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Investing in Litigation Claims: Third Party Funding

Investing in Litigation Claims: Third Party Funding

investing in litigation claims

Investing in litigation claims has become a popular revenue stream for many UK investors.

Third party funding, as it’s known, involves investors providing financial support to litigants in exchange for a share of the proceeds if the case is successful.

This arrangement allows parties to a case, who might not otherwise be able to afford legal representation to pursue their claims.

In recent years, the litigation funding market has seen significant growth, with institutional investors, hedge funds, and even individual investors seizing the opportunity to diversify their portfolios.

The potential returns can be substantial, particularly in high-stakes commercial disputes or class action lawsuits. However, investing in litigation claims also carries risks, including the possibility of losing the entire investment if the case is unsuccessful.

As such, thorough due diligence and careful consideration of the legal merits of each case are essential for investors looking to enter this increasingly competitive market.

Legal disputes can present significant financial risks for businesses due to the expenses associated with litigation and the legal system. However, these disputes are often an unavoidable aspect of conducting business.

This is where third-party funders and litigation finance firms can come into play as a valuable alternative asset class, delivering considerable benefits to businesses and individuals.

Third party litigation funding can provide financial assistance to those involved in legal actions. This support allows them to navigate complex litigation or arbitration proceedings without compromising their financial stability.

At Annecto Legal, we can assist businesses in obtaining legal finance and insurance to address any potential legal disputes that may arise.

What is litigation funding?

Litigation funding involves providing financial assistance to parties in exchange for a share of the potential proceeds from a successful legal claim or settlement. These claims can range from commercial disputes and intellectual property infringement to class action lawsuits.

The primary objective of litigation funding is to support claimants who may lack the financial resources to pursue their cases fully, thereby levelling the playing field against well-funded opponents.

The working capital involved in litigation funding is typically non-recourse, meaning that it is not considered debt. This financing arrangement implies that the investment and returns are contingent upon the successful resolution of the legal matter, effectively shifting costs and risks off the balance sheet for the duration of the legal battle.

The benefits of investing in litigation claims

For litigation funders, investing in litigation claims can offer several advantages. Firstly, litigation financing typically offers the potential for significant returns on investment.

Successful litigation claims can result in substantial settlements or judgments, providing funders with a lucrative financial outcome.

Secondly, investing in litigation claims can offer attractive risk-adjusted returns. While litigation is inherently uncertain, and outcomes can be unpredictable, thorough due diligence and risk assessment can help funders identify cases with favourable prospects for success. By spreading their investments across multiple claims, funders can mitigate individual case risks and enhance the overall stability of their investment portfolio.

However, it is essential to recognise that investing in litigation claims carries inherent risks and challenges.

Legal proceedings can be protracted and costly, with outcomes often uncertain until the resolution of the case.

Benefits of third party funding for claimants

One of the most significant advantages of using third party funding is that it provides claimants with access to much-needed capital.

Litigation can be expensive, involving costs such as legal fees, court expenses, and expert witness fees. Using third party funding allows claimants to secure the financial resources and cash flow necessary to pursue their claims vigorously without bearing the full financial burden themselves.

When funders invest in litigation finance claims, it allows claimants to share the financial risks associated with litigation. If the claim is unsuccessful, the claimant is typically not required to repay the invested capital, which helps mitigate the financial risks of pursuing legal action.

By partnering with funders, claimants can focus more of their time and energy on the substance of their case rather than worrying about the financial aspects of litigation. This can allow claimants to better prepare their legal arguments, gather evidence, and pursue favourable outcomes.

The obvious drawback is that a successful party must forfeit a considerable portion of any amounts obtained. Importantly, funders will sometimes only accept liability for costs incurred after the funding has been put in place, not expenses involved in preparing the application for funding.

Lastly, it is crucial to note that the funder may reserve the right to impact specific decision-making processes, such as reaching an agreement on settlement figures.

Alternative funding options

Alongside third-party funding, there are other alternative funding options available to assist when conducting litigation in a cost-effective manner. These methods include:

Damages based agreements

damages based agreement (DBA), also known as a contingency fee agreement, is a type of funding arrangement made between a client and a solicitor in which the solicitor agrees to fund their case and share the risk of litigation. In return, the solicitor will be paid a percentage sum of the damages recovered as long as the client’s case is successful.

DBAs provide that, instead of being paid on a conventional hourly rate, the solicitor’s legal fees are only payable if the case is successful. Therefore, these types of funding agreements allow clients the opportunity to pursue a case without having to worry about the solicitors’ fees associated with it. In some circumstances, however, fees for Counsel and other disbursements may still be payable by the client. 

Conditional Fee Agreement (CFAs)

This is a type of agreement between a solicitor and a client where the lawyer’s fees are only payable if the case is successful. The client may still be responsible for court fees, but some lawyers may agree to defer or waive these fees if the case is lost. ATE insurance is often taken out to cover costs in these types of funding agreements.

It is important to note that the availability of funding methods may depend on the specifics of each case. It is recommended that parties seek advice from a legal professional to determine which funding options may be suitable for their specific case.

At Annecto Legal, we can help you determine which commercial litigation finance choice is the correct one for your case. We can help you reach a successful conclusion whilst keeping commercial court fees as low as possible.

ATE insurance for litigation

After the event legal expenses insurance is often used in conjunction with third party funding and the alternative funding options listed above. It can perhaps best be thought of as similar to a ‘swap’. For either no upfront fee or a small upfront fee, the insurer takes on all of the risk of the potential adverse cost award. Therefore, the client has swapped their obligation to pay the defendants in the event of a loss with the obligation to pay the insurer in the event of a win.

This is generally an attractive swap as the client is likely to be in a better financial position following a win than following a loss. Also, the payment to the insurer will only be a percentage of the adverse costs rather than the whole amount.

How can Annecto legal assist?

In cases of business disputes, obtaining timely and cost-effective legal advice is crucial to saving money and safeguarding your position. The utilisation of the legal financing industry is becoming increasingly common in business litigation matters.

Annecto Legal assists clients in recognising the value of their commercial disputes by working closely with litigation funders, insurers, and law firms that are exploring alternatives to the traditional hourly rate funding model.

If you have been involved in a dispute or are pursuing a legal claim, get in touch with an expert member of our team to find out which litigation cover is the right litigation funding option for you to reduce your commercial litigation costs.

Get in touch

* Annecto Legal can only assist on case where the loss is in excess of £100,000, with the exception of data breach claims. If you need assistance on a claim worth over £100,000, please get in touch using our form or the details below:

Registered Office

Annecto Legal Ltd, 106 Kennedy Building, Murray Street, Manchester , M4 6HS

Phone

0800 612 6587

Email

info@annectolegal.co.uk

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