Legal finance happens in three stages: project setup, agreeing on financing, and running the dispute. Each stage is crucial for the eventual outcome. We will illustrate this with an example from our arbitration practice.
Stage 1: Project setup
At the beginning there is always a project. A commercial or investment dispute between a claimant and a respondent. Or multiple claimants, as it was in our case: more than 50. Whatever the case may be, the first stage is all about the right setup.
Getting the facts straight, getting the information together, conducting a preliminary assessment of the claim: does it have merit? Can we approach a litigation funder with it? How should we approach them? How is the dispute going to play out?
Sometimes multiple claimants may have already organised themselves into an association which manages their claims. This simplifies the setup. But it is quite rare, especially in Central Europe, where we are not used to mass claims.
And so, the setup usually falls on the lawyers. How do we do it? Together.
In our case, the Vienna and Bucharest offices joined forces. This was suitable from a cultural and legal perspective. Not to mention logistics. Neither office had to see every single claimant. And the claimants, who were from all over the world, did not all have to travel to one office. Instead, we divided up the work.
The setup must never be underestimated. Whether dealing with many claims or just one, it takes time to understand a claim; to get across the key documents, to apply the law, to formulate a case theory. It takes time to be prepared.
And you cannot approach a litigation funder unprepared. Ultimately, you want to provide the funder with a document outlining who you are as claimant, what your claim is, how you expect to run it, and what the projected return is. Of course, we do this for you. But it's hard work, and the first stage can easily take several months. If done well, the funder will sign a terms sheet with you outlining the commercial terms of a potential funding agreement.
Stage 2: Agreeing on financing
A lot happens before a funding agreement is concluded. First, the terms must be agreed.
You and your claim are tested by the funder. The funder needs to determine the risk and agree on an appropriate rate of return. Then comes the budget: the lawyers' fees, the expenses of courts or arbitration institutions, witnesses, experts etc. The funder wants to know a budget for all this upfront. Also, there may be adverse costs insurance (in case you lose the case). Its premium, too, may be covered by the funder.
And so, a comprehensive due diligence is required. In our case, the Vienna and Bucharest offices worked in sync, using state-of-the-art legal tech. With a specialised tool, our teams worked at different times from different locations, while work products remained up-to-date and accessible by all team members and the funder. The four-eye approval principle ensured that key documents were checked by lawyers from both offices.
The second stage concludes with the signing of the funding agreement, which sets out in detail the funding conditions, obligations of the parties, schedules and budgets. It also sets out how funding is done and how proceeds are eventually distributed.
In our case, escrow accounts were set up for funding and proceeds distribution. Through a separate escrow agreement, this guarantees that funds are allocated, and proceeds are distributed, correctly. Securities are executed, so claims and proceeds cannot be taken or set off.
Stage 3: Running the dispute
With the funding agreement in place, the dispute can proceed. The funder does not advise or influence the conduct of the dispute, or any potential settlement. It does, however, ask for regular updates on the proceedings, the budget and any relevant issues which could impact the dispute.
And so, the teamwork continues. Everyone stays informed.
Once the award is issued (or the case settles), proceeds start coming in. They go into an escrow account. They are then distributed according to the funding agreement, a so-called waterfall. But no matter the agreed premium and no matter the cost, you, as the claimant, should always recover the larger part of the proceeds. If the respondent does not pay the whole amount, a funder may monetise the award (or settlement). It pays an upfront premium to you and handles the enforcement itself. If the funder collects more than expected, you may even be paid a deferred premium later on.
At the end of the day, you can run a risk-free dispute, just like our claimants. Protected from legal fees, expenses and even adverse costs. You can run a case you otherwise wouldn't. Perhaps because the risk was too high, perhaps because it would look bad on the balance sheets.
That is how legal finance works.