Legal financing (also known as litigation financing, professional funding, settlement funding, third-party funding, third-party litigation funding (TPLF), legal funding, lawsuit loans and, in England and Wales, litigation funding) is the mechanism or process through which litigants (and even
law firms) can finance their
litigation
-
A lawsuit is a proceeding by a party or parties against another in the civil court of law. The archaic term "suit in law" is found in only a small number of laws still in effect today. The term "lawsuit" is used in reference to a civil actio ...
or other legal costs through a third party funding company.
Similar to
legal defense funds, legal financing companies provide
money
Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The primary functions which distinguish money are as ...
for lawsuits but are more often used by those without strong financial resources. Furthermore, legal financing is more likely to be used by plaintiffs, whereas legal defense funds are more likely to be used by defendants. Money obtained from legal financing companies can be used for any purpose, whether for litigation or for personal matters. On the other hand, money obtained through legal defense funds are solely used to fund litigation and legal costs.
Legal financing companies provide a
nonrecourse cash advance to litigants in exchange for a percentage share of the
judgment or
settlement
Settlement may refer to:
*Human settlement, a community where people live
*Settlement (structural), the distortion or disruption of parts of a building
*Closing (real estate), the final step in executing a real estate transaction
*Settlement (fina ...
. Despite some superficial similarity to an
unsecured loan
In finance, unsecured debt refers to any type of debt or general obligation that is not protected by a guarantor, or collateralized by a lien on specific assets of the borrower in the case of a bankruptcy or liquidation or failure to meet the t ...
with a traditional lender, legal financing operates differently from a
loan
In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations, etc. The recipient (i.e., the borrower) incurs a debt and is usually liable to pay interest on that d ...
. Litigation funding is generally ''not'' considered a
loan
In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations, etc. The recipient (i.e., the borrower) incurs a debt and is usually liable to pay interest on that d ...
, but rather as a form of an
asset purchase or
venture capital
Venture capital (often abbreviated as VC) is a form of private equity financing that is provided by venture capital firms or funds to startups, early-stage, and emerging companies that have been deemed to have high growth potential or which ha ...
. Legal funding advances are not debt and are not reported to the credit bureaus, so a litigant's
credit ratings
A credit rating is an evaluation of the credit risk of a prospective debtor (an individual, a business, company or a government), predicting their ability to pay back the debt, and an implicit forecast of the likelihood of the debtor defaulting.
...
will not be affected by a litigant obtains a legal funding advance.
Legal financing companies normally provide money in the form of a lump sum payment, and generally, no specific account is established for the litigant. If the case proceeds to
trial
In law, a trial is a coming together of Party (law), parties to a :wikt:dispute, dispute, to present information (in the form of evidence (law), evidence) in a tribunal, a formal setting with the authority to Adjudication, adjudicate claims or d ...
and the litigant loses, the third party funding company receives nothing and loses the
money
Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The primary functions which distinguish money are as ...
they have invested in the case.
In other words, if the litigant loses, they do not have to repay the
money
Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The primary functions which distinguish money are as ...
. In addition, litigants generally do not have to pay monthly fees after obtaining legal financing. Instead, no payments of any kind are made until the case settles or judgment is obtained, which could occur months or years after legal funding is received. Accordingly, to qualify for funding with a legal financing company, a litigant's case must have sufficient merit that the company deems its investment in the case to be worth the risk.
In
tort
A tort is a civil wrong that causes a claimant to suffer loss or harm, resulting in legal liability for the person who commits the tortious act. Tort law can be contrasted with criminal law, which deals with criminal wrongs that are punishable ...
litigation, legal financing is most commonly sought in
personal injury cases, but may also be sought for commercial disputes,
civil rights
Civil and political rights are a class of rights that protect individuals' freedom from infringement by governments, social organizations, and private individuals. They ensure one's entitlement to participate in the civil and political life of ...
cases, and
workers' compensation
Workers' compensation or workers' comp is a form of insurance providing wage replacement and medical benefits to employees injured in the course of employment in exchange for mandatory relinquishment of the employee's right to sue his or her emp ...
cases.
