History of Legal Funding

Litigation finance originated in Australia in the 1990s with the inception of legislation that permits insolvency practitioners to enter into contracts financing lawsuits characterized as company property. This rise was also fueled by class actions, which came about in 1992 when courts recognized it as an efficient way of dealing with group claims. These developments created a new niche market; thus, the Litigation Financing industry was born.

Around the same time as Australia, the rise of litigation financing started in the United Kingdom following two significant pieces of legislation. The Criminal Law Act of 1967 decriminalized maintenance and champerty, and Parliament’s passage of the Courts and Legal Services Act in 1990 allowed clients and attorneys to enter into conditional fee agreements (CFAs), such as “no-win, no-fee” representation. CFAs gave clients access to affordable representation and introduced the concept of litigation financing in the UK as lawyers funded the litigation with their time and expertise in exchange for a portion of the settlement. After the passage of the Access to Justice Act in 1999, intended to offer alternatives to the traditional means of litigation funding, the rise of litigation financing in the UK began. Since 2002, when the courts stated that only funding arrangements meant to “undermine the ends of justice” should be viewed as unlawful, the UK legal financing industry has been steadily increasing.

Before the mid-2000s, the U.S. litigation financing industry was primarily limited to personal injury cases. Since the inception of specialized commercial litigation funding in 2006, the U.S litigation finance industry has grown significantly. Litigation finance regulations have largely been left to the states. Prohibitions on Maintenance and Champerty are left to individual state bars, legislators, and courts. In 2004, the American Legal Finance Association (AFLA) was formed, and in 2005 the ALFA member companies created a code of conduct to formalize ethical standards, fair business practices, and rules around transparency. They continue collaborating to standardize deal documents, ensure cases are not overfunded and institute state-tailored legal frameworks. The trend toward normalizing litigation finance continues as legislatures, courts, and society recognize these agreements for what they are – mutually beneficial contracts between investors and plaintiffs.