Step by step: The nuts and bolts of the funding process, part two

Step by step: The nuts and bolts of the funding process, part two
Sarah Jacobson
Investment Manager and Legal Counsel - United States

In the first post of this two-part series, we addressed the initial steps of entering into an NDA and term sheet, the diligence process, and the considerations for analyzing specialized claims. In part two, we will address drafting, negotiating, and executing the funding agreement—which, for Omni Bridgeway, proceeds in parallel with diligence and is executed once an investment is approved—and monitoring a funded case.

The litigation funding agreement (“LFA”)

The LFA sets forth a funder’s contractual obligation to finance litigation fees/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 generally do not take any other security interest or collateral. The LFA also typically provides the funder with only a limited set of rights. Thus, funders are often resistant to substantially diverging from the material terms of the LFA; doing so could impact their right to recover their investment return upon a successful resolution.   

Claimants—and in particular, their lawyers—should be wary of litigation finance contracts that allow the funder to exert control over decisions otherwise held by counsel (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. Such provisions may run contrary to legal ethical rules forbidding third parties from interfering with an attorney’s independent professional judgment. While reputable funders will ordinarily ask to be apprised of settlement negotiations, good faith acceptance or rejection of a settlement offer typically remains fully within the client’s purview.

One final issue for consideration is whether a claimant should engage independent counsel to negotiate and advise on the LFA to avoid any potential conflicts issues with litigation counsel. Many LFAs provide that all or a portion of the lawyer’s fees will be paid by the litigation funder (a third party) on behalf of the client. They also provide a repayment waterfall that likely places the lawyer’s contingency portion of any of litigation proceeds before the client’s recovery. Thus, using separate counsel may alleviate potential client concerns about conflicts with respect to litigation counsel’s interest in the funding terms. However, if the claimant is unable to secure separate counsel or prefers that litigation counsel for the proposed funded case negotiate the LFA (not uncommon), the rules of professional conduct generally permit the arrangement so long as the lawyer secures the client’s informed written consent.

Monitoring the funded case

Once a case is funded, the claimant’s partnership with the funder begins. The same Omni Bridgeway investment team that shepherded the case through the funding process will monitor the case throughout the life of the investment. This includes obtaining regular updates on the progress of the case and notification of any critical events. The frequency of these discussions is usually once a month, but largely depends on the level of activity in a case. In addition to monitoring substantive case developments, the funder carefully monitors 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 right the ship by helping the legal team identify the resources needed to get the case back on track. And while Omni Bridgeway does not control strategy, its highly experienced lawyers develop a deep understanding of every funded matter and are always willing to provide non-binding views on strategy upon request. 

To learn more about the funding process or to discuss whether you have a viable case for funding with Omni Bridgeway, please contact us for a consultation. Or visit our Company Insights to learn more about our dispute finance capabilities.