A. Introduction

Let’s say Linda (the litigant) intends to file a claim against Dr. Jim who was negligent in treating her, causing her to suffer injuries that will require lifetime care. Unfortunately, Linda does not have the funds to hire a lawyer, could not find a lawyer who is willing to take up her matter on a pro bono basis and does not satisfy the ‘means test’ to qualify for legal aid.

There are many people who are plagued by the same problem. Many a times, potential litigants seeking to assert their legal rights are hindered by a lack of funds. Justice does come with a price tag afterall. In order to overcome this problem in a capitalistic environment, litigation funding affords a potentially viable solution.

B. What is Litigation Funding?

Litigation funding is a practice where a third party (which can be an individual or a company) funds a claimant to litigate or arbitrate a claim. For example, Edward (the funder) found out about Linda’s woes and would like to provide her the financial resources to initiate and maintain her claim in court. 

Broadly speaking, there are 2 types of litigation funding, i.e. the investment-based model and non-investment-based model.

Illustration

Investment-Based

The funder gives out the financial resources to the litigant to cover legal expenses and expects a financial return which could be in the following form:

(i) A percentage of the settlement or judgment sum when the litigant is successful in the claim; or

Edward agrees to cover all the legal expenses for Linda’s claim against Dr. Jim for a return of 20% of the settlement of judgment sum. If Linda is awarded RM2,000,000.00 as damages, Edward will receive a sum of RM400,000.00.

(ii) A repayment of the investment with interest, regardless of the success of the litigant’s claim.

Edward agrees to lend RM20,000.00 to Linda to cover the legal expenses. Linda agrees to repay the RM20,000.00 in a monthly instalment plan, for 5 years with an interest of 8% per annum.

(iii) Lawyers taking on a brief on a contingency fee basis.

Linda found a lawyer who is willing to take on her matter without any fees but will take a cut of the damages awarded.

Generally, the funder and the litigant will enter into a written contract to set out the terms of the funding.

Non-Investment Based 

The funder provides financial resources to the litigant to cover legal expenses:

(i) And expects non-monetary benefit; or

Edward agrees to cover Linda legal expenses in exchange for Linda’s services as an accountant.

(ii) As a donation.

Edward donates RM10,000.00 to cover some of Linda’s legal expenses out of empathy.

(iii) Lawyer taking on a case on a pro bono basis.

C. Litigation Funding in Malaysia

While litigation funding is a multi-million dollar industry in countries such as the United States of America, England and Wales and Australia, it remains an obscure notion in Malaysia since it is neither legislated nor extensively deliberated in court before.

In Malaysia, a funder will not be able to enforce an agreement to recover the share of litigation proceeds after providing the funds to the litigant (also known as “champertous agreement”) because such agreement would be deemed void.

Why void?

Under the common law doctrine in England, maintenance and champerty were both crime and tort. Lord Denning, in Re Trepica Mines Ltd (No. 2) [1963] Ch. 199, in striking out a champertous agreement, highlighted the reason why the common law condemns champerty:

“The reason why the common law condemns champerty is because of the abuses to which it may give rise. The common law fears that the champertous maintainer might be tempted, for his own personal gain, to inflame damages, to suppress evidence, or even to suborn witnesses. These fears may be exaggerated; be that so or not, the law for centuries has declared champerty to be unlawful, and we cannot do otherwise than enforce the law…”

Pursuant to section 3 of the Civil Law Act 1956, the common law doctrine was imported into the laws of Malaysia. 

Contracts Act 1950

However, the case of Quill Construction Sdn Bhd v Tan Hor Teng @ Tan Tien Chi and Anor [2006] MLJU 120 held that the tort of maintenance and champerty is not maintainable causes of action and what remains is that the court may apply the common law doctrine to declare a contract or assignment void against public policy. This finding is also premised on the fact that the United Kingdom’s Criminal Law Act 1967 had removed maintenance and champerty as crime and torts.

Therefore, if one seeks to enforce a champertous agreement, the Defendant may rely on section 24(e) of the Contracts Act 1950 as a defence to declare that such agreement is void as it is against public policy. Hamid Sultan Abu Backer JC, in Amal Bakti Sdn Bhd & Ors v Milan Auto (M) Sdn Bhd & Ors [2009] 5 MLJ 95 (“Amal Bakti”) also held that

“It is trite that court will not entertain champerty agreement or its like on public policy grounds, etc.”

In Amal Bakti, KLCS Management Sdn Bhd assigned the Plaintiff all of its rights, claims, interest and chose in action for RM1.00, since the shares were practically worthless after a failed listing exercise. The Plaintiff filed a claim against the 2nd Defendant based on negligent misstatement and breach of statutory duties and claimed that it was affected since they purchased the shares. However, the court declared that the assignment was void as it goes against public policy.

If the agreement is found to be void, this does not mean that the funder will see its investment disappear in its entirety. Section 66 of the Contracts Act 1950 can be relied upon by the funder to recover its investment amount.

Legal Profession Act 1976

Section 112 (1) of the Legal Profession Act 1976 (“LPA 1976”) clearly states that

“no advocate and solicitor shall enter into any agreement by which he is retained or employed to prosecute any suit or action or other contentious proceeding which stipulates for or contemplates payment only in the event of success in such suit, action or proceeding”

Such agreements will be declared void ab initio as seen in various cases.

