Litigation Funding in Commercial Disputes

Litigation funding in commercial disputes has arisen as a strategic and financial alternative for claimants facing high value legal actions. This method, also known as third party litigation funding, enables firms and individuals to pursue valid legal claims without incurring the initial litigation costs. It was once considered contentious, but it is now widely accepted and used in many countries throughout the world.

What is Litigation Funding in Commercial Disputes?

Commercial disputes, whether involving breach of contract, intellectual property infringement, shareholder conflicts, antitrust claims, or large-scale construction arbitration, can be extremely costly, uncertain, and time-consuming. Even strong claims are frequently abandoned or resolved prematurely because litigants (corporations, small and medium sized businesses, or individuals) lack sufficient money or are afraid of financial risk. Litigation funding, often known as third-party funding or dispute finance, has evolved in recent decades to address these barriers.

In essence, litigation funding involves a third‑party litigation funding providing capital to a claimant (or sometimes a law firm) in a commercial dispute in exchange for a share of the proceeds (settlement or judgment). The funding is non recourse in many cases: if the claimant loses, the funder absorbs the loss, and the claimant typically owes nothing.

Models of  Litigation Funding in Commercial Disputes

Litigation funding for commercial disputes is not a universal solution. Different cases, claimants, and jurisdictions necessitate tailored funding strategies. Over time, numerous models have evolved to fulfill the diverse needs of both claimants and donors.

Understanding these models enables businesses and law firms to identify the best funding arrangement for their particular issue.

1. Case-Level Litigation Funding

The most popular and straightforward model. The funder gives funds for a single commercial dispute or claim. This financing covers legal fees, expert fees, and, in some cases, unfavorable costs. The agreement is unique, established for the specific case, and includes a set scope and funding amount.

• How it works: After reviewing the case’s merits, expected costs, and risks, the funder gives funding for legal fees and expenditures.
• Use cases: High-value commercial conflicts, such as breach of contract claims or intellectual property lawsuits.
• Benefits: Tailored funding focused on a single dispute with very straightforward agreements.
• Drawbacks: Funders assume full risk in a single case, therefore pricing may be higher.

2. Portfolio Litigation Funding

Portfolio funding occurs when a funder finances a group or portfolio of cases at the same time. These lawsuits may include the same claimant, law firm, or a group of linked parties. The goal is to diversify risk over multiple claims, smoothing returns and increasing funding availability.

• How it works: A funder commits to finance a number of cases, typically for a law firm, corporation, or investor group.
• Use cases: A funder commits to finance a number of cases, typically for a law firm, corporation, or investor group.
• Benefits: Risk diversification decreases the cost of capital and streamlines processes.
• Drawbacks: Claimants have less control over individual case decisions.

3. Pre-filing / Early-stage Litigation Funding

This concept offers funding before a formal claim or arbitration notice is submitted. Funding is provided for investigation, expert analysis, evidence collection, and initial legal advice. It assists claimants who require funds to examine or prepare their case without having to invest big sums up front.

• How it works: As the case progresses, funders evaluate preliminary data and offer phased funding.
• Use cases: Complex disputes that call for preliminary legal study or fact-finding.
• Benefits: Allows claimants to analyze claims with no upfront expenditures.
• Drawbacks: Funders face more uncertainty and may want bigger returns.

4. Mid-Litigation Funding

Funding provided after litigation has begun, usually to meet rising or unexpected costs.

• How it works: Funders evaluate progress and risk profile, then provide capital in tranches.
• Use cases: Cases in which costs rise or funding shortfalls appear during proceedings.
• Benefits: Flexible cash injection throughout lawsuit.
• Drawbacks: The involvement at a later stage may result in a higher cost.

5. Appeals and Enforcement Funding

Funding designated explicitly for the costs of appeals, post-judgment proceedings, or enforcement activities, particularly cross-border enforcement, which can be costly and time-consuming.

