Litigation funding — also described as third-party funding or litigation finance — allows a party to bring or defend a legal claim using capital supplied by an investor. The investor is repaid only if the funded claim produces a recovery. The document that sets out the arrangement is the litigation funding agreement (LFA), and its structure determines who pays for the case, how the funder is rewarded, and who decides how the dispute is run.
Litigation finance has become a recognised part of the commercial legal market in several jurisdictions, and developments in the sector are followed closely in legal sector coverage. This article explains how LFAs are typically structured, the clauses that do most of the work, and how the wider legal framework shapes the choices the parties make.
None of the following is legal advice. The terms of any specific agreement depend on the jurisdiction, the type of claim, and the negotiations between the parties.
The parties and the basic bargain
Most LFAs bring together three groups, and the agreement is the instrument that governs the relationship between them.
- The funder — an investment firm that commits capital to the claim. The funder generally has no direct interest in the subject matter of the dispute.
- The funded party — the claimant or litigant that receives the financing. In commercial work this is often a company, but it can also be an individual or a group of claimants.
- The legal team — the solicitors and, where relevant, barristers who run the case. Their professional duties run to their client, not to the funder.
The defining feature of the arrangement is that it is usually non-recourse. If the claim is unsuccessful, the funder typically loses the money it advanced, and the funded party generally owes nothing beyond what the agreement specifies. Because the funder recovers only on success, LFAs are generally characterised as investments rather than loans, which is one reason they are treated differently from ordinary borrowing. That is also why funders tend to assess cases closely on their merits, the recoverable value, and the defendant’s ability to pay before committing capital.
What the funder’s money usually covers
An LFA normally defines a budget and a scope, because the funder’s exposure depends on both. Common categories of funding include:
- Legal fees for solicitors and barristers, often billed to the funder rather than the client.
- Disbursements such as expert reports, court fees, transcription, and document review costs.
- Adverse costs exposure — the risk that the funded party will be ordered to pay the other side’s costs if the claim fails.
- Security for costs, where a court requires the claimant to provide a sum as a condition of proceeding.
- The claimant’s own costs in some consumer financing models, where a claimant may receive an advance against an expected recovery.
The agreement usually records how the budget is set, how drawdowns are requested, and what happens if the case costs more than expected. Many LFAs allow staged funding, with the funder committing a first tranche and retaining a discretion over later tranches.
How the funder’s return is calculated
The return is the commercial heart of the agreement, and it is negotiated at the outset. According to the Association of Litigation Funders (ALF), a funder’s financial reward typically consists of either a percentage of the damages recovered, a multiple of the amount advanced, or a combination of the two.
| Model | How the funder’s return is generally calculated | Points to note |
|---|---|---|
| Multiple of invested capital | A negotiated multiple applied to the amount the funder has actually advanced. | The return is set by the amount invested and the agreed multiple, rather than by the size of the recovery. |
| Percentage of recovery | A defined share of the damages or settlement recovered. | Links the funder’s return directly to the outcome; in England and Wales this formulation may engage the damages-based agreement rules. |
| Combination / hybrid | A multiple on capital plus a share of recovery, sometimes subject to a cap. | Balances a base return with upside; the interplay between the two elements is defined in the payment waterfall. |
Models summarised from the Association of Litigation Funders’ description of litigation finance, current as of October 2026. The specific rate or multiple depends on the assessed risk, the merits of the claim, and the expected duration.
Why the wording matters: the PACCAR decision
Because the legal characterisation of a payment can turn on how it is calculated, the drafting of the funder’s return is more than a commercial question. In R (on the application of PACCAR Inc) v Competition Appeal Tribunal, the UK Supreme Court held that an LFA under which the funder’s maximum remuneration was calculated by reference to a percentage of the damages recovered could fall within the statutory definition of a damages-based agreement in section 58AA of the Courts and Legal Services Act 1990. You can read the Supreme Court’s judgment in PACCAR, handed down on 26 July 2023.
Where an agreement meets that definition but does not satisfy the associated formal requirements, it is unenforceable. The decision did not change the damages-based agreement rules themselves; it clarified that some funding arrangements were caught by them. The Litigation Funding Agreements (Enforceability) Bill, a private member’s bill that would have reversed the effect of the ruling, did not complete its passage through Parliament, so as of October 2026 the position in England and Wales continues to rest on the case law and the terms of each agreement.
The payment waterfall and priority of payments
Once a claim produces a recovery, the LFA determines the order in which the money is applied. This is often set out as a waterfall, and the sequence is negotiated rather than standardised. A typical structure might apply proceeds in this order:
- Repayment of the funder’s invested capital.
- Payment of the funder’s agreed return.
- Payment of any outstanding legal costs and disbursements.
- Distribution of the balance to the funded party.
Not every agreement follows that order. Some give the funded party a priority tranche before the funder is paid, and some define separate treatment for settlement proceeds and court-awarded damages. For that reason, LFAs usually define “recovery” precisely and specify whether calculations are made on gross or net sums. The interplay between the multiple and the percentage in a hybrid model is also resolved here.
Control, consent, and who runs the case
A recurring question is how much influence the funder has. Under the Code of Conduct for Litigation Funders, members of the ALF are not permitted to control the litigation or settlement negotiations, and must not cause the litigant’s lawyers to act in breach of their professional duties. The Code reflects the practice in England and Wales of keeping the roles of funder, litigant, and lawyer separate.
