Litigation Funding: how does it work?


Over the past few years, third party litigation funders have enjoyed an increase presence in the marketplace. However, the concept of litigation funding is still fairly new.

So, what is litigation funding and how does it work?  

Litigation funding refers to the involvement of a third party in a litigation case, who takes the responsibility of funding the costs of bringing the case to court.

Because of the level of investment that third party funders are expected to make, it’s uncommon for a case with less that £1m in value attached to it and a strong change of success, to be taken on. In fact, only around 15% of applications for litigation funding are progressed, and these tend to be commercial cases.

Cases that are taken forward are funded by the third party through to completion. This is based on a predetermined agreement that, if the case is won, the litigation funder takes back the value of its original investment, plus a return on their original investment, paid from the damages.  This will usually work out at around 30% of the settlement.

litigation funders

What is the return on investment (ROI)?

The ROI refers to the sum of money that the third party funder takes as its fee for providing the client with means to support the case. The exact amount is calculated based on a case-by-case basis, as it can vary depending on a number of factors; most prominently:

  1. level of risk involved
  2. level of investment  

Is it worth the cost?

Litigation funding companies can be invaluable to big businesses and law firms that require funding for lengthy and costly court cases.

To illustrate, if a business wants to bring a case forward and the likelihood of success is strong but there are no other means of funding it, then taking a reduced pay-out can be worth it. This is particularly true considering the added security that third party funding affords its clients. That is to say: if the case isn’t successful, the client is free to walk away, having made no cash commitment and incurred no legal costs.

How Do I Know I’m Getting the Best Deal?

Litigation funding is basically a three-way agreement between funder, solicitor and client.

Under their code of conduct, commercial litigation solicitors are required to inform their client of all possible ways to fund a piece of litigation, including paying their fees. As such, the solicitor’s motives are aligned with the client’s in that it’s imperative to everybody that a reliable funder is selected.