An Economic Analysis of Third Party Litigation Funding

Abstract

Third party litigation funding (TPLF) is one of the most innovative trends in litigation funding industry. In a TPLF contract, an external investor (the third party funder) financially supports a litigant to cover litigation expenses. If the claim is finally successful, a share of recoveries will come to the funder in return. On the other hand, the third party funder will receive no compensation if the plaintiff loses the suit. Up till now, in some common law jurisdictions (e.g., Australia, the UK, and the U.S.), TPLF has been legally accepted and develops rapidly. Meanwhile, concerns about the use of TPLF have also been raised. For example, whether TPLF will encourage frivolous suits and unmeritorious claims; and whether the use of TPLF will be socially desirable. In this article, a basic economic model of TPLF will be built firstly. Then, analysis based on this model will be delivered and further social externalities brought by the use of TPLF will also be investigated. Finally, through an economic analysis, it is concluded that TPLF is generally social desirable but regulations should be imposed.