Last updated Example of litigation financing process
Legal financing (also known as litigation financing, professional funding, settlement funding, third-party funding, third-party litigation funding, legal funding, lawsuit loans and, in England and Wales, litigation funding) is the mechanism or process through which litigants (and even law firms) can finance their litigation or other legal costs through a third party funding company.
Similar to legal defense funds, legal financing companies provide money for lawsuits but are more often used by those without strong financial resources. Furthermore, legal financing is more likely to be used by plaintiffs, whereas legal defense funds are more likely to be used by defendants. Money obtained from legal financing companies can be used for any purpose, whether for litigation or for personal matters. On the other hand, money obtained through legal defense funds is solely used to fund litigation and legal costs.
Legal financing companies provide a nonrecoursecash advance to litigants in exchange for a percentage share of the judgment or settlement. Despite some superficial similarities to an unsecured loan with a traditional lender, legal financing operates differently from a loan. Litigation funding is generally not considered a loan, but rather as a form of an asset purchase or venture capital. Legal funding advances are not debt and are not reported to the credit bureaus, so a litigant's credit ratings will not be affected by a litigant obtaining a legal funding advance.
Legal financing companies normally provide money in the form of a lump sum payment, and generally, no specific account is established for the litigant. If the case proceeds to trial and the litigant loses, the third-party funding company receives nothing and loses the money they have invested in the case.[1] In other words, if the litigant loses, they do not have to repay the money. In addition, litigants generally do not have to pay monthly fees after obtaining legal financing. Instead, no payments of any kind are made until the case settles or judgment is obtained, which could occur months or years after legal funding is received. Accordingly, to qualify for funding with a legal financing company, a litigant's case must have sufficient merit that the company deems its investment in the case to be worth the risk.
While third-party litigation funding is not a new concept, it is relatively new to the United States and has its roots in the old English principles of champerty and maintenance. Some U.S. states still prohibit or materially limit champerty and others allow it with some restrictions.[3]
Little financial assistance is available from traditional sources to help injured plaintiffs cover the cost of litigation or pay their personal expenses while a case remains pending. Plaintiffs may turn to credit cards and personal loans to cover litigation fees, attorneys' fees, court filings, personal finances, and living expense shortfalls while they wait for litigation to be resolved. The obligation to repay that debt is not affected by the outcome of the plaintiff's lawsuit.
In many jurisdictions, and throughout the United States, attorney rules of ethics preclude an attorney from advancing money in the form of loans to their clients.[4]
The introduction of legal financing provides qualified plaintiffs with a means of paying the cost of litigation and their personal expenses, without having to resort to traditional borrowing.
Qualification for litigation financing
Legal funding companies do not provide legal advice to applicants, nor do they provide referrals to attorneys. Thus, to qualify for legal financing a plaintiff must have already hired an attorney. To apply for legal financing, the plaintiff must complete an application form and provide supporting documents.[5]
As legal financing companies only recover their investment if the plaintiff recovers money from the funded lawsuit, the merits of the plaintiff's case must be strong, meaning that the plaintiff has a strong argument that the defendant is liable for the damages claimed in the lawsuit. The defendant in the case (the person or company being sued) must also have the ability to pay a judgment, whether by virtue of its own financial strength or through insurance coverage. The injured party's attorney must also agree to the legal financing and generally must to sign an agreement consenting to the legal financing.
Additional qualification or approval factors may include the total amount of damages sought, a sufficient potential margin of recovery to justify the investment, the background of the applicant, and the laws of the applicant's place of residence.[6] Some legal financing companies limit their investment to specific types of lawsuits, such as a personal injury claim or commercial litigation.[7]
Benefits
Lawsuits are expensive and may progress slowly, over a period of many months or years. During that time, many plaintiffs may feel considerable financial pressure and may need money to pay the costs of litigation, as well as the costs of supporting themselves. When obtained during the course of tort litigation, legal financing may help a plaintiff who has immediate needs, such as medical care, and cannot afford to wait until the litigation concludes to obtain money. A severely injured plaintiff might have significant personal expenses due to disability or loss of income and may face significant personal and medical debt, and as a result, may feel considerable pressure to enter into an early settlement. A defendant may recognize a plaintiff's financial need and offer a low settlement in anticipation that the plaintiff will not be able to afford continued litigation.
