Litigation financing, sometimes termed litigation funding / third party funding, is the giving of funds to a claim holder or legal firm in return for a piece of the revenues from litigation or arbitration. The main element of litigation financing is that recourse is often restricted to the revenues of the litigation/arbitration judgment or settlement which means that the party who has been funded has to pay the litigation financier only if the party wins or settles its case.
To help you understand better what is litigation funding, let us get started with the basics.
Litigation Funding: The Basics
All or a part of the financial risk involved in litigation is transferred to the litigation funder as a result of litigation financing. Capital from a litigation funder may not only cover the legal bills and expenditures connected with pursuing or defending a case but it may be used to pay down or restructure debt as well. As a result of litigation financing, businesses are able to better deploy their financial resources and engage in initiatives that boost economic development and return on investment.
Why do Companies Utilize Third-Party Funding For Litigation?
- There is a shortage of financial resources to effectively prosecute or defend a lawsuit or arbitration; litigation financing provides businesses with the wherewithal to retain top legal personnel;
- Off-balance sheet funding is desired.
- Corporate possibilities allow a company to spend its resources on tasks other than a valid legal claim. In order to make the most of their financial resources, firms might make use of litigation financing.
- Raise cash from sources other than conventional banks and other financial institutions that are reluctant or unable to invest at a reasonable price because the company’s core business has been affected by the misbehavior of a third party.
- To protect oneself from risks.
Parties Involved in Litigation Finance
The attorney, the plaintiff, and the funder are the three main players in commercial lawsuit finance.
In a lawsuit, a plaintiff may be a person or a business. Legal costs, litigation expenditures, personal expenses, and working capital may all be paid for using litigation money.
Legal counsel serves as the plaintiff’s advocate throughout the course of a lawsuit. In order to determine whether a financing agreement is in the best interest of all parties, litigation funders work closely with the plaintiff’s legal team. The bulk of money needed to pay for litigation costs is often sent straight to the law firm in order to cover the legal fees. As a result, the legal team is often engaged in the fundraising phase.
When a lawsuit is funded by a third party, the funder receives a percentage of the settlement. If you think about it, the funder is doing something similar to investing in a company or bond.
Litigation funding’s importance may be better appreciated if the steps involved in a lawsuit are examined.
What are the stages in litigation?
When it comes to civil litigation, there are eight distinct phases to be aware of. Some or all of these steps may be involved in a single instance. A lawsuit might be settled at any stage of the litigation process, which is crucial.
Prior to initiating a lawsuit, plaintiffs and their lawyers often conduct an investigation and gather relevant material. This may entail interviewing potential witnesses, compiling relevant documentation, or even engaging the services of a private investigator. In certain cases, a demand letter is to be sent to the defendant as part of the inquiry to determine whether there is a swift settlement to the disagreement.
The first legal filing is known as a pleading. To begin, the plaintiff will file a complaint with the court, in which they will lay out the specifics of their claim, including any losses they’ve sustained. The defendants’ response to the lawsuit is likewise included in the pleadings.
It’s all about collecting data in the process of discovery. Requests for information are made by both parties at this point. For the most part, the process of fact discovery entails exchanging documents and deposing witnesses to events. The process of discovery aids in the prevention of surprises and the equal preparation of all parties. Due to the vast volume of emails and electronic documents that businesses create on a daily basis, fact discovery may be a time-consuming and costly operation.
An expert witness is a person who is hired by one of the parties in a lawsuit to provide their opinion on the case. Experts aren’t required in every case, but they’re a typical occurrence in high-stakes civil litigation. Technical concerns, the extent of damages that are reasonable, or intricacies in the sector at issue are regularly discussed by experts.
This stage of litigation follows the discovery and is devoted to resolving any lingering problems that may arise before the trial. Motions for summary judgment or the motions to dispute the appropriateness of experts are common during this stage. Jury instructions and evidentiary concerns might arise during this time as the trial date nears. Pre-trial negotiations are typical and often restarted, between the parties. Often, courts try to get parties to reach a settlement before a protracted trial starts in order to save money.
Preparation for trial may be time-consuming and costly, as the lawyers try to sort out the many problems that must be resolved before the trial can begin. Your legal team will be able to gather the necessary evidence for a strong case with the help of funds.
Statistically, the vast majority of cases never get to court. However, if a dispute cannot be settled before trial, a full trial is held. Witnesses and evidence are presented by both sides. A bench trial or a jury trial, when the case is heard only by the judge, may be appropriate depending on the allegations and agreements between the parties. Trials may run for days, weeks, or even months, depending on the intricacy of the case.
Verdict or Judgment
The jury or the court declares their decision at the conclusion of a trial, following a thorough review of the evidence presented by both parties. In effect, this is the ultimate ruling of the trial court, even if there is a post-trial briefing.