• How it works: Funding is offered to pay legal and procedural costs associated with appeals and enforcement actions.
• Use cases: Cross-border enforcement in foreign countries, or lengthy appeals processes.
• Benefits: Allows the recovery of rewards that would otherwise be inaccessible.
• Drawbacks: High-risk, difficult enforcement challenges.

Why Litigation Funding in Commercial Disputes Has Grown

Several factors contribute to the growing usage of litigation finance in commercial conflicts:

Rising Costs & Increasing Complexity

Legal fees, expert witness expenses, discovery and evidentiary charges, and even cross-border enforcement can add up. Disputes in industries such as construction, energy, medicines, technology, and international trade can result in large expenditure nets well before they are resolved.

Risk Shifting & Cash Flow Management

Businesses tend not to devote huge sums to litigation, which can take years to conclude and has an unclear outcome. Litigation finance enables a claimant to mitigate financial risk while preserving working resources for key businesses. It provides better cash flow stability.

Access to Justice & Level Playing Field

Smaller claimants or undercapitalized firms may be discouraged from exercising their claims. Third-party funding can “level the playing field” by allowing meritorious claims to be brought despite the opposing party’s much higher resources.

Claim Monetisation / Balance Sheet Considerations

Legal claims constitute assets. When a company has a pending claim or an expected award, litigation funding allows them to monetize or partially monetise the asset, converting a future uncertain recovery into working capital immediately. Furthermore, removing litigation costs from the balance sheet can enhance financial indicators and lower risk.

Strategic & Tactical Advantages

Having cash in place can help to strengthen your negotiating position, avoid being coerced into cheap settlements due to a lack of funds, improve your capacity to prosecute through trial or arbitration, enforce decisions, and appeal if necessary. Funders can also provide strategic knowledge.

Why Use Litigation Funding in Commercial Disputes

Some of the main drivers / benefits include:

1. Risk Management and Financial Leverage
   Litigation is expensive, and the outcomes are unknown. Funding enables a claimant to transfer a significant portion of the financial risk to a third party, avoiding capital dilution or cash flow disruption.
2. Access to Justice
   Smaller parties may have valid claims but little resources. When faced with a more resourceful foe, funding can help to level the playing field.
3. Strategic / Tactical Advantages
   A sponsored claimant is less likely to be obliged to settle early for a small sum due to a lack of cash. It also allows the claimant to continue litigation, possibly through appeals. Some data suggests that having a funder can improve the quality of settlement outcomes because funders have the experience and motivation to negotiate terms that are more in accordance with the case’s merits.
4. Balance Sheet / Financial Structuring
   Litigation costs can be removed from a company’s balance sheet or handled so that other business operations are not jeopardized. Funding allows a company to keep resources for essential operations rather than spending substantially on litigation.
5. Expert Support & Case Management
   Many funders provide more than just money; they often add skill in lawsuit or arbitration strategy, budgeting, expert management, and enforcement. This additional value can boost a case’s prospects.

Risks, Drawbacks, and Ethical / Legal Challenges

While lawsuit funding has many benefits, there are also dangers, potential downsides, and ethical considerations that claimants and funders must consider.

High Cost to Claimant

Because the funder is taking a risk, their portion of any recovery (or multiple) could be significant. This can imply that after repaying the funder (plus legal fees, etc.), the claimant’s net is drastically diminished.

Loss of Flexibility / Some Control

Although claimants typically retain discretion over strategy, funders frequently impose reporting requirements, may have veto power regarding settlement, or may insist on specific procedural or financial constraints.

Delay or Complexity

Securing money (due diligence, negotiation of the deal) might take time. Additionally, donors may be concerned about countries, which could cause delays.

Enforcement Issues

Even with a judgment or award, collecting from the defendant can be challenging. Asset tracing, cross-border enforcement, and jurisdictional obstacles can hinder actual recovery.

