The justice system is supposed to provide a fair and equal battleground, however, court cases can be costly. Whether you are a business person dealing with contractual disputes or an individual who has been injured by a defective product, the high cost of litigation– attorney fees –can quickly prevent you from seeking legal redress. This is where litigation finance (also known as litigation funding or legal financing) comes in.
Litigation finance companies are third-party funders that invest in lawsuits in return for some share of possible winnings. Think of them as venture capitalists of lawsuits. If your case has strong potential, they will assess it and give you the money required to take it to court.
This can change the game for people and corporate entities alike. With litigation funding, there’s no need to delve into your savings account or go bankrupt. You concentrate on your case, while the funders deal with financial burdens.
In this blog post’s subsequent sections, we will explore how exactly litigation finance works, its advantages, and key points to remember about it all. So if you have a legal dispute and want to know what is meant by “litigation finance”- how does it work?, keep reading!
What is Litigation Finance (Litigation Funding or Legal Financing)?
We introduced the concept of litigation finance in the previous section, but let’s break it down further. Litigation finance, also known as litigation funding or legal financing, is a financial tool that allows parties involved in lawsuits (plaintiffs) to access the capital they need to pursue their legal claims.
Here’s how it works:
Litigation finance, which is also known as litigation funding or legal financing, is a means of obtaining funds for people engaged in lawsuits (the plaintiffs) to pursue their claims.
As a third-party investor in your case, a litigation funding company will assess your claim.
In case they feel that your claim stands a high chance of being successful, then they will give you money so that you can pay for attorney fees and other legal expenses, including expert witnesses.
The funding company then gets a predetermined percentage of any settlement or award you win in court.
Note that litigation finance is different from borrowing. Legal funding companies do not look at your credit score; they are making calculated risks based on the likely outcome of your case. If you lose the lawsuit, there will be no obligation to repay the financing company (this is called non-recourse financing).
This type of financing can prove crucial for individuals who may otherwise be unable to afford the high costs associated with litigation. It makes legal representation available to all regardless of their financial capability, thus promoting equality before the law.
How Does Litigation Finance Work?
Having learned what litigation finance is (another term for which is litigation funding or legal financing), let’s get into the process of how it works.
The Parties Involved:
Plaintiff (Claimant): This is an individual who files a court case to seek recompense for the claims they have made in their lawsuit.
Defendant: This is a person being sued and may be defending themselves against these charges.
Litigation Funding Company (Funder): This investor from outside offers financial support for a lawsuit in exchange for potential rewards sharing.
The Funding Process:
Case Evaluation: At this point, you need to go to a litigation funding company with your case. They will meticulously consider various aspects of your claim including the defendant’s financial might, its intrinsic worth, and the legitimacy of your arguments.
Funding Agreement: If the funder sees some promise in your case, you will agree on funding terms. The funder will indicate how much money they are willing to put into your case, specify what specific costs like legal fees or paying expert witnesses it covers and state the percentage of any compensation stemming from settlement or judgment payable to the funder.
Funding and Case Progression: Upon concluding this partnership agreement, then there comes disbursement of funds by the funder as per agreed amounts towards paying all legal expenses; thereby enabling pursuit without upfront.
Funding and Case Progression: Once the agreement is finalized, the funder releases the agreed-upon funds to cover legal expenses. This allows you to pursue your case without the upfront financial burden.
Return on Investment for the Funder:
Remember, legal funding companies are investors, not lenders. Their return comes from a share of the winnings if the case is successful. The specific percentage they receive will vary depending on the risk profile of the case, but it’s typically a significant portion of the settlement or award.
Non-Recourse Financing:
One critical aspect to remember is that litigation finance is considered non-recourse financing. This means if you lose the lawsuit, you are not obligated to repay the litigation funding company. They bear the risk of losing their investment if the case is unsuccessful.
Benefits of Litigation Finance
Litigation can be a long and expensive process, often deterring individuals and businesses with strong legal claims from pursuing them. Litigation finance (also known as litigation funding or legal financing) steps in to bridge this gap, offering significant benefits for both plaintiffs and businesses:
Benefits for Plaintiffs:
Access to Justice: For individuals facing a financial burden, litigation finance removes the barrier of upfront costs. This levels the playing field and allows them to pursue their legal claims regardless of their financial situation.
Focus on the Case: With the financial burden covered by the funding company, plaintiffs can focus on the merits of their case and work with their lawyer to achieve the best possible outcome.
Potential for Higher Payout: If the case is successful, the potential payout can be higher with litigation finance. Since the plaintiff doesn’t have to settle for a lower amount due to financial pressure, they can aim for a settlement that fully reflects the value of their claim.
Benefits for Businesses:
Maintain Cash Flow: Businesses involved in litigation can maintain their cash flow during the legal process. Litigation finance ensures critical operations continue uninterrupted while legal battles are fought.
Fund Complex Legal Battles: Complex legal battles often require significant upfront investment. Legal funding companies provide the resources needed to pursue these complex cases without straining a company’s finances.
Level the Playing Field: Small and medium-sized businesses can leverage litigation finance to compete with larger corporations that have deeper financial reserves.
Considerations and Potential Drawbacks of Litigation Finance
It is important to be well aware that legal financing, also called litigation funding or litigation finance can be a useful tool; however, it must be approached with an understanding of the various limitations. Some key considerations and potential drawbacks are as follows:
The high cost of this approach remains a major drawback. In fact, those who invest in litigations do not do it for charity. There could be a significant percentage charged on a successful case which may amount to less money compared to what won without funding.
Loss of Control:
Despite the ultimate decision-making power still lying with you, litigating finance has an impact on your case’s direction. It could limit some tactics or affect the terms of settlement in the funding agreement. Open communication with your lawyer is crucial to ensure your interests are protected.
Ethical Concerns:
In some jurisdictions, there might arise ethical issues about litigation finance. These concerns usually revolve around the fear that funders may unduly influence the legal process. However, things are changing within the law, and litigation finance is now increasingly becoming acceptable as an option for these cases.
Finding the Right Fit:
Litigation funding companies are not one-size-fits-all solutions. Carefully evaluate your case and its merits before pursuing this option. Research different funding companies, compare their terms, and ensure they align with your specific needs and goals.
Consulting with a Lawyer:
Before entering into a litigation funding agreement, consult with an experienced attorney. Your lawyer can advise you on the pros and cons of litigation finance in the context of your case and help you negotiate the best possible terms with a funding company.
Summing Up
While legal financing offers clear benefits like access to justice, focus on the case, and potentially higher payouts, it’s not without its considerations. The cost of litigation funding can be significant, and there may be some loss of control over the legal strategy. Ethical concerns in certain jurisdictions are also a factor to keep in mind.
The key takeaway? Litigation finance can be a powerful tool, but approaching it with a clear understanding of its implications is crucial. Carefully evaluate your case, research funding companies, and consult with a lawyer before making a decision. By doing so, you can determine if litigation finance is the right fit for your legal battle and empower yourself to pursue the justice you deserve.
