What is litigation funding?
It is a funding method which is also often referred to as third party funding. It can provide companies with funding for cases. Most litigation funding companies only accept cases when presented through a solicitor, which can be easy to arrange.
When businesses choose to take a claim to court but they don't have the necessary funds to do so, a litigation funding company could prove to be a viable option. The business would not need to pay anything in the first instance and would only seek to recoup the loan should the case win.
How much do litigation funding companies recoup?
This all depends on the third party funding company in question. Some ask for their initial investment back plus a Return on Investment (ROI) of around 30% of the damages that have been awarded. Others ask for the investment plus an amount equal to three times this amount as their ROI.
What kind of cases do third party funders take on?
In order to take on a case, third party funders must go through extensive due diligence procedures first.
If a case is accepted, it must:
- Be of high value (some third party funding companies will only accept cases with a value of more than £5m)
- Be strong enough to win
- The defendant has to be able to pay for the case
Also, commercial law is the main sector for litigation funding at the moment, as this can provide funders with the best ROI. There is of course increased risk with funding cases which are of higher value, but the potential returns can be worth this.
At the moment, smaller cases of lesser financial merit are not taken on as there is no real market for them. However, there is some speculation over whether the recent introduction of Alternative Business Structures (ABS) could change this.
What is the future of third party funding?
Litigation funding has steadily increased in popularity over the years and has also seen success in the USA and Australia. Australia has a quite similar system to the UK’s, whereas the USA has some differences.
It is thought that, as law firms begin to familiarise themselves with the third party funding market, it will become more commonplace and an increased number of big businesses will choose to use it.
This article was provided by Aurora Johnson on behalf of Vannin Capital, a litigation funding company working within the commercial sector. You can visit ligitationfunding.com to find out more.
