Litigation finance 101

For centuries, insurance has been commonplace for a huge variety of commercial risks. However, the historic principles of Champerty and Maintenance barred a third-party from funding legal cases in many jurisdictions and legal risks were not widely and legitimately transferrable until a few decades ago.

Most governments, often with the assistance of the courts through case law that is supportive of third-party funding, have adapted rules in the name of enabling access to justice. As a result, the litigation funding industry was born and today, such funding is increasingly in demand from claimants, their lawyers and investors alike.

On the “demand side”, claimants with legitimate commercial disputes can readily access third-party litigation funding. Such arrangements differ to traditional insurance policies in that, rather than requiring premiums to be paid in advance of the risk being taken on, no payment is required until a case is won or settled in favour of the claimant. Costs are in fact taken from winnings from the defendants. Should a case be lost, the funder takes the loss without recourse to the claimant, who has no costs to pay. It is worth noting that even in the event of a winning claim, if there is insufficient recovery from the defendant to meet the funding party’s costs, the insured will not be liable to the funding party. Such a risk transfer mechanism can be appealing to claimants in a variety of situations.

Should I consider third-party funding?

Many legal disputes are unexpected, so those without legal budgets set aside for litigation can often find third-party funding attractive. So too can those businesses without the significant free cash flow required for funding of often hefty legal fees. That said, funding is increasingly attractive also to cash-rich organisations that wish to manage their working capital and to transfer risks of litigation, turning a potential sizable liability into an asset.

Well-managed funders have effective case management processes in place. Often combining analytical and legal skill, they assess cases on a variety of bases including naturally the legal merits, but also the financial dynamics of the claim, the defendant’s ability to pay, and the lawyer’s calibre.

Such processes act as a filter, often leading to only two to three percent of cases offered to funders being taken on. This ensures the funders a high success rate, often above seventy percent, as is the case with Augusta. The result is strong returns on capital that have not gone unnoticed on the “supply-side” amongst institutional investors.

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For all questions regarding the topics raised in this blog, please contact Louis, Gian or a member of our team of litigation funding experts.