Litigation funders provide businesses with the means to support a legal case that they are otherwise unable to bring to court.
A solicitor will commonly recommend litigation funding as an option when their client has a strong case against a well-resourced opponent but no means by which to support the litigation process. When enlisting the help of a third party funder, a business isn’t required to pay anything up front, and is only obligated to pay their funder in the event of success.
The amount that the litigation company seeks to recoup from the court damages is usually worked out on a case-by-case basis, and all depends on the funder in question. Some ask for their initial investment back plus a return (ROI) of around 30% of the awarded damages. Others ask for three times their investment back.
What kind of cases do third party funders take on?
Currently, around 85% of funding applications are rejected, as third party funders are reluctant to take on the costly expenses of a legal battle if they feel that they may incur a loss.
There are three essential elements for a case to be an attractive prospect to a litigation funder. These are:
- less than a 40% chance of failure
- a well-resourced defendant who will be able to pay damages
- a sizeable reward to make the investment worthwhile (usually £1m+)
Commercial law is the main area for litigation funding at the moment, as it tends to provide the greatest ROI.
Small cases with lesser financial merit (less than £1m), tend not to be taken on by funders as they are unlikely to provide a decent enough return. It is thought that Alternative Business Structures (ABS), by which non-lawyers may be allowed to own or invest in law firms, may go some way to bridge this gap.
What is the future of third party funding?
As law firms start to become more familiar with the third party funding market, it’s predicted that it will become more common practise in the litigation process. The existence of the Association of Litigation Funders (ALF) and their voluntary ‘code of conduct’ goes some way to enhance the credibility of this up and coming industry.