It’s no secret that funding litigation can be an incredibly expensive feat for businesses of all sizes, and costs are inevitably a key commercial consideration for any company that’s facing a business dispute. To help, our business dispute solicitors have created this handy guide for businesses on the topic of third party litigation funding, covering the most commonly asked questions about this increasingly popular way of financing litigation.
In this handy guide, our dispute resolution solicitors explain:
- What is third party litigation funding?
- What types of cases qualify for third party litigation funding?
- When should you consider third party litigation funding?
- Who is the third party litigation funding paid to?
- What is covered by third party litigation funding?
- How to make an application for third party litigation funding
- How does a prospective funder assess an application for third party litigation funding?
- How long does it take to get third party litigation funding?
- What happens if the claim is unsuccessful?
- What happens if the claim is successful?
- Summary
What is third party litigation funding?
Third party litigation funding is a type of funding that covers all of your legal costs associated with litigation. The way it works is that the funder will then take a fee from the proceeds recovered by you, but because the funder takes on the financial risk, this means that you won’t have to pay them anything if you’ve received funding and your claim ends up being unsuccessful.
What types of cases qualify for third party litigation funding?
It’s possible for third party litigation funding to be used for both litigation proceedings in the courts and in arbitration, both here and internationally. Commercial claimants are the most common type to take advantage of the funding, so our solicitors often come across it being utilised in shareholder disputes, breach of contract claims and intellectual property (IP) matters.
What about the financial value of the claim?
Historically it has been the case that most funders prefer to support claims that are high in value, mainly for the clear commercial reason that their share of the damages awarded will be greater than in a lower-value claim if the claim is successful. That said, there’s no strict threshold that dictates a minimum value for a claim to be eligible for funding and each funder will consider the circumstances of the case on its own merits.
What about counterclaims or non-monetary claims?
Monetary claims are those which most funders will be attracted to, simply because there’s a higher likelihood that they’ll offer a direct financial return. If your claim is non-monetary in nature (for example, a claim for injunctive or declaratory relief) but will be monetised shortly after the proceedings have officially concluded, some funders might be willing to assist.
With counterclaims, if it’s significant enough in value, a funder may well consider offering funding to support this.
When should you consider third party litigation funding?
It’s definitely worthwhile to consider applying for third party funding if you have a strong case, but you’re worried about not having enough financial resources to take it all the way through the process, whether that’s arbitration or litigated court action. Or, you might have the means, but would prefer to manage the risks involved by transferring this to a third party funder – particularly if you feel that the stakes are high.
Who is the third party litigation funding paid to?
What tends to happen is that the funding is paid directly to your solicitor at various stages throughout the lifetime of your case. The funder will often keep close contact with your legal representatives to satisfy themselves that costs are being properly managed through the management of the case.
What is covered by third party litigation funding?
Exactly what’s covered by the funding will be set out in the agreement between you and the funder, but if your agreement provides for a fuller type of coverage, the funder will typically pay your costs of the legal proceedings in their entirety (including alternative dispute resolution or ‘ADR’, as it’s commonly known), along with disbursements such as court fees, counsel’s fees and any expert witness costs.
Other funding policies may only cover a percentage of your legal costs or just the disbursements, so it’s very important to check your policy carefully right at the outset to make sure it’ll provide you with financial support for what you’re likely to need.
How to make an application for third party litigation funding
It’s a good idea to apply for litigation funding as early as possible in the stages of the dispute you’re facing. The main steps in making an application are as follows:
- Research potential funders with a track record in funding cases in the area of law that your dispute falls within, for example, shareholder disputes.
- Choose the funder who seems to be the best fit for your circumstances and provide them with a summary of your case. The summary should include details of the claim’s value, your legal team and information about the evidence you’ve gathered in support of your claim.
- Await completion of the funder’s due diligence exercise, which will be a detailed and thorough assessment.
- If your application is approved, the final stage will be to negotiate terms with the funder on key matters such as exactly what funding will be provided for, and the percentage of your damages that they’ll receive if your claim is successful.
How does a prospective funder assess an application for third party litigation funding?
The due diligence that a prospective funder will carry out on your application will be rigorous and probably take several weeks to complete. The main factors they’re concerned with are:
- Weighing up the prospects of your case being successful, i.e. assessing the merits of your case. This can include seeking legal and other expert advice of their own.
- The value of the claim.
- The projected amount of legal costs (and disbursements if they will form part of the funding) that you’re likely to incur.
- Who your legal representation consists of and their expertise and track record – this demonstrates how crucial it is to have the right support in place from an early stage.
- The defendant’s financial standing, which is so the potential funders can be satisfied of their ability to pay any damages owing to you if you achieve a successful outcome.
How long does it take to get third party litigation funding?
The length of time it takes to secure third party litigation funding will vary depending on how complex your case is: more complicated matters will inevitably involve greater due diligence and mean that the process takes longer. Overall, it can take in the region of a few weeks to several months.
What happens if the claim is unsuccessful?
If the claim is unsuccessful, the funder won’t recover anything and will lose the capital they invested in supporting your case. You won’t owe them any money in this situation.
What happens if the claim is successful?
If your claim is successful, the funder will be entitled to an amount which will likely be payable from the proceeds you recover from the litigation. How this fee – and the amount of it – will be calculated will be set out in the funding agreement: it could be a percentage of the amount you recover, a multiple of the amount of funding actually given or committed, or possibly a hybrid. Ultimately, there are rules in place which prevent the funder from profiting excessively from their arrangement with you at the heart of these types of funding agreements.
Summary
Securing third party litigation funding can be an invaluable resource for your company if you become involved in a dispute and you’re worried about how you might mitigate the financial risks of it to your business. It can result in a win-win situation for both you and the funder if you’re successful in bringing a claim that you might not otherwise be able to fund from start to finish using your own resources, in light of the fact that arbitration and litigation can become expensive.
Our business disputes solicitors can offer vital support with approaching the right funder for you, preparing a case summary and helping you with negotiating the terms of the agreement – all so that you can rest assured that once funding is secured, the focus can be on managing the case effectively without worrying about your legal costs.
