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Legal costs have long been a deterrent for people wanting to file lawsuits. In a country like America, the legal fees can be significant. A lot of good lawyers charge hourly fees.
Many plaintiffs believe that in an hourly fee system, the lawyer is incentivized to drag the case for as long as possible. This is why clients prefer to pay a fixed retainer.
Also, many times the law firm has to bear the expenses related to a case which is under trial. In such cases, law firms get paid off only after the case has been won and settlement amounts have been received.
However, there is another new type of financial arrangement which is used in financing lawsuits. This involves a third party and is called litigation financing. In this article, we will further explore the concept of litigation financing, its advantages as well as disadvantages.
Litigation financing refers to an arrangement wherein a third party agrees to bear the legal fees related to a case in exchange for a bigger pay off later.
Simply put, neither the plaintiff nor the law firms have to bear the cost of financing the lawsuit. Instead, there are specialized third-party investors who invest money by paying legal fees when a case is in progress.
At the end of the case, if the side which is being backed by the investor wins, the investors get their payoff from the settlement money received. On the other hand, if the side which is being backed by the investor loses, the investors have to write down the losses with no recourse from either the plaintiff or the law firm.
Some of the major advantages of litigation funding are listed below.
Of late, investors such as hedge funds have also shown interest in litigation financing. These high returns are primarily because of the low investment required compared to the high returns.
If any corporation is found to be guilty, courts often order them to pay heavy damages. Investors are paid out a percentage of the final settlement. As a result, investors often end up with multiples of the initial investment that they had made.
Only in cases, where the litigation time is very low, and the win is certain are the returns lower. Also, the risk involved in litigation finance is lower as compared to other investment classes.
In fact, during an economic downturn, the number of insolvencies increases. As a result, there is more litigation leading to more gains to investors. This is the reason why sophisticated investors have started hedging their portfolio with the help of litigation finance.
Hence, even if a poor person has a good case, lawyers can take these cases with the help of a financier. The fear of litigation ensures that organizations create processes which are robust thereby avoiding inconvenience to the consumer community.
This means that financer A can sell their stake in a particular case to financer B. This provides investors with relief. It is good to know that if the case goes on for too long, investors can recover their funds by finding another buyer.
Critics of litigation funding have highlighted a few disadvantages of this arrangement. The same have been listed below:
There are multiple levels of state and federal laws that litigation finance companies and law firms must comply with. Hence, the cost and effort involved while using litigation finance is not insignificant.
The bottom line is that litigation financing is here to stay. In 2024 itself, the entire sector was worth more than $18 billion. Many funds have been created to take advantage of this opportunity.
Estimates suggest that by 2037 more than $68 billion would be deployed in these funds. Hence, even with all the regulation involved, the business of litigation financing is expected to witness a major boom in the forthcoming years.
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