Okay, let's break down commercial litigation financing. Here's a comprehensive overview:

What is Commercial Litigation Financing (CLF)?

Commercial litigation financing (also called litigation funding, third-party funding, or legal finance) is a non-recourse investment in a commercial legal claim by a third-party funder. In simpler terms, it's when a company or law firm involved in a lawsuit receives funding from an outside investor to help cover the costs of pursuing the case.

Key Characteristics:

• Non-Recourse: This is the most crucial element. The funder only gets paid back if the case is successful (e.g., a settlement or judgment). If the case is lost, the funder loses its investment. The plaintiff owes nothing. This protects the plaintiff from further financial burden if the litigation fails.


• Investment, Not a Loan: CLF isn't a loan. There's no repayment obligation unless the case generates revenue. It's an investment based on the assessed value and potential success of the legal claim.


• Funding Covers Costs: Funds are typically used to pay for legal fees (law firm), expert witness fees, court costs, discovery expenses, and other related expenses associated with litigation. Sometimes, funding can even be used for working capital for the company while the litigation is pending.


• Percentage Share of Recovery: The funder's return is usually a pre-agreed percentage of the settlement or judgment amount. The specific percentage will depend on the risk profile of the case, the amount of funding required, and the duration of the litigation. Returns can also be calculated as a multiple of the investment.


• Funder's Role: Funders typically do not control the litigation. The plaintiff (the company or law firm that hired them) and their attorneys retain decision-making authority over strategy and settlement negotiations. However, funders often have contractual rights to be kept informed about the progress of the case and may have consultation rights (but not control). They conduct due diligence before funding to be reasonably sure that the lawyers are skilled and the case has merit.

• Businesses (Plaintiffs): Companies of all sizes, from startups to large corporations, use CLF to pursue meritorious claims without depleting their operating capital. This allows them to level the playing field against well-resourced defendants.


• Law Firms: Law firms, especially smaller or boutique firms, might use CLF to take on complex or high-stakes cases that they otherwise couldn't afford. It allows them to offer their clients contingency-fee arrangements without taking on excessive financial risk.


• Insolvency Practitioners: Trustees, liquidators, and administrators use CLF to pursue claims on behalf of insolvent estates, maximizing returns for creditors.

CLF can be used for a wide range of commercial disputes, including:

• Breach of Contract: Disputes arising from broken agreements.


• Intellectual Property (IP) Infringement: Patent, trademark, and copyright infringement cases.


• Antitrust/Competition: Cases alleging anti-competitive behavior.


• Fraud: Claims of fraudulent activities.


• Bankruptcy Litigation: Avoidance actions, preference claims, and other disputes arising in bankruptcy proceedings.


• International Arbitration: Cross-border disputes resolved through arbitration.


• Mass Torts/Class Actions: Although these often have different funding structures, CLF principles can apply.


• Judgment Enforcement: Funding to help enforce judgments already won in court.


• Environmental Litigation: Disputes relating to environmental damage.

• Preserves Capital: Companies can pursue legal claims without tying up their working capital.


• Levels the Playing Field: Allows smaller companies to compete with larger, better-funded opponents.


• Risk Mitigation: Transfers the financial risk of litigation to the funder.


• Access to Justice: Enables meritorious claims to be pursued that might otherwise be abandoned due to lack of resources.


• Alignment of Interests: Aligns the interests of the plaintiff, their attorneys, and the funder, all incentivized to achieve a successful outcome.


• Due Diligence Benefits: The funder's due diligence process provides an independent assessment of the case's merits, which can be valuable for the plaintiff.

• Cost of Capital: CLF is an expensive form of financing. Funders expect a significant return to compensate for the risk they are taking.


• Loss of Control (Potential): While funders typically don't control the litigation, some agreements may include provisions that could limit the plaintiff's flexibility in settlement negotiations. It's crucial to understand the funder's contractual rights.


• Due Diligence Requirements: The funding process involves a thorough due diligence review by the funder, which can be time-consuming and require the disclosure of sensitive information.


• Disclosure Issues: In some jurisdictions, there may be debates or requirements about disclosing the existence of the funding arrangement to the opposing party or the court. Transparency is generally considered best practice, but the specific rules vary.


• Funder Selection: Choosing the right funder is crucial. Plaintiffs should carefully evaluate the funder's experience, reputation, financial stability, and alignment with their litigation goals.


• Ethical Considerations: Lawyers have ethical obligations to their clients, including maintaining independence and avoiding conflicts of interest. They must ensure that the funding arrangement doesn't compromise their professional duties.

• Initial Contact: The plaintiff or their attorney contacts a litigation funder.


• Case Assessment: The funder conducts a preliminary assessment of the case, reviewing key documents and information.


• Due Diligence: If the initial assessment is favorable, the funder conducts a more thorough due diligence review, including legal and financial analysis.


• Term Sheet Negotiation: If the funder is interested in providing funding, they will issue a term sheet outlining the key terms of the investment.


• Legal Documentation: The parties negotiate and execute a funding agreement.


• Funding Disbursement: The funder provides the agreed-upon funding.


• Case Management: The litigation proceeds, with the funder receiving regular updates and potentially providing strategic input.


• Recovery and Payment: If the case is successful, the funder receives its share of the recovery.

Commercial litigation financing is a growing industry worldwide. It's becoming increasingly accepted as a legitimate and valuable tool for businesses and law firms. As the industry matures, we can expect to see:

• Greater Standardization: More standardized terms and practices.


• Increased Competition: More funders entering the market, potentially driving down costs.


• Broader Adoption: Wider use of CLF across different types of cases and jurisdictions.


• Increased Regulation: More regulatory oversight to ensure transparency and protect the interests of all parties.

There are many commercial litigation funders operating globally. Some of the major players include:

• Burford Capital


• Omni Bridgeway


• Woodsford Litigation Funding


• Harbour Litigation Funding


• Longford Capital

• ALF (Association of Litigation Funders): A professional association that promotes responsible and ethical practices in the CLF industry.


• Lexology, Law360, Bloomberg Law, Westlaw, and other legal news sources: Provide coverage of developments in the CLF market.

Commercial litigation financing offers a valuable alternative for companies and law firms seeking to pursue legal claims without depleting their resources. It is important to understand the benefits, risks, and considerations before entering into a funding agreement. If you are considering CLF, it is essential to work with experienced legal counsel and conduct thorough due diligence to ensure that you are making an informed decision.