Litigation funding is referred to by a bewildering variety of names. You may see it called:
- Litigation finance
- Legal finance
- Third-party funding
- TPLF
- Appeals funding
- Arbitration funding
- Claimant funding
- Plaintiff funding
Whatever we call litigation funding, it is actually quite simple to understand, and as a growing alternative asset class that is not correlated to the equity and bond markets, it represents a uniquely attractive opportunity for investors.
Below we outline the basics of what litigation funding is, how it works, and how VWM Capital is using it to provide targeted funding to legal cases with a positive social impact.
What is litigation funding?
Litigation funding is when a third-party investor provides capital to someone to enable them to pursue a legal case.
As an example, a family who lives in social housing may suffer from housing disrepair that has not been addressed. They may also lack the funds to take their housing provider to court. Litigation funding can open the doors of justice for them and allow them to seek a speedy resolution.
The funder provides financing for the legal claim in return for a portion of any costs and damages that are awarded or agreed to by a settlement.
A litigation finance transaction is not a loan because it is non-recourse. This means that if the case is lost, the funder will receive nothing. They will only receive a payout if the case is successful.
Litigation funders must weigh the potential returns of any claim against the risk of it losing. By treating legal claims as financial assets, litigation funding has grown into a compelling alternative asset class – one that is not correlated to traditional capital markets and therefore relatively insulated from market volatility.
The changing face of litigation funding
The growth of litigation funding over the last few years has seen it gradually transform to become a force for good.
Traditionally, funders have concentrated on high-risk, high-stakes commercial cases involving large corporations. Increasingly, though, this is no longer the case.
Funds are now being used to support the person-in-the-street who has suffered from excessive undisclosed commissions on car PCP deals or mortgages, or whose business has been mis-sold an energy contract.
This has been made possible by innovative applications of the latest technology. Previously, the administrative costs of selecting cases for funding, performing due diligence checks, and releasing funds to solicitors for a high volume of these cases have all rendered it unviable. However, by using technology to automate and enhance this process, at VWM Capital we’ve been able to open up funding to hundreds of these cases each week – meaning we can support people who would otherwise struggle to bring their cases to court.
With our approach, alongside ESG benefits, we can offer investors risk diversification benefits, as their investment is spread over a greater surface area of smaller litigation claims – all preselected by algorithmic lawtech before being submitted to an expert legal panel to assess their probability of success.
Funders and investors will only see a return on their investment if the cases are successful, either when they reach a judgment in court or if they reach a favourable early settlement. For that reason, accuracy in selecting cases for funding is of paramount importance.
Another way funders can reduce risk for themselves and investors is by using specialist insurance products. At VWM Capital, we fund cases protected by After-The-Event (ATE) insurance, which covers adverse legal fees in the unlikely event the case is lost.
In the coming years, litigation funding looks set to continue to grow around the world as regulatory reform makes it possible for more people to secure financing for their claims.
At its heart, litigation funding is about opening up access to justice – so it’s available to everyone, not just those with the deepest pockets.
How does litigation funding work?
Litigation funding is a simple agreement between two parties: one is the claimant, who is involved in a legal dispute, and the other is the funder, who provides the finance needed to make the claim.
A contractual agreement is drawn up between the funder and the claimant. This is called a Litigation Funding Agreement (LFA).
This outlines the level of finance that will be provided to fund the litigation. It also details the share of any award the funder will receive should the case reach a successful resolution or settlement.
If a successful judgment is achieved, or when the claim is settled early, the funds are paid to the law firm representing the claimant. They are then distributed, first to the funder, according to the LFA’s terms, and then to the claimant.
If a case is unsuccessful, the amount of capital the funder has invested will not be returned. This is why claims are often backed by After the Event (ATE) insurance to limit the funder’s exposure.
Common misconceptions about litigation funding
- Litigation finance leads to frivolous lawsuits
The argument goes that with more claimants being able to sue we will see an increase in cases coming to court that have no merit.
Yet, the reality is that funders simply won’t finance cases that have ‘likely to lose’ written all over them. These are non-recourse investments: if the case is lost, the funder gets nothing.
- Third-party funders influence legal outcomes
It’s a fact that no one should control the decisions of a case except the claimant and the legal team, and this is why all litigation funders must remain passive investors. Contracts specify that they are forbidden from making legal decisions unless the claimant asks them for advice.
- Litigation finance prolongs trial times
It is often stated that claimants having access to funding will be much less likely to settle early, but why should those without the money be forced to take an early settlement? Litigation funding is there to empower those with meritorious legal claims.
- Litigation funding will simply clog up the courts
This argument may be partially true – more cases will be able to come to court. But our justice system is there to serve those who have been wronged, and it is a far greater problem if people who have been wronged cannot access justice. More cases may also act as a deterrent for those doing wrong.
Litigation funding: an asset class with enormous potential
Experts predict that litigation funding will continue to grow – and at VWM Capital we’re ensuring that it’s accessible to more and more people, while also remaining a simple and attractive option for investors.
Litigation funding:
- Is a growing alternative asset class uncorrelated to traditional capital markets
- Can provide compelling returns for investors that are not subject to equity and bond market volatility
- Supports ESG objectives
To find out more, please contact the team. You can read more about how litigation funding works here.