What is litigation finance? . . .

Litigation finance joins two things that have historically been thought of as separate: corporate finance and litigation. Litigation finance is the provisioning of capital, typically on a non-recourse basis, to plaintiffs to allow them to fund their meritorious litigation against defendants. The capital can be used to fund both third-party costs (court costs, expert witness costs, discovery, etc.) and legal fees and, sometimes, for corporate working capital purposes.

Litigation and arbitration claims are assets—“choses in action,” technically. They are just as much corporate assets as other intangible or contingent assets, like receivables or intellectual property. Litigation funders provide a broad range of corporate finance solutions to firms and clients engaged in significant commercial litigation and arbitration. Litigation funding can take many forms, such as:

• Fund clients’ litigation fees—including full fees, partial fees, or case expenses—as plaintiff or defendant
• Finance portfolios of pending litigation (law firms or corporations)
• Transfer risk in contingent or conditional fee arrangements
• Monetize contingent fee or conditional positions at the beginning of a case or after judgement or appeal to minimize risk or generate capital
• Secure corporate debt facilities linked to a legal claim
• Finance, sell, or collect uncollected judgements
• Secure litigation-related insurance and risk solutions
• Accelerate receipt of fees

Some litigation funders also provide direct loans to qualified law firms.

Who uses litigation finance? . . .

Litigation finance can help in many situations. For example:

• A client with a meritorious case may ask its hourly firm for alternative fee arrangements—and need an outside litigation funder’s help to do so
• A firm that embraces contingent work or alternative fee arrangements may surpass the financial risk they’re able or willing to bear—and seek the partnership of a litigation funder
• A client or firm may need financing for case expenses
• A company may need to unlock the value of pending litigation or arbitration to lower its cost of borrowing
• In-house counsel may need a solution to manage all legal costs—including defense
• CFOs and financial executives, seeing the negative accounting impact of litigation expenses on their balance sheets, may seek a better solution
  

Who are the funders offering funding for litigation? . . .

Litigation Finance is a very established industry supported by some of the most reputable law firms and investment professionals.

When we use the term “funder”, we are primarily referring to professional fund managers – often those that run dedicated investment vehicles. An example of these are private equity-type funds with long-term committed capital that enables the managers to make discretionary investments based on the merits of a particular opportunity. While these cases are very personal to a claimant – most investors view the opportunity set dispassionately on a risk and reward basis – no different than if they were investing in the stock market. However, there are other funders active in the marketplace like hedge funds, credit funds, family offices and high net worth investors.
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What are basic requirements for litigation financing? . . .

Beyond being comfortable with the merits of the matter, the quality and experience of the lawyers, and the collectability of the settlement or award, the merits of financing any case are very specific to the facts of the case. There is no magic, “percent likelihood of success,” or ratio of expected costs to damages. Each matter is assessed as a potential investment and funders generally consider the case’s risk profile independently. Considerations include:

• Likely duration
• Competency of plaintiff’s counsel
• Competency of defendant’s counsel
• Presiding judge
• Jurisdiction
• Collectability
• Defendants’ litigation track record

That said, it is difficult to finance cases that are likely to have relatively low damages and relatively high costs, because there simply won’t be room in such a case for a return investment while still providing satisfactory compensation for the claimant. The ‘rule of thumb’ in the industry is that funders will not fund more than 10% of their expected outcome, which is their view of likely damages or settlement based on a set of probability weighted outcomes.

Are there cases that commercial litigation funders will not fund? . . .

The answer is very specific to the litigation funder itself. However, many commercial litigation funders will not fund the following types of cases:

• Litigation involving personal injury (such as medical malpractice or personal loss), divorce, and defamation cases typically fall within the purview of consumer litigation finance companies
• Litigation where something other than economic redress is in issue (such as litigation brought for policy or strategic reasons)
  

In Cases Backed by Litigation Finance, Are Lawyers Paid on Contingency or an Hourly Basis? . . .

