A Legal, Empirical, and Economic Analysis
New Horizons in Law and Economics series
Edited by Mark Tuil and Louis Visscher
Paul Fenn and Neil Rickman INTRODUCTION 1. Litigation raises a number of significant difficulties for the participating parties. In particular, it is regularly claimed to be costly and risky and, because of the asymmetric information problem between lawyer and client, to raise principal–agent incentive problems. Problems can be exacerbated by procedural rules: perhaps the most obvious being the one in many jurisdictions where the losers pay winners’ costs. Such problems may compromise the twin aims of any system of litigation: efficiency (in terms of deterrence through the bringing of meritorious claims) and equity (through the compensation of those who have suffered genuine harm). The contracts between lawyers and clients – hence ‘litigation funding’ – can be seen as market and regulatory responses to such concerns. In some jurisdictions, clients bear all the litigation risk through ‘out-of-pocket’ hourly fee contracts; elsewhere lawyers take on this role through contingency payment, while insurance may also be provided by state-sponsored legal aid or by the insurance industry itself.1 Clearly, these examples suggest that a potentially complex set of agency relationships (between lawyers, clients and third-party funders) surround issues relating to fees, incentives and information asymmetries in litigation. Of course, the choice of funding mechanisms is of theoretical interest but only has practical consequences if it can be shown to affect key outcomes of the litigation process; in particular, ones related to the objectives set out above. This requires empirical analysis, which is the scope of this chapter. Our aim is to explain briefly why funding...
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