Understanding Third-Party Funding in Legal Proceedings

Pursuing or defending a legal claim can involve significant costs, including attorney fees, expert witnesses, court filings, and document review. Third-party funding is one way that parties to a dispute can cover these expenses without paying them entirely out of their own pockets. This guide explains how third-party funding works, the main forms it takes, how funders are generally repaid, and the regulatory questions that surround it.

Table of Contents

• What Is Third-Party Litigation Funding?
• How Funding Agreements Generally Work
• Commercial and Consumer Funding Compared
• How Funders Are Repaid
• Regulation and Disclosure Rules
• Practical Considerations for Parties
• Looking Ahead

What Is Third-Party Litigation Funding?

Third-party litigation funding, often shortened to TPLF or TPF, is an arrangement in which a funder that is not a party to a lawsuit agrees to provide money to a litigant or to a law firm. The funder typically supplies capital for legal or business expenses in exchange for a financial interest in any eventual recovery. According to the U.S. Government Accountability Office, funders are typically private firms that obtain their capital from investors.

The concept is not new, but it has grown more visible as parties look for ways to manage the cost and duration of complex disputes. Funding may be used in commercial contract disputes, patent matters, arbitration, insolvency proceedings, and collective or group actions, among other settings.

How Funding Agreements Generally Work

A funding arrangement is usually documented in a written agreement between the funder and the funded party, or between the funder and a law firm. While the specific terms vary widely, agreements commonly address the same core questions:

• Amount and purpose: how much money is advanced and which costs it may cover.
• Recourse: whether the funded party must repay the funds if the case is unsuccessful. Many arrangements are described as non-recourse, meaning repayment generally depends on the outcome of the case.
• Return calculation: how the funder’s payment is determined if the case succeeds, such as a multiple of the amount advanced, a percentage of the recovery, or a combination of both.
• Control and decision-making: whether the funder has any approval role over litigation or settlement decisions. Disclosure rules in some jurisdictions focus specifically on this point.

Because the terms of each agreement depend on the facts of the matter and the governing law, parties usually review these documents with their own legal advisers before signing.

Commercial and Consumer Funding Compared

Third-party funding is often grouped into two broad categories. Commercial arrangements involve corporate litigants or law firms, while consumer arrangements involve individuals, such as a person pursuing a personal injury claim. The table below summarizes common differences, based on the general descriptions published by the U.S. Government Accountability Office. Actual amounts and terms vary by case.

Commercial and consumer arrangements are often subject to different rules. In some jurisdictions, consumer funding receives additional attention because the funded individual may be in a weaker bargaining position, which is why several regulatory proposals distinguish between the two.

How Funders Are Repaid

Repayment mechanics are central to how these arrangements function. Depending on the agreement, a funder may be repaid in one or more of the following ways:

• A fixed multiple of the amount advanced, payable only if the case produces a recovery
• A percentage of the damages or settlement amount, subject to any limits set in the agreement or by law
• A return that is the greater of a set amount or a share of the recovery
• In some cases, a periodic charge or interest-style return on the funds provided

Where the case does not result in a recovery, the funded party’s repayment obligation may be limited or nonexistent, depending on the terms. The exact outcome is set by the agreement itself and by any applicable statute or court order, so readers should not assume that one structure applies across all matters.

Regulation and Disclosure Rules

The legal framework for third-party funding differs considerably from one jurisdiction to another. The following points reflect general patterns described in official reports and court rules, and they may change over time:

• United States: federal law does not specifically regulate the third-party funding industry, according to the GAO. Some states regulate consumer funding, for example by limiting the fees that funders may charge.
• Court disclosure: there is no nationwide U.S. requirement to disclose funding agreements, although some courts and individual judges have required disclosure in particular cases. A local rule in the District of New Jersey, for instance, requires parties to identify non-party funders in civil cases.
• United Kingdom: the Civil Justice Council’s Final Report on Litigation Funding recommends statutory, light-touch regulation of the sector, with more detailed requirements for consumer and collective claims.
• European Union: the European Parliament has called for common minimum standards covering transparency, fairness, and proportionality for commercial third-party litigation funding.

Disclosure is an area where the rules often depend on the forum. Some regimes require the existence of funding to be revealed early, while others limit disclosure to the identity of the funder or to conflicts-of-interest questions. The terms of the agreement itself are frequently treated as confidential unless a court orders otherwise.

Practical Considerations for Parties

Anyone considering third-party funding, whether as a claimant, a defendant, or a law firm, may want to address several questions before entering into an agreement:

• Which jurisdiction governs the agreement, and does it contain any specific funding or disclosure rules?
• How is the funder’s return calculated, and how would it interact with a settlement offer?
• Does the funder have any approval rights over settlement or litigation strategy?
• Are there disclosure obligations in the court where the case is pending?
• Has independent legal advice been obtained on the terms?

Staying informed about litigation funding developments can also help parties understand how the framework is changing. Reputable legal news sources and official court or government publications are generally the most reliable places to follow new rules and decisions.

Looking Ahead

Third-party funding occupies a growing place in the broader landscape of how disputes are financed, alongside contingency fee arrangements, legal expenses insurance, and conditional fee agreements. Its future is likely to be shaped by new legislation, court rules, and industry standards, many of which are still under discussion. Readers who understand the basic mechanics, the difference between commercial and consumer arrangements, and the disclosure rules that apply in their jurisdiction will be better placed to evaluate these arrangements as they arise.