What Is Litigation Finance?
Litigation finance, also known as legal financing or third-party funding, allows external funders to provide financial support to claimants involved in legal disputes. In exchange for this funding, the funder receives a portion of any recovery if the case is successful. A key feature of litigation finance is that it’s generally non-recourse, meaning that if the case is lost, the funder bears the financial loss. This structure enables claimants to pursue their cases without taking on the entire financial risk themselves, opening doors to justice that might otherwise remain closed.
Who Uses Litigation Finance and Why?
Litigation finance serves a diverse range of clients, including:
- Businesses: From startups to multinational corporations, companies use litigation finance to pursue valid claims without diverting capital from core operations.
- Individuals: Private clients can level the playing field against well-funded opponents, ensuring their day in court regardless of personal financial constraints.
- Law Firms: Firms utilize litigation finance to manage risk, take on contingency cases, and grow their practice without overextending their resources.
Litigation finance is particularly beneficial in scenarios where:
- Cash flow constraints make it challenging to fund litigation independently.
- Businesses prefer to preserve capital for operations rather than allocate it to legal expenses.
- Smaller parties need support to take on well-funded opponents.
- Complex, high-stakes litigation requires significant resources over an extended period.
Benefits of Litigation Finance
- Risk Management: Litigation finance allows claimants to share or mitigate the financial risk of lengthy litigation. By involving a funder, the risk of losing the case and incurring significant expenses is shifted away from the claimant, providing peace of mind and financial security.
- Budget Flexibility: For businesses, litigation finance offers the flexibility to pursue legal claims without sacrificing financial stability or diverting resources from core operations. This strategic approach to managing legal expenses can be a significant competitive advantage.
- Access to Justice: Perhaps most importantly, litigation finance empowers parties with valid claims to seek redress, even if they cannot cover legal expenses independently. This democratization of the legal system ensures that justice is not solely the privilege of the wealthy.
- Expertise and Resources: Many litigation funders contribute valuable expertise and resources, potentially strengthening the case and improving the chances of a favorable outcome.
How Litigation Finance Works
The process of securing litigation finance involves several key steps:
- Identifying Suitable Funders: This crucial first step involves finding funders whose investment criteria, funding capacity, and approach align with the case’s needs. Westfleet Advisors plays a pivotal role here, leveraging our extensive network and expertise to match claimants with ideal funding partners.
- Preliminary Due Diligence: Interested funders conduct an initial assessment to determine whether to issue a Term Sheet.
- Term Sheet Issuance and Negotiation: If a funder decides to proceed, they issue a Term Sheet outlining proposed funding terms. Westfleet advises clients on market rates and helps model various return scenarios to ensure an informed decision.
- In-Depth Due Diligence: Once a Term Sheet is signed, the funder conducts comprehensive due diligence, often involving external counsel.
- Final Approval: The funder presents the investment to their Investment Committee for final approval.
- Funding Deployment: After signing the Litigation Funding Agreement, the funder begins deploying capital according to the agreed-upon schedule.
Throughout this process, Westfleet Advisors provides invaluable support, saving clients time and effort while ensuring they secure the most favorable funding arrangement possible.
Common Misconceptions
It’s important to address some common misconceptions about litigation finance:
Myth: Litigation finance is only for those unable to pay for litigation.
Reality: Many financially stable businesses use litigation finance as a strategic tool to manage risk and allocate resources effectively.
Myth: Funders control the litigation process.
Reality: Funders are typically passive investors. The claimant and their legal team retain control over decision-making throughout the litigation.
Myth: Litigation finance encourages frivolous lawsuits.
Reality: Funders conduct thorough due diligence and only invest in cases with strong merits, actually discouraging weak claims.
Choosing a Litigation Finance Partner
Selecting the right litigation finance partner is critical to the success of any funded case. Funders vary in terms of their:
- Case preferences
- Capital availability
- Deal structures
- Diligence processes
This variability underscores the importance of finding a partner whose approach aligns with your specific needs. Westfleet Advisors acts as a trusted intermediary in this selection process, representing solely the interests of our clients. Our expertise ensures that you receive the best possible deal structured to meet your unique objectives while saving you valuable time to focus on the substance of your case.
Conclusion
Litigation finance plays a vital role in supporting valid claims and helping parties navigate the complexities of litigation without bearing the full financial burden. By providing funding for legal expenses, it empowers claimants to pursue fair outcomes that might otherwise be out of reach. As a strategic tool for managing risk, preserving cash flow, and ensuring access to justice, litigation finance is revolutionizing the legal landscape.
If you’re considering litigation finance as part of your legal strategy, partnering with experienced advisors can make all the difference. Westfleet Advisors is here to help you navigate this complex landscape and find the right funding solution tailored to your unique needs and goals.
Interested in learning how litigation finance can support your legal strategy? Contact Westfleet Advisors today to explore your options and take the first step toward empowering your legal pursuits.