What Is Litigation Funding?

Litigation can consume significant financial resources long before a claimant receives any settlement, judgment or award.

Lawyers, expert witnesses, forensic accountants, technical specialists, court or arbitration fees, discovery, evidence collection and enforcement activity can create substantial expenditure over an extended period.

At the same time, the outcome of litigation is uncertain.

A company may therefore have a commercially valuable legal claim while preferring not to commit substantial operating capital to pursuing it. Another claimant may have suffered serious loss but lack the resources required to prosecute a complex case against a well-funded defendant.

A third-party funder can assume some of that financial exposure by supplying capital specifically for the legal claim.

This allows the claimant to pursue the case while transferring part of the cost and outcome risk to an external capital provider.

Litigation funding is therefore not simply a way of paying legal bills. In commercial disputes, it can also function as a form of risk transfer, liquidity preservation and strategic financial management.

A typical litigation funding transaction begins with an existing legal claim.

The claimant, company or its lawyers approach a litigation funder and provide sufficient information for an initial assessment.

The funder then evaluates whether the matter is suitable for investment.

That review ordinarily extends beyond the question of whether the claimant believes the case is strong. A professional litigation funding company will typically examine the legal merits, the available evidence, the value of the claim, the litigation budget, the expected duration of the proceedings, the defendant’s ability to satisfy a judgment and the overall economics of the case.

If the matter passes the funder’s underwriting process, the parties may enter into a funding agreement.

Capital is then provided according to the agreed structure. Some transactions fund substantially all approved litigation costs. Others cover particular stages, particular categories of expenditure or defined amounts released as the case progresses.

If the dispute produces a successful financial recovery, the funder receives the agreed return from the proceeds.

If there is no qualifying recovery, a genuinely non-recourse litigation funding arrangement ordinarily leaves the funder bearing the loss of the capital it deployed, subject to the agreed contractual terms.

A third-party funder provides financial capital. It is not the claimant’s lawyer.

This distinction is fundamental to understanding litigation finance.

The claimant remains the party asserting the legal claim. Independent legal counsel remains responsible for advising the client and conducting the legal proceedings in accordance with professional duties and applicable law.

The third-party litigation funder assesses the matter as an investment and may monitor matters relevant to its capital, including budgets, material developments and the economic performance of the claim.

The precise rights and responsibilities of the parties depend on the funding agreement and the laws or professional rules applicable to the dispute.

A properly structured arrangement therefore distinguishes between financing litigation and controlling litigation.

Litigation funding can potentially cover a broad range of costs associated with pursuing a legal claim.

Depending on the particular transaction, funded expenditure may include legal fees, specialist counsel, court or arbitration fees, expert witnesses, forensic accounting, technical experts, damages analysis, evidence collection, document review, discovery or disclosure, translations, investigations and certain enforcement expenses.

Not every funding agreement covers every expense.

Some arrangements finance substantially all approved legal costs. Others fund only part of the budget or a defined stage of proceedings.

Capital may also be deployed in tranches as specified litigation milestones are reached.

The scope of funding therefore depends on the characteristics of the legal claim, the agreed budget and the structure negotiated between the claimant and the funder.

Commercial litigation funding can be used across a wide range of disputes.

Funded matters may involve breach of contract, shareholder disputes, partnership disputes, commercial fraud, international arbitration, intellectual property, competition claims, insolvency-related litigation, professional negligence, complex business disputes and post-judgment enforcement.

Funding may also be structured around a portfolio of legal claims rather than a single case.

The presence of a lawsuit, however, does not automatically make a matter suitable for litigation finance.

A funder must determine whether the legal and economic characteristics of the claim justify the capital required to pursue it.

Litigation funders conduct their own independent underwriting.

Legal merits are an important part of that process, but they are not the only consideration.

The funder will ordinarily examine whether the claimant has the legal right to bring the claim, whether the proposed causes of action are supportable, what evidence exists, what defences are likely to be raised and whether any jurisdictional or procedural issues could materially affect the case.

The expected financial recovery must also be tested.

A claimant may assert very substantial damages, but a litigation funder will normally distinguish between a headline claim amount and the amount that can realistically be established, awarded and ultimately collected.

The expected cost and duration of the proceedings are also significant.