The desperate situation of plaintiffs is reflected in a finding by the American Legal Finance Association, an industry group for legal financing companies, that over 62% of funds provided to plaintiffs are used to stop a foreclosure or an eviction action.[8]
Types
Litigation funding has two major divisions: consumer financing, commonly referred to as pre-settlement funding or plaintiff advances, and commercial financing. Consumer financing generally consists of small advances between $500 and $2000. Prominent consumer financing companies include LawCash, Oasis Financial, and RD Legal Funding. Commercial financing for companies to pursue legal claims generally is dedicated toward the payment of attorney fees and litigation costs.[9]
Litigation funding may also come in the form of crowdfunding, in which case hundreds or tens of thousands of individuals can help to pay for a legal dispute, either investing in a case in return for part of a contingent fee or offering donations to support a legal right that they believe in.[10]
Criticisms
One concern about litigation funding is that it is costly to the plaintiff, and may take a very large chunk out of the plaintiff's eventual settlement or verdict. After paying attorney fees and the amount owed to the legal financing company, the plaintiff may receive little or no additional money beyond any amount received from the advance.[2]
There is some concern that, if widely adopted, litigation finance could prolong litigation and reduce the frequency of settlements of civil lawsuits.[11] A study of civil lawsuits published in the Journal of Empirical Legal Studies found that between 80% and 92% of cases settle.[12] The study found that most plaintiffs who decided to pass up a settlement offer and proceed to trial ended up recovering less money than if they had accepted the settlement offer.[12]
The legal financing industry has come under fire from critics for actual and potential legal and ethical violations. For example, some companies have been found to violate state usury laws (laws against unreasonably high-interest rates), champerty laws (laws prohibiting third parties from furthering a lawsuit for an interest in the recovery), or to require action by the applicant's lawyer that might be unethical under state rules of professional conduct.[13]
A major criticism of litigation funding is that its cost is disproportionate to the risk accepted by litigation finance companies.[2] As lenders thoroughly evaluate claims before they agree to provide financing, they have a very high likelihood of recovering their fee at the conclusion of the plaintiff's case, and further limit potential losses by providing financing in amounts that are relatively small as compared to the plaintiff's anticipated recovery.[2]
In June 2011, the New York City Bar Association addressed some of the ethical issues raised by lawsuit financing in an ethics opinion about third-party non-recourse legal funding. It concluded that with due care a lawyer could help a client obtain legal financing and that non-recourse litigation financing “provides to some claimants a valuable means for paying the costs of pursuing a legal claim, or even sustaining basic living expenses until a settlement or judgment is obtained.”[13] Many lawyers advise clients to pursue legal financing only as a last resort when other forms of financing are not available.[2][12]
In recent years, some high-profile cases have inspired criticism of legal financing.[14] For example, an international legal battle financed by UK-based litigation financing firm Therium[15] involved self proclaimed heirs of the Sultan of Sulu and the Malaysian government, which was ordered to pay $14.9 billion as compensation by Spanish arbitrator Gonzalo Stampa. The award, which was eventually struck down by the Hague Court of Appeal on June 27, 2023,[16][17] inspired calls for stronger regulation, over such concerns as corruption, profiteering, and undue foreign influence.[18][19] In 2022, the European Parliament called on the European Commission to introduce regulations covering third-party litigation funding.[20] The demand followed a report by German MEP Axel Voss on the same issue.
