The Role of Representations, Warranties and Covenants

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As we’ve discussed, litigation finance contracting faces very similar challenges to venture capital finance, and with our draft model we have consciously adapted several VC solutions. One type of solution are representations, warranties and covenants, which work together to address agency and informational challenges.

Such tactics can be of even greater importance to litigation financiers than in VC because of barriers imposed by the legal system, such as privilege and attorney ethics rules. In addition, the private nature of most litigation funding firms, the absence of reputation markets and the unregulated state of the industry means that the plaintiff faces informational challenges not faced by entrepreneurs. The relevant provisions in the draft model have all been introduced as part of other discussions, but will be recapped here in this frame.

Representations and warranties that address the litigation-specific information challenges are: 2.1.3 Full Disclosure (as of contract execution), 2.1.6.1 No Impairment (as of contract execution); and 2.2.5.1 (no privilege waiver by funder as of contract execution. To address funding-specific information challenges they are 2.2 Funds, 2.2.4.1 and 2.2.4.3 No Conflicts of Interest (as of contract execution), and 2.2.7.1 No Secondary Market Financing (as of contract execution).

Covenants, both positive and negative, that address agency issues are: 2.1.6.2 (no action to impair the claim going forward); 2.2.4.2 (no creation of conflicts of interest going forward); 2.2.5.2 (no action that could waive privilege without informed client consent); 3.1.2 (affirmative duty to cooperate);  3.2.2 (affirmative creation of a fiduciary duty) and 8.4 (no creation of security interests other than funder’s on the proceed account). Provisions affecting informational issues are: 3.1.3 (affirmative duty to inform); 3.1.4 (no change in litigation counsel without giving notice); and 3.1.5 (affirmative duty to notify funder about settlement offers and to give good faith consideration to its input). The last two are really hybrid, affecting information and agency issues.

 

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