Third party funding is a way of funding complex litigation and arbitration. How could it potentially benefit you?
What is third party funding?
Third party funding is a way of funding complex litigation and arbitration. It is used primarily by commercial claimants, although claims brought by individuals and public bodies can sometimes be funded.
A third party, with no connection to the claim, agrees to finance all or part of the legal costs. In return, the third party is paid a fee out of any proceeds recovered from the opponent if the claim is successful. If the claim is unsuccessful, then the funder will lose its investment.
The Pros and Cons
So what are the main advantages and disadvantages of third party funding?
Third party funding can:
- allow claimants to pursue a claim where they may not have done so;
- enable the risk of pursuing the claim to be shared;
- contribute to the success of the claim by increasing cash flow;
- be a way for a company to pay for legal fees and expenses by moving them off the balance sheet;
- be used in conjunction with other funding options, including a conditional fee agreement and/or after the event insurance; and
- allow a company with multiple claims to finance more actions than their limited budget would otherwise allow.
But disadvantages are:
- Third party funders need a pot of money at the end of a case from which they can extract a return. As a result, funding is usually only available to claimants with a high value claim or defendants with a significant counterclaim.
- A successful claimant will have to pay a significant proportion of its recoveries (usually up to 50%) to the funder.
- Funding is not usually available for non-monetary claims.
- Even though third party funders are, in theory, unable to control proceedings, there is a concern that they may influence some of the decisions because they are ultimately funding all or part of the claim.
- There is no formal regulation of funders. Accordingly, the credibility of any potential third party funder needs to be reviewed.
How accessible is third party funding?
Funders can be quite selective about the cases that they choose to fund. Most funders, for example, would only provide funding for high value claims worth in excess of £2 million with sufficient prospects of success.
But the market is changing and more recently, a small number of funders are providing finance for lower value claims, especially where there is a portfolio of different matters.
What factors will a third party funder consider?
- How quickly they will be able to recover their outlay and see a return on their investment (usually within 2-3 years).
- The prospects of success – usually a funder will wish to see prospects of 60% or over.
- Whether the facts of the dispute are clear and well documented. Third party funders tend to dislike disputes where the performance of witnesses during cross-examination is likely to be critical.
- The creditworthiness of the opponent. Funders will need to be confident that any award can be enforced if necessary.
- Whether the funded party is committed and will co-operate throughout the litigation and take a reasonable approach to settlement negotiations.
- Whether there are any other funding arrangements in place, such as a conditional fee agreement, and after the event insurance, to cover an adverse costs order if the litigation is not successful.
The market for third party funding has increased rapidly in recent years and it is here to stay. This is likely to mean that the cost of obtaining funding will become more mainstream and therefore more competitive as more funders enter the market.
TLT is well placed to provide access to reputable third party funders and is able to work with clients to identify and arrange the most appropriate funding and risk management package.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at February 2017. Specific advice should be sought for specific cases. For more information see our terms & conditions