History
While third-party litigation funding is not a new concept, it is relatively new to the United States and has its roots in the old English principles of
champerty and maintenance. Some U.S. states still prohibit or materially limit champerty and other allow it with some restrictions.
Little financial assistance is available from traditional sources to help injured plaintiffs cover the cost of litigation or pay their personal expenses while a case remains pending.
Plaintiffs
A plaintiff (pi (letter), Π in List of legal abbreviations, legal shorthand) is the party who initiates a lawsuit (also known as an ''action'') before a court. By doing so, the plaintiff seeks a legal remedy. If this search is successful, the co ...
may turn to credit cards and personal
loans to cover litigation fees, attorneys' fees, court filings, personal finances, and living expense shortfalls while they wait for litigation to be resolved. The obligation to repay that debt is not affected by the outcome of the plaintiff's lawsuit.
In many jurisdictions, and throughout the United States,
attorney rules of ethics preclude an attorney from advancing money in the form of loans to their clients.
The introduction of legal financing provides qualified plaintiffs with a means of paying the cost of litigation and their personal expenses, without having to resort to traditional borrowing.
Qualification for litigation financing
Legal funding companies do not provide legal advice to applicants, nor do they provide referrals to
attorneys. Thus, to qualify for legal financing a plaintiff must have already hired an attorney. To apply for legal financing, the plaintiff must complete an application form and provide supporting documents.
As legal financing companies only recover their investment if the plaintiff recovers money from the funded lawsuit, the merits of the plaintiff's case must be strong, meaning that the plaintiff has a strong argument that the defendant is liable for the damages claimed in the lawsuit. The defendant in the case (the person or company being sued) must also have the ability to pay a judgment, whether by virtue of its own financial strength or through insurance coverage. The injured party's attorney must also agree to the legal financing and generally must to sign an agreement consenting to the legal financing.
Additional qualification or approval factors may include the total amount of damages sought, a sufficient potential margin of recovery to justify the
investment
Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort.
In finance, the purpose of investing i ...
, the background of the applicant, and laws of the applicant's place of residence. Some legal financing companies limit their investment to specific types of lawsuits, such as a
personal injury claim or commercial litigation.
Third Party Litigation Funding has been analysed and formalised in order to compute the minimum value of a claim suitable for the funding agreement.
Benefits
Lawsuits are expensive and may progress slowly, over a period of many months or years.
During that time, many plaintiffs may feel considerable financial pressure, and may need money to pay the costs of litigation, as well as the costs of supporting themselves. When obtained during the course of
tort
A tort is a civil wrong that causes a claimant to suffer loss or harm, resulting in legal liability for the person who commits the tortious act. Tort law can be contrasted with criminal law, which deals with criminal wrongs that are punishable ...
litigation, legal financing may help a plaintiff who has immediate needs, such as medical care, and cannot afford to wait until the litigation concludes to obtain money. A severely injured plaintiff might have significant personal expenses due to disability or loss of income and may face significant personal and
medical debt
Medical debt refers to debt incurred by individuals due to health care costs and related expenses.
Medical debt is different from other forms of debt, because it is usually incurred accidentally or faultlessly. People do not plan to fall ill or ...
, and as a result may feel considerable pressure to enter into an early settlement.
A defendant may recognize a plaintiff's financial need and offer a low settlement in anticipation that the plaintiff will not be able to afford continued litigation.
The desperate situation of plaintiffs is reflected in a finding by the American Legal Finance Association, an industry group for legal financing companies, that over 62% of funds provided to plaintiffs are used to stop a
foreclosure
Foreclosure is a legal process in which a lender attempts to recover the balance of a loan from a borrower who has stopped making payments to the lender by forcing the sale of the asset used as the collateral for the loan.
