Litigation funding (also known as litigation finance) has become an essential part of the litigation process. It involves those pursuing litigation against an individual or organization receiving capital from a third party to cover legal expenses, among other things.
However, unlike a traditional loan, where a person is responsible for paying it back out of pocket, plaintiffs aren’t expected to pay this back. Instead, the financier will receive a percentage of the lawsuit settlement if/when damages are awarded. The more you know about litigation funding, the easier it will be for you to convince a lender to take your case.
Below are nine crucial litigation funding terms you should know.
1. Alternative dispute resolution
Alternative dispute resolution (ADR) generally indicates a broad range of resolution techniques and processes parties use to resolve a dispute. ADRs involve a third-party mediator and the process of arbitration and mediation. They’re used by opposing parties who cannot agree on their own. ADRs are also implemented to aid in settling disputes alongside the court system.
2. Arbitration
Much like mediation, arbitration uses a neutral party called an arbitrator to help settle disputes between parties. One of the significant differences between mediation and arbitration is that the arbitrator acts as a private judge. They hear the evidence provided by both parties and then decide the outcome of the civil dispute. In other words, the arbitrator controls the entire process and the outcome.
Most arbitrators try to be flexible as possible, working around the schedules and needs of both parties. Arbitration is typically less formal than a courtroom trial. The arbitrator will set procedures for both sides before, during, and after the hearing. Whatever agreement is made during arbitration is final and binding, limiting appeals.
3. Claim monetization
Claim monetization is generally defined as converting portions of a pending claim into capital the plaintiffs can access. Typically, claim monetization is done by litigation funding firms, providing capital in advance that would remain inaccessible until a resolution is made and a judgment issued. Without help from a third party, a pending claim would likely remain inactive.
4. Class action
A class action is a civil, legal, or administrative proceeding in which one or more plaintiffs file suit on behalf of a larger group of people who also claim to have been affected by the defendant. This larger group is the “class” and enables litigation to be initiated expeditiously and cost-effectively.
Class actions are especially beneficial to plaintiffs against large organizations with substantial litigation budgets and top-tier legal teams. If the plaintiff wins the case, the settlement will be divided and paid out to the class members. However, since each defendant’s losses or damages differ, not all class members will receive equal amounts.
5. Commercial litigation
Commercial litigation is a form of civil litigation that involves one or more commercial organizations. The area of commercial law being litigated is specialized based on the industry of the parties involved. However, generalized commercial litigation effectively covers every kind of civil dispute in the business context.
Some general commercial litigation cases include shareholder issues, breach of contract cases, civil Racketeer Influenced and Corrupt Organizations (RICO) claims, business torts, partnership/joint venture disputes, and fiduciary duty allegations, among other things.
6. Consequential damages
Consequential damages can be proven due to a party’s failure to satisfy a contractual agreement. Contracts are enforceable when one or more of the following elements are present:
- A statement of terms and conditions to which the offeror is willing to be bound.
- The person or persons possessing contractual capacity or contractual competence.
- The acceptance of an offer in a way that conveys a willingness to abide by contractual terms and conditions.
- The contract’s terms and conditions are consistent with the law.
- It meets the “mutuality of contract,” or the terms and conditions apply to everyone.
However, consequential damages also go beyond the contract itself and include actions resulting in a contract breach. The rules or determinations linked to certain types of damages directly affect the type of claim that can be filed. For example, was it a breach of contract or a tort claim?
Another way to look at it is that consequential damages are “expectation damages” that usually occur in contract law.
7. Litigation risk management
Litigation risk is the probability that an individual or organization’s actions, inaction, products, or services will lead to a civil suit. Leveraging litigation risk management procedures to pinpoint critical areas where the risk of litigation is the highest, the proper actions are taken to mitigate risks, such as ensuring product safety and following all pertinent laws and regulations.
8. Mediation
The process referred to as mediation involves a mediator who helps two or more parties talk over and attempt to resolve legal matters. Both the plaintiff and defendant should voluntarily agree to the process of mediation. Those who participate in mediation are expected to provide their evidence, argue their case, and forfeit specific demands proposed by the other party.
The end goal of all parties involved should be to ultimately reach a mutual agreement. Lastly, any mediator’s decision is final, with either party incapable of appealing.
9. Underwriting
Litigation funding is somewhat like traditional lending or insurance in that mitigating risk is essential. The underwriters at litigation funding firms typically have litigation experience at a law firm. They may also have job experience in sophisticated corporate legal departments.
Litigation funding underwriters evaluate the following things when assessing a potential case:
- The merits of the case.
- The plaintiff’s motivation for seeking litigation funding.
- The financing risk as compared to the potential award settlement.
- The proposed deal structure and economics of a proposed investment.
