Litigation Funding

What to do when the claimant does not have sufficient financial resources to support lengthy and expensive legal proceedings? In this case, individuals and companies use litigation funding.

What is litigation funding?

Litigation funding investment (also known as third-party litigation funding) helps people or businesses pay for legal costs when they cannot afford them. From a social perspective, litigation funding services represent a major step towards greater equality before the law.

A funder covers expenses like lawyer fees and court costs. If the case is successful, the litigation funding company gets a share of the settlement or award. If the case is lost, the claimant does not have to pay anything back.

Since litigation business is risky, funders carefully review each case before deciding to invest. This process, called preliminary case assessment and involves evaluating the likelihood of winning and recovering money from the opposing party. The review requires input from various experts, such as legal consultants, forensic specialists, and asset tracers, making it a detailed and costly process.

As a rule, the claimant needs to fund its litigation until the funder made all necessary checks and the agreement between the claimant and funder is signed. In the event when the case is successful (depending on the specific agreements with the fund, this may be either a positive court/arbitration decision, a settlement agreement, or actual collection from the opponent), the investor receives a stipulated percentage and lawsuit funding solutions are considered successful.

What costs are covered by litigation funding?

Litigation funding covers various legal costs, including:

• Lawyer fees – Payment for legal representation.
• Court fees – Costs for filing and other court-related expenses.
• Expert witness fees – Costs for hiring experts to support the case.
• Investigation costs – Expenses related to gathering evidence.
• Administrative expenses – Costs for document management, discovery, and other case-related tasks.

Who uses litigation funding?

• General Counsels seeking greater control over their litigation and arbitration budgets.
• CFOs and other financial professionals who want to enhance their company’s liquidity without extra debt.
• Corporate counsel willing to bring innovation to the legal department.
• Arbitrators (and their clients) seeking to outsource legal advance funding costs in the context of lengthy litigation.
• Asset managers and other large institutional investors seeking to take a systematic approach to enforcing legal claims against issuers.
• Companies involved in costly litigation.

Benefits of litigation funding

• An alternative to a loan: The involvement of a litigation funder is usually more attractive than taking out a bank loan. A bank loan must be repaid with interest in any event, whilst litigation funding is provided when chances for a successful outcome of litigation are high, which means that the claimant is not at loss.
• 3rd party litigation funding only has an impact when the claimant wins the case: In addition, there is no burden of ongoing repayment and interest payments. Another advantage is that the funder’s investment is secured by the case alone. This means that personal liability for repayment is excluded if the proceedings or enforcement fail.
• Litigation financing is independent of rising interest rates: The loan costs can rise at any time. The terms of litigation financing, on the other hand, are fixed and depend solely on the scope, prospects of success, and profitability of the asserted claim.
• Litigation financing also has immediate balance sheet advantages: Loans increase operating costs and thus reduce profits. Litigation financing, on the other hand, avoids this expense and, depending on the circumstances, can even be booked as income – with a direct legal funding impact on the company’s annual result.
• Flexibility: Many claimants value a sophisticated financing agreement that offers them much flexibility. Since litigation financing is purely dependent on success, it can also be used for purposes other than litigation, provided there is a significant reason for doing so. For example, the investment can be used to cover operating costs during proceedings that threaten the existence of the company or to finance further proceedings that arise unexpectedly (by agreement).
• Unreasonable settlement offers: Litigation financing enables claimants to turn down unreasonable settlement offers. Thanks to the strong financial backing, the chances increase that promising claims will be awarded in full and will not have to be settled on unfavourable terms due to the financial strength of the opposing party.
• Release potential for companies: Litigation financing offers companies new potential. Customers of a litigation funder can consult renowned lawyers who they would otherwise not hire for cost reasons.

What are the legal funding options?

Litigation funding provides several ways to finance legal cases. The right choice depends on the case type and needs of the claimant.

Pre-Settlement Funding

• Provides financial support while case is ongoing.
• Allows claimants to access funds based on their expected settlement.
• Repaid only if the case is successful.

Post-Settlement Funding

• Offers access to funds after a case is settled but before the payment is received.
• Helps claimants to cover instant expenses.

Commercial Litigation Funding

• Serving for businesses involved in disputes such as breach of contract or intellectual property cases.
• Covers legal fees, court costs, and expert witness expenses.

Portfolio Funding

• Provides funding for litigation for multiple cases within a business or law firm’s portfolio.
• Spreads the risk across several cases, making it attractive for larger firms.

Single-Case Funding

• Focuses on financing one specific case.
• Common for individuals or businesses with a single high-value claim.

Contingency Fee Agreements

• Lawyers represent clients in exchange for a recovery percentage.
• No prepayment is required, but the lawyer’s fees come from the settlement or the award.

Legal Loans

• Claimants can borrow money to cover legal costs.
• These loans must be repaid with interest, regardless of the case outcome.

Litigation funding agreement

Litigation funding agreement (LFA) is an agreement between the claimant and the litigation funder. LFA outlines the specific terms of the funding arrangement and helps individuals and companies to be able to afford litigation without financial stress.

LFA should guarantee that the client retains control over the litigation. For example, the client should be able to terminate the dispute if necessary. When working with legal funding companies, the claimant should be wary of agreements that transfer the main role in the process to the funder. It should also be specified that only the client (and not the funder) can terminate the lawyer’s instructions.

In addition, funders themselves often request access to information on the case so they can assess whether there is any sense in investing. This should not be done without the client’s consent. To ensure that such consent is conscious, lawyer should warn the client that disclosure of information may violate lawyer-client privilege.

It is also necessary to specify in the agreement the amount of financing, the method for calculating the profit of the funder, the principles for distributing the money received as a result of successful resolution of the claim, and, if necessary, the investor’s payment schedule. The irrevocable nature of such an agreement should also be specified.

The duration of a litigation funding agreement means the time it will take the funder to support the case financially. Typical Durations of LFA:

• Short-Term: For straightforward cases (1-2 years).
• Medium-Term: For more complex cases (2-4 years).
• Long-Term: For very complex cases (5+ years).