Litigation Finance in New Jersey

New Jersey courts have stated unequivocally that the state’s law has never recognized the doctrine of champerty.  Indeed, those courts have asserted the irrelevance of the doctrine rather aggressively.  But it is worth noting that, in the context of contingent attorneys’ fees, New Jersey courts require that agreements for such fees be reasonable under all circumstances.  Although New Jersey courts have not directly addressed litigation finance agreements, it seems likely that the same principles about reasonableness will apply.

In 1878, the New Jersey Supreme Court discussed the doctrine of champerty in connection with an attorney’s contingent fee.  Schomp v. Schenck, 40 N.J.L. 195 (Sup. Ct. 1878).  There, the court noted that bearing the costs of litigation was an essential element of champerty and it considered the argument that an attorney engaged in champtery by agreeing to a contingent fee.  In rejecting this argument, the court noted that New Jersey courts had never recognized the doctrine.

About seventy years later, this proposition was re-affirmed – but with a caveat.  In Hughes v. Eisner, 8 N.J. Super. 351, 72 A.2d 901 (Super. Ct. Ch. Div. 1950), the court again addressed the question whether contingent attorneys’ fees were permissible.  The court agreed that they were, but it also noted that “[a] contract for a contingent fee, where sanctioned by law, should be reasonable under all the circumstances of the case, including the risk and uncertainty of the compensation, but should always be subject to the supervision of a court, as to its reasonableness.”

For those concerned with litigation finance agreements, it is worth paying attention to the way in which the court described this “rule of reasonableness.”  The court indicated that the validity of any contingent agreement depends upon the relationship between risk and reward in the formulation of the agreement.  For a litigation finance agreement, if the reward to the funder is disproportionately high with respect to the risk assumed by the funder, it is possible that a court could find the agreement to be void as unreasonable and against public policy.

In addition, the court noted that courts will always be in a position to review agreements where one party’s compensation depends upon the outcome of litigation.  This principle demonstrates that litigation funders should always be vigilant in the way they draft agreements in New Jersey or with parties from New Jersey because New Jersey courts have reserved the authority to review such agreements under any circumstances.

 Topics:  litigation finance, legal reform, third-party funding, New Jersey, reasonableness , non-recourse financing

 Works Cited:  Hughes v. Eisner, 8 N.J. Super. 351, 72 A.2d 901 (Super. Ct. Ch. Div. 1950)

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