What is Third-Party Litigation Funding?
A complete guide to understanding how litigation funding works, who provides it, and why it's transforming access to justice.
The Simple Answer
Third-party litigation funding (also called litigation finance or legal funding) is when an external party—usually a specialized funding company—provides capital to cover the costs of a legal case in exchange for a share of any successful outcome.
Think of it as investment capital for lawsuits. Instead of the claimant or law firm bearing 100% of the financial risk, a funder steps in to cover expenses like legal fees, expert witnesses, and court costs.
How Does Litigation Funding Actually Work?
Step 1: Case Assessment
A claimant or law firm approaches a litigation funder with details of a legal dispute. The funder evaluates the merits of the case, the strength of evidence, potential damages, and the likelihood of success. This process typically takes 2-8 weeks depending on case complexity.
Step 2: Funding Agreement
If the funder approves the case, both parties sign a Litigation Funding Agreement (LFA). This contract specifies exactly how much capital will be provided, what expenses are covered, and what return the funder receives if the case succeeds.
Step 3: Capital Deployment
The funder provides capital as needed throughout the case—paying legal fees, expert witness costs, court fees, and other litigation expenses. This is typically done on a drawdown basis rather than a lump sum.
Step 4: Case Resolution
If the case wins or settles successfully, the funder receives back their invested capital plus an agreed return (typically a multiple of the deployed capital or a percentage of the recovery). If the case loses, the funder loses their investment—the claimant owes nothing.
Who Provides Litigation Funding?
Litigation funding comes from various sources, each with different risk appetites and focus areas:
- Specialized Litigation Funders: Professional firms dedicated exclusively to funding legal cases, such as Burford Capital, Therium, and Litigation Capital Management. They typically fund larger commercial disputes worth £2M+.
- Institutional Investors: Pension funds, sovereign wealth funds, and hedge funds increasingly allocate capital to litigation as an alternative asset class uncorrelated with traditional markets.
- Family Offices & Private Capital: High-net-worth individuals and family offices seeking diversification into legal claims as an asset class.
- Law Firm Portfolios: Some funders specialize in providing capital to law firms to finance their entire litigation portfolio rather than single cases.
What Types of Cases Get Funded?
Not all cases qualify for litigation funding. Funders typically look for:
✓ Strong Merits
Cases with solid legal grounds and strong evidence supporting the claim.
✓ Significant Damages
Claims typically worth £1M+ (though some funders go lower for portfolios).
✓ Solvent Defendants
Defendants who can actually pay if they lose—either through assets or insurance.
✓ Clear Enforceability
Judgments that can be enforced in stable jurisdictions with reliable legal systems.
Common funded case types include: commercial contract disputes, competition/antitrust claims, international arbitration, intellectual property litigation, professional negligence, insolvency claims, and class actions.
Why Do Claimants Use Litigation Funding?
There are several compelling reasons to use third-party funding:
- Risk Transfer: The claimant transfers financial risk to the funder. If the case loses, they owe nothing to the funder.
- Cash Flow Protection: Businesses can pursue valid claims without depleting working capital or taking on debt.
- Access to Justice: SMEs and individuals can afford to take on well-funded opponents they otherwise couldn't challenge.
- Balance Sheet Benefits: Funded litigation is off-balance-sheet and doesn't count as corporate debt.
- Independent Validation: A funder's investment provides third-party validation of the case's merits, which can strengthen settlement negotiations.
What Does Litigation Funding Cost?
Litigation funding is non-recourse: if the case loses, the claimant owes nothing to the funder. If the case succeeds, the funder typically receives:
- Return of Capital: The original amount invested in the case
- Plus a Return: Either a multiple of deployed capital (e.g., 2-4x) or a percentage of the recovery (e.g., 20-40%)
The exact pricing depends on the risk profile of the case, the strength of the claim, the quality of legal representation, and the expected duration. More speculative cases command higher returns for funders.
Learn more about litigation funding costs and fee structures →
Is Litigation Funding Regulated?
In the UK, litigation funding is largely self-regulated through industry bodies like the Association of Litigation Funders (ALF). Members must adhere to a Code of Conduct covering:
- Capital adequacy requirements
- Ethical standards and conflicts of interest management
- Transparency in pricing and terms
- Obligations to maintain adverse costs insurance where appropriate
While the industry is mostly self-regulated, courts have oversight through their powers to manage litigation funding agreements and costs orders.
Need Expert Guidance on Litigation Funding?
Audley Capital helps law firms, claimants, and funders navigate the litigation funding landscape. We provide independent advisory on funding strategy, funder selection, deal structuring, and capital raising.
