Litigation is a risky and expensive endeavour.
Over the past decade, litigation funding has become an increasingly enticing financial alternative for individuals, companies, and lawyers to transfer the costs and risks of litigation to a third party. In the eyes of many it has proven to facilitate access to justice by offering an exclusive source of capital for the litigation space.
In times marked by capital constraint and risk aversion, litigation funding has also proved to be a valuable asset for businesses, which is why the demand for financing continues to grow around the world. We believe that the use of Litigation Funding will continue to increase as the industry expands to secondary legal markets in well-fished jurisdictions and starts to break ground in new jurisdictions, in particular emerging markets. As litigation financing reaches more countries, it is relevant to address common misconceptions about the industry for those who are not familiar with this tool.
- Myth 1: litigation funding is a fancy name for a loan.
Fact: An ordinary loan needs to be repaid to the lender one way or another. Think about a credit facility or a student loan, the debt may be re-financed (even more than once), but it will still have to be paid back eventually. The particularity of litigation finance is that capital is offered on a non-recourse basis, this means that the plaintiff will only pay the funder if the case is successful (i.e., yields an economic return). If the case does not lead to a positive result, the plaintiff owes nothing to the funder.
- Myth 2: litigation funding is expensive and complex.
Fact: The core of litigation funding is quite simple. The funder offers to pay all litigation expenses in return for a share of the recovery effectively removing the economic downside of the case from the plaintiffs’ hands. If the case is won, the funder will charge for its financing. While the legal market is normally aligned with the cost of funding, there is a common misconception that litigation funding is very expensive. When evaluating pricing, it is essential to consider two key elements: (i) who assumes the risks? and (ii) is the pricing rate expensive when compared to rates across comparable markets? In litigation finance, the funder is not only deploying non-recourse capital but also effectively removing litigation risks from the plaintiff’s balance sheet while taking no personal guarantees. While regular credit risks are usually backed up by personal recourse over the debtor, litigation finance risks are not. In reality, litigation funding may seem intuitively expensive, but when comparing the risks assumed by funders across other financing markets it may seem more reasonably priced.
- Myth 3: litigation funding encourages meritless cases.
Fact: Providing plaintiffs with non-recourse capital is thought to encourage the number of frivolous cases introduced in court systems. This is far from true. At Deminor, our main target is to invest in meritorious claims that have a high probability of success. To be able to devote time and resources to a successful claim, we need to conduct a thorough and detailed due diligence process on the merits of each claim. As much as a wall street wizard would not purchase worthless stock, a reputable funder will not fund a meritless case. If the plaintiff loses, the funder does too (as well as his money).
- Myth 4: litigation funding is only for plaintiffs with limited resources.
Fact: Successful companies and individuals can profit from litigation finance as much as plaintiffs with limited resources. Our litigation funding proposal allows successful businesses to continue to invest their money in their productive economic activities, and to get rid of the downsides and uncertainty associated with litigation, while preserving the lion’s share of any potential recovery.
- Myth 5: litigation funders take decision-making powers away from plaintiffs and legal advisors.
Fact: At Deminor, we propose plaintiffs and lawyers’ various alternatives regarding the extent of our involvement in a case in accordance with applicable legislation. If desired, Deminor can take an active role in the conduct of the litigation or it may also defer decision making to the plaintiff (then acting as a passive investor), to the extent permitted by law. We are convinced that a successful case is founded on the alignment of interests between funder, advisor, and plaintiff, which is why we always propose tailor-made solutions. If the case is successful, everyone wins.
- Myth 6: litigation funding is limited to the provision of legal expenses.
Fact: Litigation finance can be deployed in the benefit of a company or an individual in a multitude of forms. The necessities of each plaintiff or the specific industry concerned will determine the different funding solutions that are available. We act in the interest of our clients and strive to provide ad-hoc solutions to every plaintiff that we assist.
Written on January 28, 2020 by
Legal Counsel for Spain and Latin America
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