Litigation Funding (a loan or not)

Friday, December 29, 2017

Opponents of Consumer based Legal Funding have been attempting to reclassify the product “as a loan” whilst funders purfusly object.

So, what’s the fuss?

Should the legal claim funding product be reclassified as a loan its simply more than mere semantics. The provision of Consumer Litigation Funding has been broadly asserted as the purchase of “an asset”. That assert being, a portion of any proceeds flowing from a consumer’s meritorious legal victory. Accordingly, litigation funding is a form of “investment” which permits the consumer to access needy financial support, whilst their legal adventure makes its way through the legal system.

In a publication titled “Harmonizing Third-Party Litigation Funding Regulations,” Professor Victoria Shannon Sahani clarified her reasoning why Consumer Legal Funding is not a loan and proffers the following reasons:

Firstly, there is no absolute obligation for the funded client to repay the litigation funder. If the client is the claimant, the client must only repay the funder if the client wins the case. If the client is the Defendant, the premium payments end as soon as the case settles, and if the Defendant loses, the funder will not receive a success fee or bonus.

Secondly, litigation funding is non-recourse, meaning, should the client loses their case, the funder cannot pursue the client’s other unrelated assets to gain satisfaction.

Thirdly, the funder is taking substancially more risk than a traditional collateral-based lender, accordingly, a funder will seeks a higher rate of return than a traditional lender.

This risk to reward concept is not new, as an unsecured credit card typically carries more risk than a secured loan, so laws/regulations do tolerate elevated interest rates and dependant upon risk or collaterilised lending is generally less expensive than non-collateral lending. 

Fourthly, distancing funding even further from a loan, funders are taking on even more risk than unsecured credit cards because the credit card agreement is a bilateral transaction, while funding is a multilateral transaction.

Moreover consumer Legal Funding does not contain any of the characteristics of a loan, as illustrated in the chart below:

Characteristics

Loan

Consumer Legal Funding

Personal repayment obligation

YES

NO

Monthly or periodic payments

YES

NO

Risk of collection, garnishment, bankruptcy.

YES

NO