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Third Party Funding: A Quick Guide

February 24, 2021

Third party funding is the financing of all or part of a claim by a third party, in consideration for a share of the damages recovered from the opponent through settlement or by ‘winning’ at trial.  This means paying for things such as the Court fees and expert costs, as well as the bills from the solicitors and barristers.

Funding by third parties in civil litigation is endorsed by the judiciary and is seen by many as a means of access to justice. However, it has not always been accepted by policymakers and the judiciary. At the beginning of the twentieth century, third party funding was prohibited. Today however, third party funding can be obtained in relation to a wide range of commercial disputes.

Is third party funding right for you?

The financing offered by an ever-increasing number of funders means that those who are risk averse or would not ordinarily be able to afford the cost of litigation, have an alternative route to accessing justice and minimising cost exposure.

The main appeal of third party funding is that, if the claim is unsuccessful and no recovery is made from the opponent, there is usually no obligation to repay the funder for the funds drawn down. Third party funding also provides an extra level of assessment on the merits of the claim at an early stage of the dispute. Funders are highly unlikely to provide financing unless they strongly believe the case has sufficient merits to result in a return of the capital they provide.  

Another benefit of third party funding is that it can increase the chances of a settlement.  If the Defendant is made aware of the fact that the Claimant has substantial financial backing and is unlikely to ‘back down’ easily, then the Claimant’s bargaining position is strengthened significantly, potentially leading to an early settlement.   It also tells the Defendant that a number of lawyers may have reviewed the strength of the claim against it; and all have concluded that it has merits.

Funding considerations

Before agreeing to a third party funding a claim, several factors should be considered carefully, including:

  • Does the claim have good prospects of success and are the damages significant (most funders will only finance a claim if the damages meet a certain level)?
  • Has the funder presented the costs and risks associated with litigation funding in a clear and understandable way (i.e. what proportion of the proceeds will be paid to the funder)?
  • Is the funder reputable and financially sound (i.e. do they have the funds to support the claim through to trial)?
  • Are there any cheaper, alternative, and more appropriate options available, such as a “no win no fee” conditional fee agreement or a damages-based agreement?

One further point to note is that the involvement of a funder in a claim is generally limited to the overwatch of the funds they invest. The client retains control of most of the decision making and the day-to-day communication will be with the solicitors and barrister; the funder should only become involved when their expertise is required. The exception to this is where the funder reserves the right of approval regarding settlement.

Alternatives to third party funding

As mentioned above, third party funding is not the only option available to minimise the outlay of legal costs when pursuing a claim. Conditional fee agreements (CFAs) and damages-based agreements (DBAs) having often been used in litigation over the past two decades.

CFAs (commonly known as ‘no win, no fee’ agreements) are an agreement between the client and the solicitor (and sometimes the barrister). CFAs typically provide that the client will only pay its solicitors’ fees on the condition that the claim is successful or settles.

DBAs are an agreement between the client and its solicitors which provides that the solicitors’ fee is contingent on the success of the case. The legal costs are calculated based on a percentage of the award made in favour of the client.

ATE insurance, which can be used separately or in conjunction with CFAs and DBAs, is a type of insurance which covers legal costs and disbursements in the event of a defeat at trial or an interim hearing.  

In short, CFAs, DBAs, and ATE insurance offer a viable pathway to pursuing a claim where funding is not appropriate and/or the cost and risk of litigation would otherwise be prohibitive.

Conclusion

The range of funding options available, and the increasing size of the funding market, means that those who have a claim with strong merits, and where the value of the claim is high enough, should be able to obtain some form of financial assistance and will not have their access to justice blocked at the first hurdle.  

If you would like to discuss the funding options available, then please contact George Duncan at george.duncan@ilaw.co.uk.

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