Formally, a mortg ...
or an
eviction action.
Types
Litigation funding has two major divisions: consumer financing, commonly referred to as pre-settlement funding or plaintiff advances, and commercial financing. Consumer financing generally consists of small advances between $500 and $2000. Prominent consumer financing companies include LawCash, Oasis Financial, and RD Legal Funding. Commercial financing for companies to pursue legal claims generally is dedicated towards payment of attorney fees and litigation costs.
Litigation funding may also come in the form of crowdfunding, in which case hundreds or tens of thousands of individuals can help to pay for a legal dispute, either investing in a case in return for part of a contingent fee, or offering donations to support a legal right that they believe in.
Criticisms
One concern about litigation funding is that it is costly to the plaintiff, and may take a very large chunk out of plaintiff's eventual
settlement
Settlement may refer to:
*Human settlement, a community where people live
*Settlement (structural), the distortion or disruption of parts of a building
*Closing (real estate), the final step in executing a real estate transaction
*Settlement (fina ...
or verdict. After paying attorney fees and the amount owed to the legal financing company, the plaintiff may receive little or no additional money beyond any amount received from the advance.
There is some concern that, if widely adopted, litigation finance could prolong litigation and reduce the frequency of settlements of civil lawsuits. A study of civil lawsuits published in the Journal of Empirical Legal Studies found that between 80% and 92% of cases settle.
The study found that most plaintiffs who decided to pass up a settlement offer and proceed to trial ended up recovering less money than if they had accepted the settlement offer.
The legal financing industry has come under fire from critics for actual and potential legal and ethical violations.
For example, some companies have been found to violate state
usury
Usury () is the practice of making unethical or immoral monetary loans that unfairly enrich the lender. The term may be used in a moral sense—condemning taking advantage of others' misfortunes—or in a legal sense, where an interest rate is ch ...
laws (laws against unreasonably high interest rates),
champerty
Champerty and maintenance are doctrines in common law jurisdictions that aim to preclude frivolous litigation:
*Maintenance is the intermeddling of a disinterested party to encourage a lawsuit. It is: "A taking in hand, a bearing up or upholding ...
laws (laws prohibiting third parties from furthering a lawsuit for an interest in the recovery), or to require action by the applicant's lawyer that might be unethical under state rules of professional conduct.
A major criticism of litigation funding is that its cost is disproportionate to the risk accepted by litigation finance companies.
As lenders thoroughly evaluate claims before they agree to provide financing, they have a very high likelihood of recovering their fee at the conclusion of the plaintiff's case, and further limit potential losses by providing financing in amounts that are relatively small as compared to the plaintiff's anticipated recovery.
In June 2011, the New York City Bar Association addressed some of the ethical issues raised by lawsuit financing in an ethics opinion about third-party non-recourse legal funding. It concluded that with due care a lawyer could help a client obtain legal financing, and that non-recourse litigation financing “provides to some claimants a valuable means for paying the costs of pursuing a legal claim, or even sustaining basic living expenses until a settlement or judgment is obtained.”
Many lawyers advise clients to pursue legal financing only as a last resort, when other forms of financing are not available.
Worldwide
Australia
Commercial litigation funding has been allowed in
Australia
Australia, officially the Commonwealth of Australia, is a Sovereign state, sovereign country comprising the mainland of the Australia (continent), Australian continent, the island of Tasmania, and numerous List of islands of Australia, sma ...
in the late 1990s, in parallel with developments in the US,
Canada
Canada is a country in North America. Its ten provinces and three territories extend from the Atlantic Ocean to the Pacific Ocean and northward into the Arctic Ocean, covering over , making it the world's second-largest country by tot ...
and
Asia
Asia (, ) is one of the world's most notable geographical regions, which is either considered a continent in its own right or a subcontinent of Eurasia, which shares the continental landmass of Afro-Eurasia with Africa. Asia covers an area ...
.
