Litigation Funding: Myth or Reality?

Posted on 13 July 2015

Litigation Funding: Myth or Reality?

If you believe surveys, 25% of people reading this will have never heard of third party litigation funding, 56% will have a general idea of what it is, 11% will know someone who has used it and just 8% will have had some form of direct experience. In a world where 92% of people have either never heard of it or never used it, it's hardly surprising that litigation funding is a topic rife with rumour. So what is the truth?

What is Litigation Funding?

Put simply, it's getting someone else to fund the costs of bringing a claim -whether litigation, arbitration or another form of Alternative Dispute Resolution (ADR) - in return for a share of the damages if the case is successful.

Myth No 1.

I can afford to pay for my own legal costs, funding doesn't apply to me.

The origins of litigation funding stem from those who had a good claim but lacked the means to pursue it. Funding makes clear sense for a bankrupt company, or an individual without the means to challenge a big multinational, but times have changed: Funding will always have a natural home with those that can’t pay for themselves but a new class is emerging of those that could pay but prefer not to. We run funded cases for large PLC's and well-known household names who could pay for the litigation or arbitration many times over but look to funding as a way of managing their balance sheets and cash flow, avoiding the need to divert cash from their core business to fund legal costs.

Myth No. 2

Funding is prohibitively expensive.

Funding doesn’t work for every case. On successful claims, funders will typically want their original investment back, plus a return of at least three times that amount if the dispute runs its full course. For funding to be viable, you need a case where you stand to receive back at least five times the amount of your legal costs. That can sound expensive or cheap depending on the situation. The funder holds onto the tab if you lose and the structuring of funders' returns is becoming more sophisticated by the day. It's now normal for the funder's success fee to be staged over time, or by reference to the amount recovered to encourage early settlement and allow for a potentially greater return to the client.

Myth No. 3

Funders are cowboys who can’t be trusted

Funding is an unregulated industry. Anyone can call themselves a litigation funder and promise to fund your claim with no guarantee that they are good for the money. There have been a couple of widely publicised horror stories but the truth is that litigation funding in the UK is now an industry worth over £1billion. The cowboys have been side-lined, forced out by an increasing number of highly sophisticated professional funders backed by some of the world's largest investment funds. There is even a self-regulating body within the UK to which a number of funders voluntarily subscribe.

Third party funding has exploded in the UK over the last five years. It is no longer just a clever way to allow administrators to call in debts but a permanent fixture of the litigation landscape. It has permeated all sectors, clients and forms of dispute resolution and its prevalence will only increase. In a world where knowledge is power and cash is king, the time for turning a blind-eye to litigation funding is gone.



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