Third party litigation funding options for a business dispute

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Funding options for bringing or defending a claim in court.

Our dispute resolution solicitors provide guidance on the options available to fund the costs of bringing or defending a claim in court.

If your business is embroiled in a dispute, tough decisions will need to be made. Taking a claim to court, or defending a claim brought against your business, can be very costly and can quickly eat into your cash flow and divert valuable resources.

A business may have what they believe to be a very strong claim against another business, or they may have a sound defence to a claim brought against them, but the costs of engaging in litigation are seen as prohibitively high and can prevent a strong case from reaching court.

The funding of litigation will become even more relevant in light of the extension of the Fixed Cost Regime, which comes into effect from 1 October 2023. The extended regime will limit the recovery of legal fees and disbursements for the successful party from their opponent to fixed amounts, which may be significantly less than the sums actually spent on the litigation. The changes are complex and will be the subject of a separate update, however it is worth noting that they will generally apply to most money claims under £100,000.

There are various funding options available, even crowd funding, but a more established option is to have your case funded by a third party. This will help to free up your cash flow and allow you to progress a claim with a strong chance of good financial recovery. Alternatively, it may allow you to fully defend a claim that you know you can win but could not otherwise afford to fight. In this article, I will look at what litigation funding means in practice.

What is third party litigation funding?

Third party litigation funding is where a third party organisation, usually a company which specialises in such funding, agrees to pay some or all of your legal costs of court proceedings, on the basis that they will receive a specific share of the proceeds of any financial award if you are successful.

In return for funding your claim or defence to a claim, you will agree to return the money paid out by the funder in costs, together with an additional success fee to cover the risk to the funder of the proceedings failing. The success fee is a percentage of the amount of money recovered from a settlement or judgment if your claim is successful.

This type of funding is sometimes used alongside a conditional fee agreement provided by your lawyer, more commonly referred to as a ‘no win no fee’ agreement, which will also include a percentage uplift for your lawyer by way of a success fee if you win. Some firms also use damages based agreements for claimant clients, whereby their fees are paid as an agreed percentage of any damages which are recovered by the client through settlement or judgment.

If your claim is unsuccessful, the funder loses the money they have paid in legal costs, and they are not entitled to their success fee. You will not need to pay anything if unsuccessful; this is all met by the funder, including costs for the other side that you may be ordered to pay.

Who is funding provided by?

There are a number of litigation funding companies to choose from in the market, and this market has grown substantially in the past 10-15 years. You can find a vast range through a simple internet search, although a referral is usually preferable. These funders are not regulated by the Financial Conduct Authority (FCA) as a rule, although some are authorised by the FCA in relation to some of their other more general activities.

Your lawyer will often recommend someone they have worked alongside before, which may provide some comfort as they will know how they work, what they expect and what you can expect from them. However, there is nothing to prevent you from doing some research of your own to find a suitable provider.

When is third party litigation funding appropriate?

Remember that a commercial funder will be looking for a good return on their investment, so your position needs to be strong.

As court costs can be disproportionately high compared to the value of a claim, a funder will usually only agree funding if the claim and potential recovery is of high value and there is a very good chance of success.

It remains to be seen how the extension of the Fixed Costs Regime will affect the likelihood of a funder agreeing to fund your claim. It may be that with a lower cost risk for some claims (e.g. if you lose the claim, the costs which the funder has to pay the winner are fixed at a reasonable level), funding becomes more widely available.

The funder will undertake their own due diligence on the case and will assess your chances of success before making any decision to fund your claim. Many funders will require a barrister’s written opinion on the prospects of success before agreeing to advance funding.

Which costs can be covered by third party funding?

Usually the on-going costs of your litigation will be paid by the funder. Often funders will only cover costs from the date of your agreement so you may need to cover costs before this.

If you are unsuccessful, you will not have to pay anything as your legal costs are met by the funder. If you are ordered to pay the other side’s costs as well as your own, these will usually also be met by the funder.

In practice, it may be preferable to take out after-the-event (ATE) legal expenses insurance to cover the possibility of losing the claim, rather than simply relying on third party funding. This is because a third party funding agreement that covers both your costs and any potential adverse costs can mean a much higher percentage going to the funder to cover this additional risk.

Any agreement will be decided between yourselves and the funding provider, and there is flexibility in the various options available. For example:

  • if your lawyers are working on a no win no fee basis, and you have also acquired after-the-event legal expenses insurance to cover any adverse costs, then you may only need funding for disbursements such as experts’ fees, court fees and counsel’s fees; or
  • if there is no conditional fee agreement in place, then the funders may also fund all of your lawyer’s costs, either with or without disbursements; or
  • you might prefer to fund your own disbursements to keep the final success fee down.

Does a third party funder have control over my case?

You remain in control of the process and the decision making. You instruct us as your solicitors and we must deal with your case as if you were funding it yourself. A third party funder must not be able to direct the litigation or make decisions. It will usually be an obligation of your funding agreement that you commit to the claim and see it through.

How much will it cost me?

The cost depends on the type of agreement you have reached. If your claim is successful, the funder will be entitled to a fee based on a percentage of the amount recovered, which can be anywhere from 25 to 100 per cent, depending on the type of claim.

How we can help

If you would like to discuss your funding options in more detail, speak to one of our team. We have many years of experience in pursuing and defending claims for our clients, and can help you make the right decision with regard to funding your claim.

For further information, please contact Rebecca Beynon-Phillips in the dispute resolution team on 01733 882800 or email [email protected].

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