England and Wales
Litigation funding has been permitted in England and Wales since 1967 (and in insolvency matters since the late nineteenth century). However, the recent years have seen its growing acceptance as part of the litigation landscape.
Litigation funding can be broadly split into 4 different forms in the UK,
Conditional fee agreements,
Damages Based Agreements,
Fixed Fees and Third Party Funding.
In 2005, in the case of ''Arkin v Borchard Lines Ltd & Others'', the
English Court of Appeal made it clear that litigation funding is a legitimate method of financing litigation. In January 2010, Chapter 11 of the ''Jackson Review of Civil Litigation Costs'' was published, effectively providing judicial endorsement to litigation funding.
In November 2011, a ''Code of Conduct for Litigation Funders'' was launched, which sets out the standards of best practice and behaviour for litigation funders in England and Wales. The Code of Conduct provides transparency to claimants and their solicitors. It requires litigation funders to provide satisfactory answers to certain key questions before entering into relationships with claimants. Under the Code, litigation funders are required to give assurances to claimants that, among other things, the litigation funder will not try to take control of the litigation, the litigation funder has the money to pay for the costs of the funded litigation and the litigation funder will not terminate funding absent a material adverse development. The Code has been approved by Lord Justice Jackson and commended by the Chair of the
Civil Justice Council,
Lord Neuberger of Abbotsbury
David Edmond Neuberger, Baron Neuberger of Abbotsbury (; born 10 January 1948) is an English judge. He served as President of the Supreme Court of the United Kingdom from 2012 to 2017. He was a Lord of Appeal in Ordinary until the House of L ...
, the President of the Supreme Court.
The regulatory body responsible for litigation funding and ensuring compliance with the Code is the Association of Litigation Funders (ALF). The Board of Directors of ALF comprises representatives from Therium Capital Management, Burford Capital, Calunius, Woodsford and
Harbour Litigation Funding
Harbour Litigation Funding or 'Harbour' is one of the UK's first litigation funders and one of the largest litigation funders in the world, measured by the size of its investment funds.
History and operation
Harbour was founded in 2007 by Susa ...
. Other ALF members include Augusta Ventures and Balance Legal Capital, among others. The members of ALF have adopted the Code and undertake to comply at all times with it.
Russia
There is no specific legislation in
Russia
Russia (, , ), or the Russian Federation, is a List of transcontinental countries, transcontinental country spanning Eastern Europe and North Asia, Northern Asia. It is the List of countries and dependencies by area, largest country in the ...
governing litigation funding, however it is not prohibited by Russian law. In 2019, Chairman of the Council of Judges of the Russian Federation Viktor Momotov stated that third party investment in litigation could increase access to the courts by parties who could not otherwise afford the cost of litigation. In 2020, the Council of the Federation Committee on Constitutional Legislation and State Building discussed the need for legislation or regulation to allow a litigation funding industry to develop.
South Africa
Litigation funding is generally unregulated in
South Africa
South Africa, officially the Republic of South Africa (RSA), is the southernmost country in Africa. It is bounded to the south by of coastline that stretch along the South Atlantic and Indian Oceans; to the north by the neighbouring countri ...
, but it appears that it has quietly become part of the
South African legal landscape, getting little to no resistance in the face of what used to be portrayed as ''contra bonos mores champertous'' agreements, which are, by definition, illegal.
A ''pactum de quota litis'' is defined as “an agreement to share the proceeds of one or more lawsuits” and it is the duty of the court to ascertain, of its own motion, the lawfulness of such agreement as it cannot lend its assistance to the execution of agreements and transactions which are contrary to law. An initial distinction between an acceptable and an objectionable ''pactum de quota litis'' was formulated in ''Hugo & Möller N.O. v Transvaal Loan, Finance and Mortgage Co'', 1894 (1) OR 336. The Court held that a fair agreement to provide the necessary funds to enable an action to be proceeded with, in consideration for which the person lending the money is to receive an interest in the property sought to be recovered, must not be considered per se to be ''contra bonos mores''. The court was concerned about potential abuses for such agreements, such using them for purposes of gambling with litigation cases.
