How does litigation funding work?

Litigation funding a way of financing claims, where a third party provides the financial resources, enabling costly litigation or arbitration cases to proceed where they otherwise might not. Where litigation funding is used, the litigant obtains all or part of the financing to cover its legal costs from a private commercial litigation funder. The private third-party funder has no direct interest in the proceedings. Then, if the case is won, the funder receives an agreed share of the proceeds of the claim in return. If the case is not won, the funder loses its money but nothing is owed by the litigant.

As the return of the litigation funders is dependent upon the success of the case, funders look to fund cases with good chances of success.

The funders’ share of the proceeds of a successful case is always negotiated with the litigant from the outset. Typically, this financial reward is either a percentage of the damages recovered, or a multiple of the amount advanced by the funder, or a combination.

Why might I need litigation finance?

Litigation finance provides a valuable means of access to justice for claimants who may not have funds available. It can be a lower risk and cost-effective financing tool for claimants who either can’t afford or may not wish to tie up funds, for costly but valuable claims.

Solicitors in England and Wales are now legally obliged to explain the existence and function of litigation funding to their clients. This means clients can take this financing tool into consideration when planning the funding of a case.

Here are some more common reasons people use litigation finance.

The legal framework for litigation funding

In the UK, Litigation funding is permitted under statute, case law and public policy. In 2013 the Jackson reforms of English commercial litigation came into force. Following that review of the funding of litigation in England and Wales, litigation funding has been widely recognised as promoting access to justice by enabling litigants to manage their costs, reduce their financial risk and fund cases that otherwise couldn’t be funded.

The Civil Litigation Costs Review published in 2010 and was led by Lord Justice Jackson, approved of litigation funding as an option for funding cases. This review led to the 2013 reforms and his report recommended self-regulation for the industry. Now, litigation funders in the UK are not, permitted to exercise any control over cases that they are funding.  Funders must not have any involvement in the cases that they support and must not attempt to intervene in the case or encourage lawyers to do anything outside of the law.

In the wake of the Jackson reforms, lawyers are now ethically obliged to discuss financing options with their clients at the start of their case, including but not limited to litigation funding. There is a growing consensus that litigation funding can be a valuable tool for justice, allowing cases to go to court where it might not otherwise be possible.