Aligning incentives by requiring plaintiff to shoulder part of the costs

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Last week I had the pleasure of attending a vibrant, comparative conference titled, simply, Commercial Litigation Funding Conference hosted by Windsor Law and organized by Prof. Jasminka Kalajdzic.  One of the speakers, Ralph Sutton, the Chief Investment Officer of Bantham Capital (a subsidiary of IMF (Australia)), described a mechanism for aligning incentives quite different than the one suggested in the model contract. Sutton suggested requiring the plaintiff to remain responsible for a percentage of the costs to avoid the moral hazard (the hazard that once all risk, in the form of costs, has been transferred to others plaintiff will no longer have an incentive to cooperate or will have an incentive to over-spend others’ funds).  In addition, more broadly, Sutton described a deal structure in which the funder and the law firm each obtain a 20% contingency in the recovery.  Combined, the two measures – leaving plaintiff on the hook for some of the costs and placing the lawyers on contingency – help minimize the conflicts inherent in the funder–client–lawyer tripartite relationship.  Finally, such a deal implies that 60% of the proceeds remain with the plaintiff. Leaving 50%  - 60% percent of the stake in the hands of the client was described by Sutton as important in order to avoid ‘buyer’s remorse’ namely, plaintiff reneging on the deal post hoc.

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