Litigation funding is the manner in which a court case is paid for by a party to the case. Although there are several types of litigation funding, it is more common by far for a client to simply pay his or her solicitor the required amount. By doing so the client guarantees the solicitor income, regardless of the result of the case.
The different funding options
The ‘normal’ way of paying for the considerable costs associated with litigation is not always possible. In some cases one party does not have the means with which to pay the costs in advance. In these instances two alternative types of litigation funding are possible:
- One is third-party funding, which allows the party and the solicitor to receive payment from a third party. The third party will examine the case and if it concludes that it is likely that the case will be successful, it will ‘invest’ in the case. Once the litigation is successful the losing party nearly always has to pay the winning party’s costs. It is from these costs that the third party makes its return on investment
- A second possibility is a conditional-fee arrangement, also known as “no win, no fee”. In this type of litigation funding the party does not have to pay any upfront fees. The solicitor takes on the work and is repaid if and when the lawsuit is successful
Third party funding
Litigation funding can be offered by third party loan companies. Litigation loans differ from a regular financial loan. They are seen as an investment, or an advance offered to an individual who needs that help at that time.
The way a litigation loan works is slightly complex. The loan company will take on part of the client’s risk – they will receive a percentage of the winnings made by the individual from the final settlement, but if the return made by the individual doesn’t cover the loan then the company too will suffer a loss.
Litigation loans can also be personal or true loans. These loans are recourse in nature unlike the litigation loan discussed above, but aren't as readily available as only a few companies offer them.
Individuals also do not favour these kinds of litigation loans as they are based on the sources of income, bank balances, credits etc. The individual will also have to make a monthly payment to the company.
The biggest negative of these sorts of loans is that they are recoverable by the company whether the individual loses or wins the case.
If you are seeking alternative litigation funding, it is highly recommended that you research the source of the funding, the terms of the agreement and the common practices associated with the type of litigation you are preparing for.
Although there are many legal operations associated with alternative litigation funding, some may be operating unethically and should be avoided.
Want to know more about conditional-fee arrangements? Find out more about what is no-win, no-fee litigation.
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