The word Champerty – coming from the French word Champart, meaning to share a neighbour’s field – is an odd term referring to an agreement between a third party and a legal claimant.

The agreement goes thus: the claimant’s legal fees are paid by the interested party in return for a share of any eventual damages pay out.

Both the Ancient Greeks and Romans deployed the system in their societies, although it was once outlawed by the powers-that-be in Athens.

So too, was it outlawed in the UK, until 1967 when that year’s Criminal Law Act decriminalized it, along with eavesdropping, being a common scold or night walker and, rather bizarrely, challenging the enemy to a fight.

In modern day Britain, Champerty is now broadly acceptable and in every day use as ‘Litigation Funding’ – it is a big business and growing investment vehicle.
Currently, there is more than £500 million of funds ready to be channeled into funding court cases at this present time. The rise of the industry – one of the few industries which have significantly grown in the past five years – has impacted on companies of all sizes.

Small and Medium Sized enterprises have found it a useful tool to level the playing field in legal fights with stronger-armed opponents with canyon-sized pockets and the legal-battle appetite to match. There are a number of UK banks currently facing funded cases filed by opponents which may not otherwise had the means to do so.

The company to which I am consultant, Vannin Capital, is currently involved in the funding of many of these various areas, but also large scale oil project and exploration disputes stemming from Eastern Europe and Africa, many of them concerning figures running into the hundreds of millions.

Litigation funding is basically an investment by a funding company in a court case which it believes will result in a success. It then takes a per cent of the damages pay out awarded by the court.

If the case is not successful, the funder writes off the investment – litigation funding isn’t a loan.

The model is growing as an asset class, with some funders open to outside investment from areas such as investment funds, pension funds and family wealth.

There are various listed funds, with some based in the US and Australia, and taking on international cases.

Others, such as Vannin, are backed by Private Equity, but the principle of the investment is the same.

Corporates have also found funding an increasingly useful tool as it is attractive to the financial decision makers within companies. The Finance Director, the CFO, even the CEO, are taking up the mantle and looking towards litigation funding.
The cost of litigation is something which can keep even the most hardened CFO awake at night.

Take Deutsche Bank’s most recent profits announcement.

As well as commenting on steps needed to meet regulatory guidelines, the bank also reported a 49 per cent drop in second-quarter profit. It was telling that it set aside €630m for legal costs to defend against investigations into its role as an underwriter of US mortgage-backed securities and in the Libor rate-setting scandal

That is the extreme end of the scale, but it an example of how litigation costs can hurt a business financially, let alone the reputational damage it can cause in the event of a loss.

Clearly, as with any industry, there are significant downsides.

Over the last year the litigation funding market in England has seen a number of new entrants and in recent months some well-established funders have announced large increases in the capital available to them for investment in cases.
This influx of newly available capital is positive.

But the biggest risk in the world of litigation funding is where a funding company represents it has funds when it does not.
It would be a disastrous situation if a funder ran out of money in the middle of a case, or simply did not pay. Aside from ruining that particular funder’s reputation in the industry it leaves the client and the legal team, high and dry.

There has, most unfortunately, been a rise in the number of the companies masquerading around the market. These companies find a case first, misrepresenting their financial position, then they look to raise the money on a one-off basis, usually by looking to insure the capital invested with an ‘own costs’ insurance policy, thus protecting the invested funds at the very least.

The current rise in these organisations has been fuelled by the perceived high rewards available to funders. It is true, the rewards are high, but so are the risks. Real funders operate their businesses on a portfolio basis in order to spread the risk.

One client had what he calls a “painful and drawn out” experience with a funder who could not come up with money. He informed: “After wasting six months, and hearing every excuse possible, we went back to the market and were lucky to find a funder with money. However, it delayed the whole litigation process considerably”.

The question is what can be done to avoid these problems. One immediate remedy is the introduction of the Association of Litigation Funders and its Code of Conduct, which contains provisions to ensure capital adequacy and the basis upon which funders can withdraw from cases. To join the Association, a funder must prove their financial resources.

Undoubtedly things will improve with these new measures. But put simply, clients and solicitors should ensure they know with whom they are dealing. They can ask for references and obviously, proof of adequate capital. Real funders have real clients who have had positive experiences with them – and have been paid well.

The thought of a day – or weeks, as it usually is – in court does not fill the modern day CEO with the joy.

But the rise of litigation funding shows that the appetite is there for businesses to protect themselves against tougher opponents – and seek redress while mitigating risk.

Nick Rowles-Davies is an experienced lawyer and legal commentator, and consultant to litigation funding company Vannin Capital – www.litigationfunding.com