A Global Industry with National Characteristics
Litigation funding enables a costly litigation or arbitration case to proceed through the provision of financial resources by a third party. The litigation funder has no direct interest in the proceedings but, at the outset, agrees a fee if the case is won. This may comprise a percentage of the damages recovered or a multiple of the advance, or a combination of the two. If the case is lost, the funder will forfeit its financing funds.
Initially established in Australia, the funding of litigation has become increasingly common in the U.K., the U.S. and Canada, and is growing in Germany, the Netherlands and South Africa, among other jurisdictions. Although the industry is global, country boundaries define the use, form and impact of litigation funding in each jurisdiction and its potential growth.
The impact of litigation funding goes beyond the introduction of capital to enable claims that might otherwise not have been pursued. Litigation funders are entrepreneurial and able to utilize their knowledge and experience in the extraction of a commercial return from the claims process. As a result, they have contributed to and accelerated the spread of different types of claims and litigation. Funders have linked with the American plaintiff bar, which is also exporting know-how and initiatives globally, and have been front and center in some of the largest multi-jurisdictional claims against companies and directors.
The role of third party litigation funders has been a core part of the development of securities class actions in Australia, and has been pivotal in the development of collective actions against financial institutions and commercial entities and their directors and officers in England.
While many funders specialize in litigation funding, others may include the funding of litigation within a diverse investment portfolio. Funders may be backed by institutional investors (publicly listed or private), a permanent capital vehicle, a private equity or hedge fund, closed end funds (either dedicated to litigation funding or with funding as part of their operations) or a high net worth individual. Figure 1 lists selected litigation funders by type.
The Future of Litigation Funding
It will be interesting to see whether the litigation funding market develops into the “litigation finance” market many anticipate. It is increasingly regarded by corporations as an attractive alternative thereby liberating capital that would otherwise be tied up in the litigation process. Indeed, sophisticated users of litigation finance have been able to utilize a pending dispute/portfolio of claims as a contingent asset to raise capital.
Funders have diversified their investments and moved into new products, such as appeals hedging and monetisation. In addition, global judgment enforcement and the method of case funding has become increasingly creative. For example, they may fund part of the claim or only disbursements, and provide appeal and post settlement financing (which bridges the gap between judgment and recovery of the settlement sum).