Understanding the Costs of Third-Party Funding Arrangements: an approach.
- AAmstg
- Apr 25, 2024
- 6 min read
Updated: Nov 14, 2024
Unlock your Alertness: Embrace the Warnings!
An agreement between claimants and funders is neither a gift for the firsts nor a risky bet for the latter. It is a partnership agreement encompassing a venture with a goal to achieve in common. Each part of that financial relationship would have lateral interests to pursue. Still, they are lateral, so they are secondary to getting together to an ending, an expected successful ending. Remember what has settled the doctrinal difference between the cause and the motives in any arrangement. As in any venture, prospected benefits should be balanced with respective costs; either they were tagged as risks to overcome or disadvantages to avoid. And it is all a matter to be drafted in the agreement ruling the relationship.
Costs, the reverse side of Benefits: not the dark side, but the light about your real chances to evaluate.
So the point is clear if assuming the message Dr. Strangelove left in 1964: learn how lo love your costs for avoiding misleadings. Needless to say what is a cost and what was a bomb in the context. This is the second post about understanding how to face litigation or arbitration using a third-party funding driver in a ready-made mindset approach. These lines are about the necessary side of awareness and alertness on.
Remind the scene: Third-party funding in litigation and arbitration involves an outside party, typically a professional funding entity, providing financial support to one of the parties involved in a legal dispute in exchange for a share of the proceeds if the case is successful.
And remind the three (+1) summarising Pros associated with third-party funding:
1. Access to Justice: Third-party funding can enable individuals or companies with valid legal claims but limited financial resources to pursue their cases. This can level the playing field and ensure that justice is not only available to those who can afford it.
2. Risk Mitigation: Litigation and arbitration can be expensive and uncertain. Third-party funding can help spread the risk by covering legal costs, including attorney, court, and expert witness expenses. If the case is unsuccessful, the funder typically bears the financial loss, not the litigant.
3. Increased Efficiency: With third-party funding, litigants may have more resources to dedicate to their cases, which can lead to more thorough legal research, better presentation of evidence, and stronger arguments. This can lead to quicker settlements or favourable outcomes.
[Now, here it comes a fourth one, regularly exhibited as a driver for better enhancement, which is not untrue but should be a lever for preventing the claimants from their confirmation bias and connected risks:]
4. Deterrence of Frivolous Claims: Funding entities conduct rigorous due diligence before investing in a case. This can act as a filter, discouraging frivolous or weak claims from being pursued, as funders are typically only interested in cases with strong merits and a high likelihood of success..
Four Cons which helps you to refrain over exciting on the outcomes:
Well, now you have to keep an eye on these other four items: Cons with respect to third-party funding settlements. While third-party funding can be a valuable tool for increasing access to justice and managing litigation risk, it also presents ethical, regulatory, and financial challenges that must be carefully considered and addressed. Getting to the points:
1. Potential Conflicts of Interest: Third-party funders have a financial interest in the outcome of the case, which could influence litigation strategy or settlement decisions. This could create conflicts of interest between the funded party and their legal counsel and between co-parties with differing financial arrangements.
2. Lack of Regulation: Third-party funding operates in a relatively unregulated space in many jurisdictions, which can raise concerns about transparency, ethical standards, and the enforceability of funding agreements. Without clear rules and oversight, there's a risk of abuse or exploitation of the system. [note: I am not precisely a person very keen on regulation for everything, specially if this results in over-regulation by institutional authorities, but seeking a common ground among the players in the industry is a good try].
3. Costs and Fees: While third-party funding can provide access to justice for cash-strapped litigants, it comes at a price. Funding agreements typically involve significant fees and a share of the proceeds if the case is successful, which could reduce the overall amount recovered by the funded party. And the funded party has a focus in the returns since signing the adecuate agreement: get its part in the venture; and that is right, naturally.
4. Potential for Increased Litigation: Some critics argue that third-party funding could incentivise frivolous litigation by removing the financial risk for litigants. This could increase the number of lawsuits and arbitration proceedings, clogging up the legal system and imposing additional costs on defendants. And, well, being that true, the relevant case is not as much increassing litigation by claimants, as the issue of becoming the funder failing in the venture and squeezing the procedure beyond the reasonable line. And that is also a theme about to debate related to this point.
Diving into some issues: the line wherein telling you apart frivolous from non-frivolous items: interest conflicts, fair claims, etc.
The purpose of this second post is not to delve into all the items above but to focus on some. As is the case of the Pros num. 4 (deterrence of frivolous Claims) and the Cons num. 1 (potential conflicts of interest). When connecting both results, it lies in third-party funders' role in evaluating and selecting cases for funding. Filtering the assets is something pretty delicate to manage: any failure at the beginning of the project carries out a long tail of unwilling consequences if it results in wrongdoing. Let's see this separately as a sample for other cases:
1. Deterrence of Frivolous Claims (Pro #4): Third-party funders typically conduct extensive due diligence before agreeing to fund a case. They assess the merits of the claim, the likelihood of success, the potential damages or recovery, and other relevant factors. Since funders have a financial stake in the outcome, they are incentivised to invest only in cases they believe have strong legal and factual grounds. This rigorous evaluation process is a deterrent to frivolous or weak claims, as funders are unlikely to invest in cases with low chances of success.
2. Potential Conflicts of Interest (Con #1): Despite -‘despite’ is a key word here- the due diligence process, third-party funders inherently have a financial interest in the outcome of the cases they fund. This creates a potential conflict of interest, particularly in situations where the interests of the funded party and the funder diverge. For example:
- Settlement Pressure: Funders may prioritise settlements that provide a quick return on investment, even if the settlement is not in the best interest of the funded party.
- Litigation Strategy: Funders may influence the litigation strategy pursued by the funded party to maximise the chances of success and the potential recovery, possibly at the expense of other considerations such as reputation or long-term business relationships.
- Sharing of Information: Funders may require access to sensitive information about the case, which could raise concerns about confidentiality and privilege, as well as potential conflicts with the legal strategy or interests of the funded party.
[they three are abstract examples, of course: specific cases involving real persons or situations are an issue for the reader’s mind, not mine].
The connection between these two aspects is that while third-party funding can serve as a filter to deter frivolous claims by only funding strong cases, the financial interests of the funders could potentially introduce conflicts of interest that compromise the integrity of the litigation process. It's essential for parties considering third-party funding to carefully evaluate these potential conflicts and address them through clear communication, ethical guidelines, and, where appropriate, safeguards such as confidentiality agreements or independent legal advice.
Let me know about your comments, or develop other connections between Pros and Cons. It will be a true delight to read about your ideas.
Two tips to grab:1. An agreement between claimants and funders isn't merely a gift or a risky bet; it's a partnership toward a common goal. Each party has its own interests, but these are secondary to the shared objective of success. Remember, the agreement must address both potential benefits and costs, whether they're seen as risks to overcome or pitfalls to avoid. This balance should be clearly outlined in the agreement governing the relationship.2. Understanding the costs is just as crucial as grasping the benefits. It's not about seeing costs as negative, but rather as illuminating your true evaluation of the situation. Dr. Strangelove's message about embracing costs in 1964 remains relevant: appreciating the price and understanding its implications are essential. This discussion emphasizes the importance of being alert and aware in the context of third-party funding for litigation or arbitration.In the third and last post, you will read what you would do and how to deal with minimising uncomfortable situations either from the claimants or the funders managers, and pursue to safe the relationship of financing litigations or arbitration processes. You will read about getting to balance in the financial agreement.
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