Funding Justice: The Growing Role of Litigation Finance
- BSLB
- May 6
- 5 min read
In today's legal labyrinth, pursuing justice is often more than just a matter of right or wrong, it often comes at a staggering cost. From corporate disputes to international arbitration battles, the price of navigating the law can be financially crippling. Legal expenses, witness fees, costs of procedures, and just sheer litigation length can cause even the most well-substantiated claims to sit in storage. Here, a great majority of would-be claimants will give up their suits in favor of their better-heeled counterparts.
Litigation finance then comes in and turns things around.
Litigation financing, or third-party funding, works like this: a third party provides
the funding necessary to pursue a claim. The third party's profit is a share of
the ultimate award, only if, and when, the case is victorious. The non-recourse nature of this funding makes it highly unusual and appealing, if the case is lost, the claimant owes nothing.
Such convergence of interests introduces a new dynamic into the legal landscape, where lawyers, funders, and claimants align in a single objective: winning the case.
Democratizing access to justice
The expansion of litigation financing is driven by its ability to democratize access to justice. It smooths the playing field for claimants who otherwise might be overwhelmed by the cost of litigation. Whether it's a small company pitted against a multinational giant or an individual battling his rights against a firm, litigation funding ensures an equal fight. This has especially been groundbreaking in areas such as commercial disputes, intellectual property issues, cases related to insolvency, and class actions, where costs can get out of hand rapidly.
How funders choose cases
And yet, how exactly does litigation finance play out on the ground? Litigation
finance is extremely selective and strategic. Not all cases qualify. Investors undergo rigorous due diligence before investing in a claim. They look at elements of legal merit and probability of success, jurisdiction under which the case will be decided, and the defendant's ability to pay in case of loss. Further, they project potential damages and model various recovery scenarios to calculate the
risk-return profile.
Financial experts, lawyers, and sometimes even industry professionals collaborate to review all aspects of the case before spending money.
Structuring the financing
After approval has been granted, the funder becomes responsible for paying for the expenses related to litigation. These can include attorney fees, court costs, expert witness fees, and other costs directly associated with pursuing the case. Sometimes, even operational capital is provided by funders to help claimants go through the financial strain of lengthy proceedings. Particularly, while the funder stands to gain from the outcome, ethical guidelines and contractual safeguards prevent funders from driving the legal tactic, which remains firmly in the hands of the claimant and his or her solicitors.
Corporate risk-management tool
In addition to unlocking access to justice, litigation finance has evolved as a strategic tool for firms. Litigation has traditionally been viewed by the majority of
firms as an expensive nuisance or variable liability. Litigation finance allows them to shift this expense off their balance sheets. Outsourcing the risk of money, companies can pursue valuable claims without impacting their cash flow or taking away resources from core business. This makes litigation funding an
attractive option not merely for distress claimants, but alsofor commercial sophisticated players wishing to manage risk more effectively.
An institutional-grade asset class Its growth has also drawn in institutional investors' interests. Specialist litigation funds, private equity companies, and hedge funds have moved in, driven by its low correlation with broader economic cycles and potential for robust returns.
Compared to other forms of investment, the outcome of legal disputes might be influenced more by issues of law, facts, and judicial reasoning than by cyclical market turns, which gives investors a diversification play.
Ethical and regulatory considerations
However, as with any revolutionary technology, litigation finance has been controversial and has produced ethical and regulatory concerns. Critics grumble about the potential for conflicts of interest, namely, regarding funders' influence over settlement decisions or litigation strategy. Others worry about the potential for encouraging speculative or frivolous suits.
In response to these issues jurisdictions worldwide have begun crafting regulatory frameworks. Rules on disclosure requirements, confidentiality, funder control, and ethical boundaries are being brought into sharper focus.
Italy’s emerging market
Italy, for example, is only beginning to realize the potential of litigation funding.
Compared with more advanced markets such as the United States, United Kingdom, and Australia,
Italy is at the beginning. But the pace is picking up. Intellectual debate is unfolding, pilot initiatives are underway, and jurists are starting to perceive the potential advantages.
Once the market is matured, Italian authorities will face the same balancing challenge: encouraging innovation and safeguarding ethical values and process integrity.
Globally, litigation finance is evolving. Trends such as portfolio funding
(with financiers insuring several cases for diversification of risk) and defense side funding (with financing defendants rather than claimants alone) are gaining
traction. While technological advancements and data analytics are transforming the way funders assess case feasibility, quantify results, and deal with investments, calls are also being made for greater consistency in regulation across jurisdictions, considering the increasing global reach of the industry.
All these innovations will be at the heart of our conference, "Funding the Fight: The Role of Litigation Finance." This won’t be an academic panel, it's a serious examination of the forces shaping the future of legal practice and the resolution of disputes. Attendees will get to hear from seasoned fund managers, financial analysts, and legal thinkers as they deconstruct the nuances and offer insight based on real experience. Talk will vary from the conundrums of balancing returns and morality to the evolving position of litigation finance in global markets, and the growing position of Italy on this dynamic landscape.
Whether you are an aspiring law student looking to find out about future career opportunities, a business school student looking into alternative investments, or simply anyone who is interested in knowing more about how justice and money interact more and more, this conversation will give penetrating and thought-provoking considerations.
Litigation finance is now no longer some esoteric topic, it is increasingly becoming a top-of-mind feature of today's legal economy. Knowing more about it now could mean you are ahead of the curve sooner.
Refine your questions, and join us as we explore a topic that is at the nexus of law, finance, and ethics, a topic that is already transforming how justice is pursued and disputes are resolved around the world.
CC: Piero Fioretto
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