9] European Parliament, “Responsible private funding of litigation: European added value assessment”, March 2021.

[10] Parisi Giacinto, Trial as an investment: litigation funding compatible with the Italian civil procedural law system?, Roma Tre Press, 2019.

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