Litigation Funding and Its Advantages

Litigation funding, also known as third-party funding, provides money to plaintiffs in lawsuits. A third party finances a lawsuit in return for a portion of the settlement or judgment. This makes access to justice possible for plaintiffs who would not have the financial means to pursue a lawsuit on their own. The funder assumes the risk and will profit only if the plaintiff wins.

Litigation funding originated in Australia in the 1990s when legislation permitted insolvency practitioners to finance lawsuits. The rise of class actions further fueled the growth of litigation finance. In the United States, litigation financing was originally limited to personal injury cases but expanded to commercial litigation in 2006 with the founding of a litigation risk strategies unit by Credit Suisse Securities. Since then, there has been a substantial increase, with investors and funders paying billions of dollars to finance cases.

Litigation funding is not limited to individuals seeking money for personal injury or medical malpractice lawsuits. It is also frequently used by companies in commercial litigation, intellectual property disputes, and international arbitration. Litigation funding has become an important tool for companies looking to manage the cost and risk of litigation.

Litigation funding can help level the playing field between plaintiffs and defendants. Because defendants usually have substantial financial resources and can outspend plaintiffs, plaintiffs may find it challenging to reach a fair settlement or judgment.

Litigation funding lowers the risk of litigation for plaintiffs. The risk is transferred to the funder, who could lose money if the plaintiff is unsuccessful. Plaintiffs may get peace of mind as a result and be able to concentrate on their case without being concerned about the financial dangers.

Although litigation financing is sought to pay legal fees and expenses, companies may also use this financing to support their operations during legal proceedings. With litigation financing, claimants with valuable claims can access the benefits of their claims prior to the final judgment. This is especially advantageous for growth companies with limited access to capital markets and face high borrowing costs.

Also, with litigation finance, investors can easily liquidate their investments. Since there are numerous investors who purchase these assets, investors can sell their stake in a specific case to another financier, providing them with a sense of relief if a case drags on for an extended period.

From an investor’s perspective, litigation funding can be an attractive opportunity. The returns can be high, with funders typically receiving a large percentage of the settlement or judgment. However, litigation funding is not without risks. Lawsuits are unpredictable, and funders may lose their investment.

Litigation funding has faced criticism, with some arguing that it can lead to frivolous lawsuits and plaintiffs pursuing claims that have little merit in the hopes of securing a settlement or judgment. Others have argued that the fees charged by litigation finance companies can be exorbitant and greatly reduce the amount of money the plaintiff ultimately receives from any settlement or judgment.

Many jurisdictions have adopted rules governing lawsuit funding to allay these worries. In the United States, for example, several states have introduced regulations that require litigation funders to register with the state and disclose certain information about their operations. While litigation funding can be useful for plaintiffs, individuals considering this option should consider the costs and risks carefully.