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Third-party litigation funding allows claimants to pursue legal claims without paying substantial upfront costs, with a funder covering expenses in exchange for a share of any successful recovery.
While it can improve access to justice and reduce financial risk, funding agreements may affect costs, settlement considerations and case management. Independent legal advice is essential to fully understand the terms, obligations and potential consequences before entering a funding arrangement. Consult iLA today.
Legal disputes can be expensive, and many individuals and businesses may struggle to afford the costs of taking a case to court. This is where third-party litigation funding can help.
In the UK, litigation funding allows an independent funder to cover some or all of the legal costs of a claim in exchange for a share of any compensation recovered if the case is successful. For many claimants, this can provide access to justice that might otherwise be out of reach.
However, while third-party funding offers clear advantages, it’s not without risks. Funding agreements can be complex, and the involvement of an external funder may affect how a case is managed or settled.
Recent landmark UK court rulings, specifically the Supreme Court's PACCAR decision, have thrown the litigation funding market into a period of transition.
The courts ruled that many traditional percentage-based funding structures are legally unenforceable unless they meet strict regulatory conditions. This ongoing legal shift has left many agreements open to challenge. So then, is litigation funding worth it for legal disputes in the current environment?
In this blog, we’ll help you understand the pros and cons of litigation funding so you’ll know what to expect before entering into any funding arrangement.
Third-party litigation funding is a financial arrangement where an independent funder pays some or all of the legal costs of a court case on behalf of a claimant.
In return, the funder receives an agreed share of any compensation or damages recovered if the claim succeeds. However, if the case is unsuccessful, the funder usually loses its investment and doesn’t receive a payment.
This type of funding is commonly used in complex commercial disputes, group actions and high-value claims. It can help individuals and businesses pursue legal action when they may not have the resources to cover litigation costs themselves.
In commercial and civil cases, litigation funding typically begins with a funder assessing the strength of a claim and its likelihood of success. If the case meets the funder’s criteria, they may agree to cover legal fees, court costs, expert witness expenses or other litigation-related costs.
The claimant can then pursue the case without paying these expenses upfront. If the claim succeeds, the funder receives a pre-agreed return, often calculated as a percentage of the damages recovered or a multiple of the amount invested. If the case fails, the funder generally absorbs the financial loss.
If the claim succeeds, the funder receives a pre-agreed return. Historically, this was calculated as a percentage of the damages recovered. However, following recent landmark UK Supreme Court rulings, many modern commercial funders now structure their returns as a multiple of the invested capital to ensure the contract remains fully enforceable under UK law. If the case fails, the funder generally absorbs the financial loss.
One of the main benefits of third-party litigation funding is that it improves access to justice by enabling claimants to pursue valid claims without paying high legal costs upfront. This can be particularly valuable for individuals, small businesses and companies involved in complex disputes.
Funding also reduces financial risk because the funder usually bears the cost if the claim is unsuccessful. For businesses, it can preserve cash flow and allow resources to be used elsewhere rather than being tied up in lengthy litigation.
In some cases, the involvement of a professional funder can also provide additional confidence in the strength of a claim. To better understand the pros and cons of litigation funding, consult iLA’s experts.
While these third-party arrangements can be beneficial, businesses should carefully consider the potential risks of litigation funding. The most obvious downside is that a successful claimant must share a portion of any damages recovered with the funder, reducing the final amount received.
Funding agreements can also be complex, with terms that need careful review before signing. Plus, although funders generally can’t control legal strategy, they may have certain rights relating to settlement discussions or key decisions.
There’s also no guarantee that funding will be approved, as funders typically support only claims they believe have strong prospects for success and recovery.
Funding agreements can influence certain aspects of a legal case, particularly costs, risk management and settlement decisions. While claimants and their solicitors generally retain control of the litigation, funding agreements often require that funders be kept informed of the case’s progress.
Some agreements may also include provisions relating to settlement offers, especially where a proposed settlement could affect the funder’s return on investment. This can sometimes create differing views between the claimant and the funder.
For these reasons, it’s important to understand the pros and cons of litigation funding agreements and seek legal advice before signing.
Before entering a litigation funding arrangement, it’s essential to seek ILA to fully understand the agreement’s terms and potential consequences.
Legal advice can help claimants assess how much of any future recovery may be payable to the funder, what obligations they will have during the case, and how settlement decisions may be handled. These contracts can often be quite detailed and complex.
With UK courts closely scrutinising funding contracts for enforceability, an independent review ensures your agreement won't be ruled invalid mid-lawsuit. Independent legal guidance can also help identify alternative funding options and ensure the arrangement aligns with the claimant’s objectives and best interests. Consult with us today.
Third-party litigation funding can provide valuable financial support for individuals and businesses pursuing legal claims. That said, it’s important to understand both the pros and cons of litigation funding before signing any agreement.
By carefully reviewing the terms and seeking professional guidance, claimants can make more informed decisions and avoid unexpected consequences. If you’re considering a litigation funding arrangement, let us help you understand the legal and financial implications before you commit.
iLA is the UK’s leading independent legal advice provider, helping borrowers understand the documents they’re signing and providing the clear, independent advice that lenders and clients increasingly rely on.
If you need independent legal advice, we’ve got you covered. You can easily book an appointment online with us from the comfort of your office or home. We offer a no-fuss, fully transparent pricing model based on your urgency, with pricing disclosed upfront.
Contact iLA today or book a consultation and receive expert legal guidance before making any decisions.
The information in this blog is general in nature. It is not intended as legal or financial advice. You should always obtain professional advice before making decisions based on your own circumstances.
