Third party funding – Justice without financial risk?

Having your day in court can be expensive

The list of litigation costs is long: Advance payments of court fees, attorney fees, compensation of the opposing party’s attorney fees if the case is lost, evidence costs. The decision whether or not to go to court raises not only legal questions, but also financial ones.

The court fees that must be advanced by the claimant vary from canton to canton in Switzerland, but generally depend on the amount in dispute. This means that asserting a large claim already requires a high initial investment. If the case is won, the claimant has the right to have all of the advanced court fees as well as all or part of its attorney fees reimbursed. However, the opposite is true if the case is lost: The claimant bears not only all of the court fees and its own attorney fees, but also the attorney fees of the opposing party. The same principles generally apply in arbitration proceedings, whereas the costs are usually split between the parties in mediation proceedings. All too often, this means that even claimants with a good chance of winning their case refrain from starting legal proceedings because of the financial risk.

Destitute individuals have the right to free legal aid before state courts, but this option is not available to other individuals and, in most cases, to legal entities. How can such clients protect themselves financially?

Check your legal protection insurance

Having legal protection insurance can help. However, clients must first check whether or not the type of dispute that has arisen is covered by their insurance and exactly which costs are covered. And, of course, the client must have already taken out an insurance policy before the dispute arises.  

Third party funding can be a solution

Another option is third party funding of disputes. In our neighboring countries, such as in Germany and Austria, third party funding has been an accepted and common option for a long time. In Switzerland, the Supreme Court only decided in the year 2005 that third party funding of disputes was permissible. In a later decision, the Supreme Court additionally held that, in some cases, an attorney’s obligations can even include making clients aware of this possibility. A third party funding agreement can be concluded with a provider even after legal proceedings have been launched.

Two main third party funding providers are active in Switzerland, and 30-40 civil proceedings have been financed annually in the past few years. The funder bears the financial risk – if its client loses, the funder pays the client’s attorney costs, all court costs, the attorney costs of the opposing party and any expenses related to enforcing the judgment. If the client wins the case, the funder receives a percentage share in the result, which is agreed upon with the client in advance in the funding agreement and, as a rule, amounts to about 30-35%.

Conditions for third party funding

The third party funding providers active in Switzerland stipulate the same basic conditions for accepting to fund a dispute. In principle, any civil dispute that entails a monetary claim can be funded. At the same time, however, a minimum amount in dispute must be given, which varies from CHF 50,000 and CHF 300,000 depending on the provider. Secondly, the claimant must have a reasonable chance of winning the case. Finally, the opposing party must be solvent so that the judgment can be enforced. The client may choose an attorney freely.

When does third party funding make sense?

Third party funding provides the client with a strong financial partner and can help restore equality of arms if the opposing party is financially better off. It can be a useful option for companies, especially SMEs, that do not have sufficient liquidity to finance disputes, but also for companies that have sufficient liquidity, but prefer using their financial resources to run their business rather than binding them in long and arduous legal proceedings. For individual clients, the type of proceedings and the risk of losing the case are the key factors – in other words, whether the client can afford to be involved in long, complex proceedings and, above all, whether he or she can bear the financial risk of losing the case.

For certain clients, third party funding can mean the difference between being right and being proven right. In these cases, it’s an opportunity worth considering.