The concept of litigation funding has enjoyed increased popularity in the UK over the last few years, with some companies (such as litigationfunding.com) reporting to have as much as quadrupled their annual litigation fund within 12 months.

Essentially, litigation funding is an investment. Funders take financial responsibility for bringing a case to court on behalf of a client, up to the limit of an agreed sum. If the case is won, the funder receives a percentage of the damages as payment.

Because of the level of investment and risk involved in the funding process, there must be a strong likelihood of success or it simply wouldn’t be worth it for the third party to get involved.

To be approved by a funding company, a case must:

–        Have a significant pay out associated with the claim (typically over £1m)

–        Have a strong likelihood of success (60%)

–        The defendant must be well-resourced and therefore have the means to pay the damages

For obvious reasons, funders must be convinced that they stand a good chance of receiving their investment back plus a high return on investment, to compensate for the level of risk taken.

Many funding companies require their original investment back at the end of a case, plus a substantial return, which can amount to up to three times as much as their original investment. Other companies will work on the premise that they will receive a percentage of the damages, which will ordinarily be specified at the start of the agreement.

In the past, other funding options have existed to solicitors, including:

Consumer Credit Agreement (CCA)

In a CCA, the money for a case was borrowed from an independent finance company. The loan term would ordinarily be around three years, and money would be available to be drawn to pay for solicitors’ disbursements, in turn, the solicitor would work with a Conditional Fee Arrangement (no win, no fee) basis. In case of court loss, the amount of the loan would be insured with an After the Event (ATE) policy.

This method of funding has fallen out of favour in recent years, as:

• The interest rates were too high
• There was too much exposure to risk: the inevitable involvement of claims companies caused mayhem, going into administration and leaving the insurers incurring massive losses.

Direct Lending

Direct Lending was a method of funding available to solicitors, rather than their clients. This was down to the fact that the insurers decided they would no longer insure court debt as a result of the huge losses incurred from CCA loans.

However, this method of funding often carried too much risk for the solicitors, eliminating the benefit of having direct access to the loan.

The future of third party funding

The prevalence of third party funding has been increasing steadily over the past few years in the UK as well as abroad.

Because of the high levels of cash involved, it is only really suitable for the commercial market, and at present there is no real market for lower value claims. However, in the world of litigation funding, the development of Alternative Business Structures (ABS) may go some way to addressing the issue of small claims.

This article was written by Laura Moulden on behalf of Vannin Capital who specialises in a third party funding.