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Litigation Funding: Then and Now

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The litigation process can be lengthy and expensive. Historically, various methods of funding court cases have been developed for solicitors to take advantage of. Some of these methods have gone by the wayside, partly in disgrace, whilst others were simply too risky or too expensive to maintain.

Consumer Credit Agreement (CCA)

One of the first models used, when a client took a consumer credit agreement, they would borrow money from a finance house on a term of three years or less and took out an After the Event (ATE) insurance policy to insure the loan.

The money was drawn to pay solicitors costs, with the lawyers working solely on a ‘no win no fee’ basis.

However, this model has fallen out of favour due to fundamental flaws, including:

Soaring interest rates

  • Primarily used at the consumer end of the market, such as personal injury cases.
  • Exposure to risk: claims companies inextricably linked to these packages caused mayhem in the market place, going bust and leaving huge losses for the insurers of the loans.

Direct Lending  

Direct lending essentially means that the solicitors of a case took on the debt themselves. Because of the huge losses incurred from paying back the balances on the consumer credit loans, the insurers decided they would no longer insure court debt.

This left the lawyers no alternative but to obtain finance by borrowing the money themselves, or at least underwrite the clients’ borrowings. This allowed solicitors working on a no win, no fee basis to use the borrowed sum to pay expenses.

Nowadays…

There are a number of ways to fund a legal case without breaking the bank, however it’s important to consider the options carefully and make the most astute choice for your case.

New legislation is being developed all the time to refine the way we borrow money for litigation. In April 2013, new laws are expected to be passed that will alter the terms in no win no fee case, and paving the way for a new funding option called Damages-based Agreements (DBA).

In DBA, the solicitor is paid a proportion of the damages won, directly aligns their interests with the client, and so therefore encouraging a more competitive marketplace.

In big business cases, third party funding is an emergent option, whereby means to fund the case are obtained via an impartial third party in exchange for a percentage of the reward. However, due to the level of commitment and investment in such cases, litigation funding is only really available to cases that meet the following criteria:

  • Strong prospect for success – 60%+
  • A well-resourced defendant, who will have the means to pay the claim
  • A large reward (usually in excess of £1m) to make the case worthwhile for both funder and claimant

Lawyers have a professional obligation to advise their client of how they may be able to secure funding for their case, so it’s always advisable to ensure all options have been considered before going ahead.

This article was written by Laura Moulden on behalf of Vannin Capital, specialists Litigation Funding UK.

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AUTHOR Derek

My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.

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