Why is Commercial Litigation Funding becoming so popular?
In only a few years, Commercial Litigation Funding has turned into an essential financing mechanism for entities ranging from modest start-ups to multinational corporations. The number of attorneys who proclaimed their firms had used litigation funding catapulted four-fold between 2013 and 2016. Moreover, 75% of the in-house counsel projected that the utilisation of litigation funding would continue to grow. According to 2017 Litigation Finance Survey, eight in ten (81%) of UK lawyers claim to know about litigation funding, while more than half (54%) of the respondents who have not yet used litigation funding intend to do so in next two years.
At the point of writing, most individuals familiar with this industry recognise litigation funding as the process through which a third-party provides advanced funds to cover the litigation expenses. IN exchange for this they will a return on their capital deployed, a percentage of the settlement or a combination of the two. In recent times however commercial litigation funding is being deployed as a strategic risk management tool. Businesses have become aware that by using funding solutions they can mitigate against the underlying financial risks of pursuing litigation by instead using third party funding solutions. This enables them to deploy their capitol into key business operations and protects whilst also protecting the financial security of their business in the event of an unsuccessful claim.
Today, hedge funds and banks are becoming more willing to fund meritorious claims, since such claims now constitute a comparatively less-risky asset class, unrelated to the capital markets and offering more favourable returns. This, in turn, has allowed litigation financiers to invest in a more significant number of disputes. Additionally, commercial litigation funders have started supporting a broader range of disputes than previously. Notwithstanding funding individual lawsuits, several litigation funders are now strategizing to invest in portfolios of related claims. Gradually, well-funded corporates and law firms are turning to litigation financing to control risk and boost their balance sheet. Nonetheless, inhibitions remain. Even now, the availability of third-party litigation funding continues to differ from jurisdiction to jurisdiction.
From its beginning, one of the fundamental benefits of litigation financing for claimants and their legal teams was that it ensured access to justice. It enabled the funding of ‘David v Goliath’ cases where a modest claimant can take on a financial powerhouse in the courts of law. However, there are two additional benefits of using litigation funding. Firstly, litigation funders will only fund reasonable claims, and to do so will undertake their own rigorous evaluation of every claim they are asked to finance. If they refuse to finance a claim on the pretext of merit rather than commercial viability, claimants may well reconsider whether their claim has got the potential to succeed.
Secondly, having a funder on board strengthens a claim so the third party will not look force early settlement for reduced amounts which is often a tactic used when they are facing under resourced claimants. When a funder is on hand they will have the capital required to ensure that a claim has the finances required to reach it’s conclusion and for a maximum possible settlement.
Last but certainly not least, the use of litigation financing can be highly beneficial from a corporate accounting perspective. Once litigation funding is approved, the expenses and contingent liabilities of furthering a claim are effectively transferred to the third-party financier. Therefore, the claimant can record their dispute as a prospective asset, rather than as a liability.