In cases backed by litigation finance, are lawyers paid on contingency or an hourly basis?
Sometimes, litigation funders prefer to invest in cases where the law firm is working on either a full or partial contingency basis (referred to as “having skin in the game”). This means that the law firm is willing to forego all or a portion of their hourly fees in exchange for taking a percentage of the proceeds or a premium to the ‘rack rate’ of their fees at risk upon a successful outcome. In these cases, the parties enter into a tripartite agreement which covers the relationship and the “waterfall” of proceeds and how the proceeds are distributed among the parties. Typically, the funder, which is investing its own capital, has a priority in the waterfall ensuring that they get paid their principal back first, usually with a preferred return, before any other party gets paid. Thereafter, the waterfall dictates the order of payment among the remaining parties. These are highly customized agreements dependent on negotiations, stage of the case, prospects for the case, and myriad other factors.
In other cases, the litigation finance is used to pay for the plaintiff’s legal fees. In these cases, there is usually an agreement in place whereby if the law firm exceeds their original budget, they are responsible to cover the excess costs, thus providing an element of accountability. Essentially, the law firm is working on a per hour basis. In the event of a positive outcome, the proceeds are generally distributed in accordance with the funding contract between the plaintiff and the litigation fund.