The principal benefits of litigation funding have long been known. Such funding can spread the risk of adverse litigation outcomes and, in doing so, improve access to justice for litigants who lack resources of their own. But, beyond these benefits for less well-heeled litigants, there can be significant financial advantages for well-capitalized corporate litigants as well.
First, litigation funding offers significant benefits in terms of financial reporting and operations. When corporations obtain third-party financing to cover their own legal expenses, they can find immediate improvements in EBITDA and cash flow. In the conventional approach to funding litigation, a company must diminish its cash reserves to pay legal costs, creating a negative impact on the balance sheet. Litigation funding eliminates these impacts by removing costs from the P&L and the contingency from the balance sheet, and providing greater certainty and predictability over future cash flows.
Second, using litigation funding permits the company to re-direct resources into revenue-generating areas of the business. Thus, using third-party funding can drive profitability in the business by shifting the use of funds from legal costs and into core business activities that will generate profit and produce a higher return on capital employed. In short, litigation funding makes business more efficient.
Litigation funding also reduces risk. When a third-party investor funds a company’s litigation, the entire financial risk shifts from the company to the funder. Moreover, because the investment in non-recourse, the funder’s interests are fully aligned with those of the claimant. The funder will only receive a return on its investment if the claimant actually recovers proceeds from the litigation – whether through a judgment, arbitral award or negotiated settlement. Thus, the funder and the company can work hand in hand to optimize both of their interests.
Another important advantage of third-party funding is that it permits a corporation to pursue claims that it would not otherwise pursue due to budget constraints, at zero risk and at zero cost. Thus, third-party funding makes it possible for a company to fully monetize its litigation portfolio. Even when it share the proceeds of its litigation with the funder, it can still achieve a more lucrative outcome than it would have without third-party funding.
Keywords: litigation finance, third-party litigation funding, EBITDA, risk management
Work Cited: What Are the Operational Advantages of Litigation Funding, Lawyer Monthly (July 9, 2018) available at https://www.lawyer-monthly.com/2018/07/what-are-the-operational-advantages-of-litigation-funding/