Legal financing
Legal financing companies provide a nonrecourse cash advance to litigants in exchange for a percentage share of the judgment or settlement.
Legal financing companies normally provide money in the form of a lump sum payment, and generally, no specific account is established for the litigant.
Instead, no payments of any kind are made until the case settles or judgment is obtained, which could occur months or years after legal funding is received.
[2] While third-party litigation funding is not a new concept, it is relatively new to the United States and has its roots in the old English principles of champerty and maintenance.
[3] Little financial assistance is available from traditional sources to help injured plaintiffs cover the cost of litigation or pay their personal expenses while a case remains pending.
[4] The introduction of legal financing provides qualified plaintiffs with a means of paying the cost of litigation and their personal expenses, without having to resort to traditional borrowing.
The defendant in the case (the person or company being sued) must also have the ability to pay a judgment, whether by virtue of its own financial strength or through insurance coverage.
[6] Some legal financing companies limit their investment to specific types of lawsuits, such as a personal injury claim or commercial litigation.
Commercial financing for companies to pursue legal claims generally is dedicated toward the payment of attorney fees and litigation costs.
[2] As lenders thoroughly evaluate claims before they agree to provide financing, they have a very high likelihood of recovering their fee at the conclusion of the plaintiff's case, and further limit potential losses by providing financing in amounts that are relatively small as compared to the plaintiff's anticipated recovery.
The award, which was eventually struck down by the Hague Court of Appeal on June 27, 2023,[16][17] inspired calls for stronger regulation, over such concerns as corruption, profiteering, and undue foreign influence.
It requires litigation funders to provide satisfactory answers to certain key questions before entering into relationships with claimants.
[28] The Adam Smith Institute think tank published a report in October 2024, calling for greater regulation in third party litigation funding.
Recommendations included regulation of the funding by the Financial Conduct Authority, in the same way as other investment products, and increased transparency.
[30] With the changes to legislation third party funders in Hong Kong have been made subject to codes of practices and safeguards to assure industry standards.
[34] There is no express law regulating third party funding, but court precedents have recognized the practice and put in restrictions.
An initial distinction between an acceptable and an objectionable pactum de quota litis was formulated in Hugo & Möller N.O.
The Court held that a fair agreement to provide the necessary funds to enable an action to proceed, in consideration for which the person lending the money is to receive an interest in the property sought to be recovered, must not be considered per se to be contra bonos mores.
In another case, the South Africa Supreme Court of Appeal held, in PriceWaterHouse Coopers Inc and Others v National Potato Co-operative Ltd, 2004 (6) SA 66 (SCA), that the "although the number of reported cases concerned with champertous agreements diminished, courts have still adhered to the view that generally they are unlawful and that litigation pursuant to such agreements should not be entertained".
The Supreme Court ruled that: Legal financing is a fairly recent phenomenon in the United States, beginning in or around 1997.
The amount of money that plaintiff receive through legal financing varies widely but often is around 10 to 15 percent of the expected value of judgment or settlement of their lawsuit.
Litigation funders generally evaluate cases based on legal merit, amount of damages, and financial viability of the defendant.
