Third party litigation funding: what is it and how does it work?

July 13, 2012

Do you have a good claim for compensation or indemnity under the Commercial Agents Regulations but cannot afford the legal costs to pursue it?  Or even though you can afford the costs, would you prefer to share the risks with another party?  If so, third party funding may be the answer. 

Under a third party funding arrangement, a funder will finance some or all of a claimant's legal costs in exchange for a share of the compensation or indemnity which the claimant recovers at trial (if successful) or through an earlier settlement. So, although it means sharing the cake, if you cannot afford to pursue a claim, then better to have some cake than no cake at all! Or if you can afford the costs but are risk averse or would prefer to use your cash for other purposes, then sharing the rewards in exchange for no or only a partial liability for costs may be an attractive option.

So far so good, but how easy is it to obtain third party funding? Typically, a funder will be looking for three things in order to agree to fund:

  • a claim with good prospects of success; 
  • a defendant who can afford to pay the claim; and
  • the right 'economics' so that the rewards are sizeable enough to make the claim worthwhile for both the funder and the claimant. 

In practice, this means that you will need to have:

  • a claim with at least a 55% chance of success (and, in reality, funders will be looking for 60+%);
  • a defendant who is good for the money and is expected to remain good for the money by the time you get a judgment at trial (a major corporate or a government department is an ideal defendant, although not if it's Greek, or Spanish, or Portugese, or...); and
  • a claim worth at least a few hundred thousand pounds. There are of course exceptions, so if the value of the claim is a low six figure sum, but the expected legal costs to take the case through to trial are also low, then it may still be possible to obtain funding. There are a number of new entrants to the funding market who are specifically targetting the lower value claims.

How big a share of the damages will the funder take?  This can vary significantly depending on the funder and the level of risk it perceives it is taking. Some funders will look to take a percentage of the damages: others will calculate their share as a multiple of the finance they have committed.

What happens if your claim is not successful? The funder takes a hit on the investment it has made, so there is no come back against the claimant unless there has been a significant breach by the claimant of the funding agreement (for example, a material fact has not been disclosed, which had the funder known about, it would not have agreed to provide funding).

If you can get funding and are happy with the share the funder is going to take from the damages you recover (if successful), be aware of the pittfalls:

  • Do your due diligence on the funder to make sure it has actually got available the finance which it has committed to your claim: a number of entities who claim to be funders are in reality brokers or middlemen and do not actually control the funds they commit. 
  • Read the small print of the funding agreement carefully, focussing in particular on the circumstances in which the funder can pull out and not provide any further finance: most of these agreements are negotiable, so do what you can to make sure the agreement is less one-sided. 
  • Bear in mind that because of the share payable to the funder, this will inevitably make the case more difficult to settle because you will need to receive a higher sum than would otherwise be the case (after allowing for the funder's share) to make it worth settling. 
  •  Finally, although the funder is not supposed (for legal reasons) to 'control' the litigation, its views on the conduct of the claim will in practice carry significant weight, so you need to be comfortable that the funder is someone you and your lawyers can work with.

Related pages:

Agency, Distribution and International Trade more

Litigation, Arbitration and Alternative Dispute Resolution more

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