Malpractice from Litigation Funding?

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Third-party litigation funding is still in its relative infancy and yet it has blossomed into a massive industry. Litigation funding spans from payday-like loans for personal injury litigation to multi-million dollar intellectual property disputes. Many attorneys across the spectrum have commented on the issues that could arise from this new market, but malpractice lawsuits in connection with the funding itself are extremely rare. However, a recent suit filed in the United Kingdom could be a sign of things to come for those firms who are involved in the financing transaction itself.

In Global Distressed Alpha Fund III Ltd. Partnership v. Hamilton Downing Quinn LLP, a litigation financier is suing attorneys who he says were paid to conduct due diligence and obtain a stake in a South African lawsuit between an employee and its former employer. Global Distressed alleges that the law firm was tasked with performing due diligence on the employment litigation and given £250,000 pounds to obtain a stake in the litigation. The firm has since responded by both denying any negligence and arguing that the plaintiff in the lawsuit has not received any funds in his lawsuit. Similar to current malpractice defense theories, the defense is therefore arguing there are no damages unless and until that action is resolved.

This case presents only a small slice of the complicated malpractice actions that could be waiting in the pipeline as a result of third party litigation financing. It would not be hard to imagine a case where a client sues his attorney under a traditional theory of legal malpractice, while the litigation financier simultaneously sues a firm that conducted due diligence on the case. Could a financier sue both parties under claims for malpractice? Will they instead settle on breach of contract claims? Considering the lack of any such cases at this point, these are merely academic questions. However, the Global Distressed case is unlikely to be the last litigation finance malpractice suit and all attorneys should keep a close eye if, and when, such a suit is filed in the U.S.