Does litigation funding come with any risks for investors?

Third-party funding of litigation is common in England and Wales nowadays, even when the third party has no relationship with either of the parties involved in the dispute. One of the reasons for this is that the courts now see access to these funds as offering a path to justice that some litigants may not otherwise have.

This type of funding is available through litigation finance specialists such as https://www.novo-modo.

Why might there be risks involved for investors?

It is important to understand that funding legal actions can be risky for investors, even when counsel suggests there is a strong case. The outcome of any litigation process is far from guaranteed, so let’s look at some of the issues involved.

What is the risk of the initial investment?

The investment will normally be provided with a non-recourse clause. This means that if the client loses the case, the third party will not recover even a proportion of its investment; however, this is similar to any other kind of investment in the commercial world.

How might risk be mitigated?

Many cases are settled before a decision by the court. Even if a matter is not progressing in the way counsel originally suggested, a settlement may result in a return, albeit lower than the amount of the original claim.

Given the unpredictability of litigation, investors are advised to choose their portfolio of cases carefully. By doing so, they can reduce the risk of losing their full investment. The likelihood of cases being settled will increase their chances of avoiding losses.

Investors should also consider after-the-event insurance, known as ATE. This is an insurance policy that the litigation funder can insist be taken out by the client. This policy covers the litigation financier against liability for adverse costs that may be claimed by the opposition if the claim is unsuccessful.

Finally, remember that the investment can be adjusted by excluding certain elements; for example, an agreement can be drawn up to confirm that the investor is not responsible for the other party’s costs.