Legal UpdatesPublicationsLitigation Funding & Its Existence in Indonesian Court System

 

Litigation or arbitration as a commercial litigation proceeding requires a massive amount of capital due to litigation costs. Such the facts prevent people who seek for justice from pursuing their claims. However, several countries have a mechanism for litigation financing or lawsuit lending, which is well-known as Litigation Funding. In other words, such a method unlocks access for legal claims by providing capital to the plaintiffs. Referring to the practice of providing money to a party to pursue a potential or filed lawsuit in exchange for a share of any damages award or settlement, this article aims to outline and overview the existence of Litigation Funding in modern days related to the models of litigation funding, worldwide implementation, and the opportunity to exist in the Indonesia Legal System. We discuss each of the matters in more detail.

 

Litigation Funding Defined

Litigation Funding or Third-Party Funding (“TPF”) is a group of funding methods that rely on funds from the insurance markets or capital markets instead of, or in addition to, the litigant’s funds. The companies/parties who provide funds have no connection with the litigation but promote access to justice. On the other hand, litigation funds are provided to defendants, but the TPF does not want to incur any costs or risks associated with litigation.

 

Legal Doctrine

Litigation Funding refers to several doctrines in common law jurisdictions; they include the principles of maintenance, champerty, and barratry, as well as attorney-client privilege and work product immunity.

1. Maintenance, Champerty, and Barratry

Maintenance involves an arrangement where a party supports another to enable the one to make a legal claim. Champerty, according to Black’s Law Dictionary, is an agreement to divide litigation proceeds between the owner of the litigated claim and a party unrelated to the lawsuit who supports or helps enforce the claim. It is a form of maintenance whereby assistance in prosecuting or defending a lawsuit [is] given to a litigant by someone who has no bona fide interest in the case.”

In conclusion, this doctrine is a specific form of maintenance, where an unrelated party strikes a bargain with a litigant to financially support the litigation in exchange for a share of the proceeds from the claim. Finally, barratry entails the encouragement of another to bring or continue a claim. In medieval England, maintenance and champerty were used by the powerful as a means of settling scores. Feudal lords and other privileged members of society would often support the legal disputes of others against the supporter’s personal or political enemy.

2. Attorney-Client Privilege and Attorney Work Product Immunity

The attorney-client privilege is a legal concept that protects certain communications between attorney and client from disclosure to the opposition. Also, the work-product immunity protects materials prepared by attorneys and third parties in anticipation of litigation from discovery. These two concepts are two separate legal doctrines but frequently cited together.

 

Two Models of Litigation Funding

There are two distinct types of litigation funding, and this section is to distinguish between the two.

1. The Individual Plaintiff (IP) model

In the first type, which we will refer to as the individual plaintiff (IP) model, a company advances money to plaintiffs and charges interest on a monthly or daily basis at annualized rates that can exceed 100 percent of the loan value. The loans are non-recourse, meaning that if the plaintiff loses, the funder has no claim for repayment. The loan is repaid only if the suit eventually ends in a monetary award for the plaintiff. Such loans are generally for relatively small loans, and the plaintiff is usually an individual involved in a personal injury case.

2. Corporate Litigant (CL) model

In the second type of litigation funding, which is called the corporate litigant (CL) model, money is advanced to plaintiffs in exchange for a predetermined pro-rata share of any proceeds that result from the lawsuit. The funding company is a specialized investment firm or hedge fund, and the borrower, under current practice, is typically a corporate litigant. CL loans are also made on a non-recourse basis, which gives the TPF a superficial resemblance to contingent-fee arrangements between attorneys and their clients. However, both types of funders differ from contingency-fee attorneys in at least one crucial respect: they are strangers to the litigation, that is, they are neither litigants nor advocates for the litigants; their role is solely as profit-seeking investors whose goal is to maximize the return on their investment. The presence of a third-party funder transforms a justice system designed to adjudicate disputes, in a fair and impartial manner, into a marketplace where disputes are commoditized and manipulated to serve the interests of investors.

 

Worldwide Implementation

To date, the use of litigation funding has been primarily confined to several certain common law jurisdictions.

England And Wales

Litigation funding has been permitted since 1967 (and in insolvency matters since the late nineteenth century). Recently, the Court of Appeal in London issued a judgment strengthening the existence of Litigation Funding. As a new high point represented in the acceptance by the London judiciary of the funding of litigation through Third Party Funding (TPF), it stated that ‘Litigation funding is an accepted and judicially sanctioned activity perceived to be in the public interest.’ TPF industry aimed at the funding of litigation in England and Wales has developed within the context of the underlying common law on maintenance and champerty and the associated risks to which funders of litigation are exposed in delivering TPF to clients.

