Understanding Commercial Dispute Finance in the United States

Abstract

Litigation is always a costly proposition. Although fraught with risk, it often represents a party’s only hope for redressing wrongs. The decision to bring suit is a momentous one, with the power to make or break entire companies. Yet those parties unable to bear the financial burdens of litigation themselves are precluded making that important decision at all, regardless of how strong their underlying claim – their right to restitution – might be. Imagine that Susan is general counsel at a company manufacturing home remodelling solutions. The company struggles to finance its operations amid poor sales and a weak housing market. It wants to branch into more profitable lines of business, but cash is always a problem. Last year, a large titanium producer shipped defective tracking wheels that were ultimately used by the company in products it sold to its customers, causing Susan’s company to lose significant market share. Susan knows she has a strong case against the titanium producer, one potentially worth tens of millions for her company. She also knows bringing suit will be very expensive. Management has always perceived her legal department as a cost centre, necessary to put out fires and help the company navigate the laws applicable to its industry, not as a potential generator of revenue. Worse yet, there simply is not enough cash available to engage in a speculative lawsuit that could cost millions. Susan needs another stakeholder in the outcome of her case because her company cannot afford the lawsuit. Unless someone commits to paying all the expenses – and perhaps even advances the company funds for working capital – her firm will have to forfeit this valuable opportunity. The stakes are high as a victory could revive the moribund manufacturer, giving it the resources to regain its competitiveness and access new markets, while a loss could precipitate the firm’s demise.