How Litigation Funding Works ?

The terms of a litigation funding arrangement typically involve a funder agreeing to pay all of a claimant’s legal expenses to prosecute the claimant’s legal action to hearing.

To calculate the extent of a funder’s exposure to paying the legal costs of action an estimate of the costs of pre-trial procedures and the likely length of the trial is made so the funder can budget for the costs involved. The legal budget is drawn up by the claimant’s solicitors and needs to cover the costs of the proceedings, including counsel fees, expert’s fees and out of pocket expenses.

Litigation funding is not an open cheque book.  The funder’s commitment is generally restricted to an agreed legal budget that the claimant’s solicitors are expected to commit to so that funding is not exhausted before the claim is conducted.

A litigation funder customarily agrees to indemnify a claimant against liability for the defendant’s own legal costs should the claim be unsuccessful. These costs are called adverse costs and represent a significant risk of commencing legal proceedings because the court is likely to order costs against an unsuccessful litigant to compensate a successful defendant for the defendant’s own legal costs incurred.

A funder’s indemnity for adverse costs is not always a feature of litigation funding, however, it is a requirement of claims brought by liquidators or bankruptcy trustees. Insolvency practitioners are understandably reluctant to expose themselves to any risk of liability associated with litigation, including having to personally pay costs for claims that they choose to pursue on behalf of creditors.

The other reason why litigation funders provide indemnity for adverse costs is because in the case of an insolvent claimant the defendant may seek a court order that the claimant provide security for the defendant’s costs. In appropriate cases a court will order that a claimant provide security for costs, usually in the form of money paid into court or provided as a bank guarantee in favour of the defendant.

If a claimant seeks litigation funding it stands to reason that such claimants will seek a funding package that involves the funder putting up whatever security for costs are ordered. In the case of liquidators or bankruptcy trustees these litigants require full indemnity against all costs involved if a case is lost.