Worldwide
Australia
Commercial litigation funding has been allowed in Australia in the late 1990s, in parallel with developments in the US, Canada and Asia.[21][22]
England and Wales
Litigation funding has been permitted in England and Wales since 1967 (and in insolvency matters since the late nineteenth century). However, recent years have seen its growing acceptance as part of the litigation landscape.[23]
In 2005, in the case of Arkin v Borchard Lines Ltd & Others, the English Court of Appeal made it clear that litigation funding is a legitimate method of financing litigation. In January 2010, Chapter 11 of the Jackson Review of Civil Litigation Costs was published, effectively providing judicial endorsement to litigation funding.[24]
In November 2011, a Code of Conduct for Litigation Funders was launched, which sets out the standards of best practice and behavior for litigation funders in England and Wales. The Code of Conduct provides transparency to claimants and their solicitors. It requires litigation funders to provide satisfactory answers to certain key questions before entering into relationships with claimants. Under the Code, litigation funders are required to give assurances to claimants that, among other things, the litigation funder will not try to take control of the litigation, the litigation funder has the money to pay for the costs of the funded litigation and the litigation funder will not terminate funding absent a material adverse development. The Code has been approved by Lord Justice Jackson and commended by the Chair of the Civil Justice Council, Lord Neuberger of Abbotsbury, the President of the Supreme Court.[25] The regulatory body responsible for litigation funding and ensuring compliance with the Code is the Association of Litigation Funders (ALF).[26]
The Adam Smith Institute think tank published a report in October 2024, calling for greater regulation in third party litigation funding. Recommendations included regulation of the funding by the Financial Conduct Authority, in the same way as other investment products, and increased transparency.[29]
Hong Kong
Hong Kong legalised third party funding in 2017 after an amendment for its use with arbitration, mediation and related proceedings.[30]
With the changes to legislation third party funders in Hong Kong have been made subject to codes of practices and safeguards to assure industry standards.[31]The Hong Kong International Arbitration Centre (HKIAC) provided further guidance in 2018[32] to give additional guidance for arbitral tribunals, parties to arbitration and third-party funders.
The HKIAC also recognised that although third party funding is frequently associated with claimants lacking the financial resources for their claim, it may also be used by parties wishing to ‘hedge cost risks or reduce capital outlay.’[33]
HKIAC statistics suggest that these legislative changes have contributed to an increasing use of third party funding within arbitrations.[34] For example, in 2020, out of the 318 arbitrations that were submitted, parties made disclosure of third-party funding in 3 of them. In 2021 this increased to 6 out of a total of 277. Then in 2022, 74 disclosures were made from a total number of 344 arbitrations. However, it remains too early to draw longer-term conclusions regarding the application and popularity of funding within Hong Kong.[35]
In terms of the global importance of Hong Kong as a destination for arbitrations, in 2021, the Queen Mary International Arbitration Survey ranked Hong Kong in the top five most preferred seats for arbitration, alongside London, Singapore, Paris and Geneva.[34]
India
There is no express law regulating third party funding, but court precedents have recognized the practice and put in restrictions. Agreements between funders and litigants are subject to Indian Contract Act, 1872.[36]
Russia
There is no specific legislation in Russia governing litigation funding, however, it is not prohibited by Russian law. In 2019, Chairman of the Council of Judges of the Russian Federation Viktor Momotov stated that third-party investment in litigation could increase access to the courts by parties who could not otherwise afford the cost of litigation.[37] In 2020, the Council of the Federation Committee on Constitutional Legislation and State Building discussed the need for legislation or regulation to allow a litigation funding industry to develop.[38]
Singapore
The first recorded use of third party funding in Singapore was in 2017 following an amendment to the Civil Law Act (CLA).[39]
Following a positive response from the business community regarding to ability to use third party funding the Ministry of Law (MinLaw) initiated a public consultation in 2018 to assess if the scope of funding should be increased. As a result of this consultation the Ministry of Law (MinLaw) extended the application of third party funding from June 28, 2021 to include domestic arbitration proceedings, certain proceedings in the Singapore International Commercial Court (SICC), and related mediation proceedings.[40]
Singapore is one of the most popular ‘arbitration seats’ globally.[41]
South Africa
Litigation funding is generally unregulated in South Africa, but it appears that it has quietly become part of the South African legal landscape, getting little to no resistance in the face of what used to be portrayed as contra bonos mores champertous agreements, which are, by definition, illegal.[42]
A pactum de quota litis is defined as “an agreement to share the proceeds of one or more lawsuits” and it is the duty of the court to ascertain, of its own motion, the lawfulness of such agreement as it cannot lend its assistance to the execution of agreements and transactions which are contrary to law. An initial distinction between an acceptable and an objectionable pactum de quota litis was formulated in Hugo & Möller N.O. v Transvaal Loan, Finance and Mortgage Co, 1894 (1) OR 336. The Court held that a fair agreement to provide the necessary funds to enable an action to proceed, in consideration for which the person lending the money is to receive an interest in the property sought to be recovered, must not be considered per se to be contra bonos mores. The court was concerned about potential abuses of such agreements, such as using them for purposes of gambling with litigation cases.
