Legal disputes can present substantial financial risks for businesses due to the significant expenses associated with litigation. However, disputes are often an unavoidable aspect of conducting business. This is where the use of litigation finance comes into play as a valuable legal tool, delivering considerable benefits to both businesses and their internal legal teams.

Litigation funding operates as a strategic asset, providing financial assistance to those involved in legal actions. This support allows them to navigate complex litigation or arbitration proceedings without compromising their financial stability. At Annecto Legal, we can assist clients in obtaining legal finance to address any potential legal disputes that may arise.

What is litigation funding?

Litigation funding, also known as third-party funding, is a financial arrangement where an external party provides funds to cover the costs of a legal case in exchange for a portion of the proceeds if the case is successful.

This type of funding is commonly used to support the costs associated with legal proceedings and may extend to covering expenses across portfolios of cases or deferring the costs linked to defending claims. External financing is a frequently utilised strategy by businesses to efficiently manage expenditures and optimise budgets. A diverse range of options is available, whether for individuals, SMEs or larger corporate entities.

Litigation funding is commonly used in commercial disputes, class actions, arbitration cases, and insolvency proceedings. It enables claimants—whether individuals, businesses, or law firms—access to justice without the financial burden or risk associated with litigation.

Litigation funding options

Litigation funding has become an essential tool for claimants and businesses to manage legal costs and risks. The following are the key litigation funding agreements available in England and Wales:

Before the event insurance (BTE Insurance)

When pursuing any type of litigation, you should investigate whether you already have the benefit of legal expenses insurance that may cover your legal costs. Insurance, such as home or business insurance, may contain terms which agree to cover the costs of commercial litigation. Where policies are limited in scope, it may be possible to use the cover in conjunction with other, after the event, insurance or alongside third party funding.

If you do not have a BTE policy in place which covers the costs of commercial litigation, Annecto Legal can offer a range of alternative commercial litigation funding policies.

Third party funding

One funding method that is commonly used for the commercial litigation process is third party funding. Third party funding acts as a form of non-recourse financing for litigation. Third party litigation providers take on the financial risk of litigation so that clients can pursue a legal claim without having to worry about the legal fees associated with it.

Third party litigation funding providers take on the risk of your litigation finance, freeing up your cash flow and shifting all the risk off your balance sheet.

In return for taking the risk, the litigation funder will typically seek a share of the proceeds in the region of a fifth to a third of any damages recovered. This means that you keep up to 80% of the reward, having taken none of the risk. This might be thought of as similar to a “joint venture”, whereby the litigation funder takes on the costs and risks of your project in return for a share of the profit. If the claim is unsuccessful, the funder will lose their investment.

Retainer Options

A damages based agreement (DBA), also known as a contingency fee agreement, is a type of arrangement made between a client and a solicitor in which the solicitor agrees to fund their case and share the risk of litigation. In return, the solicitor will be paid a percentage sum of the damages recovered as long as the client’s case is successful.

DBAs provide that, instead of being paid on a conventional hourly rate, the solicitor’s legal fees are only payable in the event that the case is successful. Therefore, these types of agreements allow clients the opportunity to pursue a case without having to worry about the solicitors’ fees associated with it. In some circumstances, however, fees for Counsel and other disbursements may still be payable by the client.

Conditional Fee Agreement (CFAs) are similar, in that the solicitor shares in the risk of the claim, but instead of the legal fees being based upon monies recovered in the claim, the solicitor is paid based upon the hours they worked on the case.

ATE insurance

After the event (ATE) legal expenses insurance is taken out after the event that has led to a dispute has taken place. ATE insurance can protect you from paying your opponent’s legal costs, should your claim not be successful.

ATE insurance is perhaps best thought as a form of ‘swap’: For either no upfront fee or a small upfront fee, the insurer takes on the risk of a potential adverse costs award. The client will have swapped their obligation to pay the defendants in the event of a loss, with the obligation to pay the insurer in the event of a win. This is generally an attractive swap as the client is likely to be in a better financial position following a win than following a loss, and the payment to the insurer will only be a percentage of the adverse costs, rather than the whole amount.

The actual amount the client will pay for the insurance will depend on how long it takes to settle the case: An early settlement and the client could pay as little as 10-20% of the amount insured (the adverse costs) as an ATE premium. If the case goes to trial, it is more likely to be in the 40% to 65% range (depending on the insurer and the case) of the amount insured.

Insurance for Disbursements, Counsel Fees and Solicitor’s Time Costs.

Some forms of ATE insurance can also be used to de-risk the claimant’s costs, rather than the opponent’s costs.

This can be a cost-effective way to manage the risks of litigation, particularly in lower-value claims where it might not be proportionate to involve a third party funder.

Hybrid Arrangements

The use of third-party litigation funding, CFAs and ATE insurance can sound complicated, but they are simply risk management tools and when used correctly, they can make all the difference to a commercial litigation case.

Understanding the full range of options and when to use them is important. It can be the difference between pursuing a claim succesfuly and failing to even get the case off the ground at all. Structuring the funding and insurance correctly will also have huge impact on what a claimant receives from any settlement, as opposed to what goes to lawyers, funders and insurers.

How can Annecto Legal assist with legal funding?

In commercial litigation, getting the right advice early without spending an excessive amount on legal fees is the best way to save money and protect your position.

Annecto Legal helps clients realise the value of their commercial disputes. We work closely with our clients to navigate the world of litigation funders, insurers and lawyers.

If you have been involved in a dispute, get in touch with an expert member of our team to find out which litigation cover is the right litigation funding option for you to reduce your commercial litigation costs.