Third Party Funding, also known as litigation financing, originated from common law countries, and is an arrangement where a company specializing in financing legal fees (typically fees associated with litigation or arbitration) agrees to cover the costs of some or all of such fees in exchange for an agreed return (usually a certain share of the successfully recovered damages or compensation payout).
Third Party Funding enables a company or an individual to bring a claim without immediately incurring significant legal costs. In litigation and arbitration cases, if the Third Party Funders believe that the applicant’s chance of winning the case and being awarded damages is high, then the Third Party Funders will assist the applicant in legal expense financing. This can be particularly helpful for parties involved international disputes, as the cost of cross-border legal proceedings is usually quite high.
This article aims to answer certain commonly asked questions in relation to Third Party Funding in China.
1. Is Third Party Funding Permitted in China?
In some countries, prohibitions or restrictions on the certain aspects of Third Party Funding exist in order to prevent Third Party Funders from abusing litigation resources and placing an excessive burden on the judicial system. However, there is no substantive legal prohibition or restriction on Third Party Funding in China, meaning that Third Party Funding is currently legal in China.
One common financing method traditionally used by lawyers is what is known under Chinese law as “risk representation/contingency fee”, whereby lawyers collect a certain share of amount awarded by the court or the arbitration tribunal. In recent years, professional Third Party Funders have established themselves in China.
As Third Party Funding industry develops in China, we expect that it will be more regulated in the future.
2. What is the Difference Between Third Party Funding and Legal Aid?
Third Party Funders finance a range of costs associated with legal proceedings, such as upfront attorney fees, travel expenses, litigation or arbitration registration fees, appraisal fees, expert witness fees, costs to keep the applicant’s company running during the trial, appeal costs, costs to enforce a favorable arbitration award/court judgment, and costs to resume the normal operation of the applicant’s company after enforcement.
Unlike legal aid, Third Party Funders will not examine the financial situation of the applicants, because the intention of Third Party Funding is to make a profit from the ultimate amount awarded to the applicant.
As a result, if the likelihood of winning the case is high, applicants can try to seek funding from Third Party Funders, without the pressure to commit their own finances to participate in the legal proceedings.
3. Who are Third Party Funders?
In China, large domestic Third Party Funders exist such as “Weian Legal Finance” and “Duomeng Litigation Funding”, as well as other Third Party Funders set up by law firms. Most Third Party Funders are mainly based in China’s most prominent commercial and financial centers, that is, Beijing, Shanghai, Shenzhen and Guangzhou. The reliability of Third Party Funders can vary, so applicants should do their due diligence before choosing a Third Party Funder.
4. How do Third Party Funders Charge?
Third Party Funders often require applicants to collect and submit evidence and other case materials for case evaluation before deciding whether or not to invest in the case.
Generally speaking, Third Party Funders prefer commercial cases compared with other types of cases. If a Third Party Funder decides to accept a case, the next step is for an applicant and the Third Party Funder to identify the specific fees to be covered and to negotiate the return rates paid to the Third Party Funder (normally 30% of the amount awarded). Usually, the higher the costs to be covered by Third Party Funding, the higher the returns that will be paid to the Third-Party Funder upon successfully winning the case. Therefore, the most financially appropriate payment method for an applicant’s case can only be determined on a case-by-case basis.
5. How do Third Party Funders Handle the Cases?
Most Third Party Funders have their own law firms which they engage to provide litigation and/or arbitration services to applicants. Normally, applicants engage a law firm recommended by the Third Party Funder from whom they are seeking funding. The applicants usually need to provide certain materials required by the Third Party Funder, and then wait for the Third Party Funder to inform them whether the Third Party Funder will provide financial assistance to their cases.
Third Party Funders usually also allow applicants to engage their own law firm. However, it may mean that relatively higher returns are charged so as to cover the fee gap (if any) between the Third Party Funder’s law firm’s rate and the applicant’s law firm’s rate. Under this kind of arrangement, applicants may be required to pay higher rate, but can enjoy more transparency and maintain better control of the entire legal process.
6. Do You Still Need Your Own Lawyer?
The answer is yes if your finance situation permits. When choosing a Third Party Funder, a good lawyer should be able to assist applicants in assessing the reliability of qualified Third Party Funders, and then help them to select an appropriate one. The lawyer can also assist applicants to estimate the legal costs required and also advise on how to determine the fees in a manner that maximizes the interests of the applicants.
For Third Party Funders, each legal claim is an investment that has the potential to yield returns based on the likelihood of success. Therefore, Third Party Funding is a serious option for any company or individual facing economic difficulties or looking to reduce the cost of legal proceedings through structured financial arrangements. It is highly recommended that applicants seeking Third Party Funding engage their own law firm to assist in the entire process so as to better protect their own rights and interests.