Part I: Understanding Risk and Benefits in Litigation Finance
Like any other form of investment, litigation financing involves a careful analysis of risk and reward. When a funder considers investment in a case, it evaluates a number of factors that could affect the ultimate outcome of that case and prospects for recovery. In this three-part post, we will discuss the particular kinds of risk in detail.
The primary risks associated with investment in litigation relate to the legal process itself. The most important of these legal risks relates to the legal claim itself. As a general matter, some causes of action have higher rates of success than others. In addition, the risk of a claim can very with the strength of the evidence available to the claimant. In many cases, the substantive strength of a claim cannot be measured until significant progress has been made in discovery. Thus, when an investment is made early in the legal process, it can be difficult for the investor to fully evaluate this factor.
Other legal risks include those associated with the claimant’s counsel. When considering an investment, the funder must have a sense of the capabilities of the attorney and the law firm who will be prosecuting the claim. This involves assessing the track record and resources of that attorney and law firm, among other things.
Legal risks can also include developments in the law. The body of law that governs the claim may be in flux, either because precedent in case law is unclear or because there are efforts in the legislature or elsewhere for legal reform. If the law takes the wrong turn, a claim that looked promising could turn out to be a poor risk.
Jurisdictional risk is a kind of subset of the risks associated with developments in the law. Different courts and different judges may interpret the law differently, including procedural rules that can be important factors in the development of a case. In addition, different jurisdictions have different procedural conventions, which may improve or diminish the chances of certain claims. If the claim is being arbitrated, this kind of jurisdictional risk takes on a different dimension because, according to most arbitration procedure, the parties can select arbitrators and therefore have some control over who will be deciding their case.
Topics: litigation finance, legal reform, third-party funding, litigation costs, cost-benefit analysis, risk, reward
Works Cited: Edward Truant, The Importance of Diversification in Litigation Finance (pt. 1 of 2), Litigation Finance Journal (July 25, 2017) available at https://litigationfinancejournal.com/importance-diversification-commercial-litigation-finance-pt-1-2/
