Deminor Wiki - Litigation Funder

Overview

The primary objective of a litigation funder is to enable claimants, often those lacking sufficient resources, to pursue meritorious claims without bearing the financial risks associated with legal proceedings. In return, the funder receives an agreed-upon portion of the damages, e.g., calculated as a certain percentage of the amount recovered from the defendant or a multiple of the capital invested, if the case is successfully concluded by means of a judgment/award, or settlement. If the case is unsuccessful, the funder generally loses its investment and receives no return, and the client owes no payment to the funder.

Litigation funders operate across a range of legal disputes, including commercial litigation, arbitration, insolvency proceedings, and group actions. Their involvement has contributed to the evolution of the legal services market, providing new avenues for access to justice and influencing the strategies of both claimants and defendants.

History

The concept of third-party funding in litigation has historical antecedents in doctrines such as “Maintenance” and “Champerty”, which were originally designed to prevent the abuse of legal process by disinterested parties. Maintenance prohibited a third party with no legitimate interest from supporting litigation, financially or otherwise, whereas Champerty was a particular form of maintenance, where the third party financed a case in return for a share of the proceeds. For centuries, common law jurisdictions prohibited third-party funding on the grounds that it could encourage frivolous litigation and interfere with the administration of justice.

However, as legal systems evolved and the costs of litigation increased, attitudes towards third-party funding began to shift. The late 20th and early 21st centuries saw a gradual relaxation of prohibitions against maintenance and champerty, particularly in jurisdictions such as England and Wales, Australia, and the United States. This shift was driven by recognition of the potential benefits of litigation funding, including improved access to justice and the efficient allocation of legal risk.

The modern litigation funding industry began to take shape in the 1990s, with the emergence of specialist funders and the development of sophisticated funding models. Today, litigation funders are active in numerous jurisdictions worldwide, and the industry has grown to encompass a diverse range of participants, from boutique funders to large institutional investors. Funders vary significantly in their size, legal structure, and range of cases accepted, from highly specialised funders seeking to invest in only one specific type of case, to broader generalist funders who invest in different kinds of (mostly, yet not exclusively) commercial claims.

Litigation Funding Context

Litigation funding refers to the provision of capital to finance legal claims, typically on a non-recourse basis. This means that the funder's return is contingent upon the (commercial) success of the case; if the claim fails, the funder receives nothing and bears the loss. Litigation funding can take several forms, including:

• Single-case funding: Financing is provided for a specific legal dispute, usually high-value commercial litigation, arbitration, or personal injury and mass tort cases. The funder covers litigation costs and, if the case succeeds, receives an agreed return.
• Portfolio funding: A funder provides capital to support a portfolio of cases, often for a law firm or corporate client. Risk is spread across multiple claims, which can reduce the cost of capital and provide more flexible financing structures.
• Monetisation: A funder advances funds against a potential or existing judgment or award, allowing the claimant to access capital before the resolution of the case.

Litigation funders conduct rigorous due diligence before agreeing to fund a case, assessing factors such as the merits of the claim, the quantum of damages, the enforceability of any judgment, and the legal and jurisdictional risks involved. The funding agreement typically sets out the funder's entitlement to a share of the proceeds, the budget provided for the pursuit of the claim, as well as provisions regarding certain consent rights of the funder, settlement decisions, and the allocation of costs.

Role and Functions of a Litigation Funder

Litigation funders serve several key functions within the legal ecosystem:

• Risk Transfer: By assuming the financial risk of litigation, funders enable claimants to pursue claims without jeopardising their own resources. Usually, this also means that the pursuit of that claim is balance-sheet neutral for the client, as no provisions or accruals for costs need to be made.
• Access to Justice: Funding can make it possible for individuals and entities with meritorious claims, but limited means, to access the courts.
• Case Management: While funders do not control litigation, some are able to provide strategic input and share their experience in complex disputes, subject to ethical and regulatory limits on lawyer–client independence in the respective legal system. Other types of support by the funder can include, among others, damages calculation, document assessment, and asset tracing, again subject to the specific legal framework in the relevant jurisdiction(s).
• Market Efficiency: By funding only cases with strong prospects, funders can help to filter out weak or speculative claims, ensuring that both claimants and their counsel do not waste resources on cases with little chance of success.

Funders may also cover ancillary costs, such as expert witness fees, court fees, and premiums for after-the-event (ATE) insurance, which protects claimants from adverse costs if the case is lost.