In practice, an LFA will still address information rights, such as regular case updates and access to advice, along with budget approval and circumstances in which the funded party must obtain the funder’s consent — commonly for settlements below a specified value. These provisions allocate influence and protect the funder’s investment without transferring the conduct of the case, which remains with the client and its legal advisers.
Termination and withdrawal
The Code requires members to behave reasonably and allows them to withdraw from funding only in specified circumstances. Where there is a dispute about termination or settlement, the Code provides for a binding opinion from an independent QC, either jointly instructed or appointed by the Bar Council.
Individual agreements typically list their own termination events — for example, a material adverse development in the claim, a breach of the agreement, or a decision by the funded party to reject a settlement the funder considers reasonable. The financial consequences of termination, including whether sums already advanced become repayable and on what basis, depend on the terms. This is one of the areas where the drafting has the most practical effect on both sides.
Adverse costs, security, and insurance
In England and Wales, the general rule is that the unsuccessful party pays a portion of the successful party’s legal costs, subject to the court’s discretion and the applicable rules. A funded claimant therefore faces potential adverse costs exposure in addition to its own costs, and LFAs commonly address who bears that risk. Some agreements require the funder to cover adverse costs; others rely on after-the-event (ATE) insurance, or on a combination of the two. Courts may also order a funded party to provide security for costs in certain circumstances.
The allocation of these risks is often one of the most heavily negotiated parts of an LFA. It also affects the funder’s overall pricing, because capital set aside for adverse costs is capital that is not available for other claims.
Capital adequacy and self-regulation
The Code requires full member funders to maintain adequate financial resources to meet their obligations across all the disputes they have agreed to fund, covering aggregate funding liabilities for a minimum period of 36 months. It also expects members to have immediate access to funds under their own control, rather than assembling a one-off consortium on a case-by-case basis.
Litigation funding itself is not currently authorised as a separate financial activity in the United Kingdom. Responsibility for regulating claims management services moved to the Financial Conduct Authority in April 2019, but the provision of litigation funding relies substantially on self-regulation by ALF members. The Code binds only those who are members, so the standards a funded party can expect may vary depending on the funder.
Portfolio and law-firm funding
Some funders provide finance at the level of a law firm or a portfolio of claims rather than a single dispute. A portfolio agreement may cover a group of cases, allowing the funder to spread risk across many outcomes while the firm reduces its exposure to conditional fee arrangements. Portfolio structures usually include an overall cap on the commitment and a defined return across the pool, with individual cases managed under the same framework. This approach is one reason capital adequacy matters: the obligations run across all funded matters, not just the one currently in progress.
How the structure varies by jurisdiction
Approaches differ from country to country. England and Wales permits third-party funding, subject to the case law and self-regulation described above. In the United States, consumer legal financing typically takes the form of non-recourse advances that a claimant repays only from a recovery; the amounts are often small, and the product is generally treated as an investment rather than a loan, which means it is not usually reported to credit bureaus. Several arbitration hubs, including Hong Kong and Singapore, have introduced frameworks permitting third-party funding in arbitration and related proceedings. At the EU level, the European Parliament has called for regulation of third-party funding, and the subject remains under discussion.
These differences matter to structure, not just to marketing. Where a jurisdiction treats a funder’s return as a regulated fee, the agreement may need to comply with formality requirements; where funding is permitted in arbitration but not in domestic litigation, the agreement may be drafted around the seat of the arbitration.
Frequently asked questions
Is a litigation funding agreement a loan?
Generally, no. The defining feature is that the funder is repaid only if the claim succeeds, making the arrangement non-recourse. That is why LFAs are usually treated as investments rather than debt, and why they are typically not reported to credit bureaus in the consumer context.
What does a funder usually receive?
The return is negotiated at the outset and typically takes one of three forms: a multiple of the amount advanced, a percentage of the damages recovered, or a combination of the two. The specific figure depends on the assessed risk and the merits of the claim.
Who controls the case?
The funded party and its lawyers retain conduct of the litigation. Under the ALF Code, member funders are not permitted to control the litigation or settlement negotiations, although agreements commonly include information rights and consent requirements for certain decisions.
What happens if the claim fails?
Under a non-recourse structure, the funder generally loses the capital it advanced, and the funded party typically owes nothing beyond what the agreement specifies. The agreement may still allocate certain costs or insurance arrangements between the parties.
Can a funder withdraw from the agreement?
Member funders may only withdraw in specified circumstances and are required to behave reasonably. Agreements also list their own termination events. Disputes about termination or settlement under the Code are referred for an independent, binding QC opinion.
Are litigation funding agreements regulated?
It depends on the jurisdiction. In the United Kingdom, claims management services moved to Financial Conduct Authority regulation in April 2019, but litigation funding is not currently authorised as a separate financial activity and relies substantially on self-regulation by ALF members. Other jurisdictions have their own frameworks and codes.
Where the structure is heading
An LFA is best understood as a set of linked decisions: what the funder will pay for, how its return is calculated, how proceeds are shared, who decides what, and what happens if the relationship ends early. Those decisions do not exist in a vacuum. They respond to the rules on damages-based agreements, adverse costs, and professional conduct that apply in the relevant forum.
The most active area of change is how funder returns are expressed. Following the PACCAR ruling, the choice between a multiple of invested capital and a share of damages is not merely a matter of commercial preference; it can affect whether an agreement is enforceable at all. That has made drafting precision more important, and it has kept the question of statutory reform on the agenda in England and Wales. For anyone structuring or reviewing an LFA, the practical lesson is to treat the agreement as a jurisdiction-specific document, and to confirm how the funder’s return, the payment waterfall, and the cost-risk allocation interact before signing.
