Are you wondering what is legal finance?
You heard of a possibility of non-recourse funding to finance your lawsuit and you’re interested to learn more about it.
Legal finance and non-recourse funding structures have been rising in popularity over the years and you must know more about it.
In this article, we will go over the legal financing concept so you can have a better understanding of how it works.
Are you ready?
Let’s get started…
Legal finance definition
Legal finance is the process by which a legal finance investor provides capital to a plaintiff to fund a lawsuit.
The investor is a funding company specialized in lawsuit investments.
The plaintiff is an individual or an entity directly involved in a lawsuit.
Generally, legal finance firms will fund lawsuits or claims having a good and reasonable chance of success, likely to result in a cash award or damages payable in cash and where the other party is financially able to pay an adverse judgment.
Non-recourse funding
Most legal finance companies offer non-recourse funding.
In other words, they will invest in your lawsuit on a full contingency basis.
If you win your case and get an award, they will collect a share of the award.
Their return on investment is directly linked to the success of your case.
If you don’t win your case, the investor will take its losses and will not claim their investment back from you.
This is why a non-recourse financing is not a litigation loan or advance.
Unlike a litigation loan, you do not have to reimburse what you received.
Non-recourse litigation funding is interesting for the plaintiffs as they will only be required to pay the financing firm on the successful outcome of the case.
Legal finance based on merits of the case
Different third-party funding firms will have different investment criteria.
Some will focus on commercial litigation lawsuits such as a breach of contract while others may prefer patent infringement cases.
No matter the investor’s preference in the type of lawsuit they prefer to invest in, they’ll invest based on the merits of your case.
The creditworthiness of the plaintiff is not necessarily fatal to securing legal financing.
The litigation financing firm will evaluate their investment criteria to ensure:
- The nature of the lawsuit fits their investment preference
- The defendant is financially sound enough to be able to pay in case they lose
- The plaintiff can obtain a monetary award
- The plaintiff has a reasonably good chance of success
There may be other factors that will be taken into consideration by the funder.
However, if your case does not meet the above criteria, it will be a non-starter.
Legal finance for law firms
Legal finance can be an interesting way for plaintiffs to finance their individual lawsuit but also for law firms to share risk with a funding company.
Traditionally, law firms have relied on the cash coming from their legal fees, partner funding and bank loans to operate and expand their business.
Now, law firms can team up with legal finance firms in interesting ways.
In fact, a funder can invest in either a single case handled by the firm or a portfolio of cases in exchange for a share in the potential awards.
The portfolio funding approach is interesting as the investor can realize a return on investment based on the aggregate yield of any of the cases composing the portfolio thereby diversifying risk.
Legal finance going beyond litigation financing
The legal finance industry has grown tremendously over the past decade and continues to grow at a tremendous pace.
The most popular type of legal financing structure is for a funder to finance a lawsuit.
However, this is changing.
Law firms and funding firms are finding new and creative ways to work with one another.
The result is that litigation finance is going beyond just funding litigation cases.
Legal financing firms are now considering:
- Law firm account receivables
- Uncollected damage awards
- Uncollected contingent fees
With the more widespread acceptance of litigation finance structures around the world, we may see further evolution in the legal finance industry.
So long as the legal financing structure does not violate a lawyer’s ethical rules or the law, law firms and funders can tap into an interesting funding avenue not available previously.
Legal finance proponents
Proponents of legal finance argue that litigation funding helps level the playing field between litigants.
When two parties to a lawsuit do not have the same financial capacity or resources to allocate to their lawsuit, the financially vulnerable party may abandon their case or avoid taking the proper legal recourse due to financial constraints.
The financially stronger party can adopt an aggressive litigation strategy to financially exhaust the other party hoping for the case to be dropped or settled.
Legal financing will level the playing field.
It will allow a financially weaker party to litigate their case based on its true merits and not take a selective approach based on financial limitations.
A party will have the capital needed to take the right legal recourse and adopt the proper legal strategy to successfully get a judgment or an award.
Legal finance critics
On the flip side, legal finance critics argue that litigation funders will act in such a way as to disrupt the legal process.
The argument is that the legal finance company substitutes the litigant and exerts control over the litigation.
This can put the funder and the litigant in a conflict of interest.
A funder can also use its financial strength to fund and encourage frivolous lawsuits against a financially weaker party hoping to financially exhaust the party to get a favourable settlement.
Legal finance can also incentivize a funded party to litigate the cases all the way to trial and have no incentive to consider an out-of-court settlement.
If a party is no longer concerned with the financial costs of litigating a case, they may adopt a more aggressive litigation strategy and fail to properly weigh the pros and cons of going all the way to trial.
Takeaways
Legal finance is an interesting financing model allowing a party to a lawsuit finance their legal case.
What makes legal financing so interesting is that it’s a non-recourse loan or financing.
In other words, the legal finance investor will only get paid when you win and get an award for damages.
If you don’t, you don’t have to pay anything back to the investor.
Hence, it’s non-recourse funding.
With non-recourse legal financing, a company or party to a case can share the risk of their lawsuit with an investor.
The litigant can tap into the needed financing to successfully try the case without compromising their business operations or taking legal shortcuts.
Law firms can also benefit from legal finance.
They can engage with a funder on a single-case basis or to fund a portfolio of cases.
Third-party funders are now considering financing options beyond funding litigation cases.
Law firms can now consider funding their account receivables or get the funding needed to execute a judgment linked to a law firm’s contingent fees.
The legal finance industry is evolving and we’ll continue to monitor its evolution.
We hope you were able to get a good introduction to legal finance.
Have you dealt with a legal finance company?
Are you aware of legal financing beyond the financing of lawsuits?
We would love to hear from you.
Drop us a comment.
