"When I first studied law", writes Joshua Rozenberg in The Guardian, "supporting someone else's legal claim in exchange for a share of the potential damages was a crime called "champerty". Now, it's big business."
Indeed it is, and a fast-growing one at that. Litigation funding, as it is known, is the business of financing court cases for profit it hardly existed a few years ago.
As Rozenberg states, the crime of champerty, and the associated crimes of maintenance and "barratry" (encouraging people to go to court), prohibited meddling in court cases by parties who weren't directly involved.
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Champerty was abolished in 1967, but that didn't open the doors to litigation funding straight away "champertous agreements", although no longer criminal, remained unenforceable.
There were "no-win no fee" ambulance-chasers, of course, but it wasn't really until Lord Justice Jackson, in his 2013 reforms, suggested that the practice was "beneficial and should be supported" as it "promotes access to justice" that litigation funding really took off as an industry.
According to The Times, "one hour of litigation now costs nearly half the average UK adult's weekly earnings of £500". So it's not surprising that companies wanting to litigate turn to external finance in return for a share of the damages awarded by the courts.
Numerous big firms running multi-million pound funds have sprung up to service the market. They are funded by large institutional clients such as hedge funds, pension funds and others. In-house lawyers scrutinise the claims, and cherry pick the ones most likely to succeed. These are the ones they will fund.
As well asproviding claimants with financing, litigation funding has become a way of providing investors with returns that are almost completely uncorrelated with the wider financial markets. Litigation funding gives corporations and law firms "a way to shed risk from their balance sheets", says the Wall Street Journal, and has become an asset class all of its own.
One complaint against the industry among many is that it isn't regulated. In the UK, it is regulated on a voluntary basis by the Association of Litigation Funders, which ensures that funding firms have adequate capital to meet their obligations, and sets rules on behaviour and exerting undue influence on the case.
How to profit from litigation funding
Burford Capital(AIM: BUR) is one of the industry's biggest firms, and is listed on London's Alternative Investment Market. Its price/earnings ratio of 16 makes it affordable, and in the last year alone, the share price has jumped by over 130%. The shares carry a dividend yield of 2.1%.
In 2014, Burford issued a retail bond that paid 6.5%, which currently trades on the LSE's Orb market at 108.25p. And in April this year, it issued a second bond that paid 6.125%, which now tradesat 106.82p.
Prospects are bright. In contrast to many sectors, Burford believes Brexit will be good for the legal industry as it will increase the number of cases being litigated.
Crowdfunding
In the US, there is LexShares, which funds claimants in commercial cases for a share of any potential settlement. But that is only open to accredited investors, as defined by the US Securities and Exchange Commission. Invest4justice operates on a similar principal and is open to all, but it's certainly not something I'd put any of my money into.
In the UK, CrowdJustice operates for "social justice" cases people challenging planning applications and the like. But it's not for investors. On CrowdJustice, you're donating out of the goodness of your heart and a desire to see justice done.
But with such a young industry growing so quickly, the future promises to offer up plenty more opportunities for investors.
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