Academic

Pinna on Securitization of Liability Claims

By Lawrence Solum

Andrea Pinna (Institut du Droit des Affaires Internationales) has posted Financing Civil Litigation by Way of Assignment and Securitization of Liability Claims (New Trends in Financing Civil Litigation in Europe) on SSRN. Here is the abstract:

This paper examines the possibility of financing civil litigation by way of the assignment of a liability claim to an investor, which would ?acquire? the claim and bring a claim in compensation on its own name and behalf. The starting point of the research is the observation that if, in theory, the right for compensation is considered to be a fundamental right, in practice, its implementation considerably lacks effectiveness especially in consideration of the financial barriers for accessing justice.

The hypothetical examined is the situation in which an injured party of a tort or a breach of contract (the assignor) assigns to a third party (the assignee) its rights against a liable party in exchange of remuneration. The main feature of the system is that the injured party receives compensation by way of payment of the price for the claim before a ruling on the liability and the measure of damages have been made.

Therefore the assignee makes a risky bargain because he is not sure that the possible proceeds deriving from the lawsuit will cover its investment. This is however prima facie a sound system since the assignee, before acquiring a claim and for the determination of the consideration, will carefully assess the chances to win the lawsuit and the damages that could be awarded by courts. Naturally, the consideration for the assignment an investor is prepared to pay is lower that the amount of the anticipated proceeds of the lawsuit since its determination incorporates both the risk of losing the lawsuit and the difference in time between the payment of the price and the expected gain from investment.

This technique of financing civil litigation has not been used in practice so far, at least on a large scale. This naturally raises two main questions. The first one is to determine whether the assignment of liability claims for speculation purposes is legally admissible or contrary to public policy. European legal systems are divided on the issue, which is shown by the comparison between English and French law. Either de lege lata or de lege ferenda, the second issue is to determine whether the system is economically viable and desirable. The author takes position in favor of the assignment of liability claims especially as a solution to the absence of other techniques, such as mandatory damage insurance, compensation schemes or class actions, which already aim at finding an alternative to the traditional way of seeking compensation for an injured party that is to individually claim for it in court.

One of the advantages of the assignment of liability claims over other techniques is to technically enable to have recourse to financial markets by the securitization of such claims. This facilitates the raising of capital for financing civil litigation and allows the transfer of the risk related to liability claims at low transaction costs. Naturally, the inconveniences of this technique of financing civil litigation and of the securitization of claims should not be underestimated.

Full post as published by Legal Theory Blog on May 01, 2009 (boomark / email).