Looking for third-party litigation funding: what to consider?
By Jennifer Pritchett, Associate Editor
1. Can you describe some of the circumstances that one would be looking for third-party litigation funding?
"Law firm financing would apply to situations where lawyers provide legal services on a contingency fee basis. Personal injury lawyers will tell their clients, 'I’ll take on your case on a no-win, no-fee basis. If I’m successful, I get paid and my pay will be a percentage of the damages. If I’m unsuccessful, I get paid nothing. I will also fund the disbursements in litigation and if I’m successful I get those back and if I’m unsuccessful, I don’t.' Contingency fee retainer arrangements are invariably used in personal injury and class-action cases. The lawyers will typically seek litigation funding for their disbursements. Fast-growing practices need to invest in their cases. If they have access to funding they can hire the best experts, invest earlier and maximize the value of their clients' claims. Our funding facilitates access to justice by ensuring that law firms have the money to invest and that their clients are fairly compensated for their losses.
In addition to financing law firms, we also fund individual legal claims in situations where clients have significant injuries, are unable to work, and need funding for legal expenses or treatment. In the absence of this funding, people will either be forced, due to financial pressure, to prematurely settle their claims for less than fair value or not obtain appropriate treatment and rehabilitation services.
Corporations are increasingly seeking access to litigation funding to share the financial risk of litigation. The market continues to grow as new areas of law such as employment, estates and family all require, to varying degrees, access to funding as law firms and/or their clients seek new ways to manage legal and financial risk."
2. What sort of expenses does third-party litigation funding cover?
"It depends on whether the loan is to a law firm or an individual. For law firms, litigation finance would cover disbursements or expert reports. These investments are made to validate and build the evidentiary value of the legal claim. For loans to individual claimants, depending on the nature of the claim, funding could be used to finance living expenses, treatment and rehabilitation, or legal fees."
3. Where would a lawyer or a litigant begin to search for a lender?
"Many people start with an online search. In my view, lawyers looking for litigation funding should speak to colleagues about the nature and quality of the financing partners they’re working with. As a leading provider of litigation risk management services in Canada, we focus on law firm referrals and have invested the last 12 years developing strong relationships with members of the Canadian legal services market. We work with more than 1,000 law firms across Canada.
4. What sort of qualities should someone look for in a third-party lender?
"A good lender should have the following key characteristics: credibility, high standards of client service and trust. Although these qualities are somewhat related, I think that credibility is probably the most important. People should choose a funding partner that has a long-established track record, a strong reputation in the marketplace for acting fairly and offering funding solutions that are in the best interests of the client and the law firm.
Client service is critical: does the funding solution meet the needs of a law firm and its partners? Does the finding partner offer strategic value for the practice that extends beyond just offering money? Where funding is provided to a client, does the funding partner offer loans that are suitable for clients? Are people treated with respect? Are they empathetic to client needs? When it comes to personal injury cases, we often deal with people who are in desperate situations and they’re hurting. They’re greatly impacted by the fact they’re injured, not working and may have a high degree of uncertainty about their future. Often, they are so desperate for money that they will take it at almost any price. You need to ensure lenders don’t take advantage of that and propose solutions that are in the client's best interests.
Trust is important. It is critical that funds are paid to the client on time and that appropriate records are being kept. It also means that the lender is transparent about the terms of the contract with no hidden fees.
People really need to ask the right questions and to spend time researching to determine whether the lender has these attributes."
5. Are there pitfalls — things one should avoid when choosing a lender?
"If you’ve been impacted by a car accident and you’re unable to work, it puts you in a difficult position. We often counsel people to go to friends and family for help first; if they have equity in their home, try to leverage that if you can. Seek other options before seeking third-party funding because it is relatively expensive.
I think it’s also important to find out about the lender: how long has it been in business? How many firms does it deal with? Does it have a business track record? Does it have access to capital? Do they get referrals from law firms? People should perform due diligence to get the right service at the right price."
6. Has the marketplace evolved in recent years to make this type of funding more readily available?
"We were one of the original companies in the marketplace. We launched this business in 2005 when my business partner, Stephen Pauwels, started offering litigation loans to individuals. Fourteen years later, it has become an industry with more companies offering similar services. Other companies are often more interested in offering settlement loans. They don’t necessarily provide treatment funding or fund law firms. When it comes to national service providers, there is only a handful, including us."
7. What does the availability of third-party funding mean to those who need it most?
"There are situations where a lawyer has a personal injury client who desperately needs funding because they’re seriously hurt, they can’t work and may be pushed to accept any offer they can get from the defendant. If the lawyer accepted that, it would undermine the civil justice system. If the claim is worth $500,000 and the client is willing to accept $50,000, they aren’t getting fair compensation and the lawyer isn’t getting a fair return on their work because instead of getting 30 per cent of $500,000, they’re getting 30 per cent of $50,000. Litigation funding levels the playing field so the litigant can move the case along to get fair compensation."
8. Who makes the decisions about how litigation funding is used — the client or the lawyer who represents them?
"Often it’s the lawyer who will direct the decisions because they are in the most informed position about their client’s case. Some lawyers, however, will take the stance that it’s their finances and they put that responsibility on their client. Many law firms will make several recommendations about which lender to choose and the client will make their own choices."
9. Is there risk involved for the client in accessing this type of funding?
"The loan has to be repaid so you are taking on financial risk for funding — like any other financial transaction involving borrowing money."
10. Is there anything else one would need to know about third-party funding?
"Litigation funding is required in a bunch of different areas of law, including class actions where there is a massive impact on society. Whether it’s a pharmaceutical company that has put bad drugs on the market and people have been affected or an insurance company that has sold a product that has caused financial harm to individuals, the circumstances around class actions impact a broad segment of the population. When it comes to the need for finance, class actions is one area where people are extremely vulnerable because typically they aren't in a position to do anything about it. That’s where we have focused a great deal of attention."