In this four-part series about how to get a case funded, we previously discussed how to select a funder, how to get an NDA in place, how to get to a signed the term sheet, and the diligence process. In our final installment, we will review key terms to take into consideration when faced with the all-important funding agreement.
The funding agreement represents a funder’s contractual obligation to finance litigation expenses or working capital in exchange for a portion of any award or settlement. This contract is the only protection a funder has over its investment because funders typically do not take any other security interest or collateral. Thus, they likely may not be willing to diverge substantially from the terms that impact returns and return priority.
Claimants should be wary, however, of litigation finance contracts allowing the funder to exert control over decisions otherwise held by the lawyer (and in some instances, the claimant). Such control may take the form of veto power over litigation strategy, ultimate sign-off on settlement, and the claimant’s ability to choose counsel. Further, such provisions run contrary to legal ethical rules forbidding third parties from interfering with an attorney’s independent professional judgment. A claimant and its lawyers should carefully review and analyze any control provisions under the legal professional responsibility rules of the jurisdiction in which the case will proceed.
Reputable funders will typically ask to be apprised of settlement negotiations and may offer non-binding views on the same. Of course, good faith acceptance or rejection of a settlement offer typically remains fully within the client’s purview. But the claimant should understand exactly what portion of the litigation proceeds it must turn over to the funder in exchange for the capital the funder has provided as of the date of that decision. It is also important to understand that a funder may require approval of any substitute counsel, but will often agree that such approval will not be unreasonably withheld. While substitution of counsel may be appropriate, any new attorney joining a financed case will have to be comfortable with 1) the deal terms, including priority; 2) the budget and contingency arrangements; and 3) consulting with and updating a funder. If the new counsel is not comfortable with the fundamental deal arrangements, then the underlying partnership with the funder simply will not work.
Once the transaction closes and a case is funded, the claimant’s partnership with the funder begins. Many lawyers question the level of involvement a funder has when it monitors its investment. Will the funder require weekly reports? Justification for strategy decisions? Review and approval of briefs? The answer is nothing quite so involved.
Bentham IMF subscribes to a “light touch” monitoring process involving regular updates on the progress of the case and notification of any critical events. The frequency of these discussions often depends on the level of activity – which varies over the course of any litigation – but is typically once per month. In addition to monitoring substantive case developments, the funder will carefully monitor the litigation budget to make sure there is sufficient capital committed to the investment.
Maintaining an open dialogue about both successes and unanticipated obstacles that arise during the litigation process is critical to the long-term success of the litigation finance partnership. When a case takes an unexpected turn, a funder can help right the ship by offering advice or helping the legal team identify the resources needed to get the case back on track. An experienced funder like Bentham IMF employs lawyers with a minimum of 10 years of litigation experience in its Investment Manager roles. Thus, it can and often does conduct an independent analysis of key issues through the resolution of the litigation at no cost to the claimant because its interests in a successful outcome are aligned. Of course, the claimant and its lawyers are not obligated to agree with the funder’s advice, but the assistance can sometimes prove invaluable.
Should you have an interest in obtaining financing for a case or a portfolio of cases, please contact us for a consultation.
Visit all four parts in our how to get your case funded series:
Part One: Choosing a Funder and the Importance of the NDA
Part Two: Getting to the Term Sheet
Part Three: Presenting a Matter for Funding
Part Four: Closing and Monitoring a Litigation Finance Transaction