Third Party Litigation Funding, also known as Litigation Finance is a popular way to finance large litigation claims, especially when businesses may be experiencing cash flow problems. A third party that has no prior connection to the case will agree to finance some, or all of the legal costs of litigation in return for a fee payable from the proceeds recovered by the litigant.
Many claimant-side law firms in the UK understand how Litigation Funding works and in the past few years, especially since the pandemic, funding activities have increased globally because many companies around the world face liquidity risks and are finding it difficult to meet the costs of commencing, or continuing existing proceedings and therefore, seek third party funding arrangements to protect their position.
As the funding market develops, the range of Litigation Funding sources and products are becoming available, including but not limited to, law firms that fund cases directly, family businesses, portfolio funding or hedge funds. Litigation Funders will carry out detailed due diligence at the outset and require good prospects of successfully reaching a settlement in the client’s favour. They also want to be certain that the defendant is able to meet the monies claimed, the costs and any interest due upon settlement of the case.
When choosing a Litigation Funder, factors such as those listed below (but not limited to) should be considered when making an informed choice:
• The level of risk that a Litigation Funder is willing to take?
• Is the Litigation Funder easy to work with, adaptable and willing to compromise?
• Years of experience and knowledge in the area?
• Percentage costs the Litigation Funder requires at the end of the case (usually 30% to 50% of recoveries)?
• The Litigation Funders availability to provide capital long term over a number of years/reserved capital and solvency of the Litigation Funder?
• The speed of decision-making as well as approving the funding without delay?
• The risk allocation between legal representatives, claimant and Litigation Funder?
• The Litigation Funders level of control over the settlement or litigation?
• Does the Litigation Funder require exclusivity while conducting due diligence?
• Does the Litigation Funding Agreement protect the client’s positon?
The Importance of Litigation Funding
• The legal costs will be funded by a third party and may not impact the balance sheet of the business. This way investors will not be deterred.
• Many business disputes can last several years and it is therefore crucial to develop a long-term relationship between the claimant, Litigation Funder and lawyers.
• Securing Litigation Funding can ensure a claimant can pursue a genuine and meritorious claim against the opponent, particularly if the opponent is a large entity with unlimited resources.
The Risks with Litigation Funding
• Loss of some control of the case because the Litigation Funder may want an input in the decision making process.
• The settlement may not be entirely what the claimant wants.
• You will have to make the opponent aware of the funding arrangement.
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