Sometimes, litigation funders prefer to invest in cases where the law firm is working on either a full or partial contingency basis (referred to as “having skin in the game”). This means that the law firm is willing to forego all or a portion of their hourly fees in exchange for taking a percentage of the proceeds or a premium to the ‘rack rate’ of their fees at risk upon a successful outcome. In these cases, the parties enter into a tri-partite agreement which covers the relationship and the “waterfall” of proceeds and how the proceeds are distributed among the parties. Typically, the funder, which is investing its own capital, has a priority in the waterfall ensuring that they get paid their principal back first, usually with a preferred return, before any other party gets paid. Thereafter, the waterfall dictates the order of payment among the remaining parties. These are highly customized agreements dependent on negotiations, stage of the case, prospects for the case, and myriad other factors.

In other cases, the litigation finance is used to pay for the plaintiff’s legal fees. In these cases, there is usually an agreement in place whereby if the law firm exceeds their original budget, they are responsible to cover the excess costs, thus providing an element of accountability. Essentially, the law firm is working on a per hour basis. In the event of a positive outcome, the proceeds are generally the proceeds are distributed in accordance with the funding contract between the plaintiff and the litigation fund.

What expenses can litigation financing be used for? . . .

Capital to fund commercial cases can be provided at any stage of the litigation process and can be used to cover a range of fees and expenses. These typically include:

• Lawyer fees and expenses of a lawsuit
• The costs of insurance related to a proceeding (for jurisdictions where “adverse costs” can be awarded to the defendant)
• To monetize a claim
• Provide working capital to a law firm secured by the results of a pool of contingent fee matters

Funding is most often made in the form of a non-recourse investment in exchange for a portion of the settlement or award, should the case be successful. Should the case be unsuccessful, the funder loses its investment. The cost of capital, therefore, is priced to reflect the risk of total loss to the funder.

Funders often provide financing across a portfolio of litigation matters, enabling businesses to manage risk associated with multiple actions. Funders’ terms for portfolio financing vary widely, depending not only on the strength and stage of the underlying cases, but also whether a transaction would be based on the outcome of only one case or a pool of cases. High risk matters such as international arbitration, insolvency, and patents are particularly amenable to portfolio financing.

What are the advantages of litigation finance as compared to funding my own case? . . .

The obvious advantage of litigation finance is to transform the bargaining power of claimants against better-resourced defendants. Funders help provide those taking action against large companies with the resources needed to fight a protracted legal battle. Increasingly, it is now about equalizing resources. Claimants who have the ability to self-fund benefit from sharing the cost risk of the litigation and having an expert investor confirm that the case is financially viable. Additionally, the funded claimant benefits from the experience of the funder in funding other cases (a ‘second set of eyes’ with expertise in litigation reviewing the merits of the case) which ensure best practice is followed in managing the litigation process.

What are the typical terms of investment?. . .

An investment is almost always non-recourse—meaning that funders do not earn an investment return if the underlying litigation is unsuccessful. Otherwise, the contract has terms relating to the economics of the transaction, the priority of the distributions, withdrawal clauses, and other highly customized terms specific to the transaction.

What does litigation finance cost? . . .

Cases are customized dependent on a variety of factors and the needs of the plaintiff. Investment transactions are individually negotiated and often entitle the funder to the return of its invested capital, a minimum return on that capital, and a portion of the total proceeds of the litigation. Funders use other structures, too, especially for investments where the litigation is well advanced. For example, funders will make investments based on existing judgements where they seek a fixed return on their capital as opposed to a portion of the ultimate recovery. For law firms, funders can also provide financing on a fixed return basis. Typically, the litigation finance firm will have priority in the distribution of the proceeds from the lawsuit (i.e. they are “first money out”).

Given the level of risk assumed by litigation funders, the overall financial return expectations are more consistent with private equity and venture capital funds, not commercial banks.

What is the minimum expected settlement/award that can be financed. . .

