You may feel daunted by or deterred from engaging in litigation because you‘re concerned about whether you can afford it. However, third party litigation funding (commonly referred to as litigation finance) is a lesser-known avenue that could well help your company settle a business dispute.
In this handy guide, our dispute resolution solicitors explain:
- What is 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?
- When is an application for third part litigation funding made?
- What exactly will a funder require in return?
- What happens if the claim is successful?
- What happens if the claim is unsuccessful?
- In what circumstances is third party litigation funding likely to be available?
- What about counterclaims and non-monetary claims?
- What is the level of claims that third party funders are interested in?
- How does a prospective funder assess an application for third party litigation funding?
- Third party funding for arbitration and international proceedings
- What are the distinctions between third party funding for the purposes of arbitration and court proceedings?
- How does the law view third party litigation funding?
- What commitments are involved with third party litigation funding?
What is third party litigation funding?
Also known as litigation finance, third party litigation funding is where a commercial funder with no direct interest in the proceedings pays some or all of your legal costs for court proceedings or arbitration. This is done on the basis that they will receive a pre-agreed share of the proceeds in return, in the event of a successful outcome.
When should you consider third party litigation funding?
Third party litigation funding may be right for you if you have a strong claim that you want to pursue, but your budget does not enable you to commit the funds necessary to see it through to a conclusion. It may also be appropriate if you can afford the proceedings, but simply want to share the risk of those proceedings, or release capital for other aspects of your business.
Who is the third-party litigation funding paid to?
Generally speaking, the funder pays the legal costs directly to your solicitor as the case progresses, which means that the litigation has less of an impact on your balance sheet. However, it’s important to highlight that you remain in control of the litigation.
What is covered by third party litigation funding?
Precisely what is covered will depend on the third-party litigation funding agreement that you negotiate with the funder. It can cover the entirety of your legal costs for the proceedings and any alternative dispute resolution (ADR), including the disbursements – these may include the following:
- Counsel’s fees
- Fees associated with expert witnesses
- Court fees
Alternatively, it may be the case that just a proportion of the costs are covered, or the arrangement may even cover disbursements only, depending on whether you obtain funding as part of a package of financing options together with, for example, a conditional fee agreement (CFA) or a damages-based agreement (DBA).
When is an application for third part litigation funding made?
An application for third party litigation funding is usually made after the initial case analysis has been carried out and pre-action correspondence has been exchanged. One thing you should be aware of here is that funding will not necessarily cover costs already incurred. However, it is possible to seek and obtain funding to cover these early stages of a case if the costs would otherwise be prohibitive – although the funder will usually seek a higher level of return in these circumstances. This is due to the fact that they are taking on an increased risk, which will in turn be reflected in the higher return sought.
What exactly will a funder require in return?
In return for funding the claim, the funder will look for reimbursement of its investment plus a success fee, which will usually be a multiple of the amount invested and/or a percentage of the amount recovered as a result of settlement, judgment or arbitral award. The success fee may also be staged, depending on the amount of funding committed, or particular milestones in the proceedings.
What happens if the claim is successful?
If your claim is successful, there is normally no obligation to pay the funder until and unless the damages are paid by the losing party. The third-party litigation funding agreement will provide details as to whether or not the funder will cover the costs of enforcement proceedings.
What happens if the claim is unsuccessful?
If your claim is unsuccessful, the funder loses the capital that they have invested in the case and they do not receive a success fee. There is no requirement for you to pay anything in this scenario.
Where a costs order is made following an unsuccessful claim, the third-party funders may also be ordered to pay your opponent’s legal costs together with any interest due. However, it’s usually cheaper to obtain a funding agreement on the basis that these costs are covered instead by an After The Event (ATE) insurance policy – a route which most funders will prefer. A funder may also agree to pay the costs of the ATE insurance premium.
In what circumstances is third party litigation funding likely to be available?
Third party funding is available for both litigation in the courts and for arbitration proceedings, in this country and for international proceedings. This is discussed in more detail further along in the guide.
What about counterclaims and non-monetary claims?
