The sponsorship of lawsuits by parties with no genuine stake dates back to Medieval England, where it was seen as a threat that encouraged frivolous litigation, weaponized the courts, and commercialized justice. Image Source: Deposit Photos

The current litigation finance market emerged with the decline of anti-champerty laws in the UK, Australia, and a number of jurisdictions in the United States beginning in the mid-1990s. The origins of these laws predate modern funding arrangements, originated in medieval England with the intent to prevent nobles from weaponizing the courts by sponsoring and weaponizing claims and frivolous disputes they were not party to. The concept was inherited by western jurisdictions with legal traditions based in Common Law, and effectively barred the same behavior that funders enables: financial actors injecting capital into litigation for profit, with the potential to influence outcomes or encourage claims that might otherwise never be filed.

“Funders exploit the very dynamics that champerty prohibitions were designed to prevent.”

Even with the rollback of anti-champerty laws, the permissibility of litigation finance remained doubtful, as the Harvard Law School’s Center on the Legal Profession noted. Indeed, the fundamental threat posed when litigation becomes an investment product should now be apparent to readers: the incentives behind a case shift with the funder’s goal centered on financial return, not legal merit. That dynamic can affect whether a case is filed, how aggressively it is pursued, and how long it runs.

Funders themselves are aware of these tensions; their reluctance to operate in jurisdictions with strict anti-champerty laws shows an understanding that their business model is legally vulnerable to accusations of frivolous lawsuits.

“Funders in essence acknowledge their business model escalates frivolous litigation and avoid jurisdictions with strict anti-champerty laws.”

And frivolous litigation is precisely what funders often pursue in the interest of profit, transforming small disputes into massive claims. Observing an Australian example, Melbourne City Investments (MCI)—a company created and controlled by a solicitor who also acted as its lawyer and funder—purchased tiny parcels of shares in ASX-listed companies, including Treasury Wine Estates (TWE) and Leighton Holdings (LEI), often worth under A$700.

These holdings, though small, nonetheless gave MCI legal standing to file shareholder claims against TWE and LEI, a legal standing that was weaponized. MCI might make for an imperfect comparison to other litigation funders by unifying the role of claimant, legal counsel, and funder. Yet it has nonetheless been referenced as an epitome of the threat funders present by using its financial resources to translate small financial stakes into outsized and costly lawsuits.

And of course, at a far larger scale, the Sabah dispute demonstrates the same pattern under the backing of former litigation funder Therium. Eight individuals claiming dubious descent from the historic Sulu Sultanate pursued an award of $15-billion in arbitration over symbolic payments worth roughly $1,000 per year. They later further filed an incredulous $18-billion claim against Spain for legal decisions that led to the rejection of the original award. What’s more, the latter lawsuit sought to abuse an investment protection treaty by classifying the legal fees of the Sulu claimants against Malaysia as an investment in Spain. In both cases, funding enabled the escalation of trivial underlying interests and improbable arguments into enormous legal battles at significant cost to justice systems.

“Litigation funder Therium transformed a dispute over $1,000 annual payments into two immense claims of $15 billion against Malaysia and $18 billion against Spain.”

The financial structure of funders reinforces these incentives. Funders can take as much as 20% to 40% of any award or settlement, often with compounded interest exceeding 20%. Combined with attorney contingency fees, expert costs, and administrative deductions, plaintiffs are likely to receive only a fraction of the ultimate award.

“Funders can take as much as 20% to 40% of any recovery, incentivizing investment in cases where a settlement is possible even if the case is unlikely to achieve the full value of its claims.”

While such terms have struggled to return profit to funders in a number of cases, sizable ownership of potential settlements has thus far incentivized funders to invest even when the underlying claim is marginal or speculative. Indeed, improbable claims can nonetheless present significant legal and financial pressure on defendants to provide settlements from which funders can profit. The dynamic can also put clients in a precarious position with lawyers and funders capturing most of the upside.

“Improbable claims can nonetheless present significant legal and financial pressure on defendants to provide settlements from which funders can profit.”

This drive to fund for profit rather than legal merit has been cited as a contributor to social inflation—the rising costs of claims and insurance payouts beyond what can be explained by economic trends alone. By enabling more lawsuits, extending case durations, and increasing potential recoveries, litigation funding has driven up insurance losses, premiums, and the overall cost of legal risk. Critics argue that without stronger regulation, courts and arbitration centers risk becoming markets for high-risk investment rather than forums for justice.

“Rising costs in claims, insurance payouts, and legal exposure has been attributed to the rise of third party litigation funders.”

Even jurisdictions that have provided safe harbors for funders have acknowledged these risks, with the US state of Minnesota recently holding that litigation funding agreements were technically champertous. Their courts declined to tighten regulation but still leaned on the opinion that broader regulatory tools can curb funder abuse. These decisions underscore that funders operate in a legal grey zone, where commercial incentives can conflict with the interests of litigants.

Ultimately, the revival of champerty debates highlights a broader concern: when profit and litigation intersect, the purpose of the legal system can shift from resolving disputes to generating financial returns. Recent cases demonstrate that funders can magnify minor claims into massive legal battles, stretch legal arguments, contribute to social inflation, and leave plaintiffs with only a fraction of the potential recovery. Regulators, courts, and lawyers face the challenge of ensuring that funding supports access to justice rather than transforming lawsuits into little more than vehicles for profit.

REFERENCES

Daily Journal. (2023). How third-party litigation financing works and who benefits. https://www.dailyjournal.com/

Harvard Law School Center on the Legal Profession. (2019). A brief history of litigation finance. https://clp.law.harvard.edu/

US Chamber of Commerce Institute for Legal Reform. (2014). The landscape of third-party litigation funding in Australia. https://instituteforlegalreform.com/

Norton Rose Fulbright. (n.d.). Participation of lawyers in litigation funders. https://www.nortonrosefulbright.com/