Legal Guide

8 Items That Companies Should Know About Litigation Funding

When considering litigation, small-to-midsize businesses and law firms should not only consider the legal cost but also the costs of continuing to run the business or taking other cases. Commercial litigation, arbitration, patent infringement, intellectual property rights, and the like can take months if not years to fully litigate. The associated costs can be a substantial burden and one that is difficult for a smaller company or law firm to bear alone. Thankfully, litigation funding is there to help mitigate your vulnerability.

How do you know if litigation financing is your best option, and which litigation financing firm to partner with? Below find eight things to consider before you pursue litigation funding.

The most important things about litigation funding that you should know.

1. Litigation finance can help you reduce risk to the overall health of your firm

Sometimes, firms avoid litigating lawsuits because of the prolonged nature of these proceedings. Small organizations and those struggling financially face an even more significant threat when they choose to litigate or arbitrate. While a win can help ease the strain on finances, a loss with its associated legal fees can devastate some operations. Having a funding provider that understands risk and provides both money to cover expenses and sound advice can help your company or organization achieve a favorable outcome.

2. Your damage-to-investment relationship

Court proceedings are costly. Because of this, many legal funding firms want a damages-to-investment range of approximately 5:1, if not higher. This means that assuming your lawsuit requires a hundred dollars to litigate; it should be worth roughly five hundred dollars in damages.

An experienced funder will help calculate your firm's damages-to-investment ratio and determine if this is the best course of action to follow. 

3. Litigation funds are not loans

Despite funding engagements, known as loan terms, the structures of a litigation funding transaction can combine components of a financial asset alongside loan provisions. This, like any other venture capital agreement, is often non-recourse and seldom has a set interest rate or maturity period.

Most of these financing agreements are more of acquisitions of rights in the actual legal claims than loan arrangements. This is the case despite having terms and pacts like those found in a loan contract, along with credit improvements, including collateral postings and third-party assurances.

Opting for litigation finance allows the risk to be shared by both your financier and your attorney, who accepts your case conditionally as a claimant. They both get their rewards only after a ruling in your favor.

4. Litigation funding is costly, but the conditions are reasonable

Over the years, a typical litigation financier hopes for multiples of their commitment, considering the risk they undertook. They associate the actual sum with various factors, including the timeframe of the lawsuit and their total investment.

In either case, a competent share of the judgment should be close to that of a contingent lawyer, provided you employ an adequate damages-to-investment rate.

5. Your lawyer participates

Lawyers are an important element of the evaluation process as they express their thoughts on the case's strengths and shortcomings. Let your lawyer evaluate every contract carefully before signing it, as this is critical to ensure that you appreciate what it represents.

Whatever funds are collected in the settlement deal go to your attorney's escrow first, then your lawsuit financier.

6. Distinct litigation financiers sponsor distinct cases

Corporate and private lawsuit funding are the primary forms of litigation funding.

Commercial litigation funders typically do not fund personal expenses. Rather, they cover the costs of your legal representation in commercial litigation, besides helping you with discovery, court costs, and operations that are not covered within the legal bills.

This financing is beneficial for legal firms focusing on contingency commercial cases. It allows them to unleash their case potential and de-risk their portfolio by offering a financial injection prior to and after the judgment.

7.  Both your firm and your lawyer should have absolute control

Despite so much at risk, your financier will not play a vital role in shaping the core litigation's approach, particularly in approving or rejecting any settlement deal or decision to go to court. They may assist the client’s legal counsel through various stages of the litigation but will never interfere in developing litigation strategy and any settlement discussions.

Your firm should regard all clauses in your litigation funding contract that grant your financier this amount of influence as interference with the attorney-client relationship.

8. Calculate the amount you need

Budget preparation is among the most beneficial things you can do before pursuing litigation funding. Ensure your firm and its lawyers agree on what to use the funds for. If you are using the money to pay for legal bills, your lawyer must have a plan ready that details how much it costs to pursue the case to its completion.

The takeaway

Litigation finance helps ease the organizational and financial burdens associated with a lawsuit. Once the counterparty understands you have completed funding arrangements and insured for their expenses, they are far less inclined to retaliate, even if you lose. This makes it easier to seek a settlement and strike a deal, particularly in the case of uncertain litigation.

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