The criteria will depend on the size of the litigation finance company and the resources available to it, but typically the potential settlement would be in excess of 10 million in local currency.

At what stage do litigation funders provide financing? . . .

Generally, they are open to applying finance at any stage in the litigation cycle. Financing is available at a case’s commencement, pre-trial, or pre-appeal. It may even be provided post-judgement to help cover current expenses while awaiting the proceeds of a successful decision – something akin to a bridge loan or receivables factoring.

What if I don’t need financing for all my legal costs? Will the litigation funder pay part of my legal costs? . . .

The litigation funder is happy to consider litigation financing for all or part of the costs of a case. Funders have ability to be very flexible about how to provide litigation financing for any given case and can usually find a solution for most claimants if the case fits our case criteria.

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How long does an application take? . . .

That depends on the funder and how much information is available about the case. It’s worth looking at the funder’s case criteria first. Calling the funder to discuss your case and its prospects in complete confidence is a good idea. Once the funder is satisfied that your case has potential, it will be prepared for presentation to their Investment Committee, which meets regularly to consider cases. It is not atypical for lenders to take 8-12 weeks to assess a case for funding and enter into a funding contract with the plaintiff.

How long does it take to get my case approved? . . .

That depends on how much information you have about your case and whether you have a legal opinion on the strengths and weaknesses of your claim, as well as a budget for the costs you are asking the manager to fund and an indication of the minimum claim value. Funders aim to tell you whether yours is a case they wish to investigate further within a short period of time. Most investment committees meet weekly and cases are presented to that committee a week in advance of the meeting. If the case is approved at the committee stage the funds are available to be paid as soon as the investment agreement is signed following the meeting, subject to the documentation of the funding contract.

When can the funder discontinue financing? . . .

Generally, the funder can only discontinue financing if there is a ‘material adverse decline’ in the prospects of the case. That can include the defendant going bankrupt, a reduction in the claim value resulting from new evidence, or the position on liability declining below a 50% chance of success. However, if a funder does discontinue funding, they would pay all costs up to the date of termination (including adverse costs, if applicable). It’s rare for a funder to discontinue funding a claim - and it’s not a step taken lightly. Outside of the immediate investment loss, there is a reputational impact on the litigation funder, particularly if they were to discontinue funding on multiple occasions.

How soon before the trial of my case should I approach a funder for funding? . . .

Realistically, the minimum period before trial should be three months. However, the more lead time, the better.

If my application for financing is successful, how soon can the funds be available? . . .

For those funders with access to capital specifically designated for litigation financing, funds are available immediately. In the case of single case funders, they may either raise money on a case-by-case basis or seek approval from their typical funding sources while processing your file. Usually by the time your case has been approved, the funder has obtained the necessary commitments to fund.

When are bills paid by litigation funders? . . .

Bills are paid monthly. If monies are required to be paid into court, e.g. payment for security, for costs, or an insurance premium, then those payments are made as they are requested.

Will the funder pay for costs I have already incurred?. . .

It depends on the funder. However, they will consider each case on its merits and may pay historic legal costs if there is a good reason to do so or provide your company with working capital if necessary.

How does the litigation finance company control the cases that are funded? . . .

Typically, the funders don’t get any rights to manage the litigation in which they invest. It is also atypical that the funders get any rights to control the settlement of the litigation, which remains wholly in the litigant’s control. Fund managers do not control the cases that are funded. One of the typical case criteria is to ensure the best possible legal team is in place so they can run the case in exactly the same way as if the claimant were financing the claim.

Funders ask to be kept updated on key developments in your case and sometimes they make suggestions, but you do not have to follow them. Most funded claimants often value the funder’s input because of their substantial experience of disputes. If the funder offers financing on a case, it is because they are satisfied with the capability of the legal team and have confidence in the claimant.

Does the funder insist that every case go to trial or final hearing? . . .

