What is litigation finance?

what is litigation finance

Litigation finance is a financing practice that has existed for more than twenty years.

Recently, it has picked up momentum globally. 

Important jurisdictions are now authorizing litigation finance as a legitimate mechanism enabling access to justice such as the United States, UK, Australia and Canada among others.

Litigation finance can also be quite interesting from a litigation strategy perspective. 

The financial firepower has traditionally been an important consideration and leveraged by wealthy litigants.

We probably all know a party, clearly in the right, unable to pursue a legal action or legally go toe-to-toe with an opponent having much deeper pockets.

Through litigation finance, two parties can try their case and seek true justice without the possibility of financially choking.

In this article, we will look at:

  1. Principles of champerty and maintenance 
  2. What is litigation finance
  3. Monetize your legal action
  4. Unequal access to the legal system
  5. Parties involved
  6. Litigation finance benefits
  7. Conclusion

Let’s dive right in.

1- Principles of champerty and maintenance 

What is litigation finance

The litigation financing concept is an old concept in the old English principles of champerty and maintenance

This principle was designed to counteract potential abuse by corrupt officials in fraudulently swaying the results of litigation matters, or fomenting frivolous lawsuits, in exchange for a share of the profits.

The principle of maintenance and champerty stood the test of time until the modern ear. 

For a long time, it was believed that third-party standing to earn a reward based on the outcome of a legal action would contribute to manipulate the court’s decision or act illegally to suppress evidence or the like. 

Today, the principle of maintenance and champerty has been relaxed in favour of the principle of access to justice. 

Over the past decade and we are now seeing a global movement in the litigation financing segment.

2- What is litigation finance

What is litigation finance

Litigation finance is a practice where a funding company provides capital to pay legal fees and costs to a party involved in litigation in exchange for a share of a potential recovery from the lawsuit.

This can be quite interesting if you think about it.

A party who needs the capital

Consider that you are involved in litigation with another party where you are pursuing for breach of contract. You are expecting an important award for damages.

Although you have a strong case, you do not have the capital to commit to pay for expensive lawyers and court costs.  

Your lack of financial means will prevent you from seeking justice. What can you do?

Well, you can find the capital necessary from a litigation funding firm that will provide you the necessary capital so you can bring your claim for damages to the term.

If you succeed, the funding firm will take a share of the settlement or award.

If you lose, the funding company will assume the loss of the legal fees and court-related costs of your case. You will not have to reimburse a dime. 

This is referred to as non-recourse funding

In the end, the funding firm takes the financial risk relating to your attorney fees, court costs, experts and any legal expense lifting this weight off your shoulders.

You are shifting your financial risk to the funding company.

In exchange, the litigation financing firm hopes to multiply their investment by several folds if you are successful in your lawsuit. 

Litigation funding as a strategy to increase ROI 

Even organizations with the financial means to pay for their lawsuit can see value in litigation funding.

You are involved in a lawsuit where you anticipate you will need to spend $1,000,000 in legal fees and costs. Should you fund it yourself or get litigation financing?

If you have the potential of investing your $1,000,000 in a business project or venture that could earn you very high returns, should you fund your business project or put that money towards your litigation with an uncertain outcome or lower possible return.

You may realize that you can increase your return on investment (ROI) by funding your litigation and investing your money in your business project.

Factoring all the relevant risk, if you expect your business to offer you a higher ROI, then you may want to use a litigation financing strategy to maximize your profitability.

Litigation financing operations have really picked up since 2006 and are taking on a global momentum.

As a business, you should consider this strategy from a business perspective and see how it can be leveraged to your advantage. 

3- Monetize your legal action

What is litigation finance

When engaging a litigation financing firm to fund your case, you have to weigh the pros and cons to see if it’s worth it. 

Make sure you do your due diligence.

Consider litigation financing in the same way that you may consider borrowing money to fund a business venture or project. 

You typically evaluate a business opportunity based on investment cost, your cash flow requirements in the future, potential revenues, return on investment and overall opportunity cost. 

Take the same approach with a litigation financing project.

Make a clear budget for your case. Evaluate your chances of success. Assess how much you can recover. Know your file.

Here are some questions to ask yourself:

  1. How much will you need to pay your attorneys? 
  2. Will you need experts and expert reports? If so, how much will it cost? 
  3. How long will it take for you to an executable final judgment? 
  4. How is the solvency of your opponent? 
  5. How much can the court potentially give you an award of damages? 
  6. What is your chance of success? 
  7. Will you be involved in a countersuit? If so, what’s your exposure? 

And so on.

With a solid financial and legal assessment of your case, you can calculate your case ROI, chance of recovery and potential award.

Equipped with this information, you can then have a meaningful conversation with the funding firm.

You know how much you need, how much you will potentially win and how much you can give up to the funding form in exchange for financial risk mitigation. 

Fully mastering your case will allow you to properly negotiate your litigation financing project.

Strive to strike the right balance between the upside you will give the funding firm and how much risk you are mitigating so you will both be happy.

4- Unequal access to the legal system

What is litigation finance

Litigation financing firms position themselves as enablers of access to justice particularly in jurisdictions where the cost of litigation can be prohibitive.

This has merit.

