Litigation Funding v. ADR Funding
The new February Alternatives is out next week with a comprehensive analysis of how ADR funding operates in tandem with more traditional litigation funding, and litigation itself.
Here's a preview from Geneva, Switzerland mediator/author/educator Jeremy Lack, who has developed ADR funding. The comparative overview, Lack writes, shows that ADR funding is not simply cheaper or faster. Lack argues that ADR funding reshapes incentives, reduces risks, empowers parties, and improves capital performance across the board.
Table: Summary of Key Differences Between Litigation Funding and ADR Funding
|
Feature |
Litigation Funding |
ADR Funding |
|
Primary Objective |
Maximize financial returns for funders by supporting meritorious claims in court. |
Facilitate faster, cost-efficient resolution for all parties through settlement-focused funding, independently of financial outcome. |
|
Party Focus |
One-sided (usually the claimant). |
Inclusive of all disputing parties. |
|
Funding Purpose |
Covers legal fees, institutional (court/arbitration) fees, discovery, witness fees (expert and fact witnesses). |
Pays for any additional ADR institutional fees and the fees of any ADR neutrals (mediators, conciliators, experts, adjudicators or arbitrators). |
|
Process Control |
Limited influence on how courts or tribunals wish to manage their cases or docket. |
Parties retain full control over the ADR process and outcome. |
|
Compatibility |
Compatible with independent ADR Funding. |
Compatible with and complementary to independent litigation funding. |
|
Time to Outcome |
Longer: Two to six years on average. |
Faster: Typically resolved within three to six months. |
|
Typical Cost (as a % of Value) |
≈ 10-15% |
< 7% |
|
Return Basis |
A percentage of damages awarded (e.g., 30%) or a multiple on investment (e.g., 2X-4X) or some combination of the two. |
A percentage of cost savings, often capped at 5% of dispute value or 33% of savings, leading to significant savings for clients. |
|
Risk Profile |
Higher: tied to win/loss outcome and enforceability of judgment/award. |
Lower: high settlement rates (70%-85%) and minimal post-resolution disputes. |
|
Confidentiality |
Limited: Court proceedings or enforcement of arbitral awards are often public (although funding is not always disclosed). |
Stronger: confidentiality protections can be better built into the process--for example, separating out parts of the final outcome as arbitral consent awards. |
|
Probability of an Outcome |
100%, although neither party may be satisfied with it (could be a “Pyrrhic victory” or “lose-lose”) outcome. |
75% or higher, with the outcome being mutually accepted. |
|
Enforcement |
Often complex and time-consuming if a party objects to the outcome. |
Minimal need: settlements are typically self-enforcing as outcomes are consensual. |
|
Relationship Preservation |
Rare: the adversarial nature of litigation or arbitration often damages relationships. |
Emphasized: each process is designed to preserve or restore working/personal relationships, as desired. |
|
Eligibility Threshold |
High-value, high-damages cases only. |
Flexible: even medium and lower-value disputes qualify. |
|
Cost of Capital (WCC) Impact |
Higher, due to capital tied up for years. |
Lower, thanks to faster resolution and earlier reinvestment opportunities. |
|
Lawyer Fee Dynamics |
Lawyers may be incentivized to continue litigation for duration. |
Lawyers can increase their effective hourly rates and benefit from higher IRRs and lower WCC metrics. |
More on Thursday, Jan. 29, when the new Alternatives is released. Go here for subscription information.
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