Third party funding: The minimum claim value

Abstract

Third Party Funding (TPF) is an agreement between a claimant and a funder, where the funder provides money to pursue or defend a lawsuit in return for a financial reward, usually a percentage of the sum recovered by the claimant. TPF is a useful tool to improve access to justice and through which the funded party can better allocate its financial resources. It is widely used in international arbitration and, in some countries, even in domestic litigation and arbitration. Many factors affect the decision of funding a lawsuit, in the first place its value, which has to be high enough to justify funder’s allocation of capital. In this paper, we analize litigation from the certainty equivalent perspective and provide interpretation on how differences between the parties may affect the size of the pie. Furthermore, we formalize TPF and – considering Italian costs, cost shifting rules and length of trials – derive a formula to compute the minimum value of a claim suitable for the funding agreement. Finally we use the formula to provide estimates for three-stage proceedings before two jurisdictions with different length of proceedings.