Third-Party Financing and Litigation Expenditures
New York University Journal of Law & Business, 2016, Vol. 12(3), 751-778.
28 Pages Posted: 16 May 2019
Date Written: April 1, 2016
Over the last years, third-party financing (TPF) of litigation has received considerable attention from both legal commentators and economists. Legal commentators have mainly examined whether third-party litigation financing agreements violate the common law doctrines of maintenance and champerty. Economists have investigated whether allowing third parties to finance litigation will result in the filing of more lawsuits, encourage the filing of frivolous claims, discourage settlement, remedy the imbalance of power that favours defendants in settlement negotiations, whether class actions magnify the potential effects, 7 etc. One aspect which has been largely overlooked however is how third-party financing may affect the litigation expenditures in individual cases. It is often claimed that third-party financing increases total litigation costs, but this is largely based on the expectation that TPF increases the volume of litigation, rather than the costs of individual cases. An examination of this issue is warranted given that third-party financing influences several elements which have an impact on the parties’ litigation efforts and thus on the social costs of litigation. One prominent effect is the relaxation of budget constraints. In this article, we use rent-seeking theory to examine how the relaxation of budget constraints influences the litigation expenditures of the parties.
Keywords: third party litigation, litigation expenditures, budget constraints, barriers to access to justice
JEL Classification: K13, K41
Suggested Citation: Suggested Citation