Federal statutory law in the United States provides an avenue for individuals or entities engaged...
Are you a Latin America based company or individual currently involved in litigation/arbitration, or contemplate being involved in one, and would like to learn how litigation funding works?
Legal expenses and other costs involved in litigation, such as attorney fees, expert witness fees, court reporter fees, depositions, filing fees and discovery can be extremely high and somewhat unpredictable. Fortunately, independent third parties unrelated to a case can fund the legal expenses and other costs of one of the parties and if the financed party wins the case the award is shared with the funder. Litigation funders may advance the funds to the claimant or its law firm. Funders are compensated only if the case is resolved favorably. Funders typically collect before its client is paid.
Litigation funding can be provided by traditional funders, and also by hedge funds, sovereign wealth funds, pension funds, endowments, insurers and financial institutions. Funders have the ability to customize their offerings based on their risk profile, industry expertise, and available capital. They often cover case-related expenses and may also fund living expenses or a company’s operating expenses to ensure the continuity of a business that faces litigation.
Consumer litigation funding typically finances tort or personal injury cases. While investment or commercial litigation funding usually provides financing for corporate expenses and legal expenses in large-scale tort and commercial cases. Commercial litigation funders invest in a wide variety of claims including intellectual property, insolvency claims, contracts, shareholder disputes, non-commercial disputes, and class actions for regulatory, consumer, financial or data privacy breaches.
On average, funders tend to receive approximately 3 or 4 times their invested capital or a minimum of 20% internal rate of return plus recovery of the legal expenses and other costs advanced.
As the evaluation process begins, a thorough due diligence process is normally conducted by the funder with the assistance of the claimant’s counsel. The due diligence process usually addresses:
- ability of the defendant to satisfy a judgment or award;
- monetary value of the claim;
- legal budget for the case;
- merit of the claim;
- anticipated duration of the trial or arbitration proceeding; and
- enforcement risk.
Upon successful completion of the due diligence process a litigation funding agreement is negotiated between the funder and the claimant. Funders are not meant to control or direct the underlying litigation or arbitration. However, in some instances funders are allowed to make certain strategic decisions such as when to settle or withdraw from a case. The litigation funding field is not currently regulated under U.S. federal law. Some states in the U.S. regulate consumer funding by imposing certain restrictions on the fees funders can charge its customers. Generally, funding agreements are not required to be filed with the court, however, they may be subject to disclosure either to the judge or between the parties pursuant to a court ruling.
The financing solutions offered by litigation funding can help manage the financial risk associated with litigation, and allow access to courts by companies and individuals that otherwise would not be in a position to obtain legal protection in court. Funders work both in domestic cases as well as cross-border cases on a global basis.
If you contemplate initiating a law suit or arbitration proceeding, or are already involved in one, and would like to learn how you could benefit from litigation funding please let us know!