Introduction to litigation funding

Most lawyers have heard of litigation funding and many have used it. But it’s still a relatively nascent field and has a lot of room for growth over the next few years. So how does it work and what are the benefits for firms and their clients?

Litigation funding is essentially the use of third party finance as a means of paying for legal action. It is most often employed in high value cases where there are multiple litigants. If the litigation is successful, a portion of any resulting award will be paid back to investors, with the aim of generating a healthy return on investment. The risk is that if the litigants lose their case, the investors lose their money.

Most litigation funding tends to focus on high value cases with potentially lucrative yields for large scale investors such as hedge funds and private equity firms. Some of the best known names in the field are Burford Capital and Therium, the latter of which has funded claims with a total value exceeding $36 billion. Bleeding edge technology is often used to assess claims by litigation funders - for example Therium recently announced a partnership with Solomonic which applies machine learning to assess the likelihood of litigation outcomes.

Litigation funding is also available for much smaller cases with relatively low returns. Crowdfunding platforms generally cater for the lower end of the market. One example is AxiaFunder, which focuses on smaller cases and seeks investments as low as just £500, describing itself as an “online litigation crowdfunding platform that connects investors with carefully vetted commercial litigation investment opportunities that we believe have the potential to generate attractive risk-adjusted returns.” The investors are much more likely to be individuals looking for an alternative to the stock market.

Although litigation funding normally acts as an investment vehicle, this is not always the case. CrowdJustice also offers crowdfunded litigation - but instead of seeking investment with expected returns, it aims to secure donations to fight cases which often have a social justice angle. One of its current campaigns which has secured a substantial amount of funding (£163,265 as of writing) aims to prevent the extradition of Julian Assange to the US.

One of the key benefits of litigation funding, at least at the smaller scale, is the element of access to justice. It provides a way of paying for legal costs for many individuals and organisations who would otherwise be unable to fund legal action - or who would be reluctant to fight their case for fear of losing substantial legal fees if their case is unsuccessful. On the flipside, it offers interesting and potentially lucrative investment opportunities, both for large scale funders and individual investors.

In terms of the legal industry, access to litigation funding provides law firms with the confidence to take on cases which they would have otherwise had to fight on a conditional fee basis at significant financial exposure. In combination with after the event (ATE) insurance, litigation funding offsets the risk to law firms, meaning a larger variety of claims can be taken on. Commenting, Richard Fisher, partner at Temple Bright, says: “Litigation funding allows us to broaden our scope in terms of the types of cases we take on as well as providing financial backing to move a case forward through the courts in circumstances where a defendant is unwilling to engage in ADR under the Protocols. Sometimes defendants want to see whether a claimant has the appetite and, critically, resource to actually issue proceedings. Whilst funding (and insurance) erodes a claimant’s overall recovery, if a claimant has been forced by a defendant to take that step, the claimant’s position in negotiations will inevitably harden.”