6 Crucial Terms You Should Find in a Litigation Funding Agreement
Going to court can be a money-sucking ordeal. That is why having an investor to fund your legal battles through litigation funding can be a lifesaver for plaintiffs short on cash to pay for legal fees.
Litigation finance involves having an investor bankroll some or all legal costs. In return, they get a slice of whatever you get from a settlement or court judgment. This setup is convenient for plaintiffs needing a quick cash injection to cover legal expenses without using loans or maxing out credit cards.
And to ensure that both parties are protected, you need to have a litigation funding agreement in place.
A litigation funding agreement is a contract between you, the litigant, and an investor, spelling out how you'll work together. This agreement dives into the potential risks, what gains the investor expects, and how the cash will be divided among backers.
But what does the contract contain? Here are the most common sections in litigation funding agreements.
1) Funded Party
One of the main contents of the agreement is the identification of the funded party. Is it the law firm or the actual client?
If the funder directly contracts with the client, the commitments the client makes in that agreement can actually loop in the law firms.
The money is usually coursed through the law firm’s bank account, and the law firm needs to give the nod to the funding agreement before dishing out the case proceeds to the client and funder once things are settled.
2) Amount and Timing of Funding
In a typical one-case funding deal with the client, the funder steps in with a set dollar amount for legal fees — often a certain chunk of the expected budget for those fees. They also include a set dollar amount for litigation expenses from the expected expense budget. Some extra working capital for the legal services might also be involved to keep things running smoothly.
All of these are laid out in the litigation funding agreement, including how much the funder covers and how much the client and law firm can handle. You and your lawyers must be clear on who covers the extra costs if they exceed the expected budgets.
As for the timing of payments, one option is drip funding, where the money for litigation costs and fees comes in as things pop up. It might also follow a set schedule, milestones, or other terms.
3) Calculation of Funder’s Return
Litigation funders usually base their cut on either a multiple of the cash they've put in or a chunk of the total money coming from the case — whatever's the bigger piece of the pie. Also, the longer the case takes to wrap up, the more they might end up getting.
Some funding deals might have an "unexpected delay" provision, which means that if your case is taking way longer than planned, they might up the ante on their cut.
If the funder's talking about a "2x" return, you have to figure out if they mean double the cash they put in or double the total commitment. Ensure everyone's on the same page about how the funders and your lawyers get their piece. Clients should walk away with 50-60% of the proceeds in a solid funding setup.
4) Case Proceeds
If the funding deal is about the funder getting a percentage of the case money, you must know what falls under that category.
Partial payments should be covered. You also need to have an agreement outlined for non-monetary proceeds.
5) Other Payments to Funder
It's not just about the regular return to the funder; some bonus payments might be sneaking in there, too.
Some funding agreements slip in a structuring or transaction fee for the funder. It could be a fixed amount or a percentage of what the funder puts in. Some contracts might also have a bonus return for the funder from future cases.
“Breakup fees" might also be hiding in the fine print, applicable if the case gets resolved during the underwriting process.
6) The “Waterfall” Provision
The waterfall provision specifies how money cascades down to different parties.
At first, all the cash goes to the funder until they get back their investment. Once they've covered that, the cash flows and gets shared between the funder and the law firm. Finally, the client gets their slice of the cake.
The shape of this waterfall can shift based on the risk level of the case. When the resolution amount is less than expected, the waterfall decides who gets the bigger cut.
The waterfall can become exceedingly complex if multiple payments come in over time, like if you're dealing with a case involving multiple defendants or phases. It’s best to have expert finance pros to help you out.
Other considerations include exclusivity terms, portfolio funding, termination clauses, and representations and covenants.
The essential thing about commercial litigation funding arrangements that make everyone – the client, the counsel, and the litigation funder – happy is all about being crystal clear. When the whole litigation wraps up, there shouldn't be any unexpected plot twists about where the case proceeds are headed.