No. On the contrary, funders are commercially-minded and want the case to be settled as quickly as possible on the best possible terms for the claimant. However, they are also prepared to take cases through to trial or final hearing if an appropriate settlement cannot be agreed upon.

Do funders have the right to require me to make or accept a settlement offer? . . .

No. Whether or not to settle is your decision alone. Funders will expect you to behave reasonably and may require you to take advice from your solicitors and/or counsel on whether settlement is appropriate.

What if my claim recovers less than the litigation funder has invested?. . .

Funders typically have a priority return, meaning they will have their fees paid before any other group participates in the proceeds of a settlement, but they will never be paid more than you recover.

What happens if the case is not successful? Will I have to repay some money? . . .

No. The funder only gets paid if your case is successful.

Is there a charge for considering a request for financing? . . .

Typically, there is no fee for considering financing a case.

Who performs diligence on matters that litigation funders consider funding? . . .

Typically, funders use a combination of internal and external resources which are dependent on the complexity of the case and the specific points of law at issue. Most funders will do the majority of diligence internally through their in-house litigation experts (most of whom were former practicing litigators). As part of their underwriting process, most funders will engage outside legal counsel to review the entire case or specific areas of law to validate the internal underwriters views.

Can litigation funders help me find a lawyer? . . .

Yes, funders are very well connected in the legal community and can find the right legal partner for you and your case. If a funder gets involved at the early stage of a case, they may make their funding contract contingent on the plaintiff using specific legal representation either in replacement of or in addition to current legal counsel.

Does litigation finance offer accounting benefits? . . .

Clients are required to record litigation costs as immediate expenses, which decreases their operating income (the basis on which companies are typically valued). Litigation finance is a solution to the challenge of helping clients overcome overwhelming case expenses—both because it provides a means of managing how those expenses are paid and because it avoids the injurious accounting rules for recording litigation expenses. Funders are adept at unlocking the value of litigation assets—and they’re also sensitive to the impact of litigation expenses on balance sheets. Litigation finance can be viewed as a form of off balance-sheet financing for corporations that have little to benefit, but much to lose from funding the litigation themselves.

Is litigation financing permitted in all jurisdictions? . . .

It is permitted in most common law jurisdictions because courts realise it provides access to justice and actually filters out unmeritorious cases.

The industry started in earnest in Australia and is now active in many jurisdictions, including New Zealand, USA, France, Germany, Netherlands, South Africa, Canada, Hong Kong, and Singapore to different extents. Litigation financing is permitted under statute, case law, and in public policy in the United Kingdom and elsewhere. There has been widespread recognition in the UK and other jurisdictions over the last decade, supported by case law and public policy documents, that litigation financing provides access to justice.

Litigation funders in many jurisdictions such as the UK, USA, and Canada are not, however, permitted to exercise control over cases.

Providing capital in cases is not control. The global trend is towards treating litigation financing as a social good and a means of providing access to justice. The specific status of litigation financing in other jurisdictions varies by reference to case law and policy developments in that jurisdiction. Cases have been funded in The Channel Islands, USA, Canada, BVI, Nevis, Bermuda, Hong Kong, New Zealand, and Australia. This includes international arbitrations governed by, amongst others, the rules of ICSID, UNCITRAL, LCIA, ICC, and the Energy Charter Treaty.

What is the role of After The Event (ATE) insurance? . . .

In certain jurisdictions, “after-the-event” insurance is taken out after an event, such as an accident which has caused an injury, to insure the policyholder for disbursements, as well as any adverse costs should they lose their case. After-the-event insurance is usually used by people who do not have before-the-event insurance. If the policyholder loses the case, the insurance company will pay the opponent's legal costs and expenses as well as the policyholder's own disbursements. For example, solicitors who take on personal injury cases on a "no win, no fee" basis, may require their clients (whether defendants or plaintiffs) to take out after-the-event insurance so that costs will be covered if the case is lost. This is typically used in jurisdictions where courts are allowed to award damages to the defendant in the amount of their legal costs, such as UK, AUS, and Canada.