The Importance of Disclosure in Drafting a Litigation Funding Agreement
Full disclosure is an important part of making any transaction work. This applies to litigation funding transactions to the same extent as any other transaction. When an attorney advises a client in connection with a litigation funding transaction, she must make sure that there is full disclosure on both sides in the transaction. This is a crucial step in avoiding any problems or disputes once the case is over and time to repay the investment comes.
In a few jurisdictions, there are express statutory rules about what must be disclosed in litigation financing transactions. These rules are found in the states that regulate litigation financing directly, such as Maine, Vermont, Indiana, Ohio, and Tennessee. Some of these jurisdictions prescribe that funders disclose certain information about the fee structure in the transaction and that these disclosures be made in a certain format. In some states, there are even rules about the font size for these disclosures in the funding agreement. As a general rule, the disclosure requirements under these statutory schemes mimic the disclosure requirements for consumer lending transactions.
In the vast majority of jurisdictions that do not directly regulate litigation financing, the question arises about what kind of disclosure should be made in connection with the agreement. It certainly makes sense to disclose the precise nature of the fee structure, and following the model of consumer lending disclosures makes sense, regardless of whether the client is a financially sophisticated business entity or an individual. Accurate disclosure is never a bad idea, even if it takes a little extra effort.
In addition, if there is a relationship between the funder and the attorney, the nature and extent of this relationship should be disclosed to the litigant. In many situations, attorneys refer business to funders; and if there has been such a referral relationship in the past, the litigant should be informed about it. This disclosure need not come in the financing agreement itself, but it should be made in writing to avoid any suggestion later on that the litigant was unaware of the fact that the attorney and the funder had some shared interests outside of the litigant’s own case.
Disclosure is not a one-way street, so it is important that the litigant make disclosures as well. In this connection, the most important information concerns any security interests in the recovery that the litigant may have previously given out, including, of course, the attorney’s contingent fee, if there is one. In addition, litigants should disclose any other information relating to their willingness or ability to take the case to its conclusion. Virtually every funder will seek this information as a matter of course, but if there is any doubt about whether there has been full disclosure by the client, any attorney involved in the financing transaction should make sure that such disclosure has been made.
Topics: litigation finance, legal reform, third-party funding, ethics, litigation finance best practices, disclosure
Works Cited: Victoria A. Shannon, Harmonizing Third-Party Litigation Funding Regulation, 36 Cardozo L. Rev. 861 (2015)
