Third Party Funding – Worth Considering?
Third party funding of disputes is on the rise, but how does it work, and more importantly; could it be a fit for your company’s claims? In this article the main characteristics of TPF are discussed.
Third party funding (or: TPF) has been a method of funding disputes in the United States of America and the United Kingdom for some time. In Europe, TPF is relatively new, and its possibilities are largely unexplored. TPF has come into play in cases of class actions or mass litigation, but its potential could be wider. It is worth for companies to consider if TPF could be a financing tool in the collection of claims. In order to do that, we should consider a few questions.
What is TPF?
Firstly, what is TPF exactly? A claim against a counter party arising out of a dispute with that party is a time and cost consuming burden for the company. From an investment perspective, however, that claim can be considered an asset. Third party funding of litigation or arbitration (TPF) has become a focus for investors. A claimant is provided with funding by an external party (the funder) to cover the cost of collecting its claim, with the funder receiving a percentage of the outcome of a successful collection of the claim.
How does TPF work?
The principle of funding a claim is straightforward. Although a claim in itself may represent value, in order for that value to materialise, the claim needs to be collected, often through litigation or arbitration. Therefore, considerable costs need to be incurred in advance. Costs of litigation or arbitration, including lawyers’ fees, costs of experts and internal man hours spent on preparation of the proceedings are all to be paid out-of-pocket, with the uncertainty if the claim will be collected, let alone collected in full.
A third party funder will advance the costs associated with collection of the claim. In exchange, it expects a return on its investment, which manifests itself in (i) a recuperation of the costs made from the proceeds and (ii) a percentage of the net proceeds.
That upside for the third party funder is part of the contractual arrangement between claimant and funder. The arrangement is tailor made per claimant, and often covers various items that are associated with collection of the claim. Relevant items form part of this are:
- the level of influence the claimant has over topics such as the selection of lawyers or experts;
- the level of influence the third party funder will have over the strategy of proceedings;
- the amount of costs the third party funder is able to recoup; and, most importantly,
- the percentage of proceeds for the funder.
The funder will perform an independent assessment of the viability of the claim, the costs associated with collection and, as a result, its chances of a successful investment. It will use those findings as a benchmark for its negotiation position.
When to fund?
TPF is a relevant route to explore if the claim has a considerable level of success. As said, a funder will only be interested to fund the collection of the claim if there is a reasonable chance of success. The analysis the funder performs in this respect, can provide a valuable benchmark for the company to assess if its claim is worth pursuing at all.
TPF can be considered a financing tool, whereby the cash flow issue of financing a dispute is taken over by the funder, against a consideration. This can be interesting if the claimant has no (or not enough) funds of its own. But it is also worth considering if the company has the funds, but wants to spend that liquidity elsewhere, or for a legal counsel that wants or needs to keep legal spend within budget.
TPD is increasingly on the radar of claimants. Not only those that are interested in bringing mass or class actions, but also companies that are exploring the option to use it as a financing tool. It is worth keeping TPF on the list of items to consider when pursuing a claim against a debtor. It may not always be a fit, but when it is, its financial outcome can be beneficial.