Ten years ago, the UK litigation funding industry was in its infancy. Since then its growth has been phenomenal, particularly following the Jackson Reforms which came into effect in 2013, and which affirmed the importance of third-party funding as a means of access to justice for litigants who might otherwise have been unable to fund the costs of going to court from their own resources.

The growth has been matched in the arbitration sphere, particularly in international commercial arbitration and investment treaty disputes. This article examines how the industry works and why its success has generated so much outside investment, and how that investment translates into returns for the investors concerned.

Third-party funding is the mechanism by which an outside funder underwrites the costs of parties to litigation and arbitration. Because the funder will want a cash recovery to generate a return on its money, the funded party will almost invariably be the claimant. It is high risk and high reward.

First, the risk. Funders agree to pay the claimant’s costs on a non-recourse basis. If the claim fails, they recover nothing. This makes funding a high risk investment. But before an investment is made, the funder will carry out a thorough analysis of the claim, both as to liability and quantum of loss and as to the ability of the defendant/respondent to pay whatever is adjudged to be due. To do this, the successful third-party funders have their own teams of highly experienced litigation and arbitration lawyers, all of whom will have practised in major UK and international law firms, or at the Bar. So while the investment is high risk, that risk will have been exhaustively evaluated before the funder takes it on.

Apr-Jun 2016 issue

Vannin Capital