As the commercial world becomes more litigious, individuals and corporations are increasingly hamstrung from pursuing justified legal claims by a lack of liquidity or other means of financing.
Insufficient resources, which can limit fair access to the justice system and create market failures, is being addressed by the emerging field of third-party funding—that is, investing in litigation or arbitration claims, providing credit or loans for legal representation, or financing individuals directly.
This trend should be understood in the broader context of corporate legal and compliance management. Since the global financial crisis, many in-house legal departments have been seeking ways to reduce corporate legal costs. Risk sharing and third-party funding help reduce the financial burden on many of these companies.
Moreover, the investment community is increasingly interested in legal claims as a new asset class within alternative investments. As fund managers and institutional investors look for new noncorrelated assets in an environment of low commodity prices and volatile financial markets, third-party funding has become more attractive with improved financial results.
Investments and claims’ value can be sizable. Harbour Funds, the UK-based, third-party funding pioneers, for example, holds aggregate claims valued in excess of £2.5 billion ($3.6 billion).
One of the main challenges for the third-party funding industry is the regulatory framework, since investing in legal claims also raises ethical concerns. Jurisdictions around the world are closely monitoring the development of the market in the US and the UK, the leading venues for this new financial asset.
“It is still too early to see where the regulation is heading. Many countries have not even begun to explore the third-party funding industry from the legislative perspective,” notes Victoria Shannon Sahani, assistant professor at Washington and Lee University School of Law.
For now, self-governance is the norm, with regulators reserving the right to step in. Given the growth in the business, there are also general guidelines for international arbitration, including disclosure requirements, Sahani notes.