Investment litigation, also known as litigation financing, refers to third-party funding provided to plaintiffs or law firms to cover litigation costs in exchange for an agreed return upon a successful outcome. This innovative model has gained popularity globally in recent years as an alternative way to fund high-cost, lengthy lawsuits while sharing risks.
In China, although still at an early stage, litigation investment also shows potentials especially in commercial disputes. With reasonable risk control and aligned incentives between investors and litigants, it can become a win-win solution when fair judicial environment is ensured.
Litigation investment diversifies the financing channels for lawsuits
Traditionally, financing a lawsuit relies heavily on litigants’ own funding or loans from relatives and banks, which could be limited when claims amount to millions or even billions. Third-party capital brought by litigation investment funds greatly diversifies the financing channels by providing professional evaluation and risk pricing models. For qualified cases, sufficient funding could be secured to empower good claims, making quality litigation accessible by more entities.
Litigation investment shares risks while aligning incentives
Compared with lawyers under contingency fee arrangements, specialized litigation investment firms are more capable of providing large-scale capital, absorbing higher risks and even adversary costs when disputes continue for years. By pricing risks and requiring a return benchmark, these investors are incentivized to ensure efficient capital deployment and bring claims to fair settlements, creating aligned incentives with litigants.
China litigation market prepares for healthy growth of litigation investment
Despite certain constraints in China’s legal environment currently, commercial litigation investment within reasonable scope should be encouraged. As courts enhance efficiency and predictability, and regulators provide more supporting rules, litigation investment can stimulate benign market competition and growth. With expected improvements in coming years, investment funds will gain confidence in evaluating risks, fueling the prosperity.
When properly regulated, litigation investment creates shared motivation for investors and litigant companies to pursue fair results, providing alternative dispute resolution pathways especially for qualified commercial lawsuits. As judicial system reform deepens in China, a healthy growth runway is expected for this innovative market.