A strong claim may still be unsuitable for funding if the anticipated legal budget is disproportionately high in relation to the realistic recovery.

Likewise, a favourable judgment has limited economic value if the defendant has no reachable assets or if enforcement would be prohibitively difficult.

For that reason, professional litigation finance underwriting often examines legal merits, damages, budget, duration, counsel, enforcement and collectability together.

One of the most important features of litigation funding is its non-recourse nature.

A conventional loan normally requires repayment whether or not the activity financed by the loan succeeds.

Litigation finance operates differently.

In a typical non-recourse litigation funding transaction, the funder’s return depends on a successful financial outcome from the legal claim.

If the matter produces a settlement, judgment, award or other qualifying recovery, the funder receives the agreed return.

If the matter fails and there is no recovery, the funder ordinarily does not have recourse to unrelated assets of the claimant merely because the litigation investment was unsuccessful, subject to the specific agreement and any defined contractual exceptions.

This means the third-party funder assumes genuine litigation risk.

That is one reason litigation finance economics differ materially from ordinary lending.

Litigation funding returns can be structured in several ways.

A funder may receive an agreed multiple of the capital deployed, a percentage of the recovery, or a return calculated using a combination of methods.

The structure may also take account of the amount of capital invested, the length of time the capital is at risk and the overall complexity of the dispute.

Whatever the mechanism, the economics are usually established contractually before the relevant capital is deployed.

The return compensates the funder for taking the risk that the litigation may produce no recovery at all.

For that reason, the return earned by a litigation funder should not be viewed in the same way as ordinary interest charged on a conventional loan.

Litigation finance is not limited to claimants that cannot afford lawyers.

Businesses with substantial financial resources may use third-party litigation funding because they prefer to preserve working capital for operations, acquisitions, investment, research or other strategic priorities.

Companies may also use funding to reduce the earnings volatility associated with large litigation budgets or to transfer part of the financial risk of a major dispute.

Law firms may participate in funding arrangements where permitted, particularly in connection with contingency portfolios or other arrangements involving deferred legal fees.

Insolvency practitioners and other parties responsible for legal claims may also consider litigation funding where the claim represents a potentially valuable asset but available cash resources are limited.

The use of a third-party funder is therefore increasingly associated with financial strategy as well as access to justice.

The existence of a litigation funder does not mean that the funder becomes legal counsel or replaces the claimant.

The claimant remains the client of its lawyers.

Counsel remains responsible for professional legal advice and the proper conduct of the proceedings.

Funding agreements may contain provisions dealing with budgets, reporting, material developments or other matters affecting the funder’s investment. The permissible extent of those provisions can depend on jurisdiction, professional obligations and applicable rules.

The central distinction remains that a litigation funding company provides capital, while legal counsel conducts the legal case.

Confidentiality is important because a litigation funder generally needs access to sensitive information before deciding whether to invest.

That material may include pleadings, legal analysis, contracts, evidence, expert reports, damages information, budgets, settlement history and information concerning the defendant or potential recovery.

Claimants and counsel therefore commonly consider confidentiality arrangements before substantive materials are disclosed.

The legal treatment of information shared with a third-party funder can vary between jurisdictions.

Questions can arise concerning attorney-client privilege, litigation privilege, work-product protection, common-interest principles and disclosure obligations.

Parties considering litigation finance should therefore understand the applicable procedural and professional rules before exchanging sensitive information.

Litigation funding operates in many jurisdictions, but the legal and regulatory framework is not identical everywhere.

Different countries—and sometimes different states or courts within the same country—may apply different rules concerning third-party funding.

Relevant issues can include maintenance and champerty rules, disclosure requirements, privilege, conflicts of interest, control of litigation, funder liability for costs, ethical obligations and court or arbitration rules.

Some jurisdictions expressly regulate aspects of third-party litigation funding. Others rely primarily on contract law, judicial decisions, professional conduct rules or a combination of these approaches.

International disputes can be more complex because the law governing the funding agreement may differ from the law governing the underlying dispute.

The legality and structure of litigation funding should therefore be considered in the context of the particular jurisdiction and proceedings.

Third-party funding has become particularly significant in international arbitration.

Arbitration can involve substantial counsel fees, tribunal fees, institutional charges, expert costs, translations and complex cross-border evidence.

