Litigation funding explained: how third-party funding works
A funder with no stake in the dispute pays the legal bills in exchange for a cut of any win - and a 2023 Supreme Court ruling has left much of the market's paperwork in legal limbo ever since.
Third-party litigation funding lets a claimant pursue a case it might not otherwise be able to afford, by bringing in a funder that has no connection to the underlying dispute to pay the legal costs. In return, if the claim succeeds, the funder takes an agreed share of the damages or settlement; if it fails, the funder typically recovers nothing, which is what makes the arrangement non-recourse and, for the claimant, considerably less risky than borrowing to fund a case outright.
The market in England and Wales is largely self-regulated. The Association of Litigation Funders (ALF), set up in November 2011 with the backing of the Ministry of Justice, oversees a voluntary Code of Conduct for Litigation Funders, covering matters such as funders keeping adequate capital to meet their commitments, the limited circumstances in which a funder can withdraw from a case partway through, and a firm rule that funders must not seek to control the litigation itself. Membership of the ALF, and adherence to the code, is voluntary rather than a legal requirement, which means funders operating outside it are not bound by the same standards.
That relatively settled picture was disrupted in July 2023, when the Supreme Court ruled in R (PACCAR Inc) v Competition Appeal Tribunal that litigation funding agreements which pay the funder a percentage of the damages recovered are, in law, damages-based agreements (DBAs). Because most funding agreements did not meet the specific regulatory requirements that apply to DBAs, the ruling meant a large proportion of the funding agreements then in use were, on the court’s reasoning, unenforceable as drafted - a serious problem for a market built on percentage-of-damages returns.
The government has since signalled it intends to legislate to reverse the effect of that decision and put third-party litigation funding on a clearer statutory footing, rather than leave the market to restructure deals around the ruling indefinitely. Until that legislation is in force, funders and the lawyers drafting funding agreements have largely worked around PACCAR by shifting toward multiples of the funding provided, rather than a straight percentage of damages, as the basis for calculating a funder’s return.