In our previous post, we discussed how the United Kingdom and Australia have liberalized traditional legal doctrines to make it easier for third parties to provide funding to litigants. This liberalization has included permitting these funders to play a substantive role in strategic decision-making on matters such as settlement value and the financial analysis of the claim. This post explains in more detail why this liberalization makes sense.
Third parties invest in litigation matters on the basis of a sophisticated understanding of the financial value of a claim. Because lawyers are not necessarily experts in finance, third-party funders are often better able to help litigants understand what their claim is worth and what costs are worth incurring in the pursuit of that claim. Through their specialized financial expertise, litigation funders can help litigants by providing econometric principles and data to define sensible settlement ranges. In addition, the funder can provide assistance in developing economic arguments to be used in settlement negotiations.
When a third-party has an economic stake in a claim, it can function as an effective watchdog to keep litigation costs down. In many cases, a third-party funder will have vastly more experience than the litigant in dealing with the cost of discovery, expert witnesses, and other aspects of trial preparation. Moreover, many third-party funders have specific experience in project management that can be invaluable in making the litigation process efficient. Thus, a third-party funder can monitor the performance of the litigant’s attorneys, making sure that they are meeting performance standards and keeping costs down.
In addition, third-party funders often have more leverage than a client would in negotiating with a law firm for its attorney fees and other costs. Here again, the funders’ experience in managing litigation projects can assist a litigant, who may have never been involved in a legal claim before. And the funder can act as an intermediary between the litigant and the law firm with respect to billing issues. This can be especially valuable when the litigant is a business entity whose in-house counsel is supervising the litigation. In an extensive and potentially valuable litigation matter, managing the outside lawyers can be nearly a full-time job, even though it is only a portion of the in-house counsel’s responsibility to his company. A third-party funder can remove some of this burden from in-house counsel, allowing in-house counsel to have more time for his full range of duties to the company.
Finally, the presence of a third-party funder can help bring about faster and more lucrative settlements. When a third-party risks its own funds on a case, its involvement is a signal to the opposing party that an objective outsider thinks the legal claim has merit. In a sense, a third-party funder can provide a reality check to an opposing party who might be unreasonably resisting settlement. In this respect, permitting third-party funding does not drag litigation out. To the contrary, it can bring it to a swifter and more efficient conclusion.
Topics: litigation finance, capital markets, third-party funding, litigation costs, legal costs, law reform
Michele DeStefano, Nonlawyers Influencing Lawyers: Too Many Cooks in the Kitchen or Stone Soup?, 80 Fordham L. Rev. 2791 (2012) available at: http://ir.lawnet.fordham.edu/flr/vol80/iss6/16