Litigation funding - the basics

Litigation funding is a financial arrangement where a third-party funder provides capital to cover the costs of litigation in exchange for a share of the damages recovered.

The UK litigation funding sector has been growing strongly, reaching £2.2bn in the last three years alone. This has been driven primarily by the increased cost of bringing litigation, a desire to improve access to justice and the attractive potential returns for investors as the market continues to mature.

The advantages of litigation funding

Breaking down financial barriers - Litigation funding provides claimants with an ability to remove the financial barriers that historically have prevented individuals and smaller enterprises from bringing a claim. Litigation funders provide claimants with a partner who can shoulder the costs of litigation and open the door to obtaining expert representation.

Limiting risk - Litigation funding is usually provided on a non-recourse basis, meaning that a claimant does not have to face the prospect of financial ruin if their claim is unsuccessful. The funder assumes the financial risks associated with bringing the claim on the basis that it will receive a healthy return on its investment if the claim is successful.

Expanding legal services - Litigation funding is being embraced by more and more law firms, allowing them to conduct complex claims against large defendants that they might otherwise have declined to take on.

Increasing the quality and credibility of claims - Litigation funders operate with teams of legal and financial experts that assess the merits of the cases they are asked to fund. Given that the funders’ return on its investment is dependent on the success of the cases, they have a vested interest in only supporting good cases and ensuring they are progressed effectively. The net result is they make a positive contribution to the quality and credibility of the claims that are being brought through the courts.

The basic structure

The terms on which funding is provided depends on the specific needs of each case and the parties involved. However, these are some common elements you would expect see:

Funding amount - The funder will agree to provide a certain amount of funding to the claimant or law firm. The funding is typically used to cover all or part of the legal costs associated with the case, including legal fees, expert witness fees, and court costs.

Non-recourse - The funder’s return on its investment will be contingent on the success of the case that it is funding. It is typically a percentage of the damages awarded, but it can also be structured in other ways, such as a fixed fee or a multiple of the funder's investment.

Payment terms - The funder will typically make payments to the claimant or law firm as needed to cover legal costs. However, the funder may require the claimant or law firm to make certain upfront payments or to provide security for the loan.

Role of the funder - The funder must take a passive role in the claim and cannot make any major decisions concerning the continuation, progression and/or settlement of the claim. All decisions relating to the claim are made by the law firm acting. If the claimant no longer wishes to proceed with the claim, the claimant is free to discontinue the claim without requiring permission from the funder or the law firm.

Other terms - Litigation funding agreements will include other terms such as the parties' confidentiality obligations and the dispute resolution process.

The need for specialist advice

Despite the perceived advantages, litigation funding still faces challenges. Some argue that it promotes bad behaviours, such as frivolous litigation, or that it creates a conflict of interest between the funder and the claimant. The Association of Litigation Funders (ALF) has been established to address these concerns and has introduced codes of conduct to ensure transparency, fairness, and ethical practices within the industry. Such regulations are helping to maintain the integrity of litigation funding while safeguarding the interests of both claimants and funders.

Perhaps more importantly, a recent Supreme Court ruling in a case known as PACCAR has called into question the validity of some litigation funding agreements and this makes it critically important that law firms now take specialist legal advice on the form and content of such agreements before they are entered into.

For further information, please contact Craig Geraghty.