An introduction to litigation funding

Legal disputes can be costly, which often deters businesses from pursing valid legal claims. Litigation funding offers a solution, covering the legal costs so that companies can focus on pursuing valid legal claims rather than the financial strain. From start-ups to large corporations, litigation funding allows businesses to manage risks without diverting capital away from their core operations.

Once illegal in England and Wales, litigation funding is now widely accepted in commercial disputes and arbitration. Courts have consistently upheld the validity of various forms of litigation funding, supporting it as a tool to improve access to justice.

To help you further understand how litigation funding can transform your approach to legal costs and risks, we’ve created an essential guide that explains the various funding options available and how they can benefit your business.

What is litigation funding?

Litigation funding, or litigation finance, is a financial agreement where a third party covers your legal costs in exchange for a financial return, usually a percentage of damages recovered or multiple of sums invested. Importantly, you retain control over your case, but the litigation funder may require progress updates and withdraw funding if the case subsequently weakens.

Types of litigation financing

Several litigation funding options are available in the UK and can work on their own, or can be used in conjunction with one another for maximum benefit. Those options include:

Third-party funding: where a third party finances your case in return for a financial return;

Legal Expenses Insurance including Before the Event Insurance and After the Event (ATE) Insurance: these types of insurance policies can cover your legal costs and disbursements or alternatively, the opposing side's costs (known as "adverse costs") if you lose;

Conditional Fee Agreements (CFA): here your lawyer agrees to receive all or part of its fees only if you win the case with an uplift in their fees if the claim is successful;

Damages Based Agreements (DBA): here your lawyer takes a percentage of damages if you win. If unsuccessful, the law firm receives nothing, but you remain responsible for adverse costs unless otherwise covered by ATE insurance.

Benefits of litigation funding

Litigation funding offers several key benefits.

Non-recourse financing: you repay the funder only if you win, meaning there's generally no repayment if the claim is unsuccessful. This reduces the financial risks associated with litigation, enabling you to carry out legitimate claims without the expense of legal fees.

Cash flow preservation: litigation funding frees up your capital, allowing you to pursue valid legal action without diverting funds from your core business.

Risk mitigation: litigation funding can enable you to pursue claims that might otherwise seem financially unviable.

While funders will claim a return on their investment, typically a percentage of the damages or a multiple of their investment, any reduction in your recoveries is generally outweighed by the advantage of being able to pursue a meritorious claim without any upfront legal costs

In summary, litigation funding can mitigate the risk of an unsuccessful outcome, improve cash flow, and enable businesses to invest their own capital elsewhere, making it a highly valuable financial tool and a useful weapon in your litigation armoury.

How to secure third party litigation funding in the UK

When securing third party litigation funding, thorough due diligence is crucial. Research potential funders to ensure they have the necessary capital and solid reputation, especially since litigation funders are not regulated by a formal authority in the UK.

Once a term sheet is agreed upon, the funder will usually perform in-depth due diligence on your claim, evaluating its merits, potential damages, budget, and your legal team's expertise. If satisfied, the funder will often present the claim to their investment committee for approval and provide you with a detailed litigation funding agreement ("LFA") to review. The LFA will outline important terms, including reporting obligations and settlement conditions.

Once funding is secured, most funders adopt a light-touch approach to case management, ensuring their involvement does not jeopardise the enforceability of the LFA or create complications around adverse costs liability.

Courts in England are generally supportive of litigation funding, recognising its role in promoting access to justice. As long as the LFA adheres to regulations, and case law, including the PACCAR ruling, the Courts are likely to enforce it, providing businesses with a powerful tool to pursue claims without bearing the upfront financial burden and risk.

Understanding litigation financing in the UK

Grasping the concept of litigation funding can transform how businesses manage legal costs and risks. By exploring the benefits and drawbacks of different funding options, businesses can better navigate legal challenges and protect their business interests without compromising their financial stability.

Our comprehensive guide, ‘How can litigation funding help your business’, offers a deeper dive in to the various funding options available and how they can benefit you.