What Is a Litigation Funding Agreement?
The LFA is the foundational document in any litigation funding arrangement. It is a bespoke financial contract negotiated between the claimant (and their lawyers) and the funder. Every clause matters—from how the funder calculates their return to the circumstances under which either party can walk away.
Following the UK Supreme Court's PACCAR ruling in 2023, the structure of LFAs has come under heightened scrutiny. Read our UK litigation funding reforms guide for the latest regulatory context.
What Are the Key Clauses in a Litigation Funding Agreement?
Scope of Funding
Defines exactly what the funder will pay for: solicitor fees, counsel fees, expert witnesses, court costs, ATE insurance premiums, and adverse costs exposure.
Budget & Drawdown Mechanism
Sets out the total funding commitment and how capital is released—usually in staged tranches tied to litigation milestones (e.g., disclosure, trial preparation).
Funder's Return (The Waterfall)
The most negotiated clause. Defines how proceeds are distributed on success: funder capital return → funder success fee (multiple or percentage) → ATE premium → net proceeds to claimant.
Non-Recourse Confirmation
Expressly confirms that if the case is unsuccessful, the claimant has no obligation to repay the funder. This is the defining feature of litigation funding.
Control & Decision-Making
Establishes that the claimant and their lawyers retain full control over litigation strategy and settlement decisions. The funder has consultation rights only.
Termination & Material Adverse Change
Defines when the funder can terminate funding (e.g., merits deterioration, budget overrun) and what notice and cure periods apply. Heavily negotiated to protect the claimant.
Reporting & Information Rights
Obliges the claimant's lawyers to provide regular case updates, budget reports, and material developments to the funder—typically quarterly.
How Did PACCAR Change Litigation Funding Agreements?
The PACCAR Ruling (2023)
The UK Supreme Court ruled that LFAs where the funder's return is calculated as a percentage of damages recovered may constitute Damages-Based Agreements (DBAs) and could be unenforceable unless complying with DBA Regulations 2013.
Impact: Most modern LFAs now use a multiple-of-invested-capital return structure (e.g., 3× the funding deployed) rather than a percentage of damages to avoid PACCAR enforceability risks.
The UK Government has since introduced legislation to clarify enforceability. See our 2026 reforms update for the latest position.
How to Negotiate Better LFA Terms
Cap the Funder's Return
Negotiate an overall cap on the funder's take as a percentage of total recovery (e.g., max 40%) regardless of the multiple achieved.
Protect Against Early Termination
Insist on cure periods, independent QC review before termination, and continuation funding obligations during notice periods.
Define 'Material Adverse Change' Tightly
Ensure MAC clauses have clear, objective triggers rather than subjective funder discretion.
Negotiate Budget Flexibility
Build in a 15–20% budget contingency and require mutual agreement before the funder can terminate for cost overrun.
An experienced litigation funding advisor can negotiate significantly better terms than going direct to funders. Read more about how to choose between litigation funders.
Frequently Asked Questions
Need Help Reviewing a Funding Agreement?
Our litigation funding experts can review your LFA, negotiate terms, and ensure you get the best possible deal.
