This is why all legal practitioners should start learning about it
For those that still do not know (yes, these people exist), ‘Third Party Funding’ (‘TPF’), stricto sensu, is the professional practice of funding legal proceedings in exchange for a fraction of the recovery, only in case of success, sometimes entailing the transfer of the claim. In a broader sense, TPF may be understood as a series of instruments of financial and/or contractual nature to cover the costs and/or hedge the risks of legal proceedings, in principle provided for and remunerated on a success basis only. TPF has emerged in recent years as a result of globalization and of the financial crisis and has found a fertile terrain in many jurisdictions where the ‘litigation market’ was liberalized by legislative changes or changes in case law. The intertwinement of these trends seems to have allowed the emergence of a new asset class, i.e. ‘litigious assets’, and many professional ‘third party funders’ have been set up to provide specialized financial services for this. Third party funders are, however, not the only actors in this market: litigation lawyers and legal expenses insurers (offering cost and risk hedging products for litigation) are also present, alongside other more minor actors. In general terms, TPF differs from the provision of legal services related to litigation offered by qualified lawyers, which entail any type of legal advice for litigation and court or arbitral assistance, and are generally (but not necessarily) offered on an hourly or similar basis. It also differs from legal expenses insurances for litigious events, which are generally offered in exchange for a premium, paid by the client to the insurer upfront, rather than as a fraction of the eventual recovery. The litigation market is part of the wider ‘market for legal services’, which encompasses any services provided for by qualified lawyers and by authorized legal expenses insurers, but also others, such as legal tech start-ups. In such context, the funding for any of these services can be considered as ‘legal funding’.
This – deliberately schematic, and idealized – categorization, which tries very briefly to frame TPF in the wider litigation and legal services’ markets, is much more nuanced in reality: in fact, TPF is a chameleonic instrument that continues to evolve and adapt to real-world business and regulation. Honestly, I believe that much of the potential of TPF is still unknown. In recent years, having had a unique chance to combine theory and practice of TPF, I have identified three factors that are driving this evolution: one is the different regulatory regimes (local, national, international, Bar regulation(s), insurance regulation(s) etc.) applicable to the actors of the market for legal services; another is the impact of new technologies on the practice of law; the third one is the investment structure of professional third party funders. Understanding Third Party Funding in relation to these factors will be key for any professional involved in the practice of law and in the fast-evolving litigation and legal services markets.