What Is Litigation Financing?
Litigation financing has been active for a few decades now, but is rapidly growing in popularity across the globe. Internationally, this is the go-to option for individuals and businesses that attempt to secure financing for their disputes.
Litigation finance involves the use of a third party — which has zero relation to a specific lawsuit — which is willing to supply capital to a plaintiff involved in litigation. The objective is to receive a portion of any financial recovery which is generated from the lawsuit.
How a Case Works
Litigation finance unlocks the value of legal claims by providing capital to plaintiffs before a case is resolved.
Plaintiffs can be either individuals or companies that are involved in a lawsuit. However, there are specific ones which require funding for their litigation expenses, working capital, or even personal expenses.
That said, a litigation financing arrangement happens on a non-recourse basis. The claimant is obligated to pay a financier the fixed sum only when there is monetary relief through their pursuit of the dispute.
In a scenario where there is no monetary recovery, the financier receives no amount, Therefore, a litigation financing arrangement cannot be seen as a loan.
The Required Resources
The financiers will carefully review the strength of the claim and the evidentiary support, alongside the anticipated defenses and counterclaims to predict the probability of the action being successful.
They will seek to understand the claimant’s motivation for seeking funding, including if the claimant lacks any of the required resources to bring the claims or desires to shift risk and free up the cash flow.
The claimant’s reputation also plays a role here, which is another threshold for a case to advance through the initial screening.
Additionally, the size of a potential award will need to be sufficient to provide the financier with a return to match the investment risk and cover the cost of running the opportunity through diligence and transactional processes.
The Stages in Litigation
There are eight stages in total.
- Investigation — Litigants and their attorneys need to investigate and collect information about the dispute. This includes talking to witnesses, collecting essential documentation, and at times, hiring an investigator.
- Pleading — Pleadings are the initial paperwork of the lawsuit. The plaintiff’s first pleading will be in the form of a complaint filed in a court that details any of the damages that have been suffered, alongside other essential facts.
- Fact Discovery — This is a process where facts are gathered and where both the plaintiff and defendant request and exchange information.
- Expert Discovery — Parties to the lawsuit each retain specialized experts with the goal of offering options about the litigation. Not every single case will have this, but they are common and can be lengthy and expensive.
- Pre-Trial — This is a period after discovery where the parties address any of the remaining issues which are leading up to the trial.
- Trial — Most lawsuits will typically not proceed to the trial stage. However, if a case cannot be resolved during the pre-trial phase, it does go to a formal trial, where both sides present their case with witnesses and evidence. This can be a jury trial or a bench trial before a judge. This can last days, weeks, or months depending on the level of complexity of the dispute.
- Verdict or Judgment — Once the trial completes and the jury or court announces their verdict, this stage ends.
- Appeal — If a party loses at the trial court level, they can appeal the jury verdict or the judge’s rulings during the case.
Why You Might Need Litigation Financing
The main reason why you might require or might be interested in litigation financing depends on your specific condition.
For plaintiffs, it helps them access funds that will allow them to pursue their cases through financing commercial litigation expenses. This helps them unlock liquidity for working capital and cushion personal expenses while also enabling greater access to the best legal resources.
For attorneys and law firms, this allows them to accept cases that would otherwise not be able to afford their services. This also provides them with capital for litigation expenses, such as expert witness fees and a reduction in the client’s risk of running out of money during the litigation process. They can, in turn, offer more flexible payment arrangements to their clients.
For investors, the story is a bit different. It allows them access to a growing alternative asset class, where they can make investments in legal claims that are uncorrelated to capital markets. They also gain reasonable time and liquidity when compared to alternative markets.
Private Equity Involvement
Litigation finance has matured over time, growing from an unknown boutique investment product to an asset class specifically desired by private equity (PE) investors.
This investment has solid investment returns, shorter periods and a lack of correlation to the broader financial markets.
This investing strategy will involve providing cash to litigants or attorneys to fund their litigation in exchange for a portion of any awarded damages, assuming the case is won.
However, if the case does not end in your favor, and the plaintiff loses the case, then you lose your entire investment. The goal here is to have less overall risk compared to other forms of investments where private equity is involved.
Liti Capital is a litigation funding company financing large legal claims which favor the claimant, and bringing them the justice they deserve alongside financial rewards through blockchain technology. Liti has tokenized digital, asset-backed equity shares of its company.