Several cases have provided further guidelines for such litigation financing agreements. In Hadleigh Private Hospital (Pty) Ltd t/a Rand Clinic v Soller & Manning Attorneys and Others 2001 (4) SA 360 (W), the Court affirmed that an agreement to share the proceeds of one or more lawsuits is not necessarily unlawful and must indeed be considered acceptable when a litigant is not in a financial position to fund his litigation completely. In another case, the
South Africa Supreme Court of Appeal held, in ''PriceWaterHouse Coopers Inc and Others v National Potato Co-operative Ltd'', 2004 (6) SA 66 (SCA), that the "although the number of reported cases concerned with champertous agreements diminished, courts have still adhered to the view that generally they are unlawful and that litigation pursuant to such agreements should not be entertained". However, the Supreme Court sought to clarify any disagreements and took a different route.
The Supreme Court ruled that:
* An agreement in terms of which a stranger to a lawsuit advances funds to a litigant on condition that his remuneration, in case the litigant wins the action, is to be part of the proceeds of the suit is not contrary to public policy or void, and
* The existence of such an assistance agreement cannot be the base of a defense in the action. In June 2010, in an
interlocutory ruling rendered in the same case, the High Court found that the funder is, after all, a co-owner of the claim and should, therefore, be joined as a party to the trial. Therefore, an order for costs may be made directly against him to the extent that the funded party cannot support them even after the termination of the funding agreement.
United States
Legal financing is a fairly recent phenomenon in the United States, beginning in or around 1997.
Litigation funding is available in most U.S.
jurisdictions
Jurisdiction (from Latin 'law' + 'declaration') is the legal term for the legal authority granted to a legal entity to enact justice. In federations like the United States, areas of jurisdiction apply to local, state, and federal levels.
Jur ...
. Litigation funding is most commonly sought in
personal injury cases, but may also be sought for commercial disputes,
civil rights
Civil and political rights are a class of rights that protect individuals' freedom from infringement by governments, social organizations, and private individuals. They ensure one's entitlement to participate in the civil and political life of ...
cases, and
workers' compensation
Workers' compensation or workers' comp is a form of insurance providing wage replacement and medical benefits to employees injured in the course of employment in exchange for mandatory relinquishment of the employee's right to sue his or her emp ...
cases. The amount of money that
plaintiff
A plaintiff ( Π in legal shorthand) is the party who initiates a lawsuit (also known as an ''action'') before a court. By doing so, the plaintiff seeks a legal remedy. If this search is successful, the court will issue judgment in favor of the p ...
receive through legal financing varies widely, but often is around 10 to 15 percent of the expected value of judgment or settlement of their lawsuit.
Some companies allow individuals to request additional funding at a later date. The amount of money available depends on the policies of the financing company and the characteristics of the plaintiff's lawsuit.
One major division in litigation finance is between consumer and commercial financing companies. While consumer financing generally consists of small advances between $500 and $2000 directly for individual plaintiffs, commercial financing for companies to pursue legal claims generally is dedicated towards payment of litigation costs.
The largest legal financing companies in the space are commercial, including public companies.
Litigation funders generally evaluate cases based on legal merit, amount of damages, and financial viability of the defendant. Many funders also specialize in specific areas of litigation or have restrictions on funding size and funding structure.
The American Legal Financing Association (ALFA) is a trade association that represents consumer legal financing companies.
ALFA's main goals are to establish voluntary standards for the legal funding industry and to serve as the liaison with the public, government officials, and the media.
While ALFA is a non-profit organization, most legal funding companies are for-profit organizations.
See also
*
Champerty and maintenance
*
Legal defense fund
*
Legal financing industry
References
{{Authority control
Lawsuits
Legal costs
de:Prozessfinanzierung