If you want to pursue legal action for your business, but you’re understandably concerned it could be too costly, you may want to consider litigation funding as a solution.
Litigation funding, also known as litigation finance, legal finance or third-party funding, covers the legal costs for your business, reducing your financial strain. Although it used to be illegal in England and Wales, litigation funding is now accepted in arbitration and commercial disputes, and courts consider it a valid tool for allowing access to legal justice.
Key takeaways:
- Litigation funding used to be illegal, but is growing in popularity
- Litigation finance lets you stay in control of your legal battle, but reduces the stakes
- Litigation funding also works as an alternative investment option
Understanding litigation funding
What is litigation funding?
Litigation financing is a financial agreement mechanism in which a third party covers your legal costs. The third party, also known as litigation funders, do this in exchange for a financial return, which is normally either a percentage of the recovered damages, or a multiple of sums invested.
With litigation finance, you stay in control of the case. However, your litigation funders may ask for progress updates, and they can withdraw their funding if your case runs into trouble.
Distinction between funding and financing in legal contexts
When it comes to funding and financing in legal disputes, there are a number of differences. With traditional financing you use conventional sources to fund your case, including:
- Personal savings
- Credit cards
- Loans from family/friends
- Borrowing from financial institutions
Litigation funding allows you to focus on your business, because the legal case is being funded by the third party – usually a specialised funding company.
The role of litigation funders
Litigation funders specialise in different types of claims, so you can pick one that fits your legal case. Once they are involved, they act as passive investors, so you retain control during the litigation process. Any strategic decisions that may arise will require your consent. These can include:
- Settlement
- Claim withdrawal
- Filing an appeal
The process of litigation funding
How litigation funding works
If a litigation funder accepts a claim, they pay your legal fees and other expenses that may arise during the claim process.
Sometimes, this can also cover adverse cost risks as the claim progresses. For example, if a court orders you to immediately pay your adversary the costs associated with a defeat at an interlocutory/interim hearing).
Or, they pay the cost at the end of your trial. Bear in mind that if you lose your trial, you may still be ordered to pay your adversary’s legal fees – despite your case having been funded.
The types of cases typically funded by litigation funding
Litigation funders can support a wide range of case, including:
- Intellectual property rights
- Class actions
- Commercial disputes
- International arbitration
- Antitrust litigation
The relationship between plaintiffs and funders can be complicated. Both hope to see a positive outcome, because if the plaintiff loses, they don’t usually have to repay the litigation funder for the money they provided. And there is the risk a funder can pull out if they can see they may lose the case.
If you own a law firm, you may already be aware that litigation can be expensive and long. So you need flexible and straightforward litigation financing. You need Fenchurch Legal.
Fenchurch Legal, established in 2020, serves small-to-medium-sized law firms with short-term, tailored loans from six to 24 months, on a case-to-case basis. Only cases with a strong legal precedent, with full insurance from an ATE policy, are funded.
The benefits and risks of litigation funding
Potential advantages of litigation funding
- Litigation cost removal – No matter how lengthy the case is, you can remove this cost from your business balance sheet
- Optimisation of working capital allocation – The money you save can be retained and invested directly into the development of your business
- Strength by association – If you work with professional, experienced litigation funders, you send a message to your rival that you are determined to win the case
- Access to justice – You can pursue legal claims without an upfront cost
Potential disadvantages of litigation funding
- Settlement cost – The funder’s share could be significant
- Disagreements – Litigation funders may want a say in how the case progresses
- Market risk – Funders must consider the unpredictability of the market
- Regulatory concerns – The regulatory environment can vary depending on location
Recent UK research suggests that third-party legal funding is enabling individuals, SMEs and corporations access to justice that they might have missed out on. However, the impact remains frustratingly small unless further reforms take place.
Litigation funding as an alternative investment option
The rise of UK litigation funding also offers the chance for investors to do well. For example:
- Steady returns – You can make 10-13% per annum.
- Low risk – There’s little correlation with traditional markets, so you can avoid economic volatility.
- Diversification – Broaden the horizons of your portfolio beyond stocks and shares.
What are loan notes?
A loan note is a key financial tool used in investing and lending. Also known as a promissory note, bill of exchange or formal IOU, a loan note is a debt agreement that outlines all the terms in which a lender loans money.
Loan notes can be offered to shareholders and employees as incentives, rather than typical stocks and shares etc.
Companies like Fenchurch Legal and MHG Capital offer lucrative opportunities, so get in touch to find out how they can help.
Litigation funding is a relatively new and very welcome addition to the tools available if you need to take legal action. It mitigates risk, provides greater access to potential justice, and levels the playing field.
However, for litigation funding to grow in impact, litigation funders and clients must work together to develop robust funding agreements, while meeting regulatory requirements.
Get in touch with MHG Wealth today to learn more about litigation funding and why it’s a great alternative asset for your investment portfolio.
