ThirdParty Funding: An Overview

What Is ThirdParty Funding?

Thirdparty funding (TPF) refers to an arrangement where an external investor provides financial resources to a party involved in a dispute, project or venture. In return, the funder receives a share of the proceedsusually a percentage of any award, settlement, or revenue generated. The arrangement is common in litigation, arbitration, infrastructure projects, and startup financing.

Key Sectors That Use ThirdParty Funding

• Litigation & Arbitration: Law firms and claimants obtain capital to cover legal costs, especially in highvalue or lengthy cases.
• Construction & Infrastructure: Developers secure funding for largescale projects, with the funder taking a portion of future cash flows.
• Corporate & M&A Transactions: Investors may finance a portion of a deal, recouping their investment through earnouts or upside clauses.
• Startups & Innovation: Earlystage companies receive nondilutive capital for specific milestones.

How ThirdParty Funding Works

The typical process involves:

1. Assessment: The funder evaluates the merits, risks and potential return of the case or project.
2. Agreement: Parties sign a funding agreement outlining the amount, fees, repayment terms and contingencies.
3. Disbursement: Capital is releasedoften in stagesto cover costs such as counsel fees, expert fees, or construction expenses.
4. Outcome & Repayment: If the funded party succeeds, the funder receives the agreed percentage. If there is no recovery, the funder generally bears the loss.

Benefits of ThirdParty Funding

• Access to Justice: Claimants can pursue meritorious claims without being constrained by cash flow.
• Risk Transfer: The funder assumes the financial risk, allowing the claimant to focus on the substantive case.
• Enhanced Leverage: Wellfunded parties often negotiate from a stronger position.
• Predictable Costs: Funding agreements usually set clear fee structures, limiting surprise expenses.

Potential Drawbacks and Risks

While thirdparty funding can be advantageous, it also presents challenges:

• Cost: Funders expect a premiumoften 2040% of any recoverymaking the net return lower for the funded party.
• Control Issues: Some agreements grant funders limited rights to influence strategy, which can create tension.
• Conflicts of Interest: If a funder invests in multiple opposing parties, conflicts may arise.
• Regulatory Uncertainty: Different jurisdictions are still shaping rules around disclosure and ethics.

Regulatory Landscape

Regulators are increasingly scrutinising TPF to protect parties and maintain market integrity. Key developments include:

• England & Wales: The Litigation Funding Regulation Act 2023 introduced a licensing regime and mandatory disclosure to courts.
• Australia: The Australian Securities and Investments Commission (ASIC) issued guidance on funding contracts and conflict management.
• United States: While no federal law directly governs TPF, state bar rules often require disclosure of funding arrangements.
• European Union: The EUs Alternative Dispute Resolution (ADR) Directive encourages transparency in funding.

Practitioners should stay current with local rules, as noncompliance can result in a claims dismissal or sanctions.

Best Practices for Claimants

1. Conduct Thorough Due Diligence: Review the funders track record, financial stability and any past disputes.
2. Negotiate Clear Terms: Define success fees, expense reimbursement, and termination rights up front.
3. Maintain Independence: Ensure the funder cannot dictate legal strategy; retain control over key decisions.
4. Document Everything: Keep detailed records of all communications and funding transactions.
5. Plan for Disclosure: Anticipate court or tribunal requirements to disclose funding arrangements.

Best Practices for Funders

1. Rigorous Evaluation: Use independent experts to assess claim merit and potential recovery.
2. Transparent Agreements: Use plainlanguage contracts that outline rights, obligations and exit mechanisms.
3. Conflict Management: Implement policies to avoid investing in adverse parties within the same dispute.
4. Compliance Programs: Establish internal controls to meet regulatory disclosure and ethical standards.
5. Portfolio Diversification: Spread risk across multiple cases or projects rather than concentrating on a single large claim.

Future Trends

Several forces are shaping the evolution of thirdparty funding:

• Technology Integration: AIdriven case analytics help funders predict outcomes more accurately.
• Expansion into New Sectors: Climaterelated litigation and dataprivacy disputes are emerging funding opportunities.
• Standardisation: Industry bodies are developing model agreements to streamline negotiations.
• Greater Transparency: Ongoing regulatory pressure is likely to make public disclosure the norm.

Conclusion

Thirdparty funding offers a powerful tool for accessing resources, managing risk and leveling the playing field in disputes and large projects. When structured responsibly, it can unlock meritbased claims that might otherwise remain unpursued. However, the cost, potential conflicts and regulatory complexities require careful navigation. Both claimants and funders benefit from clear agreements, diligent assessment and adherence to evolving legal standards.

Further Reading

• Institute of Litigators & Management Counsel Insights on Funding
• Lexology: Global Trends in Litigation Funding
• The UK Judicial Conduct Advisory Group Guidance on Funding Disclosure