Best Practices for the Ethical Negotiation of a Litigation Funding Agreement
Of course, attorneys must always be sensitive to their ethical obligations, especially their ethical obligations to their clients. But those obligations can become more complicated when a litigation funder becomes involved in a case. Because the funder is a third-party with an interest in the outcome of the case, the attorney for the funded party must take care to observe his duties to the client while simultaneously protecting his client’s interest in maintaining the relationship with the funder.
An ethical challenged can arise if the funding agreement gives the funder a role in making the decision to approve any settlement agreement. It is obvious why a funder might want to participate in this decision, but there are ethical risks to such participation. An attorney’s pre-eminent duty is to act in her client’s best interest. Consequently, with respect to any settlement negotiations, the attorney must always endeavor to negotiate the best deal for the client, even if it that settlement might now be what the funder wants. For example, a settlement offer might include non-monetary benefits that are worth something to the client but add no value for the funder. In this case, the attorney must assure that lines of communication between the funder and the client remain open and that all options are clearly discussed. But, in the end, she has to do what helps her client, even if it does not clearly benefit the funder.
Another potential conflict of interest could arise if the funding agreement gives the funder a role in choosing litigation counsel. In this situation, the attorney is under pressure to please the funder, but, here again, there is a risk that this pressure could be inconsistent with the attorney’s duty to her client. If the case develops so that there is a conflict between the funders’ interest and the clients, the attorney may find herself in a position where she must withdraw from the representation.
As with everything else in litigation, an attorney’s best practice is to be prepared for such conflicts and to be pro-active about avoiding the circumstances that can create them. First, attorneys should develop a set of policies for what they will and will not do with respect to any litigation funder, and they should make those policies clear to the client whenever the client begins to consider litigation funding. Second, the attorney should make sure that she is, at the very least, informed about the negotiations between the client and the funder, even if the client has retained separate counsel to handle the litigation finance arrangement. By staying in the loop, the attorney can make the client aware of any parts of the funding agreement that could be ethically problematic for the attorney. Finally, throughout the litigation, the attorney should maintain open lines of communication with both the funder and the client and make sure that all three parties are aware of each other’s positions with respect to all developments in the case.
Litigation financing presents an ethical challenged because it creates a three-sided relationship in a context that usually involves bilateral relationships. As long as attorneys pay attention to the complications that litigation financing can create, and as long as they communicate clearly with clients about what they can and cannot do in ethical terms, these challenges will not undermine the attorney-client relationship or the benefits of litigation financing.
Topics: litigation finance, legal reform, third-party funding, ethics, litigation finance best practices
Works Cited: Victoria A. Shannon, Harmonizing Third-Party Litigation Funding Regulation, 36 Cardozo L. Rev. 861 (2015)