These costs can make arbitration an attractive area for litigation finance.

Funding may enable a claimant to pursue an arbitration while preserving working capital or transferring part of the financial risk.

At the same time, arbitration rules increasingly address matters such as disclosure of the existence or identity of a third-party funder, conflicts of interest and security for costs.

The relevant arbitral rules and applicable law should therefore be considered when funding an international arbitration claim.

Litigation funding generally concerns capital provided while a legal dispute is being pursued.

Judgment monetisation concerns liquidity after a judgment or award has already been obtained.

A successful claimant may possess a valuable judgment but still face delay arising from appeals, recognition proceedings, enforcement difficulties or the defendant’s unwillingness to pay.

A judgment-related transaction may therefore involve an advance against the expected recovery, financing of enforcement activity or the transfer of some or all of the economic rights associated with the judgment.

Those transactions involve considerations that are different from conventional litigation funding.

Issues such as finality, assignment, recognition, enforcement, competing creditors, recoverable assets and priority can become particularly important.

Litigation finance and legal expenses insurance both address the financial risk associated with legal proceedings, but they do so in fundamentally different ways.

An insurer assumes specified risks in exchange for a premium and pays covered expenses or losses in accordance with an insurance policy.

A litigation funder invests capital into a legal claim in anticipation of receiving a return from a successful recovery.

The funder is therefore evaluating the economic potential of a particular legal asset rather than providing insurance against a defined category of loss.

There is no single characteristic that determines whether a matter will qualify.

A potentially fundable commercial claim will ordinarily need a credible legal basis, identifiable ownership or standing, adequate supporting evidence, experienced legal representation, a realistic damages case, a proportionate budget and a meaningful prospect that any successful recovery can actually be collected.

These factors interact.

A very large claim may be unattractive if liability is weak or the defendant has no reachable assets.

A smaller claim may have stronger economics if liability is clear, the litigation budget is modest and the defendant has substantial collectible assets.

This is why litigation funders assess claims as both legal disputes and contingent financial assets.

Where litigation funding is genuinely non-recourse and the case produces no recovery, the funder ordinarily bears the loss of the capital deployed.

The claimant is generally not required to repay that investment simply because the legal claim was unsuccessful.

The precise result depends on the funding agreement.

Contracts may contain provisions dealing with misconduct, inaccurate disclosure, breaches of agreed obligations or other exceptional circumstances.

Claimants should therefore understand both the non-recourse nature of the arrangement and any contractual exceptions before entering into a funding agreement.

Litigation finance has developed into a broader component of commercial dispute management.

For some claimants, it facilitates access to justice by making it possible to pursue a legitimate claim against a better-resourced opponent.

For businesses, it can allow legal claims to be pursued without committing significant amounts of operating capital.

For law firms, insolvency estates and other holders of legal claims, litigation funding can provide a mechanism for sharing financial risk and creating greater predictability around litigation expenditure.

The growth of the market also reflects a wider recognition that legal claims can have economic characteristics similar to other contingent assets.

A claim may require capital, professional management, time and risk before its economic value can be realised.

A third-party funder provides capital against that uncertain future value.

Litigation finance is designed to finance legal claims that have a sufficiently identifiable basis.

It is not a substitute for legal advice or for the work required to determine whether a claim exists in the first place.

A litigation funder may conduct substantial diligence before investing, but that is different from becoming the claimant’s lawyer, constructing a legal theory on behalf of the claimant or originating a dispute.

The stronger the legal asset is already defined—including ownership, legal basis, evidence, damages, counsel, budget and recovery prospects—the more effectively a litigation funding company can assess whether capital should be deployed.

The simplest way to understand litigation funding is as risk capital for legal claims.

The third-party funder is not merely lending money.

It is investing capital in an uncertain legal outcome, accepting the possibility that the investment may be lost and expecting an agreed economic return if the claim generates a successful recovery.

For the claimant, litigation funding can provide capital, preserve liquidity and transfer part of the financial risk associated with pursuing a legal right.

For the funder, successful litigation finance requires disciplined assessment of legal merits, damages, cost, duration, enforcement and recoverability.

That intersection of law, finance and risk is what distinguishes modern litigation funding from traditional borrowing.