Several cases have provided further guidelines for such litigation financing agreements. In Hadleigh Private Hospital (Pty) Ltd t/a Rand Clinic v Soller & Manning Attorneys and Others 2001 (4) SA 360 (W), the Court affirmed that an agreement to share the proceeds of one or more lawsuits is not necessarily unlawful and must indeed be considered acceptable when a litigant is not in a financial position to fund his litigation completely. In another case, the South Africa Supreme Court of Appeal held, in PriceWaterHouse Coopers Inc and Others v National Potato Co-operative Ltd, 2004 (6) SA 66 (SCA), that the "although the number of reported cases concerned with champertous agreements diminished, courts have still adhered to the view that generally they are unlawful and that litigation pursuant to such agreements should not be entertained". However, the Supreme Court sought to clarify any disagreements and took a different route.
The Supreme Court ruled that:
An agreement in terms of which a stranger to a lawsuit advances funds to a litigant on condition that his remuneration, in case the litigant wins the action, is to be part of the proceeds of the suit is not contrary to public policy or void, and
The existence of such an assistance agreement cannot be the base of a defense in the action. In June 2010, in an interlocutory ruling rendered in the same case, the High Court found that the funder is, after all, a co-owner of the claim and should, therefore, be joined as a party to the trial. Therefore, an order for costs may be made directly against him to the extent that the funded party cannot support them even after the termination of the funding agreement.[42]
United States
Legal financing is a fairly recent phenomenon in the United States, beginning in or around 1997. Litigation funding is available in most U.S. jurisdictions. Litigation funding is most commonly sought in personal injury cases, but may also be sought for commercial disputes, civil rights cases, and workers' compensation cases. The amount of money that plaintiff receive through legal financing varies widely but often is around 10 to 15 percent of the expected value of judgment or settlement of their lawsuit.[2] Some companies allow individuals to request additional funding at a later date. The amount of money available depends on the policies of the financing company and the characteristics of the plaintiff's lawsuit.
One major division in litigation finance is between consumer and commercial financing companies. While consumer financing generally consists of small advances between $500 and $2000 directly for individual plaintiffs, commercial financing for companies to pursue legal claims generally is dedicated towards payment of litigation costs.[2] The largest legal financing companies in the space are commercial, including public companies.
Litigation funders generally evaluate cases based on legal merit, amount of damages, and financial viability of the defendant. Many funders also specialize in specific areas of litigation or have restrictions on funding size and funding structure.[43]
A class action, also known as a class action lawsuit, class suit, or representative action, is a type of lawsuit where one of the parties is a group of people who are represented collectively by a member or members of that group. The class action originated in the United States and is still predominantly an American phenomenon, but Canada, as well as several European countries with civil law, have made changes in recent years to allow consumer organizations to bring claims on behalf of consumers.
Vexatious litigation is legal action which is brought solely to harass or subdue an adversary. It may take the form of a primary frivolous lawsuit or may be the repetitive, burdensome, and unwarranted filing of meritless motions in a matter which is otherwise a meritorious cause of action. Filing vexatious litigation is considered an abuse of the judicial process and may result in sanctions against the offender.
Champerty and maintenance are doctrines in common law jurisdictions that aim to preclude frivolous litigation:
A lawsuit is a proceeding by one or more parties against one or more parties in a civil court of law. The archaic term "suit in law" is found in only a small number of laws still in effect today. The term "lawsuit" is used with respect to a civil action brought by a plaintiff who requests a legal remedy or equitable remedy from a court. The defendant is required to respond to the plaintiff's complaint or else risk default judgment. If the plaintiff is successful, judgment is entered in favor of the plaintiff, and the Court may impose the legal and/or equitable remedies available against the defendant (respondent). A variety of court orders may be issued in connection with or as part of the judgment to enforce a right, award damages or restitution, or impose a temporary or permanent injunction to prevent an act or compel an act. A declaratory judgment may be issued to prevent future legal disputes.
In English civil litigation, costs are the lawyers' fees and disbursements of the parties.
In law, a settlement is a resolution between disputing parties about a legal case, reached either before or after court action begins. A collective settlement is a settlement of multiple similar legal cases. The term also has other meanings in the context of law. Structured settlements provide for future periodic payments, instead of a one time cash payment.
Prejudice is a legal term with different meanings, which depend on whether it is used in criminal, civil, or common law. In legal context, prejudice differs from the more common use of the word and so the term has specific technical meanings.
In contract law, a forum selection clause in a contract with a conflict of laws element allows the parties to agree that any disputes relating to that contract will be resolved in a specific forum. They usually operate in conjunction with a choice of law clause which determines the proper law of the relevant contract.