Funders are principally interested in funding claimants bringing a claim for money (or money’s worth). However, it is also possible to arrange third party funding for a defendant that has a significant counterclaim. Additionally, a small proportion of funders may be willing to fund a non-monetary claim if the outcome of the case can be monetised shortly after the proceedings have ended, or if a valuable alternative can be offered – such as a percentage share in future royalties.
What is the level of claims that third party funders are interested in?
Broadly speaking, only higher-value claims will be of interest to third party funders, i.e. where the ratio of costs to likely damages is 1:6 or better. Funders will seek to ensure that once they have received their fee from the damages, you will receive a sizeable proportion of the amount recovered: this is because the funder cannot be seen to be profiting unreasonably from the claim (a factor that might make the funding agreement void and unenforceable on public policy grounds).
How does a prospective funder assess an application for third party litigation funding?
When a funder receives an application for third party litigation funding, it will conduct its own rigorous due diligence into the matter in order to determine suitability and the terms on which it will offer funding. The due diligence process usually takes a number of weeks. The funder will be looking for:
- Good prospects of a successful outcome.
- Reassurance that the case does not turn on witness evidence alone.
- Evidence that the proceedings will not be unduly protracted (for example, where there are complex preliminary issues that might delay proceedings).
- Proof that the defendant (your opponent) can afford to pay the judgment debt, and that enforcement would be reasonably straightforward should it become necessary.
Funding may also be available for a portfolio of recurrent or similar claims for a single litigant, where the funder’s investment and return is spread over a number of matters.
Third party funding for arbitration and international proceedings
Third party funding is now an accepted and increasingly popular method for funding litigation and arbitration in many jurisdictions, and as touched upon earlier, it will often be available for proceedings conducted outside of England and Wales.
Whether funding is available in each case will depend on a combination of factors, including:
- The subject matter of the proceedings.
- The underlying law.
- The law of the jurisdiction in which proceedings are taking place, or the relevant arbitral rules and seat of the arbitration.
As a general guide, third party litigation funding may be an option for proceedings in the United States, Australia, Hong Kong and Singapore, amongst many others.
What are the distinctions between third party funding for the purposes of arbitration and court proceedings?
There are few distinctions of note to mention here; however, one distinction that has recently come to light is the possibility of recovering the third-party funder’s fee after a successful arbitral award. Unlike in civil litigation in England and Wales (where a third party funder’s fee is not recoverable from the losing party), it has been confirmed that it is within the arbitrator’s discretion to award the costs of third party funding in appropriate circumstances as part of the costs of the arbitration, following arbitration in accordance with the Arbitration Act 1996. It is unlikely, however, that this discretion will be exercised in every case (or under all arbitral rules): instead, it’s likely to be reserved for those matters where the losing party has acted in such a way that the claimant had no option but to use third party funding in order to bring its claim.
How does the law view third party litigation funding?
Historically, agreements for the funding of litigation by third parties were held to be void and unenforceable on the grounds of public policy under the doctrines of maintenance and champerty, due to concerns that third party involvement might affect the purity of justice. However, the courts now accept third party litigation funding as a way of enabling claims to proceed that might not otherwise be possible due to the costs involved, provided that the administration of justice itself is not affected.
To ensure that the funding arrangement falls on the right side of the law, it’s important that the funder does not exercise excessive control over the proceedings; for example, by taking strategic decisions or controlling settlement discussions, and care should be taken to ensure that no conflict of interest can arise between you, your solicitor and the funder. The funder must also not profit excessively from success in the proceedings. To address these concerns, the Association of Litigation Funders published a code of conduct and provides self-regulation for its subscribing members.
What commitments are involved with third party litigation funding?
Although you will not be meeting the legal costs of proceedings, the funder’s role is necessarily limited by public policy. You will need to remain committed to the success of the litigation until it is concluded, including full co-operation with all aspects of the proceedings such as the disclosure process: ensuring that your solicitors are properly instructed and given full access to personnel and documents required for the conduct of the proceedings. You will also benefit from a substantial return upon a successful outcome. There are numerous potential funders, all with different specialisms, terms, conditions, requirements, and financial expectations.