How dispute finance works

Dispute finance, or third party funding, is the process whereby a ‘funder’, which has no direct interest in a piece of litigation, pays the legal costs for one of the parties.

In return, the funder receives a return on their investment which is conditional on the success of the case and is paid out of the proceeds of the action.

It is usual for that return to be a multiple of the amount that was advanced, or a percentage of the proceeds, or some agreed combination of both. The amount of any return will reflect the risk involved, the amount of capital invested and the length of time the investment is at risk.

Portfolios

Traditionally, funders have financed single, isolated claims. Funding of a single claim carries a high degree of risk for the funder because if that claim is unsuccessful the funder will not recover its investment.

Multiple claims can be packaged into a portfolio and the financial risk for the funder is diversified across the book resulting in lower capital risk and therefore a lower return charged by the funder.

• A portfolio typically consists of a minimum of three claims
• The funding costs for a portfolio are lower due to the decreased risk profile relative to a single case
• Cases may be added into a portfolio over time and the funding facility can be adjusted accordingly. A framework agreement can be created with just one case
• A portfolio can comprise different types of cases and include low value claims as well as defence cases