Litigation funders carefully evaluate potential claims before agreeing to provide financing, as they assume a significant financial risk in the outcome. Here are the key factors they consider when assessing a claim for funding:
- Strong Legal Basis: Funders look for cases that have a strong legal foundation and a high likelihood of success. They typically rely on detailed legal analyses, sometimes from external counsel, to assess the strengths of the claims, defenses, and overall legal strategy.
- Favorable Jurisdiction: The jurisdiction in which the case will be tried is important, as some courts are perceived as more favorable to plaintiffs, while others might have legal precedents that can affect the outcome.
2. Experienced Legal Team?
- Quality of Legal Representation: Litigation funders prefer cases led by experienced law firms with a strong track record in similar cases. They often want reassurance that the attorneys involved have the skills, resources, and expertise to navigate complex litigation.
- Engagement of Counsel on Contingency or Success Fees: In some cases, funders may prefer that the legal team is partially compensated based on success (e.g., contingency or success fees), aligning the law firm's interests with both the funder and the claimant.
3. Damages and Recoverability
- High-Value Damages: Funders are typically interested in claims where the potential damages are significant, usually several million dollars or more. The potential recovery must be large enough to cover the litigation costs, the funder's return, and leave a meaningful sum for the claimant.
- Clear Path to Recovery: Funders assess whether the defendant has the financial capacity to pay the damages if the case is successful. A favorable judgment is of little value if the defendant is insolvent or unable to satisfy the award.
- Enforcement Risk: Even if a favorable judgment is obtained, funders will consider the difficulty of enforcing the judgment, particularly in international cases or cases where the defendant's assets are in multiple jurisdictions.
4. Budget and Cost of Litigation
- Estimated Litigation Costs: Funders need to know how much it will cost to litigate the case, including legal fees, expert witness fees, court costs, and potential appeals. They often seek detailed budgets from the claimant's legal team.
- Proportionality of Costs to Potential Damages: The potential recovery must be proportional to the costs of litigation. Funders typically shy away from cases where litigation expenses are too high relative to the potential financial recovery.
- Time Frame: Litigation funders prefer cases that will be resolved within a reasonable time frame. While litigation can be unpredictable, funders generally avoid cases that could drag on for many years, as the longer the case takes, the more it ties up their capital.
- Settlement Potential: The likelihood of settlement, and the timing of any potential settlement, is a key consideration. Funders often prefer cases where there's a reasonable chance of settlement before trial, which can reduce the litigation timeline and costs.
6. Claimant’s Profile and Commitment
- Financial Position of the Claimant: While litigation funders provide financial backing, they often want to ensure the claimant has some financial stability and a strong commitment to the case. Funders may avoid claimants who are too dependent on a successful outcome to cover basic expenses, as this could lead to pressured decision-making.
- Motivation and Credibility of the Claimant: Funders prefer claimants who are credible and committed to seeing the litigation through to its conclusion, rather than those simply seeking a quick settlement.?
- Cost-Shifting Rules: In jurisdictions where the loser must pay the winner's legal costs, funders assess the risk of having to pay these adverse costs if the case is unsuccessful. Funders may require the claimant to take out?After the Event (ATE) insurance?to cover this risk.
- Counterclaims: If there is a significant risk that the defendant will file a counterclaim, funders may view the case as riskier. Counterclaims can add to the complexity and cost of the litigation and might reduce the net recovery for the claimant.
- Quantifiable Damages: Funders prefer cases where damages are clear, direct, and easily quantifiable. Claims where damages are speculative or hard to calculate are less attractive, as they add uncertainty to the potential recovery.
- Direct Economic Losses: Funders favor cases involving direct economic losses (e.g., breach of contract, patent infringement) over non-economic or punitive damages, which can be harder to win or enforce.
9. Defendant’s Behavior and Settlement Attitude
- Defendant’s Reputation and Conduct: If the defendant has a history of settling or has been involved in previous litigation, funders will factor this into their risk assessment. Defendants with a reputation for aggressively fighting claims may pose a higher litigation risk.
- Likelihood of Settlement: A defendant’s willingness to engage in settlement discussions can be a key factor for funders, as settlements can shorten the litigation timeline and reduce uncertainty.
10. Alignment of Interests
- Alignment Between the Parties: Funders look for situations where their interests, the claimant’s interests, and the law firm’s interests are aligned. This alignment ensures all parties are incentivized to work towards a favorable outcome without conflicts.
In summary, litigation funders seek claims that have a strong legal basis, significant potential damages, a clear path to recovery, and a manageable risk profile. They aim to balance the risks of financing with the potential for high returns and will only proceed with cases that meet their stringent criteria.
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