Benefits of Litigation Finance for Business

As per the reports by Daksh India, the average cost (other than fees of lawyers) incurred by a litigant is ₹1,039 per case per day, and the average cost incurred due to loss of pay/business is ₹1,746 per case per day. Legal expenses of listed Indian companies were Rs 36,973.75 crore in the fiscal year ended March 31, 2021

Thus, litigation has been an expensive affair since the very beginning. In the past few decades, many jurisdictions have introduced the concept of third-party litigation funding to ease this burden. Third-party litigation funding companies supply the capital to litigators in exchange for a portion of the settlement or other remedies. This funding is non-recourse which means that if the lawsuit fails, the funded party is not required to pay the funder after the case. The funders provide capital to businesses and business owners to help them protect and enforce their commercial rights and interests and strengthen their legal positions. On the ‘demand side’, companies with legitimate commercial claims can increasingly access third-party litigation funding which can be thought of as a type of hedge against the uncertainty of a legal outcome.

A cheaper alternative to loans

A bank’s loan comes with a high-interest rate and also a compulsory liability to pay back even if the litigant loses the case. This is not the case with litigation finance as it is non-recourse, i.e., a return is collected only if the case is successful. Also, the business will not have the obligation to pay the principal and the interest amount and it will be protected from inflating interest rates as well. The funder can be paid from the claim amount received by the litigant.

In addition to reducing risk, using litigation finance rather than self-funding legal disputes provides accounting benefits to the business. Loans add to operating expenses and thus, reduce profits. Whereas, litigation funding removes that expense and may, in some circumstances, even be treated as revenue, immediately boosting the financial picture of the business.

Flexibility

Litigation funding is a flexible mode of financing legal expenses as it is non-recourse in nature. Litigation funding also allows lawyers, litigants, and businesses the flexibility to take up small offers on meritorious claims and enhances the probability of the dispute being resolved on the basis of the merit of the claim and not the financial position of the parties involved.

Financial benefits to the business

Litigation Funding also provides benefits like:

a)   Hiring better lawyers that the Litigant otherwise could not have been able to afford.

b)   Increased Liquidity- It allows businesses to retain cash for immediate business needs and release capital of the business for other priorities.

c)    Potentially turn a company’s legal department into a revenue source instead of a fees and expenses center.

d)   Positive P&L impact – Litigation funding keeps ongoing litigation costs off a business’s profit and loss as the expense is borne by the funder;

Claim expertise and diligence

The Funder also assesses the merit of the case and acts as a project manager, collaborating with the law firm to give an expert opinion on the case.

The diligence that the funder undertakes provides assurance of the strength of the case as a funder’s legal team undertakes thorough due diligence prior to funding to ensure the claim has merit.

With the recent pandemic affecting every walk of life, the preservation of the cash flow by businesses is critical to ensure survival. Litigation funding can help businesses to reduce risk without writing off potential upside. This option of conversion of legal liabilities into potential assets can provide businesses with the required security and certainty.

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