Until the Criminal Law Act 1967, the funding of litigation, as we now know it, would have been a crime. Even now, litigation funding agreements (LFAs) are at risk of being unenforceable for illegality if their terms are found to be in breach of the rules against maintenance and champerty, especially if funders exert any material amount of control over the case. Maintenance and champerty were initially rules of the common law that were aimed at preventing the rich and powerful from interfering in court proceedings to the detriment of the administration of justice. However, by the 19th century, it had become apparent that, far from protecting justice, the inability of the claimant to fund his or her claim other than with his or her own money was a bar to accessing to justice, and exceptions to maintenance and champerty were then created in insolvency cases.

 

United States

Legal financing is a fairly recent phenomenon in the United States, beginning in or around 1997. Litigation funding is available in most U.S. jurisdictions. Litigation funding is most commonly sought after in personal injury cases, but may also be sought for commercial disputes, civil rights cases, and workers’ compensation cases. The amount of money that plaintiffs receive through legal financing varies widely, but often ranges from 10 to 15 percent of the expected value of judgment or settlement of their lawsuit. Some companies allow individuals to request additional funding at a later date.

The amount of money available depends on the policies of the financing company and the characteristics of the plaintiff’s lawsuit. Litigation funders generally evaluate cases based on legal merit, amount of damages, and financial viability of the defendant. Many funders also specialize in specific areas of litigation or have restrictions on funding size and funding structure. The American Legal Financing Association (ALFA) is a trade association that represents consumer legal financing companies. ALFA’s main goals are to establish voluntary standards for the legal funding industry and to serve as the liaison with the public, government officials, and the media. While ALFA is a non-profit organization, most of the legal funding companies are for-profit organizations.

 

Singapore

Singapore opened its doors to TPF in early 2017, but only for international arbitration and related proceedings. Singapore is one of the world’s leading international arbitration jurisdictions. The caseload of the Singapore International Arbitration Centre (SIAC) has increased considerably over the past decade. In 2016, SIAC received over 340 new cases involving parties from 56 jurisdictions – a 27 percent rise in caseload compared with the year before. The total aggregate sum in dispute for new cases filed in 2016 was S$17.13 billion. These trends look set to continue. By 31 March 2017, SIAC was handling an active caseload of around 650 cases. In mid-2017, the ICC International Court of Arbitration and the Permanent Court of Arbitration announced plans to establish offices in Singapore to meet the growing demand for commercial and investor–state arbitrations.

A market for TPF also seems to be emerging. The first TPF agreement under the new statutory framework was reported in July 2017, and several international funders now have a presence in Singapore. While it is still early days, the combination of light statutory regulation and a rich pool of disputes means the future looks bright for TPF in Singapore. The legal and regulatory framework for TPF in Singapore changed significantly on 1 March 2017. Singapore law now permits TPF to enter international arbitration (and related proceedings) if the funder meets certain qualifying criteria. Outside the international arbitration context, however, funding is generally prohibited on the basis of public policy.

 

Litigation Funding Existence in Indonesian Court System

Historically, Litigation Funding is derived from champerty as an ancient legal doctrine that originated in France and was imported into several common law jurisdictions of countries. The original purpose of the doctrine was to prevent speculation in litigation. Its origins were in feudal France; furthermore the doctrine mentions, “developed at common law to prevent officious intermeddlers from stirring up strife and contention by vexatious and speculative litigation which would disturb the peace of society, lead to corrupt practices, and prevent the remedial process of law.” As the development of the laws (Substantive or Procedural) is going to date, In Indonesia the Litigation Funding term or third-party entanglement is rarely to be considered, mentioned, and applied in the Indonesian Court system.

Opportunity

Third-party funding in litigation or arbitration proceedings in Indonesia is still undeveloped and unregulated, despite its significant popularity and wide usage in neighboring countries (e.g., Singapore) in recent years. Although this can be one of the ways for disputing parties to manage financial risks, Indonesia is currently not that familiar with the practice of using third-party funding. Litigants usually fund their own cases, sometimes under contingent arrangements with their lawyers. There is no legislation on third-party funding and therefore no express prohibitions are against it.

To date, there are no publicly available judicial precedents in Indonesian courts in relation to the use of third-party funding. There are also no associations or companies in Indonesia recorded as having a formal presence in the business of providing third-party funding for litigation or arbitration. The use of third-party funding is rare and not yet regarded as a commercial activity. The opportunities and market for third-party funding in Indonesia are currently considered wide open, and yet it can be a high-risk prospect at the same time.

 


ADCO Law earns the trust to represent clients from multinational companies to emerging entities across a wide range of industries to achieve their business objectives in Indonesia.

By combining commercial sensibilities and legal expertise, ADCO as a Law Firm Jakarta assists the clients to structure, organize and implement their business ventures and investments, including structuring, financing, and securing investments as well as establishing new foreign companies in Indonesia. Should you have more queries regarding this matter, please do not hesitate to contact us.

Dendi Adisuryo
dendi.adisuryo@adcolaw.com

Liza Mashita
liza@adcolaw.com

@2020 ADCO Law. All rights reserved.
This publication has been prepared for general informational purposes only to provide clients with information on recent legal developments and is not intended as legal advice or opinion.

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