Litigation Finance: Benefits for Companies

Every economic downturn is followed by an increase in litigation, and Covid19 is no exception. This crisis is generating many contractual breaches, force majeure disputes, disputes with suppliers, Employment Regulation Plans… But many companies face a tough choice: to invest their capital in legal services or even in a meritorious judicial or arbitral proceeding, or to reinvest those resources in the business to deal with these hard times. Litigation finance puts an end to this problem.

Litigation funding or “third party funding” is a legal tool that allows an external party to a judicial or arbitral procedure to pay its fees and expenses in exchange for a previously agreed portion of the recovery.

Given its non-recourse nature, which differentiates it from a loan, the benefits are undeniable. The funder does not recover the money invested should the claim be unsuccessful.

We can list the benefits for companies as follows:

-Access to justice: legal finance provides the peace of mind necessary to go ahead with a claim, without having to use the company’s own resources, or, in the worst case, spend them until the point of bankruptcy. In other words, litigation finance enables access to justice, so that a lack of financial resources is never an obstacle. Commercial claims can empty a company’s coffers, even in the case of strong and solvent companies. The need to count on strong and specialized teams of lawyers and damage experts, together with the cost of time, are important cost drivers that companies can offload. Litigation finance allows companies to offload these risks providing the financial strength necessary to continue the proceedings throughout their entire duration.

-Optimize resources: As we said before, many times a claimant is solvent and chooses not to empty its coffers in procedures that can last years, and reinvest those funds in the business or face other expenses that will generate profits in the nearer future. Especially today, many companies face the choice of initiating legal proceedings or using those resources to continue their economic activity, or even expand the business. This is the reason why 70% of companies do not pursue commercial claims, despite having the legal merits necessary to succeed. Legal finance changes this situation and helps companies optimizing their own resources.

-Transfer risk: Litigation procedures are complex and lengthy, and can result in unforeseen extra costs. Thanks to litigation funding, the risk involved in undertaking a legal or arbitration procedure is transferred to the third party.

-Improvement of a company’s financial health: the expenses derived from a litigation or arbitration proceeding are, as its name indicates, expenses that are reflected on the balance sheets of any company. However, thanks to litigation finance, such proceedings are transformed into assets that can generate income.

-Monetize legal assets: litigation finance allows the early monetization of awards or judgments, which also transforms them into assets without having to use internal resources to do so, and being able to generate income that otherwise would not be generated or would take years to generate.

*Ideas taken from the interview in LawyerPress to Carolina Bayo, Senior Director – Head of Legal Assets, and her article published in Expansión.