Market Impact

The growth of the litigation funding industry has had a significant impact on the legal market. Key effects include:

• Increased Litigation Activity: The availability of funding has enabled more claimants to bring cases, particularly in areas such as group litigation and collective redress, where, without access to third-party funding, the sheer risk in terms of cost and duration often deters claimholders from engaging in litigation.
• Law Firm Financing: Portfolio funding arrangements have provided law firms with new sources of capital, supporting innovation in fee structures and case management. This development is most pronounced in common law jurisdictions, whereas in many civil law countries, ethical rules continue to restrict its scope.
• Investment Opportunities: Litigation funding has attracted investment from private equity, hedge funds, and institutional investors, leading to the emergence of publicly listed funders and the development of secondary markets for legal claims. Several funders are now publicly listed, and although secondary markets for legal claims are developing, they remain relatively limited.
• Settlement Dynamics: The involvement of a funder can influence settlement negotiations, as defendants may perceive that a funded claimant is less likely to abandon a claim for financial reasons, and at the same time, a sophisticated defendant will understand that funders do not invest money in completely meritless claims.

The industry has also contributed to the globalisation of legal services, with funders operating across multiple jurisdictions and supporting cross-border disputes.

Regulation

The regulation of litigation funders varies significantly between jurisdictions. In some countries, the industry is subject to formal regulatory frameworks, while in others, it is governed by a combination of self-regulation and general legal principles.

• United Kingdom: In England and Wales, litigation funding is not directly regulated by statute, but funders are encouraged to adhere to the Code of Conduct of the Association of Litigation Funders (ALF), a self-regulatory body. The ALF Code sets out voluntary standards regarding capital adequacy, transparency, and the management of conflicts of interest.
• Australia: Litigation funding is subject to regulation by the Australian Securities and Investments Commission (ASIC), and funders must comply with requirements relating to licensing, disclosure, and conflicts management.
• United States: The regulatory landscape is fragmented, with different rules applying at the federal and state levels. Doctrines such as champerty still apply in some states (e.g., New York, Delaware). At the federal level, no overarching framework exists, though some courts require disclosure of funding arrangements.
• European Union: In 2022, the European Parliament adopted a resolution on the “Responsible Private Funding of Litigation”, calling on the European Commission to propose a directive establishing harmonised minimum standards across member states. The resolution emphasised transparency, claimant protection, and limits on funders’ returns. It was reviewed rather critically as being overly restrictive, in scholarly doctrine as well as practitioners’ feedback. However, regulation currently remains largely at the national level, with countries such as Germany, the Netherlands, and France developing their own approaches, particularly in the context of collective redress and competition damages claims.

Key regulatory issues include the protection of claimants' interests, the prevention of conflicts of interest, the transparency of funding arrangements, and the maintenance of the integrity of the legal process.

Broader Industry Context

The litigation funding industry is part of a wider trend towards the commoditisation and financialisation of legal claims. As legal costs have risen and the complexity of disputes has increased, the demand for alternative financing solutions has grown. Litigation funders have responded by developing innovative products and services, including:

• Funding for Arbitration: Supporting parties in international arbitration, where costs can be substantial and enforcement issues complex and time-consuming.
• Enforcement Funding: Providing capital (and, where feasible and admissible, also knowledge) to enforce judgments and arbitral awards, particularly in cross-border contexts.
• Law Firm Lending: Offering loans and credit facilities to law firms, secured against future fee income, however, more limited.

The industry is characterised by increasing sophistication, with funders employing teams of legal, financial, and risk management professionals. The use of data analytics and technology is also becoming more prevalent, enabling funders to assess cases more efficiently and manage portfolios more effectively. Emerging developments include secondary markets for legal claims and the securitisation of litigation portfolios, reflecting the industry’s integration into broader capital markets.

International Perspectives

Litigation funding has developed differently across jurisdictions, reflecting variations in legal culture, regulatory frameworks, and market demand. In common law countries, such as the UK, Australia, and the US, the industry is well-established and continues to grow. In civil law jurisdictions, the adoption of litigation funding has been more gradual, but recent years have seen increased activity, particularly in the context of collective actions and competition law claims.

International arbitration has emerged as a key area for litigation funders, given the high value and cross-border nature of many disputes. Funders play an important role in levelling the playing field between parties and facilitating the resolution of complex international disputes.

International arbitration has emerged as one of the most important areas for funders, given the high value and cross-border nature of disputes and the challenges of enforcement. Arbitral institutions such as the ICC, SIAC, HKIAC, and ICSID have introduced disclosure obligations regarding funder involvement, aiming to manage conflicts of interest and strengthen transparency to ensure the tribunal’s impartiality and independence.

Conclusion 

Litigation funders are now an integral part of the legal landscape, providing essential financial support to claimants and contributing to the evolution of dispute resolution. Their activities have enhanced access to justice, introduced new dynamics into the legal market, and attracted significant investment. As the industry continues to mature, issues of regulation, transparency, and best practice will remain central to its development. For legal professionals, understanding the role and operation of litigation funders is increasingly important, both in advising clients and in navigating the changing contours of the legal services market.

Reviewed by:  Dr. Malte Stübinger, General Counsel Germany 

Disclaimer: The sole purpose of this article is for general information, and its contents should not be considered as legal advice, as legal frameworks / systems vary from country to country. The article is based on publicly available information and while care is taken in compiling this, no warranty, express or implied is given, nor does Deminor assume any liability for the use thereof.