Third Party Funding: advantages and drawbacks

As is widely known, third party funding is a practice widely carried on in many European countries and the United States of America. The benefits are so clear that sooner rather than later this method of financing will finish up being taken up in Spain where, until now, its use continues to be rather infrequent. The proven benefits of this way of financing legal expenses for claims made through the courts or through arbitration are undeniable.

To begin with, many legal cases with a strong foundation in law would never be brought were it not for the existence of a funder who is willing to assume all of the costs so that this mechanism opens the way for access to the court system. From the business point of view these funds permit the partial transfer of the risks of litigation together with all of the costs (including the risk of the awarding of costs) which leads to a lower degree of uncertainty. Furthermore, having access to an independent and objective assessment of the possibilities of success for the case contributes to a more realistic expectation of the results which are likely to be achieved.

Concerning the potential drawback to the financing of litigation, it has been asked whether or not the intervention of a third party as financier of the case is in any way able to condition the making of decisions on the part of the plaintiff or is a breach of the confidentiality between the lawyer and their client. It has also been suggested that this form of financing might lead to increased levels of litigation.

The reality is that these risks are minimal. The funder plays no part in the making of decisions relating to the case to be brought nor do they condition the negotiations which may be entered into to reach an agreement. The funder´s participation is focused on making a correct analysis of the possibility of success of the case which it is proposed to provide financing for, as a result of which all of the factors are taken into account including that the plaintiff has competent and experienced legal representation, the greater or lesser rapidity in the realization of the procedure and of course, the well-founded legal case behind the legal action to be brought. At no time however does the funder interfere in the direction of the proceedings nor the decisions to be made on the part of the plaintiff.

All in all, said financial investors have no control over the cases which they finance, restricting themselves simply to the monitoring of its progress and its results. It has also been observed that these funds have a great concern for assuring the due confidentiality of the information received on the case from their clients. In fact, the process of evaluating the case always begins with the signing of a confidentiality agreement between the third party funders and the client seeking finance. Finally, the process of assessment of cases is so exhaustive and complete that it appears highly unlikely that this would lead to a significant increase in the number of cases.

In conclusion, we believe that the advantages of third party funding clearly exceed any supposed drawbacks which have been noted and which in any case, are only moderate and easily overcome by means of an adequate contractual regulation.
Managing partner of SLJ Abogados

Daniel Jiménez

SLJ ABOGADOS