Litigation funding is not a loan but an investment
At the 39th Professional Forum, the Foundation Aranzadi La Ley and Esade Law School discussed ‘Litigation funding, where are we now?’ with the participation of Cristina Soler, CEO of Ramco Litigation Funding; José Julio Figueroa, managing director of the legal department at Acciona, and Paulino Fajardo, director of Arbitration and Litigation for Europe, Middle East and Africa at Herbert Smith Freehills.
The panel discussion, the second in the 2022-23 academic year, was opened by Cristina Sancho, president of the Foundation Aranzadi La Ley, and chaired by Eugenia Navarro, professor of Strategy and Innovation at Esade Law School. The speakers analyzed the evolution of litigation funding in Spain, a financial instrument virtually unknown 15 years ago when it emerged in Australia in 2006. It has developed considerably in recent years and now attracts a great deal of attention and has very promising growth prospects.
Litigation funding is not a loan but an investment
According to its most basic definition, litigation financing is a funding mechanism like any other except that, in this instance, the asset is a lawsuit or arbitration. In this mechanism, an investor or professional in the field of investment – a third party not involved in the lawsuit or arbitration – funds the cost of the lawsuit or arbitration and obtains returns based on the future outcome reflected in the sentence or the settlement. The returns may be a multiple of the investment or a percentage. “We’re not talking about a loan. This is an investment,” explained Cristina Soler.
From a business point of view, it is a “very interesting and disruptive” concept, according to José Julio Figueroa, “It’s always better for a company to outsource its lawsuits and focus on its own business.” For a law firm, as Paulino Fajardo pointed out, “it’s an everyday tool and for the customer, it’s an advantage.”
What customers might be interested in this sort of finance?
When discussing why different sorts of companies might be interested in this sort of finance, Soler explained that its distinguishing feature, from a financier’s viewpoint, is that “there must be a high probability of winning the lawsuit or arbitration.” The companies most interested in such finance are usually large because this type of transaction can mitigate risk whilst enabling the company to optimize its assets. Figueroa, on the other hand, emphasized that litigation funding for small companies fulfils a very noble aim, i.e. it enables and facilitates access to justice for those without sufficient means to compete on a par with bigger opponents. Finally, Fajardo added that litigation funding employs methods and audits different from those of law firms and companies and “is far more able to target outcomes and value added.”
Pros and cons of litigation funding
The pros of resorting to litigation funding are perfectly clear: they avoid certain legal fees, monetize a risk that analyses the feasibility of lawsuits, and recoup the litigation funding upon payment by the convicted party. However, the lack of regulations governing this mechanism and its poor fit in the Spanish legal system, being a mechanism that many judges themselves are not familiar with, are an obstacle and cause for some concern.
Discussions also focused on different sorts of backers, regulations, legislation and legal certainty, funding agreements, arbitration and costs.