If a side loses a matter in the trial court, it has the option to appeal the jury’s decision or the judge’s judgments. Depending on the outcome of the appeal, the verdict may be maintained, overturned, or returned to the trial court for a new trial. The appeals procedure might take anything from a few months to a few years.
4 Benefits of Litigation Finance
Defendants may put pressure on plaintiffs to drop even the most compelling and valuable litigation because they cannot afford them. That’s where lawsuit financing comes in. Access to justice is made possible by litigation funding for individuals who otherwise would not be able to afford it. By reducing the expense, duration, and danger of litigation, it may aid many plaintiffs who are discouraged or burdened because of the money, time, and energy required for a case
Litigation is Expensive
The cost of obtaining justice via the courts might be prohibitive.
The hourly rate for a top-tier litigation partner may range from $1000 to $1700. There are no limits to the amount of money that may be spent on processing and evaluating electronic discovery in huge cases. Other than these, there are travel, expert, deposition, and court fees.
These and other expenses may be covered through litigation funds.
Litigation is Lengthy
After appeals are factored in, complex litigation normally takes between two and five years to complete. Multidistrict litigation, for example, might take months or years to resolve.
Slow-moving litigation may eat away at a company’s financial resources and weaken its management’s emotional fortitude.
Litigation funders are designed to deal with the sluggish pace of civil litigation, enabling businesses to concentrate on their core competencies instead of litigation management.
Litigation is Risky
Litigation is inherently hazardous, regardless of how strong your case is or how competent your attorneys are. It is possible for jurors and judges to make errors, yet the results of litigation are frequently all or nothing.
Litigation funders invest in a wide range of different cases in order to reduce the risk connected with any one specific one. Individual litigants may reduce their exposure to risk by enlisting the help of a funder to shoulder some of the financial burdens.
Litigation Finance Benefits Law Firms
Attorneys are sometimes placed in a difficult position as more claimants and litigants demand that their lawyers accept risk in the case via contingency agreements. However, law firms cannot (and should not) put too much risk on the balance sheets, but they also don’t want to miss out on taking on excellent cases and strong plaintiffs. This is the truth.
In order to bridge this financial gap, litigation financing has emerged. Alternative financing agreements with litigation funders allow law firms to reduce part of the risk they assume without being constrained by their client’s finances.
Litigation Funding and Legal Issues
Is litigation funding legal?
Even though many in the American legal system are still unaware of litigation financing, it has been standard practice in the US for more than a decade and for many decades in other countries like Australia and the UK.
Despite the widespread use of litigation financing, there are still some individuals who are unsure about the practice’s boundaries. There have been a number of recent court decisions outlining effective practices and procedures for navigating the legal system.
Champerty, Maintenance, and Barratry
As far back as medieval England, common law methods such as maintenance, champerty, and barratry have been in use. Maintenance and champerty, when one party offers financial assistance for the litigant or litigation in return for a portion of the earnings, were utilized by strong social classes in order to pursue legal agendas via those of inferior means, respectively. Barratry is a similar activity in which a third party is induced to file a lawsuit against a third party in order to earn some kind of indirect advantage.
Due to the prevalence of current legislation barring bad faith litigation, maintenance, champerty, and barratry are no longer employed to prevent vexatious litigation. The bans on champerty, maintenance, and barratry have essentially become outdated in the United States and do not prevent the use of litigation financing, despite the fact that states regard these principles differently. Studies show that litigation financiers have poured billions of dollars into American cases.
Privilege and Relevance
A growing collection of case law in the United States explains what occurs when a defendant seeks discovery under a lawsuit financing agreement. This body of case law is currently emerging. According to this case law, financing agreements and contacts with funders are shielded from disclosure provided the funder and counterparty have agreed to secrecy safeguards. Many courts have used the attorney-client privilege and the work product doctrine to shield such cases. If a litigation financier has a common interest in the result of a case, the common interest exception to attorney-client privilege may apply. However, some courts consider the shared interest in the case as solely financial rather than legal.
The finance arrangement, on the other hand, is often ruled irrelevant by courts. Evidence of probable prejudice or conflict of interest stemming from financial ties between the plaintiff and defendant is usually insufficient to force the provision of records. For many courts, there is no need to examine the issue of privilege because of this conclusion on relevance
When it comes to the legal system, litigation finance has become an integral aspect. A good example is Judge Polster’s ruling allowing litigation finance contracts in the Opioids MDL. It was necessary by law that the Opioids MDL’s lawyers reveal the source of their money, but Judge Polster explicitly refused to allow any further investigation into the matter. To minimize conflicts of interest, several courts have started requiring some modest disclosure to the court.