Attorney's fee is a chiefly United States term for compensation for legal services performed by an attorney for a client, in or out of court.
Personal injury is a legal term for an injury to the body, mind, or emotions, as opposed to an injury to property. In common law jurisdictions the term is most commonly used to refer to a type of tort lawsuit in which the person bringing the suit has suffered harm to their body or mind. Personal injury lawsuits are filed against the person or entity that caused the harm through negligence, gross negligence, reckless conduct, or intentional misconduct, and in some cases on the basis of strict liability. Different jurisdictions describe the damages in different ways, but damages typically include the injured person's medical bills, pain and suffering, and diminished quality of life.
Arbitration is a formal method of dispute resolution involving a third party neutral who makes a binding decision. The third party neutral renders the decision in the form of an 'arbitration award'. An arbitration award is legally binding on both sides and enforceable in local courts, unless all parties stipulate that the arbitration process and decision are non-binding.
Tort reform consists of changes in the civil justice system in common law countries that aim to reduce the ability of plaintiffs to bring tort litigation or to reduce damages they can receive. Such changes are generally justified under the grounds that litigation is an inefficient means to compensate plaintiffs; that tort law permits frivolous or otherwise undesirable litigation to crowd the court system; or that the fear of litigation can serve to curtail innovation, raise the cost of consumer goods or insurance premiums for suppliers of services, and increase legal costs for businesses. Tort reform has primarily been prominent in common law jurisdictions, where criticism of judge-made rules regarding tort actions manifests in calls for statutory reform by the legislature.
Alternative dispute resolution (ADR), or external dispute resolution (EDR), typically denotes a wide range of dispute resolution processes and techniques that parties can use to settle disputes with the help of a third party. They are used for disagreeing parties who cannot come to an agreement short of litigation. However, ADR is also increasingly being adopted as a tool to help settle disputes within the court system.
Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006), is a United States Supreme Court case concerning contract law and arbitration. The case arose from a class action filed in Florida against a payday lender alleging the loan agreements the plaintiffs had signed were unenforceable because they essentially charged a higher interest rate than that permitted under Florida law.
A case bond is an investment in a legal claim. More specifically, it is a non-recourse purchase of an assignment interest in a legal cause of action. A case bond provides a litigant with money prior to a monetary recovery. In return, the case bond accrues fees until there is a recovery which triggers the satisfaction of the assignment interest. If there is no recovery in the underlying claim or lawsuit the case bond self terminates and the obligation to satisfy its terms expire. Typically, case bonds are used by litigants to cover the costs of daily living expenses, medical bills and litigation costs.
Harrison v. NAACP, 360 U.S. 167 (1959), is a 6-to-3 ruling by the Supreme Court of the United States which held that the United States District Court for the Eastern District of Virginia should have abstained from deciding the constitutionality of three barratry, champerty, and maintenance laws in the state of Virginia until state courts had had a reasonable chance to construe them.
Peachtree Financial Solutions is a company headquartered in Radnor, PA. Peachtree provides cash to individuals with illiquid assets such as structured settlement payments, annuity payments, lottery winnings, and active non-settled lawsuits.
The legal financing industry provides non-recourse legal financing to litigants. Sometimes this financing is funded from outside of the firm or from individual lawyer's finances, and then funneled through a third-party company. Financing is often for plaintiffs involved in personal injury, workers' compensation, and civil rights. The industry provides litigants with cash in a lump sum form upfront in exchange for a share of the litigant's future settlement or trial award. While the litigant awaits the resolution of their case, the legal financing industry provides for immediate relief from financial burdens such as mortgage payments, rent, medical bills, educational bills, daily expenses, or even legal fees.
Persona Digital Telephony Ltd v Minister for Public Enterprise, Ireland, [2017] IESC 27; was an Irish Supreme Court case in which the Court ruled that third party funding to support a plaintiff's legal costs and disbursements is unlawful.
Gonzalo Stampa, is a Spanish lawyer, author and arbitration judge best known for his arbitration role in the Malaysia-Sulu Case. He is the founding partner of law firm Stampa Abogados in Madrid. According to ICLG, Stampa has over 30 years of legal practicing experience and has served as the arbitrator in more than 172 international arbitrations. He is a Corresponding Academician at the Royal European Academy of Doctors (RAED).
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