Lee Mun Keong v Precise Avenue (M) Sdn Bhd & Anor [2014] 8 CLJ 74

The 2nd Defendant (1st Plaintiff’s solicitors) advised the 1st Plaintiff that the he could still claim against its joint venture partner, Unisensa Sdn Bhd for an additional sum of RM8 million, after the dispute has been resolved, on a condition that the 2nd defendant was to be paid 30% of the success fee as legal fees in due course. The agreement and the guarantee and indemnity agreement entered by the parties were held to be champertous and declared void.

Mastika Jaya Timber Sdn Bhd v. Shankar Ram Pohumall (No 2) [2010] 10 CLJ 312

The High Court of Sabah and Sarawak held that the alleged oral agreement where the defendant agreed to refund the retainer fee of RM200,000.00 if the defendant failed to obtain an interlocutory injunction was illegal and against public policy, thus void.

Furthermore, the advocate and solicitor who enters into such an agreement would breach Rule 27(a) Legal Profession (Practice and Etiquette) Rules 1978, where “An advocate and solicitor shall not appear in any matter in which he is directly pecuniarily interested”. A breach of the rule could result in the advocate and solicitor being disbarred or suspended.

Conclusion

It is clear from the above that litigation funding via champertous agreements is not allowed in Malaysia. However, looking at several jurisdictions which accepted litigation funding and had taken steps to regulate it, it may be high time for Malaysia to consider doing the same.

D. Why Litigation Funding?

The main concern in accepting litigation funding, especially when it is for profit, is that it would result in, among others, the following scenarios:

• Promotes frivolous and vexatious litigation.
• Leads to deterioration of ethical standards where evidence may be suppressed, witnesses may be coached, bribed or threatened or damages claimed are inflamed.
• Promotes touting.
• Puts the Plaintiff in an advantageous position since the Defendant could not avail himself to the same resources, if there is no counterclaim, as funders will not see the return of investment in defending a claim.

In spite of the risks of the above, many jurisdictions allowed litigation funding because of all the benefits that it could bring, where the most important of all being access to justice. Benefits of litigation funding:

• Providing access to justice to those who could not afford legal fees but does not qualify for the legal aid.
• It is unlikely that the investors would fund a frivolous litigation, but instead opt for meritorious cases which have a good chance of success. 
• If the prohibition against contingency fee is maintained, allowing other forms of litigation funding would also reduce such arrangements as lawyers could be properly remunerated via the funds.
• Litigation funding could also be an economy-driver as evidenced by the multi-billion industry in various countries.

E. Development of Litigation Funding in Other Countries: A Snapshot

United Kingdom

The United Kingdom had established an independent body, the Association of Litigation Funders (the “ALF”) to self-regulate litigation funding in English and Wales.

In January 2018, ALF released a Code of Conduct for litigation funders. ALF also crafted the procedure to govern complaints against the Funder Members by funded litigants.

Entities interested in being a litigation funder may apply to be a member of the ALF. The members of ALF must abide by the Code of Conduct which sets out the standards for capital adequacy, the limited circumstances in which the funders may be permitted to withdraw from a case and the funders are kept away from being involved in the lawsuit or any settlement negotiations.

How does it work?

1. The litigant will identify the funder from the member list of the ALF.
2. The member will then carry out the due diligence on the claim to evaluate the chances of success and estimated costs.
3. If the member considers that the claim has merits, the member will enter into a Litigation Funding Agreement with the litigant.

Type of financial reward:

• Percentage of the damages recovered;
• A multiple of the amount invested by the member; or
• A combination of the above.

Australia

Adopting the common law position, third party litigation funding started off as a crime and tort. Later on, some states abolished the offences and torts of maintenance and champerty. Several court decisions that followed, especially the case of Campbells Cash and Carry v Fostif (2006) 229 CLR 386, legitimized litigation funding by deciding that the funder’s motive for profit nor the attempts to seek for plaintiffs to join the proceedings were sufficient to bar litigation funding agreements.

The legal developments in Australian Courts spurred the growth of the litigation funding industry in Australia. 

The landmark Federal Court case of Brookfield Multiplex Ltd v International Litigation Funding Partners Pty Ltd [2009] FCAFC 147 held that the arrangements between litigation funders and group members in class actions were managed investment schemes for the purpose of the Corporations Act 2001, which means that the funders will have to hold an Australian Financial Services (AFS) Licence. 

Australia had initially amended the Corporations Act 2001 to exclude litigation funding schemes. Now, another amendment in 2020 subjects any litigation funding scheme in Australia to the Corporations Act 2001. Hence, a funder will require an AFS license to enter into a litigation funding scheme, which means that the scheme is properly regulated and the entities are subjected to proper scrutiny.

Singapore

Singapore had amended its Civil Law Act and created the Civil Law (Third-Party Funding) Regulations 2017 to allow third party litigation funding for proceedings related to international arbitration proceedings.

The case of Re Vanguard Energy Pte Ltd [2015] SGHC 156, the Singapore High Court allowed the liquidators appointed to enter into litigation funding arrangements to initiate potential claims for the company to recover some assets which may otherwise be abandoned due to lack of funds. In Re Vanguard, three shareholders provided funding to the company to maintain the litigation in exchange for an assignment of the litigation proceeds (the “Assignment Agreement”). The court upheld the Assignment Agreement as it did not offend the doctrine of champerty and maintenance due to the following reasons:

• The assignee has a legitimate interest in the outcome of the litigation; and
• There is no realistic possibility that the administration of justice may suffer as a result of the assignment.

F. CONCLUSION

With the successful adoption of litigation funding in other jurisdictions and the access of justice it provides, it is clear that the advantages outweigh the potential risks that such practice may produce. All it takes is a proper study of litigation funding and a systematic roll-out of the regulations and best practices for people like poor Linda to have a shot at getting the justice she deserves.