Disputes are an unfortunate reality of business life. However, funding a dispute can be costly, meaning that some organisations might be inclined not to pursue claims, despite their merits. How litigation funding works in the UK varies according to the type of financing you choose; different options include third party funding to legal expense insurance cover, through to Conditional Fee and Damages Based Agreements with law firms. Each option can operate independently, yet more often than not the options are used in combination with one another. Whatever the option or combination of funding options used, litigation funding can enable businesses to pursue claims that they may otherwise have been forced to abandon due to costs.

To help you decide whether litigation funding (which is also known as litigation finance) might be right for you, we've pulled together our top ten facts to note about this specialist type of finance.

1. Litigation funding has evolved

Historically, litigation funding was unlawful in England and Wales. However, the law has evolved and it is now commonplace in both arbitration and litigation proceedings. It can be used to fund a range of disputes from large-scale commercial litigation, through to personal injury litigation. The courts have repeatedly approved various forms of litigation funding in recent years. This means that as long as the funding agreement is properly drafted and compliant with current case law, including the outcome of the PACCAR decision, it should be enforceable. The courts have generally been supportive of the litigation funding industry, because of the way legal finance can support and promote access to justice and legal services.

2. What is funded?

Funding can cover legal fees, expert costs, court fees and other disbursements, as well as liability for the other side's costs in the event the claim fails. Ultimate control of the conduct of the litigation will remain in your hands, but you may be required to report to the funder about progress of the matter in an agreed format and subject to the terms of the funding arrangement. If the prospects of a case change for the worse, the funder may be entitled to terminate their involvement.

3. If you lose, the funder gets nothing

Litigation funding is generally provided on a nonrecourse basis, meaning that the litigation funder will only get a return on their investment if you win. If you lose, the funder gets nothing. This means that you do not need to worry about paying the funder back, unless and until you make a recovery from your opponent.

However, paying the funder from such a recovery will obviously lead to a reduction in the damages that you receive, as the funder will look to recoup their investment, plus make a return. That return is usually calculated by reference to a percentage of any damages (although note the impact of PACCAR, as discussed in our earlier article on 'Post-PACCAR - What does this mean for litigation funding?'), or by way of a multiple of the funder's investment, or any combination of the two but could also be a fixed amount.

4. What will a funder look for?

Because litigation funders only get paid if the case is successful, they will need to ensure that the case is worth pursuing from the outset. A usual requirement is a counsel's opinion stating that the claim has at least a 60% chance of obtaining and enforcing a damages award; and that the damages will be large enough to make the claim profitable and worthwhile for all stakeholders.

While, traditionally, the third-party litigation funding market catered only for claimants, it is now possible for defendants to obtain third party litigation funding in certain circumstances. This remains a rarity, however, and will likely require a portfolio of claims, a counterclaim, or some other form of determinable financial upside resulting from a successful defence. Those litigation funders who are part of the Association of Litigation Funders (ALF) are also subject to a Code of Conduct. Membership of ALF is, however, voluntary and so there is no obligation for a litigation finance party to be a member or to comply with the Code of Conduct. Outside of self-regulatory bodies such as ALF there is currently no external regulation of third-party litigation funding, although this position (as at the date of this Top Ten) is currently being reviewed by the Civil Justice Council.

5. What is a Conditional Fee Arrangement (CFA)?

A CFA is a form of costs sharing arrangement with a law firm under the terms of which your legal costs will vary depending on the outcome of the dispute. A common scenario is a hybrid model, called a “Partial CFA” in which a law firm will discount their fees by a fixed percentage and, in the event the claim is unsuccessful, then that is all they will be paid. If the claim is successful, however, the law firm will be paid the balance of their fees, plus a success fee. The discounted fees that must be paid as the dispute progresses can be paid by an alternative form of litigation funding such as insurance or third party funding, with the discount and success fee payable later in the event of a win. It is also possible to have a full CFA, whereby the lawyers receive no fees at all unless they win.

6. What is a Damages Based Agreement (DBA)?

A DBA is an alternative form of cost sharing arrangement with a law firm. Like CFAs, if you lose you do not pay anything. However, under a DBA, provided it complies with the DBA Regulations, the lawyer will instead be paid a percentage of the damages recovered up to a maximum of 50%. From their percentage, the law firm will need to cover its own fees, counsel's fees, and VAT.

7. Insurance

The standard position in England and Wales is that if you are unsuccessful in your claim, you will be liable to pay a proportion of your opponent's legal costs. This is because civil litigation costs are paid by the loser. Litigation finance and legal finance will not protect you from this. The most common way to mitigate against the contingent risk of having to pay adverse costs is to obtain After The Event (ATE) insurance cover. The ATE premium will usually be payable, at least in part, at the outset, with a further contingent premium amount payable in the event of a successful outcome. The premium may be paid by an alternative form of litigation funding, but cannot subsequently be recovered from a losing party.

Other forms of contingent risk insurance may also be available to you to cover known legal risks, including judgment preservation insurance which, as the name suggests, protects the prevailing party against the risk of a judgment being reversed or overturned.

You should also consider whether you have any applicable Before The Event (BTE) insurance cover, which might cover your legal costs of pursuing the claim and/or your defence costs in the event of legal action.

8. Confidentiality and privilege

When providing a litigation funder with the information they need to assess your case, you should take steps to ensure that you do not inadvertently waive confidentiality or privilege. This is likely to be less of an issue when discussing CFAs/DBAs with a solicitor, but with any other form of funding you should consider requiring them to enter into a nondisclosure agreement (NDA) before sending them any confidential information and make it clear that the information is provided on a limited waiver basis.

9. Not just for the impecunious

Traditionally, litigation funding was used in circumstances where the claimant would be unable to litigate without it. A typical example would be an insolvent or impecunious claimant. However, it is now common for cash rich and solvent corporates to also look to utilise litigation funding. Doing so has multiple benefits, including mitigating the risks of an unsuccessful outcome, improving cash flow, and allowing the business's own funds and capital to be used for, and invested in, elsewhere.

10. How are the proceeds split?

If you are successful in your dispute there will be an award in your favour. All funders to the litigation - be that a third party, insurer and/or law firm - will want to be paid. It is vital, therefore, to have a well-drafted document in place from the outset, setting out how the proceeds should be split and the order in which they should be distributed (often known as the 'waterfall' or 'priorities agreement').

How to invest in litigation funding?

If you think that litigation funding could be of interest to your business, but are unsure what option to take, then there is help at hand. Our Commercial Litigation team has compiled 'Litigation Funding Unpacked' - an essential guide to how litigation funding works, the funding options open to you and the pros and cons of each different type of funding package.

The guide cuts through the detail of this complex area to give expert insight and practical pointers to better understand the benefits of litigation funding, when to use it and how it can change the way you think about, pay for and manage legal costs and risks.

Download the guide to find out more or contact one of the team for more insight.