Financing lawsuits is a new trend and a new type of investment
I am currently seeing a rapid growth in the financing of lawsuits (both in courts and arbitration institutions). Based on estimates from analysts, American investors alone earned almost USD 2 billion on this market in 2016. The overall volume of investments in the US has reached USD 5 billion. As reported by Burford Capital, one of the largest players on the market of investment in litigation, the number of companies that have attracted such investments has grown by 237% since 2012.
Despite the fact that the financing of lawyers’ work by professional investors is strongly developed in the USA and the UK, such practices and investments are only beginning to make inroads in continental Europe and Asia. As a lawyer who specializes in international business conflicts involving parties from former Soviet countries, I notice a growing interest in the financing of lawsuits in Eastern Europe and Central Asia. Over the past few years, I have been engaged in five large disputes involving companies from former Soviet states where specialized foundations were financing the work of one of the parties. I have noticed that the two most important factors investors assess before they made a final decision on whether to jump into a lawsuit were WHERE the dispute is to be considered and WHERE the location of the opponent’s assets is. It appeared that investors clearly prefer the UK, EU, US or Switzerland as the countries where a dispute should be considered and assets should be located.
An analysis of the market has demonstrated that investing in litigation can be based on, give or take, five different models. Under the first model, an investor (or another related entity) ‘acquires’ a lawsuit from the party that is entitled to file it. The investor obtains the freedom to handle the litigation, while payment for the ‘acquisition’ is postponed until after the litigation is over. Under the second model, only the investor’s funds are used in the litigation, but the investor does not acquire any powers to exercise control over the court proceedings. The investor is notified of the progress of the case through regular reports. Thethird model implies that the investor is more actively involved in litigation, when, for instance, the investor’s consent may be required to perform certain procedural acts (reaching a settlement), or when the investor can refuse to provide another round of financing if a certain outcome has not been achieved during the litigation. Under the fourth model, an intermediary, or a broker, appears between the investor and the party raising finance. The broker often aggregates the funds of several investors and makes portfolio investments. If the litigation is a success, the broker charges a percentage for its services. The fifth model is already known to the legal community of former Soviet states and encompasses cases when lawyers finance their clients by agreeing on a success fee or a percentage of the amount recovered.
As far as the legal structuring of the investments is concerned, market players tap into the best practices of venture investors to secure protection for, and the maximum return on, the investments. The use of such mechanisms can manifest itself in the creation (inter alia for tax optimization purposes) of offshore companies through which funds are provided, or the setting up of trusts in which allies are appointed as a trustee or a trust protector. A contract made between the investor and the party raising financing can also contain additional provisions that the services of certain law firms should be used.