Litigation funding - the way forward?

In recent years, there has been a growing trend towards the use of third party funding in litigation. As new and more sophisticated products have become available, parties to disputes have increasingly sought to benefit from them.

What is third party funding?

As the name suggests, third party funding involves a party to a dispute receiving funding from a third party. The funder (for example, a bank, insurance company or specialised third party funder) will generally cover the funded party's legal costs in exchange for a share of any sums which are recovered by that party in the event of a successful claim. Third party funding is not restricted to litigation and may be utilised in a variety of disputes.

The circumstances in which third party funding is available will depend, to an extent, on the nature of the dispute. However, in general terms, as funders are relying upon a return, it will be necessary for the case to involve a claim for damages and, given the level of risk involved, funding will usually only be available in high-value claims. Funders will also need to be satisfied that the claim has good prospects of success and that the other party will be in a position to make payment.

Advantages of third party funding

- It allows the costs and risks of pursuing a claim to be shared. 

- For a party with limited means, it may be the only way of pursuing the claim.

- Funders will conduct their own investigations to satisfy themselves as to the merits of the claim, which can be re-assuring to the party pursuing that claim. It may also influence the approach of the other party if they are aware of the involvement of a funder.

Disadvantages of third party funding

- A successful party will usually be required to give up a significant proportion of any sums recovered.

- There is no guarantee that a funder will agree to provide funding and, generally, they will only accept liability for costs incurred after the funding has been put in place. They will not cover the (usually) significant costs which are involved in preparing the application for funding.

- The funder may retain the right to influence certain decision making – for example, a funder's approval may be required before settlement can be agreed.

The way forward?

Although there are advantages and disadvantages of third party funding, it can be a valuable (and, in some cases, necessary) resource in appropriate circumstances.

It will not be suitable in every dispute, but as the market continues to develop and a wider range of funding products is introduced, it may become an increasingly attractive and accessible option for parties wishing to pursue a claim.