Litigation Funding

Litigation funding is where a third party provides the financial resources to enable costly litigation or arbitration cases to proceed.

The litigant obtains all or part of the financing to cover its legal costs from a private commercial litigation funder, who has no direct interest in the proceedings.

In return, if the case is won, the funder receives an agreed share of the proceeds of the claim. For example 2 times or 3 times the original investment, or alternatively, 30% or 50% of the damages award recovered.

If the case is unsuccessful, the funder loses its money and nothing is owed by the litigant. The client may have also had ATE insurance in place, which would protect any own disbursements incurred and other sides costs.

Because the litigation funder’s return is tied to the success of the case, funders look to fund cases with very good prospects of success, usually over a 70% chance of winning.

The funders’ share of the proceeds of a successful case is negotiated with the litigant at the outset.

This financial reward typically consists of either a percentage of the damages recovered, e.g. 25%, 35% or 50% or a multiple of the amount advanced by the funder, e.g. 2x, 3x, 4x or even a combination of the two.

This financing solution provides a valuable means of access to justice for claimants who may not have funds available, or may not wish to tie up funds, for costly yet meritorious claims. Its application is currently limited to commercial cases of a high value, for example strong commercial disputes with damages over £500,000 as a minimum.

Litigation funding provides a cost-effective financing tool for claimants, and lawyers in England and Wales are now obliged by the SRA to explain its existence and function to their clients so that they can take it into consideration when planning the funding of a case.

How Litigation Funding began in the UK

Litigation funding is permitted under statute, case law and public policy in the United Kingdom. The Jackson reforms of English commercial litigation came into force on 1 April 2013, and as part of that wholesale review of the funding of litigation in England and Wales, there has been widespread recognition that litigation funding promotes access to justice by enabling litigants to manage their exposure to costs.

Lord Justice Jackson, who led the Civil Litigation Costs Review published in 2010 that led to the reforms, approved of litigation funding as an option for funding cases, and recommended self-regulation for the industry.

Litigation funders in the UK are not, for example, permitted to exercise control over litigation that they are supporting, and it is recognised that the providing of capital is not control. Funders must not get involved in settlement negotiations, or cause the litigant’s lawyers to act in breach of their professional duties.

Some litigation funders are members of the Association of Litigation Funders, an industry group that oversees compliance by way of a code. Membership is voluntary, as there is no mandatory regulation of Litigation Funders so far in the UK, but it will probably arrive at some point soon.