Maintenance and champerty

An end to historic rules preventing third-party funding?

Historic rules prohibiting third parties from funding arbitration are being phased out in a number of jurisdictions, creating opportunities both for third-party funders and parties involved in arbitrations.

Historically, third parties were prohibited from funding an unconnected party’s litigation under the doctrines of maintenance and champerty. Maintenance refers to an unconnected third-party assisting to maintain litigation, by providing, for example, financial assistance. Champerty is a form of maintenance, where a third-party pays some or all of the litigation costs in return for a share of the proceeds.

Reasons for the rules

The rules prohibiting maintenance and champerty were first introduced in medieval England. These were intended to prevent abuses of justice by corrupt nobles and royal officials who associated themselves with fraudulent and vexatious claims, strengthening the credibility of the claims in return for a share of the profits.

In more modern times, the prohibition of third-party funding was based on the public policy ground of protecting the purity of justice. There was a fear that a third-party could manipulate the litigation process and, as Lord Denning put it, “be tempted, for his own personal gain, to inflame the damages, to supress evidence, or even to suborn witnesses” (Re Trepca Mines (No 2) [1963] Ch 199).

A modern approach

In the current era of encouraging access to justice, these concerns are widely considered to be out of date. Addressing the issue in 2013, Lord Neuberger, the president of the UK Supreme Court, said that “access to the courts is a right and the State should not stand in the way of individuals availing themselves of that right.”¹

The rules against maintenance and champerty have been relaxed in a number of jurisdictions, including England and Wales and parts of Australia, Canada and the US, where third-party litigation and arbitration funding is now permitted.

The modern approach of courts in these jurisdictions is to consider whether the arrangements are contrary to public policy and unenforceable as a result. For example, in England and Wales, in order for an arrangement to amount to maintenance or champerty there must be an element of impropriety, such as disproportionate profit or excessive control on the part of the third-party funder. The courts in Australia have gone further and have held that there is no public policy objection to a third-party not only financing but also controlling the litigation.

Implications for arbitration

The rules against maintenance and champerty extend to arbitration, which accordingly prevented the use of third-party funding in arbitration. As a result of the relaxation of these rules, third-party funding in arbitration has been growing steadily. Singapore and Hong Kong are both taking steps to allow third-party funding of arbitrations seated in those jurisdictions. This has created opportunities for funders looking to invest in such claims and for parties who would not otherwise be able to pursue their claims without funding.