Choosing the Right Firm for Litigation Finance
There are several things to look for in lawsuit funding companies when a party or a lawyer decides that they want to talk about litigation finance.
Considerations for selecting a litigation funder include:
- The Right Fit: Claims are most successful when there is a feeling of collaboration between the claimant, its attorneys, and the financier.
- Unique Terms: If you get funding from many sources, you may receive comparable economic terms, but there may be certain terms that are exclusive to each source.
- Flexibility in Structuring: Make sure you know what kind of structure the funder is proposing and if that structure is best suited to the claimant’s demands.
- Subject Matter Expertise: As a result, funders have diverse levels of knowledge, which they might use to their advantage when working with the correct claimant.
- Speed: Speak up and let prospective investors know how long your due diligence and investment documents will take.
- Reliability: You’ll want peace of mind knowing that the money is safe and secure.
Litigation Funding in Australia
The legislation was passed in Australia that allowed insolvency practitioners to engage in contracts to finance lawsuits described as corporate property in the mid-1990s. Lawsuit finance organizations started to pop up in reaction to this law, which recognized legal claims in terms of a corporate asset.
The introduction of class-action lawsuits in Australia’s legal system in 1992, when courts realized the necessity for an effective means to deal with collective claims, also fueled the growth of litigation financing in Australia. Class-action lawsuit financing was first attempted by a few litigation funders, but many were wary of doing so for fear of having their funding arrangements invalidated since they did not come within the bankruptcy legislation.
When the Australian High Court ruled in 2006 that third-party litigation finance arrangements served a legitimate function in disputes and were neither an abuse of process nor contrary to public policy, such fears were allayed – and litigation financing became widely used. Litigation financing is now a relevant product because of the surge in class-action lawsuits and the legalization of litigation funding. Most large class actions in Australia are now supported by private litigation financing firms.
Litigation Funding Adopted by the United Kingdom
After two major pieces of legislation were passed, litigation finance in the United Kingdom pursued a different course than it did in the United States. To begin, the 1967 Criminal Law Act abolished tort liability resulting from the legal theories of maintenance and champerty.
To make conditional fee agreements between clients and attorneys permissible, Parliament approved the Courts and Legal Services Act in 1990. (CFAs). Previously, no-win, no-fee agreements were not allowed in the United Kingdom. As a result of lifting the CFA restriction, attorneys may now finance lawsuits with their time and expertise in return for a part of the settlement proceeds. Because a third party was suddenly paying the cost, customers who had previously been unable to sue were able to do so with the help of CFAs. Eradication of champerty and maintenance and the introduction of modern litigation finance were all made possible as a result of the 1990 legislation.
After the adoption of the 1999’s Access to Justice Act, litigation financing took off in a big way. Three major amendments were made to the legislation by the 1999 Act. Civil legal assistance was not available for personal injury lawsuits, since plaintiffs may seek third-party money by using CFAs, which was a presumption of the law. As a second benefit, under the U.K. ‘s “loser pays” rule, successful litigants might charge their opponents for the success fees and insurance premiums related with their CFA. ATE insurance was also created, which enabled litigants to protect against the prospect of paying their opponent’s legal bills under the “loser pays” provision if a lawsuit failed. When “no win, no fee” agreements and the power to pass off an opponent’s legal bills were combined, litigants were able to have all portions of their litigation paid by third parties, no matter whether they won or lost. Litigation finance was born as a result of these events.
When the UK courts ruled in 2002 that funding methods that undermine the objectives of justice were illegitimate, they all but supported lawsuit finance. As a result of the widening access to lawsuit financing, a burgeoning industry for claim funding started to take shape.
Litigation Financing in the United States
Litigation finance in the United States was mostly restricted to personal injury claims until the mid-2000s. In 2006, Credit Suisse Securities launched a subsidiary specializing in commercial lawsuit finance (which has since disbanded). To fund legal claims, generate cash, and remove risk, businesses and law firms have turned to commercial litigation financing, which has risen dramatically in recent years.
Litigation financing is mostly state legislation at this point. Litigation financing is becoming more common in business disputes and arbitration at the state level. A recent move by Delaware, which had previously used the doctrines of champerty and maintenance, shows that the trend toward restricting their use to commercial financing arrangements is here to stay. As a result, courts have also ruled that communications between funders, plaintiffs, and their legal counsel are protected from disclosure.
That is all that you should know about “What is litigation funding”. The legal landscape will continue to adjust as courts and lawmakers throughout the globe attempt to keep up with technological advancements and rising complexity in business. It is therefore hoped that lawsuit financing would make it easier for innovators to get the justice they deserve.
Legal finance stretches back to the Middle Ages and will continue to grow as more litigators choose to explore alternate financial options for their clients.
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