Understanding the Basics of Litigation Finance
What Is Litigation Finance?
Litigation finance, also known as litigation funding or legal finance, is a financial arrangement in which a third party provides capital to a plaintiff or law firm in exchange for a portion of any financial recovery from a lawsuit. This type of funding allows litigants to pursue meritorious claims without bearing the full financial burden of legal costs.. Unlike traditional financing, litigation funding is typically non-recourse, meaning the funder is only repaid if the case is successful. If the lawsuit does not result in a favorable settlement or judgment, the funder loses its investment.
How Litigation Finance Works
The litigation finance process typically follows these steps:
Case Evaluation – The funder assesses the merits of the case, analyzing legal arguments, damages, and the defendant’s ability to pay. This due diligence phase aims to determine the likelihood of success and potential recovery.
Funding Agreement – If the funder decides to invest, they structure an agreement detailing the amount of funding, repayment terms, and the portion of the recovery they will receive in the event of a recovery.
Use of Proceeds – The plaintiff uses the funds to cover legal expenses, expert witness fees, court costs, or even business operations while awaiting a resolution.
Case Resolution – If the case is successful, the funder is repaid from the recovery, typically receiving a multiple of the amount they invested or a percentage of the settlement or judgment. If the case is unsuccessful, the plaintiff generally owes nothing to the funder.
Who Uses Litigation Finance?
Litigation finance is utilized by various entities, including:
Businesses – Companies involved in high-stakes commercial disputes, intellectual property litigation, or breach of contract cases may use litigation funding to pursue claims without diverting resources from operations.
Law Firms – Contingency-based law firms may seek funding to cover expenses and cash flow needs while handling complex cases.
Individuals – Plaintiffs in personal injury, employment, mass tort and commercial cases may obtain funding to support their litigation and living expenses during lengthy legal battles.
Investors and Lenders – Litigation finance is an alternative asset class that attracts lenders and investors seeking attractive, uncorrelated returns through diversified legal claims.
Benefits of Litigation Finance
Access to Justice – Enables plaintiffs to pursue valid claims that might otherwise be abandoned or settled for cheap due to financial constraints.
Risk Mitigation – Reduces the financial burden on plaintiffs and law firms, transferring a portion of the risk to third-party funders.
Stronger Negotiating Position – Well-funded plaintiffs may negotiate from a position of strength, potentially leading to higher settlements.
Capital Efficiency – Businesses can allocate capital to core operations rather than diverting funds to legal expenses.
Risks and Considerations
While litigation finance offers many benefits, there are potential risks and challenges to consider:
Cost of Funding – Litigation finance can be expensive, with funders typically requiring high returns due to the risk involved.
Control Issues – Funders should not control litigation decisions but they have certain contractual entitlements that must be taken into account.
Regulatory Landscape – Different jurisdictions have varying rules regarding litigation funding, and some may impose restrictions or disclosure requirements. Care must be taken to understand the applicable rules and regulations in a given situation.
Case Selection – Funders typically invest in cases with strong merits and high-value potential, making it difficult for smaller or weaker claims to secure financing.
Conclusion
Litigation finance can play a critical role in enabling access to justice, balancing financial risks, and supporting businesses and individuals pursuing legal claims. Careful consideration of the terms, risks, and ethical considerations is essential for those looking to engage in litigation funding.