Regulatory, Legal, and Ethical Issues

• Champerty and Maintenance: Traditional common law concepts that previously forbade someone with no stake in the case from supporting litigation in exchange for a share of the proceeds. Many nations have modified or eliminated these restrictions, or stated that litigation funding is acceptable under regulated frameworks.
• Conflict of Interest: There is a risk of mismatch between claimant and funder: the funder wants a huge recovery swiftly, whilst the claimant may choose specific relief or reputation preservation over a quick settlement.
• Transparency & Disclosure: Whether the funding arrangement must be disclosed to the court or the opposing party, and whether privilege is compromised. Different jurisdictions have different rules.
• Ethical Duties of Counsel: Lawyers must ensure that funding arrangements do not jeopardize their obligation of loyalty, secrecy, or objective counsel.

Structuring  litigation  Funding Agreement: Key Provisions

When entering into a litigation finance agreement, the claimant and counsel should pay special attention to:

• Fee / Return Structure: Percentage of recovery, numerous sliding scales, and time penalties.
• Control and Decision Rights: Who decides on settlements and appeals, if the funder has veto power, and how much reporting is required.
• Exclusivity and Break‑Fee Provisions: Funders may demand exclusivity during due diligence and break costs if the claimant pulls away.
• Security for Costs and Adverse Costs Exposure: Especially in jurisdictions where losing parties can pay each other’s costs.
• Enforcement & Cross‑Border Relief: Practical actions are required to establish jurisdiction for enforcement.
• Termination / Exit Provisions: What happens if the case is settled prematurely or if unforeseen circumstances alter the case’s viability.
• Confidentiality / Privilege / Disclosure: if privilege is maintained and if the funding arrangement needs to be revealed to the opponent or the court.

Legal and Ethical Considerations in Litigation Funding

Champerty & Maintenance

Common law is the source of the historical notions of champerty and maintenance. Third-party support for litigation in which they had no interest was forbidden by maintenance; champerty is a type of maintenance in which support is provided in exchange for a portion of the money received. Numerous jurisdictions have stated that appropriately structured lawsuit funding is allowed or updated or eliminated these doctrines in practice.

Disclosure & Confidentiality

Due diligence usually necessitates the provision of substantial secret information under litigation funding agreements. The issue of whether such funding needs to be revealed to opponents or courts also needs to be addressed. Non-party funding interest declaration is required under certain arbitration rules, such as the ICC rules. Additionally, courts in certain U.S. jurisdictions have local regulations pertaining to the disclosure of funders’ identities and existence, as well as whether or not they have control over settlements.

Privilege

Disclosure requirements and maintaining confidentiality and legal privilege may conflict. How can privilege be maintained if funders have access to privileged documents (for diligence, etc.)? In many jurisdictions, this is a current topic.

Regulatory Oversight

Litigation funders are governed by frameworks or self-regulatory organizations in certain jurisdictions (such as the Association of Litigation Funders in the UK). Legal clarification is still being developed by others. Regulations may cover consumer protection (if applicable), funder solvency, disclosure, and ethical duties.

Contractual Terms / Funding Agreements

Important clauses in funding agreements include:

• Percentage share / return multiple.
• Who controls strategy / whether funder has veto over settlement.
• Staging or tranches of funding.
• Termination rights and what happens if case changes materially.
• Security for costs / adverse cost exposure.
• Confidentiality, non‑disclosure, and privilege protections.

Conclusion

Litigation funding is increasingly important in commercial conflicts. It allows claimants to pursue high-value or difficult lawsuits without financial risk, perhaps leading to more equitable outcomes, higher-quality settlements, and wider access to legal remedies.

However, it is not a panacea. Case selection is critical; expenses (financial, strategic, and ethical) must be carefully considered; contracts with funders must be carefully drafted; and legal/regulatory risks must be addressed (particularly in terms of enforceability, disclosure, and privilege).

For businesses or legal teams seeking litigation finance, it is critical to approach it strategically: understand the models, negotiate advantageous terms, estimate enforcement possibilities, and constantly consider timetables and the cost of delay.