Litigation funding is also known as legal funding or litigation finance. It’s a practice that allows individuals or businesses to get financial support for their legal cases.
Legal funding involves a third-party funder providing the funds to cover legal expenses. This is in exchange for a portion of the settlement or judgment. This form of financing has gained popularity in recent years. Additionally, litigation funding provides access to justice for those who may not have the financial means.
However, like any investment, litigation has pros and cons that must be considered.
What is Litigation Funding?
Litigation funding is a mechanism that enables plaintiffs to secure the necessary funds. This is to cover legal costs associated with their lawsuits.
Traditionally, individuals would have to rely on their own financial resources or seek help from law firms. But, litigation funding introduces a new option. This allows third-party funders to provide the required capital.
Funders may assess the merits of the case. If they believe it has a high chance of success, offer financial support in exchange for a share of settlement or judgment.
The Pros of Litigation Funding
Litigation funding offers several advantages for plaintiffs.
- Access to Justice. Litigation funding can offer access to justice for those who may need more financial resources. It enables these parties to take on well-funded opponents.
- Risk Mitigation. By outsourcing the financial risk of litigation to a third party, plaintiffs can focus on their case. This is rather than worrying about how they will pay for it. If the case is unsuccessful, the funder bears the cost, not the plaintiff.
- Leveling the Playing Field. Often, deep-pocketed defendants use their financial advantage to prolong litigation. With third-party litigation funding, plaintiffs can match this financial capacity. This ensures a more matched contest.
- Efficient Use of Capital. Instead of tying up capital in lengthy and uncertain legal battles, companies, and law firms can invest their funds. This leads to better allocation of resources and improved performance.
- Encouraging Settlement. Both sides may be more inclined to reach a reasonable settlement when they know that a third party has funded the legal claim. This is rather than engaging in protracted and expensive litigation.
- Non-Recourse Nature. Most litigation funding arrangements are non-recourse. This means that if the case is lost, the plaintiff owes nothing to the litigation funder. It aligns the interests of all parties and incentivizes careful evaluation of each case’s prospects. This is before funding is approved.
Plaintiffs can use the funds to fund litigation expenses. These include attorney fees, court costs, expert witness fees, and other related costs. Litigation funding firms allow them to focus on their case without the added stress.
The Cons of Litigation Funding
Despite its benefits, litigation funding also comes with its share of drawbacks.
- High Costs. Litigation funding typically involves high-interest rates and fees. This can reduce any awarded damages or settlement amounts. Plaintiffs could end up receiving less than what they would have if they had financed the lawsuit themselves.
- Limited Transparency. Some critics argue that litigation funding lacks transparency. This makes it difficult for courts and opposing counsel to assess conflicts of interest.
- Possible Conflicts of Interest. The plaintiff’s best interests may be deferred to the financial interests. This affects the strategic choices made during a legal dispute.
- Delayed Resolution. In some instances, litigation funding can lead to delays in resolving disputes. This is true when funders insist on pursuing appeals or other post-trial remedies to maximize returns.
- Disincentives for Early Settlement. Commercial litigation finance can discourage the early resolution of disputes. This is because litigation funders often prefer to see cases through to trial or appeal in hopes of higher returns. This can result in increased litigation costs and time spent.
- Ethical Concerns. The financing of legal actions raises ethical questions. Whether it is maintenance or competition is one of these. The majority of governments forbid these activities.
- Lack of Regulation. While lawsuit finance is becoming more common, different countries have different laws controlling its use. There may not be much regulation or standards in some areas. This results in uneven implementation and possible misuse.
Is Litigation Funding Worth the Risk?
Determining whether third-party funding is worth the risk depends on the specific circumstances. Plaintiffs should check the pros and cons and consider their individual needs and goals. It is best to assess the following:
- strength of the case
- potential financial impact
- level of control they are willing to yield
For plaintiffs who don’t have the financial resources to pursue their legal claims, litigation funding can be a lifeline. It provides the means to access justice and level the playing field against well-funded opponents.
However, it is best to review the terms of the funding agreement. Also, consult with some legal professionals to ensure that the arrangement aligns with your best interests.
Final Thoughts
Litigation funding has certain disadvantages even though it lowers financial risks.
Plaintiffs ought to check their case and go over the conditions of the financing agreement. Before selecting a choice, individuals also need to understand the litigation process.
If you are thinking of sponsoring a lawsuit, be careful to research it and speak with legal experts.