All legal contracts must be reviewed and understood in their entirety, and a Litigation Funding Agreement is no different.
Getting to the point of having a Litigation Funding Agreement ready and in your lap may have felt like a long and tedious road. And, without putting a damper on things, reviewing the Litigation Funding Agreement can be even more time-consuming than all the discussions and investigations leading up to its creation. But it’s a crucial stage that needs to take priority and the time necessary to ensure the claimant understands the Litigation Funding Agreement and is happy with its terms.
This phase is not simply a case of reading and signing the agreement. There will be a review and negotiation still to come. This article intends to help you understand the different sections in a Litigation Funding Agreement and what to take note of.
1. General Terms and Definitions
First to mention is that all capitalised words are listed in this section with the prescribed meaning of the word included. Take note that some ordinary language words’ meanings may differ in the Litigation Funding Agreement. Some of these terms will consist of the fine particulars and complexities of the agreement, which is why you won’t want to misunderstand the words. Examples include the success fee, the collateral, and the terms concerning revenue. These are vital points for the claimant and transactional lawyers to note.
2. The Mechanics of the Funding Process
The information about how to make funding requests is detailed in this section. It will include how the claimant or the legal team make these requests. It will also include how the funder is obliged to make advances, how they will stage the funding for each phase of litigation or whether they will have a share of the set amount depending on the resolution of a threshold issue. At this point in reviewing the Litigation Funding Agreement, the claimant may have questions about whether the funder can meet its financing obligation and request guarantees that there is adequate capital for the funding.
3. Representations and Warranties
These are statements of present or past facts that are pertinent to the agreement. Therefore, the claimant must check each of the representations and warranties meticulously to ensure that all of the information is accurate. These statements will differ dependent upon whether a claimant is a person or a business, and according to the nature of the lawsuit. The reason behind reviewing these representations and warranties is that there is transparency from the claimant so that the funder understands any possible risk of a misunderstanding of the facts and, if necessary, allocates the risk to the party in the most suitable position to accept the risk.
4. Covenants Made to the Funder
A covenant is a promise made by the claimant to the funder. It details the commitment to take future measures that could influence the success of the lawsuit or the right of the funder to share in the recovery. The claimant must understand their performance responsibilities because a breach of these may lead to financial accountability. This is where the claimant needs to be working alongside their transactional lawyers to guarantee a complete understanding of their responsibilities under the Litigation Funding Agreement.
5. Distribution Provisions
How the recovery will be divided is detailed in the Litigation Funding Agreement. The claimant must check the defined terms in the Definition section of the Litigation Funding Agreement to confirm an understanding of the financial arrangement. The Litigation Funding Agreement will describe how the recovery will be split up between the relevant parties such as the claimant, the attorneys, insurance providers, and the funder. It will also detail the timing and priority of how the recovery payments will be made. In most cases, the first allotment will be made to the funder. This is intended to return the number of contributions advanced under the agreement. If the claimant or legal counsel has also been offering finance, then often what will happen is the distributions are made pro-rata until all parties are fully reimbursed. Once these payments are set up, the remaining profits will be divided between the claimant and the legal counsel. This is done according to the approved directions in the Term Sheet and mirrored in the Litigation Funding Agreement.
6. Termination Rights
This section of the Litigation Funding Agreement will offer the claimant and the funder the opportunity to terminate the Litigation Funding Agreement in specific situations. This is a significant section of the agreement because if the contract is quite broad, there’s a chance the funder will be able to pull their litigation finance at a potentially critical point of the litigation. Naturally, the claimant won’t want this to be the case.
7. Miscellaneous Provisions
This section may not sound very important, but, again, reviewing and understanding each section is vital before signing the Litigation Funding Agreement. The details in this section may have crucial legal implications for how the Litigation Funding Agreement is understood and how each party will settle disagreements regarding its interpretation. For example, how disputes between the parties are handled and how the governing law provision controls their rights.
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