Litigation Finance Glossary
Contributed by Julia Gewolb and William Marra, Validity Finance
Learn more about Litigation Finance
Litigation finance sits at the intersection of a rapidly evolving legal industry and the world of finance. The industry has quickly developed its own vernacular. Understanding this specialized vocabulary is critically important for anyone involved in negotiating a legal finance transaction. Below are some key concepts and their definitions.
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Insurance available to plaintiffs and defendants after litigation has already been filed, typically to cover the opponent’s legal fees if the insured party loses the case. It is more common in the United Kingdom, but it is increasingly available in the United States when litigants sue under contracts with cost-shifting provisions (i.e., a “loser pays” provision).
Litigation funding for domestic or international commercial arbitrations, which may include international treaty disputes and complex international commercial disputes. Funding in arbitration is both long-established and growing, and several jurisdictions have issued rules and regulations that expressly permit such funding.
A claimholder can fully or partially monetize a legal claim. The claimholder fully monetizes its litigation asset by assigning the claim in its entirety to a third party. Partial monetization occurs when a funder advances a portion of the expected damages in the case, usually as a non-recourse investment. In partial monetizations, the claimholder remains the party in interest, retains responsibility for pursuing the claim or enforcement effort, and continues to control the legal strategy.
Litigation funding made available to debtors, trustees or other stakeholders in the context of corporate liquidation or reorganization proceedings. As with other types of funding, the capital provided can often be used to pay the fees and costs related to litigating, or for other purposes related to the reorganization or liquidation.
Clients of litigation finance companies are typically either claimholders (e.g. a company, trust, university, government entity or NGO in commercial litigation finance, or individuals in consumer litigation finance) or lawyers (e.g. a law firm or solo practitioner that represents clients in commercial litigation).
Asset securing a loan. In litigation finance, typically, the damages award or settlement amount a claimholder expects to receive in a case or set of cases used to secure the funding. When the funded party is a law firm, collateral usually refers to the fee the law firm expects to receive in the case.
A period of time during which the client agrees to negotiate with a single funder. The funder will usually conduct diligence on the case or set of cases during this time. Clients should not expect to grant funders a period of exclusivity until after the client and funder have entered into a term sheet.
A way to structure a funder’s return on investment using a multiple of the capital committed or deployed. For example, upon successful case resolution the funder recovers its invested capital as well as a pre-negotiated amount, such as 2x or 3x the amount invested. (See also, Percentage Recovery.)
Uncertainty related to the duration, complexity, cost, or outcome of a particular case or set of cases. Litigation risk has historically been difficult for companies, firms, and traditional financial institutions to assess, price, or share. The litigation finance industry addresses these challenges by creating a market in litigation risk.
An arrangement in which a funder invests in multiple cases in a single transaction, with the return on invested capital coming from any of the cases in the portfolio or from the portfolio’s aggregate results. Portfolios are often used to spread risk and offer clients more capital on better terms.
A pre-negotiated amount (either a fixed number or percentage) received by a claimholder’s counsel or funder in the event of a favorable resolution of a case, most often in the context of defense funding. For defense funding, a success fee is typically defined in relation to the amount of liability avoided in the case.
An initial non-binding offer from a funder detailing the terms and conditions under which a funder would be willing to invest in a particular case or set of cases. A funder usually provides the term sheet after its initial review of the case, but before it conducts comprehensive due diligence.
A portion of funding deployed at set intervals. For example, a funder’s investment in a case may be tranched out at set intervals of time (e.g., a new tranche every three months) or at various stages of the case (e.g., a new tranche upon completion of the motion to dismiss stage, summary judgment stage, etc.).
“Waterfall” describes a payment priority structure outlining the order of priority in which litigation proceeds are paid out. A common example would be for the funder to receive first priority on its deployed capital, for the funder and lawyers to receive next priority on their combined returns, with the remainder of recovery going to the client.
Capital provided to a claimholder or law firm for general business purposes and secured by the claimholder’s litigation or the lawyer’s anticipated fees. For example, in addition to funding fees and costs, a funder could provide working capital to the client secured by case proceeds.