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The Rise of Third-Party Funding (TPF)- An overview


It is not a revelation that the cost of construction disputes could range from the meager to the extraordinary, as a matter of fact, some claimants have lost their cases simply because they lack the financial wherewithal to pursue a seemingly good claim. As a result, many business parties now employ third-party funding, in one form or the other, as a way of managing/mitigating risk.

With hundreds of cases now being sponsored by specialized investment funds (known as "third-party funders"), funding for commercial and investor- arbitration / litigation claims has grown into a sizable industry in several countries during the last fourteen years., demonstrating that the advantages of third-party funding extend far beyond simply providing money to claimants who might otherwise be unable to make meritorious claims. It is already becoming a common subject for consideration from the onset of disputes, and frequently before they ever exist, due to the increased availability of third-party finance and the capacity to negotiate customized solutions.

This article is set to give a general review of third-party funding and emphasize why it is important for in-house attorneys/experts handling construction disputes to consider this approach especially in a lean budget and manpower environment.

While this may be particularly new in Nigeria’s formal environment, the informal sector has witnessed such provisions in the traditional settlement of disputes. In a series of articles, we will look at some of the specific questions that must be answered in order to decide whether third-party funding is appropriate for your case, how to approach third-party funders, and some of the problems that may come up while a claim is being supported by a third-party funder.

Third-Party Funding: What Is It?

Simply expressed, third-party funding is the provision of funds by a party who does not already have a stake in a dispute. It is "non-recourse funding" in the sense that if the funded party loses the claim, they are not obligated to pay back the third-party funder for their expenses or resources deployed, whichever the case may be.

Traditionally, claimants who have compelling arguments but lack the finances to pay or prosecute their own cases (sometimes as a result of the previous investments into what developed into heir claims) seek third-party funding. Such claimants now have the option to pursue claims that would have otherwise gone unpaid thanks to third-party funding. In recent years, third-party finance has grown to be a much broader and more complex service, including a basket of funding choices for defendants, portfolio financing, and financing that covers more than just legal fees and related expenses.

Additionally, third-party financiers give the option of using legal assets as security for general business finance. This has meant that, in recent years, prominent multinational firms as well as financially strong parties have turned to third-party financiers.

The implications of In-House Counsel Handling Construction Disputes

There are two key reasons why third-party funding should be taken into account more frequently in construction disputes as well as other commercial disputes, in addition to the obvious situation of providing needed funds which would otherwise not be available to do so, they also help to level out:

1) Resources

2) Risks.

Resource management

Resource management can be aided by outside investment by freeing up the in-house resource to focus on other pressing issues. Legal costs may be challenging to absorb within the current legal budgets during litigation or arbitration since they might eat up large resources over an extended period of time.

The immediate and direct legal costs of a claim may be reduced or even eliminated with the help of third-party funding. Funders also agree that the Claim may now also be used as collateral for funding as part of the innovative ways that has evolved over time. This may imply that it is not required to wait until a judgment or award has been effectively enforced in order to access cash, in addition to the resources not being held down.

Management of Risks

Any type of dispute resolution carries some risks, and even the strongest claims may not ultimately result in the intended compensation or may require a greater investment to achieve it. With outside support, this risk need not be fully assumed (or potentially at all) by the Claimant.

A third-party funder could agree to cover all or a portion of the cost of a dispute in exchange for a portion of the losses compensated by an award, judgment, or settlement in the end. This may be especially relevant in less straightforward situations where the risks may be too great for a Claimant to bear on its own but may be acceptable to a third-party backer in full or in part.

Additionally, the evaluation process carried out by a third-party funder may offer a priceless, unbiased perspective on whether the claim is deserving of being pursued and may also proffer unique solutions to the matter.

There is an opportunity for construction companies to explore partnering with other subject matter experts in order to optimize their chances of succeeding in a claim, this possibility point to the growth of third party funders for claims management in the construction industry. While this may not a guaranteed solution, it is set to favour the construction companies who seem to be at the receiving end of the inequality of the balance of resources in the prosecution of Claims.

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