Third-party funding (TPF) has been used successfully in arbitration and litigation for many years, and in our experience, has recently been increasingly used by Polish companies. What is it all about? In a nutshell, TPF is the payment by a specialised investment fund of costs related to the proceedings.
Third-party funding in practice
Before deciding whether or not to fund a case, the fund considers the risks involved in the dispute and assesses the likelihood of winning. If it decides that the likelihood of winning is high and the risk is limited, it will cover the costs of the proceedings in return for an agreed fee (which may be a multiple of the amount invested or a percentage of the amount awarded).
Third-party funding minimises the economic risk for the company in dispute. In fact, the company does not bear the costs of the litigation, even if it loses.
Funding also has another important benefit. Often the mere information that litigation funding has been obtained can induce the opponent to change its position and settle.
Third-party funding is most often considered from the perspective of the claimant, i.e. the entity initiating the proceedings.
This is because the claimant, when deciding to commence a dispute, takes into account the need to incur costs and secures its own funds in advance or makes use of external funding.
The situation is very different for the defendant, who is often surprised by the prospect of years of expensive litigation. Regardless of whether the other party’s claim is justified, the defendant must quickly find the resources to successfully defend its rights.
Litigation funds – support for the defendant
Defence-side litigation funding, although increasingly common, is still the exception rather than the rule. There are two reasons for this.
The first is a lack of awareness – defendant companies simply are not aware of the possibility of obtaining funding from litigation funds.
The second is that defendants have to meet additional conditions. This is because it is not enough for the fund to believe that the chances of a successful defence outweigh the risk of losing the case. The funding structure is somewhat more complicated and requires more creativity in identifying potential sources of profit for the fund.
Who can benefit from third-party funding
In what situations can defence-side funding be used? Most commonly, when the fund will be able to receive remuneration as a result of monetising the defendant’s success. There are many examples of such situations.
In our experience, funding can be obtained by a defendant who has a legitimate and substantial counterclaim against the claimant.
Another example would be disputes over revenue-generating assets and rights, such as property leases or intellectual property rights.
Funding may also be available, for example, in disputes over shareholdings in companies, multi-year exclusive distribution agreements, energy supply contracts or intellectual property rights.
Funds are also interested in disputes over the establishment of rights to an asset of significant value.
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