Third-party funder ethics needs 'careful navigation'

Third-party funding of legal cases causes deep professional conflicts, according to Law Society past president Geraldine Clark.

“It is an area that needs to be navigated very carefully,” said Clarke, who formerly chaired the professional ethics committee of the IBA.

Speaking at an IBA 2020 conference seminar entitled ‘Welcome to the Wild West’ on professional and ethical obligations associated with contingency fees and litigation funding, Clarke said conflicts particularly arise where there is insurance involved such as for employer liability.

Duty to client

“The client must always have top priority,” she said, “the duty is to the client.”

“It can sometimes be easier for the lawyer to say that, than to do it,” she continued.

“That’s particularly the case where maybe there is a lot of repeat work involved.”

In that situation, it is more difficult for a lawyer to say: “Look, I don’t care what you think, my duty is to this claimant … irrespective of what you think, or what your agreement says, we are doing what the claimant wants to do, not what you want to do,” she continued.

Clarke said that agreements need to be very carefully drawn up, so that the funder has a very limited role in deciding what happens in the litigation and how the case is conducted.

A client may also need to get independent advice on the terms of any agreements, she continued.

Clarke, head of the litigation department at Gleason McGrath Baldwin solicitors in Dublin, said that generally, costs follow awards in Ireland.

Civil cases or injury claims may be taken on a ‘no-foal-no-fee’ basis, where only a nominal sum is charged if there is no win.

Where fee sums can’t be agreed, this is referred to a legal costs adjudicator.

US lawyer Steven M Richman, of New Jersey and New York firm Clark Hill told the session that the billable hour is under ‘severe challenge’ and clients are more frequently looking for alternative arrangements.

Contingency fees 

He said that contingency fees are relatively common in the US in certain types of cases, notably personal injury cases, but that under IBA rules, all fees must be reasonable in terms of hours worked and the difficulty of the case.

‘Negative contingency fees’ can also be a feature of defence teams.

“We are either adhering to our ethics codes or not,” said Richman, “and there are situations where these things get challenged and the entire arrangement then goes to the court because the client goes to another lawyer.”

Sometimes there are failures, and people get away with it, he said, but sometimes they are challenged.

The webinar heard that class actions, unavailable in Ireland are a huge motivator of contingency fees in the US.

Name on writ 

Geraldine Clark observed that, in Ireland, every claimant must take responsibility for their own claim, and put their name on a writ, and this has cost ramifications should the case go against them. 

She pointed to actions concerning defective replacement hips, which had led to a lot of unnecessary surgery.

If all of those potential plaintiffs could have got involved in one class action, it would have avoided separate proceedings, she said.

A solution was agreed in the shape of one case run as a test case.

The manufacturer agreed to be bound by the outcome of that one test case, once the liability was decided, Clarke explained.

Status quo

“One claimant had to run the gauntlet of the litigation on her own, and had to bear the consequence of possibly losing the action, without being able to get a contribution towards the costs from the others,” she said, adding that, after debate, the courts had decided that the status quo should prevail.

Australia has recently brought fresh thinking to the issue of groups or representative proceedings, on the basis of access to justice as a fundamental human right, Clarke continued.

On the issue of third-party funding, which is also not allowed in Ireland, Clarke said this is perceived to create conflict of interest and ethical issues for lawyers.

"So, if I act in a class action for 100 claimants, and offers are made and one wants to settle and the other doesn’t I must ask 'who is my client, where is my primary duty?'

“That’s also the difficulty with third-party funding in respect of ongoing litigation."

Fiduciary duty

“Is the funder taking a back seat to the claimant? Where is the solicitor’s fiduciary duty and obligation?” she asked.

Clarke continued that, in the UK, many third-party funders had become close to some law firms, which raised issues about where lawyerly obligations lay, if the funders were paying for a case.

Issues had been raised in a number of cases about where the obligations of the lawyers lay and, more importantly, where their hearts were.

Reputational damage 

She said that a funder might want a case to go to its conclusion, because there was a good defence which had been funded, but a plaintiff might want to settle for reasons of reputational damage.

“The lawyer’s duty is to the client. But how are you going to square that with the funder?

"It’s a practical difficulty for us, I think. Whether we want to acknowledge it or not, there are issues that arise for lawyers where there is more than one party to whom they owe a duty in the litigation.”

Philosophical notion

Steven Richman said that the US had a philosophical notion that making the user pay  discouraged people from bringing lawsuits.

“We have a strong feeling that people should be free to bring their lawsuits,” he said, though there were checks on frivolous lawsuits and ethics codes that governed lawyers in their assessment of cases.