Part III–Understanding Risk and Benefits in Litigation Finance
The first two parts of this post have addressed the nature of risks associated with the viability of a legal claim and the capabilities and attitudes of litigation opponents. This final post considers other risk factors that litigation funders must consider when deciding whether to invest in a case and how large that investment should be. When all of these factors are understood, it is clear that the assessment of risk in any litigation is a complicated and dynamic process.
An important but often underestimated risk in litigation finance involves the party gives the funder an interest in its claim. Just as different counterparties have different capacities for litigating, so too do different plaintiffs. Some are guided primarily by economic rationality and will make decisions that maximize the risk-utility balance. But others are risk averse and will be inclined to take the first reasonable settlement offer made by the counterparty. Still others may be motivated by non-economic factors and may persist in fighting a claim beyond the point where it makes economic sense.
Funders have little ability to control the parties they work with. Through a well-drafted litigation finance agreement, funders can retain for themselves a consultative role, with the claimant and the claimant’s counsel. In this respect, the funder can establish the framework for a decision-making process about settlement offers or litigation strategy. But a variety of legal and ethical rules prevent funders from controlling the claim and the strategic decisions, regardless of their investment stake. At some point, funders have to live with the decisions that the claimants make. And the tendencies of a claimant can be very difficult to evaluate accurately at the outset of a litigation matter.
Even when funders take great care in considering all of the relevant legal, counterparty and plaintiff risks, litigation is still an unpredictable process, and it involves a significant level of unavoidable risk. Funders have methods to manage that unavoidable risk even after the litigation process begins. These methods are an invaluable part of the risk management process.
One method is to control the distribution of the invested funds over the course of the litigation. After considering all of the risk factors and the potential for recovery in a case, an investor may determine the prudent total amount of investment that it is willing to make. But there is no reason why the entire investment amount has to be disbursed at once. By making disbursements in installments or upon the occurrence of certain conditional events, the funder can retain some ability to manage the unexpected or unavoidable risks that occur in the course of any litigation matter.
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. 2 of 2), Litigation Finance Journal (July 26, 2017) available at https://litigationfinancejournal.com/importance-diversification-commercial-litigation-finance-pt-2-2/
