Litigation Finance Explained: A Concise Guide To Third-Party Funding

Litigation finance—also known as third-party litigation funding—is a non-recourse investment where an external funder provides capital to cover legal costs in exchange for a portion of any recovery. Repayment occurs only if the case succeeds; if it is lost, the claimant owes nothing.

As litigation costs rise and access to capital becomes more constrained, third-party funding has emerged as a legitimate and increasingly institutionalized component of the global legal economy.

Two Core Litigation Funding Markets

Litigation finance operates across two main markets:

• Consumer Legal Funding: Provides individuals with risk-free cash advances while their personal injury or tort claims are pending.
• Commercial Litigation Finance: Supplies corporations and law firms with capital to pursue complex, high-value disputes such as intellectual property, antitrust, or international arbitration.

While pre-settlement funding companies like Express Legal Funding focus on consumer legal funding, the two categories serve distinct purposes within the broader litigation finance ecosystem. Both are grounded in non-recourse risk transfer, meaning repayment is contingent on the outcome of the case rather than guaranteed.

Consumer legal funding provides individual plaintiffs with immediate liquidity—typically to cover essential living expenses such as rent, utilities, and medical bills. This financial stability helps plaintiffs avoid the pressure to accept premature or undervalued settlements due to short-term hardship.

In contrast, commercial litigation finance fuels large-scale claims by supplying law firms and corporations with substantial capital to pursue complex, high-value disputes. This allows them to preserve operational resources and pursue strategic legal outcomes without diverting internal funds or impacting cash flow.

Historical Background

The modern litigation finance industry evolved from medieval English doctrines—maintenance, champerty, and barratry—which once prohibited third-party involvement in lawsuits. Their gradual repeal in jurisdictions such as the UK and Australia during the late 20th century paved the way for a legitimate funding model that enhances access to justice.

In the United States, litigation finance gained momentum in the early 2010s as courts, law firms, and institutional investors recognized its utility. Today, it is a multi-billion-dollar global industry, increasingly integrated into law firm operations and corporate finance strategies.

Consumer vs. Commercial Litigation Finance

Consumer legal funding helps individual plaintiffs maintain financial stability during litigation, while commercial litigation finance supports law firms and companies pursuing capital-intensive disputes without straining liquidity.

The Litigation Finance Process

1. Case Evaluation: Funders assess the merits, potential recovery, and enforceability of the claim.
2. Funding Agreement: A non-recourse contract outlines the capital amount, pricing, and repayment terms.
3. Capital Deployment: Funds are advanced to cover litigation or operational expenses.
4. Repayment: Upon a successful outcome, the funder is repaid from the proceeds; if unsuccessful, there is no repayment.

In commercial matters, the process may take months due to the complexity of due diligence and financial modeling.

Regulatory Landscape

Regulatory treatment of litigation finance varies widely across jurisdictions. Some U.S. states retain elements of champerty prohibitions, while others have introduced comprehensive frameworks.

• Nevada: Requires funder registration under NRS Chapter 604C.
• Maine: Governs consumer funding through the Legal Funding Practices Act.
• Federal Proposals: The Litigation Funding Transparency Act of 2021 and Protecting Our Courts from Foreign Manipulation Act of 2023 aim to increase disclosure in commercial cases.

The American Bar Association (ABA) and various state bar associations emphasize the importance of transparency, fiduciary responsibility, and full disclosure in third-party litigation funding arrangements.

Strategic Value

Litigation finance delivers measurable benefits across the legal and business spectrum:

• Capital Efficiency: Monetizes legal claims without debt.
• Access to Justice: Levels the playing field for under-resourced parties.
• Risk Management: Transfers financial risk to the funder.
• Litigation Independence: Enables claims to proceed on legal merit rather than financial capacity.

However, professionals should weigh cost implications carefully. Funder returns may reduce net recovery, and disclosure rules can create tactical considerations during litigation.

Conclusion: Litigation Finance—An Established Cornerstone

Litigation finance has matured into a sophisticated financial mechanism linking capital markets and the legal system. For law firms, businesses, and individual plaintiffs alike, it enhances liquidity, mitigates risk, and broadens access to justice.

Express Legal Funding continues to advance this model through its transparent, consumer-focused approach, providing non-recourse funding that enables claimants to maintain financial stability and pursue their cases confidently until they achieve fair resolutions with integrity.

This article was adapted from Express Legal Funding's full guide, "Litigation Finance Explained: How It Works & Is It Worth It?" available at expresslegalfunding.com/litigation-finance

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.