Protecting the Claim from Impairment

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Before any funder would want to purchase Litigation Proceed Rights (or otherwise fund a litigation), it would want to be sure that it’s getting what it purchased, free and clear of other creditors’ claims. In addition, and particular to the fact that the investment is in litigation, it would want to be sure that the claim itself has not been compromised in any way. Finally, because the litigation is an ongoing process, a funder would want an ongoing commitment to protect the Claim and its claim on the proceeds of the Claim.

The draft model contract addresses these issues. Note, however, that the language should be customized to reflect the claim being funded:

2.1.6 No Impairment:

2.1.6.1 Other than as already disclosed to the Funder[s], Plaintiff has not taken any action (including executing documents) or failed to take any action, which as a result

(a) would materially and adversely affect the Claim, or

(b) would give any person or entity other than Funder an interest in the Award or the Proceeds.

2.1.6.2 Plaintiff agrees and undertakes that

(a) it will not institute any action, suit, or arbitration separate from the Claim arising from the same facts, circumstances or law giving rise to the Claim;

(b) it will not take any step reasonably likely to have a materially adverse impact on the Claim, any Award or the Funder’s share of any Proceeds; and

(c) it will not take any step that would give any person or entity an interest in the Claim or its potential Award or Proceeds except as otherwise permitted by this Agreement.

Arguably 2.1.6.1 is belt and suspenders, given the other disclosure requirements imposed by the contract and the securities laws. Nonetheless having it as a specific provision provides clarity and certainty.

 

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