Third party funding is the most significant development in the funding of litigation since the advent of CFAs in the 1990s. Within three years, it is predicted that as much as 30% of all litigation will be supported by third party funders. Potentially, it opens up the possibility for parties to pursue litigation with clearly defined parameters as to commercial cost.
What is third party funding?
The funder agrees to pay the solicitor’s and the opponent’s costs should a claimant lose, in return for a percentage of any damages recovered by the claimant. For defendants, the funder can help manage the risks of litigation, by taking a proportion of the risk of exposure to a large damages award in return for a fee.
Is it legal in the UK?
Until recently the law on maintenance and champerty would have prohibited what is known as a Third Party Funding Agreement (“TPFA”). Maintenance is the intermeddling in the disputes of others in which the maintainer has no interest and where the maintainer assists the claimant without justification or excuse. Champerty is maintenance in return for a share of the spoils. However, public policy has recently changed and third party funding now has the approval of the Civil Justice Council and the Master of the Rolls and its lawfulness has been acknowledged in several cases.
How does it work?
The litigant enters into a TPFA. If the litigant is a claimant, the funder usually accepts responsibility for all the legal costs and expenses in return for a share of damages recovered. Usually that share is between 20% and 50%. The funder often then seeks to minimise its costs exposure and will pay the premium for an After the Event (“ATE”) insurance policy to cover the costs. It is also common for the solicitors to share some of the risks of the litigation by entering into a discounted Conditional Fee Agreement (“CFA”) agreeing that the fees payable during the case are discounted in return for increased fees if the case succeeds.
If the litigant is a defendant, then in return for a fee, the funder accepts responsibility for all or a proportion of any damages awarded.
If the defence succeeds, the defendant’s losses are limited to the fee. If the defence fails, the funder is responsible for that part of the damages which it agreed to fund. This provides defendants with a powerful risk management tool.
What are the advantages of third party funding?
It shares the risks of litigation, giving litigants much greater certainty about either costs or damages. The fact that a litigant has the benefit of third party funding can improve their tactical position, not least as a method of putting pressure on an opponent.
Does the litigant retain control of the litigation?
Yes, although solicitors normally report to both their client and the funder as the case proceeds.
How much does the case have to be worth?
In real terms there is no value of a proposed claim which is too low to consider funding. However, and in usual circumstances, £300,000 is the standard minimum figure most funders consider. Essentially, the damages need to be significant enough to justify a third party funder considering funding.
When might you consider the use of Third Party Funding?
Third party funding is potentially suitable for all commercial litigation, subject to the criteria above.
The use of third party funding is considered with our clients in all cases where we believe it to be an appropriate tool for claimants to manage risk and cost or to enable defendants to pursue their defence and equally manage the risk of an adverse damages award.