Countless companies have run into financial trouble because of COVID-19. Even companies that are otherwise healthy and well-run are struggling. Now that liquidity has become tight, cash is king. It is unclear how long the crisis will last and how it will affect the economy. Several economists predict a recession, despite government stimulus packages.
During periods of strong economic growth, the number of lawsuits increases. More deals are being made, with occasional things going wrong, and companies that have benefited from growth have been able to build up a war chest with which to finance not only acquisitions but also lawsuits.
Recession occurs when economic growth has peaked with a boom and then flattens sharply, leaving companies facing a sudden drop in orders. Suddenly, it becomes more difficult for market participants to meet obligations.
Ideally, companies with strong claims should seek to monetize them. But when business owners decide to litigate, they immediately face high attorney fees. However, cash is scarce and urgently needed to keep the business afloat. So there is less litigation even when there really should be.
Law firms face similar pressures. Advisory, transactional and litigation practices are shrinking rapidly in an economic downturn. In compensation, really only countercyclical work remains so bankruptcies, restructuring and the like.
Litigation funding can provide an intelligent solution for entrepreneurs and lawyers in lockdown. A so-so win-win solution.
With litigation funding, a third party, the litigation funder, pays all the costs of the lawsuit in exchange for a pre-agreed percentage of the proceeds. Work is done on the no cure no pay principle. This means that in the event of a loss, all costs are for the litigation financier. Thus, the litigation funder not only funds the litigation costs, but also assumes the risk that the proceeds are ultimately insufficient to cover those costs. The commission that litigation funders negotiate for this depends on the nature and scope of the case, but is usually around 30% of the final proceeds.
For law firms, litigation funding means that even in corona times the chimney can continue to smoke. The process financier shall ensure prompt payment of fees. Lawyers are also not forced to reduce their usual rates or defer payment of invoices. Litigation funding shifts the risk from both the business owner and the law firm to the funder.
Without litigation funding, the alternative of win-win is a lose-lose. Companies will fail to exploit their meritorious claims and law firms leave litigation opportunities unexploited.
Litigation funding can be a godsend in these tough times.