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What is litigation funding

What is litigation funding

litigation funding is sometimes defined as a transaction in which a third party provides the financial resources for companies to pursue or proceed with litigation.

The litigant obtains funding to cover the costs of litigation from a third party who has no direct interest in the case. In return, but only if the case is won, the lender receives an agreed-upon share of the proceeds of the claim. If the case is unsuccessful, the funder receives no compensation and nothing is owed by the litigant.

litigation funding is suitable not only for smaller companies that need money to conduct their litigation, but also for large companies with sufficient resources, as it is a way to finance the cost of litigation.

External funding of lawsuits is now a familiar phenomenon. This form of financing originated in Australia more than 30 years ago and is now well established in the United Kingdom and the United States. And growing in the Netherlands and Belgium and other European countries.

Outsourcing claims can be useful, even for large companies with their own legal departments and significant financial resources. By outsourcing its claims for a certain amount of money to a specialized outside funder, a company can stay focused on its core business and does not have to release its own funds for litigation.

Litigation costs are among the operating expenses that are directly charged to earnings. But unfortunately, when the case is won, the proceeds are not part of regular income. For accounting purposes, this income is not considered to contribute to profits. By funding a lawsuit rather than paying for it yourself, the costs can be taken off the balance sheet.

The funder’s share of the proceeds of a successful case is agreed with the client in advance. This financial reward may be a percentage of the claim won, or a multiple of the amount funded or a combination of both.

Litigation funding allows lawsuits to be decided on their merits, and not based on which party has deeper pockets or stronger appetite for protracted litigation.