When you consider a US-based litigation, your laundry list of what you need to pay for and your own direct costs can be quite long:

  1. Attorney fees
  2. Court costs
  3. Research fees
  4. Depositions
  5. Motions
  6. Court conferences
  7. Witness preparation
  8. Trial preparation
  9. Subpoenas
  10. Appeals
  11. Experts
  12. Private investigations
  13. Internal business costs 
  14. Opportunity cost to invest in a profitable project

The list can go on.

The true cost to a litigation matter goes beyond the hard-cash you spend funding it. 

That money could have been spent on other things, especially if you are cash-strapped. Payroll, research and development, taxes etc.

Due to high legal costs, litigants are unable to pursue a valid claim.

The wealthy litigant will have the upper hand.

The injustice here is that the litigant with the green bills, even in the wrong, can financially pressure the opposing party to defer their action and ultimately abandon their legal recourse.

With the deep pockets of a funding company, the litigants can legally play on a level playing field where the true merits of the case can dictate the outcome and not the financial firepower.

5- Parties involved

What is litigation finance

There are typically three parties involved in a funded litigation case: the litigant, the funding firm and the law firm representing the litigant.

Litigant

The litigant is the individual or company involved in a lawsuit.

The litigant can be the plaintiff or the defendant. 

There could also be a portfolio of litigation cases that the litigant may be involved in with the same party thereby. So in part, they are a plaintiff and in part a defendant. 

The litigant is a party to a lawsuit in need of cash to fully fund the case and expects to receive a substantial award if the case is tried.

Investor

The investor is the litigation finance firm.

Some investors will invest in commercial lawsuits, others will have an investment niche. Each investment firm will have its own litigation funding requirements.

The investor is in the business of using its capital to earn a substantial return on its investment. As a result, they will do a thorough due diligence on your legal case and potentially through their own external legal counsel to ensure that the litigation case to be funded has merits.

Let’s be clear, financing your litigation will be expensive money. It’s not going to be cheap.

Don’t expect to have a firm fund your case, take the financial risk and walk away with a small piece of the pie.

If you are looking to work with an investor, you have to be ready to share a good amount of the possible upside in exchange for immediate cash and risk mitigation.

Law firm

The third party to the funded litigation is the law firm or attorneys handling the litigious matter.

Typically, the funding companies will speak with the mandated law firm to assess the merits of the case and their experience in handling such a case.

The finance company will evaluate the law firm’s track record, experience and capabilities in successfully bringing the lawsuit to term.

In the end, the funding firm is exposed to risk stemming from your case but also the ability of the law firm to hit the home run. So they will do their due diligence consequently.

The mandated law firm will also act as the custodian of the funds for the lawsuit stakeholders in the event of a settlement or the execution of an award.

This will protect the investor who will be assured to be able to touch the proceeds at the end of a successful case.

6- Litigation finance benefits

What is litigation finance

Litigation finance benefits the parties involved. 

For litigants

For the litigant, litigation finance can open up several possibilities and offer key benefits:

  1. With sufficient funding, you could retain the counsel of your choice or the law firm based on their experience and qualification as opposed to price
  2. You can resolve liquidity issues and ensure you can fund your case regardless of the unpredictable fluctuations in your cash flow or budgetary constraints
  3. Your litigation funding is considered to be a non-recourse funding which means that in the event you lose, you will not be required to reimburse the funding company’s investment

For law firms

For the law firm involved in a litigation case, you can also reap interesting benefits:

  1. Ensures that you can adequately try your case and employ the proper legal strategies to achieve your goal
  2. Gives you protection against the excessive amounts of credit on you extend on case
  3. You will have the ability to stay competitive all the way to the end of the case by eliminating the possibility that your client’s financial position drastically changes during the litigation process

For investors

For the investor, they can evidently earn a substantial return on their investment that could be quite lucrative.

Just like any investment vehicles, with the right risk-reward exposure, a funding company can invest in a portfolio of legal cases where they could afford to lose some. But if they win some, they make good money.

We are close to the setup of venture capitalists who invest in start-ups. They invest their money in businesses providing a high level of risk but with a high potential for earnings. 

With the right portfolio, VC’s can earn substantial sums of money on their investment.

Litigation finance presents similarities in the investment approach and can be quite lucrative.

7- Conclusion

What is litigation finance

Litigation finance is a process where you can have an investment firm fund your litigation case in exchange for a share of the award or settlement.

The setup involves the litigant, the attorneys representing the litigant and the investor. The financing possibility can result in a win-win situation for all parties

The litigant can offload financial risk to the funding company, the funding company can invest and potentially earn a significant reward and the attorneys representing the litigant can be selected based on competence and have the liberty in successfully trying the case without financial limitations.

In the current era, the principles of champerty and maintenance are considered to be out of date.

The concept of access to justice is now dominating the modern ear. Individuals and businesses need to afford the legal system to be able to get justice, that in itself is a noble cause.

In 2013, Lord Neuberger of the UK Supreme Court stated that:

“Access to the courts is a right and the State should not stand in the way of individuals availing themselves of that right.”

The modern views relating to access to justice has resulted in a rapid change in the litigation financing landscape over the past decade.

Many countries have adopted the modern views and authorizing litigation finance setups while clarifying the parameters within which the integrity of the legal system can be preserved. 

We hope that this article was useful to you so you can better understand what is litigation finance.

Do you have any questions about litigation finance? Have you already funded a case through a litigation financing firm? What was your experience? We would love to hear from you. Drop us a comment.