The Financing of Litigation in Spain: a new horizon for Advocacy.
By Armando Betancor
The industry of litigation financing has arrived in Spain and is here to stay, after a long Anglo-Saxon history, in order to bear the costs of litigations in exchange for a share in the future results of the lawsuits. Although its origins can be found in the reasonable task of bringing justice to those with limited resources (David vs Goliath), today it also allows companies to obtain off-balance-sheet financing to monetise litigation that would otherwise not progress due to financial or regulatory capital restrictions. With this ratio, its true specialisation is the financing of matters within the framework of Insolvency, Arbitration and Antitrust processes, and it is currently located in a multimillion-dollar industry in global expansion which has led to numerous legislative changes in many jurisdictions for its essential acceptance. The significant opportunities that arise for funders, attending to the high returns that can be obtained in this market, unlike other investments, make us face a new class of assets, which are not very complicated to manage.
This has led to a considerable evolution of the industry, not only to focus on financing “ad hoc” specific cases, but to go into the financing of law firms by granting pre-financing lines for portfolios of certain issues, large corporations and financial institutions. Without undertaking any evaluation whether the financing of litigation today is a good opportunity or not, we can say that the benefits and opportunities that confirm the experience acquired in more mature markets should be sufficient to predict their success within our friendly jurisdiction. Normally, on the spot, the financing of litigation is designed for a specific case where an investor provides capital to a claimant in exchange for a part of the potential financial return of the claim after the final judgement. The capital provided by the monetisation of a legal claim or arbitration is usually earmarked directly to cover litigation expenses, including lawyers and court attorneys’ fees, experts’ and investigative fees, and legal expenses, among others. This financial transaction is not classified as a loan; which means that, if the lawsuit or arbitration is successful, the investor fund will receive the agreed part, and in case of an unfavourable judgement, the fund will lose all its investment.
The international funds are aware of the attractiveness of the Spanish legal sector. We have great legal security, judges are very specialised and the budget it is much more favourable than in other countries.
In view of this latter consequence, the litigation financing industry has necessarily become much more specialised, performing complex audits in order for the case, that is the subject matter of financing, meets all the requirements of a “good case” and that the legal advisers holding the case are the most specialised in the field. For the scenario posed, this creates a double guarantee, since if a fund participates in it, it has clear possibilities of success.
This is an industry designed by lawyers, in which the lawyers participate in a significant way, but it is the financial analysts who decide their evolution. Therefore, we will not only find simple financing structures, but also more complex ones, such as funds that invest in vehicle companies, whose objective is the financing of multiple litigation, not only providing funds for legal assistance but also for their management. In any case, the relationship of a litigation fund and a law firm will become a strategic asset for all parties and will bring added value within the competitive legal sector. Finally, let us not forget that the financing of litigation has also entered strongly into the offices of the financial directors of large companies because it is a tool with considerable accounting advantages that allows maintaining high litigation fees and expenses off the corporate balance sheet.
Nonetheless, this should not entail the loss of control over the case, nor a low monetisation, because it is facing a new situation that, well monitored, can lead to substantial recoveries, as the result of the fact that the knowledge of the matter should be the great success of the transaction. Funds are aware of the attractiveness of the legal sector in Spain. There is great legal security, judges are very specialised, and the budget is much more favourable than in other countries of our European environment.
Thus, our experience shows us, after many years of analysis, that the Spanish legal sector is undoubtedly prepared to work with the litigation financing system and, although I believe that some necessary legislative reforms and perhaps the implementation of an international arbitration institution would help, the Spanish jurisdiction will be, within a very short period, one of the most attractive jurisdictions on the subject.
Funds are aware of the attractiveness of the legal sector in Spain.