Large commercial disputes, collective actions, and international arbitrations can run for years and cost millions before any recovery reaches the party bringing the claim. The costs of expert witnesses, document review, counsel, court fees, and the risk of paying an opponent’s costs all fall due long before a judgment or settlement does. That timing gap is the central financial problem in complex litigation, and it has produced a set of distinct financing tools that law firms, claimants, and specialist investors use to bridge it.
This article explains where the money goes in a large case, how the main funding mechanisms work, how returns are structured, and how regulation differs between the United States, the United Kingdom, and the European Union. It stays at the level of mechanics rather than any individual matter.
Where the money actually goes
A complex case is expensive because of what it requires, not just because of lawyer time. Disclosure in commercial litigation can involve millions of documents; expert evidence on damages, causation, and market definition is often required; and cases can intersect with parallel regulatory or criminal proceedings. The US Government Accountability Office (GAO), in its 2022 review of third-party litigation financing, noted that commercial funding arrangements in the United States typically involve amounts in the millions of dollars and are used largely to cover litigation costs and expenses, whereas consumer funding is usually far smaller and used for living costs.
Those costs also arrive in stages. Pleadings, early expert work, disclosure, mediation, trial, and any appeal each draw down capital on a different timetable. A funder or law firm therefore has to plan not only the total budget but the sequence of payments – which is one reason funding is increasingly arranged at the outset rather than as a mid-case rescue measure.
The main ways a large case gets funded
There is no single funding method. Most large matters combine two or more of the mechanisms below, and the mixture depends on the client’s balance sheet, the jurisdiction, and the strength of the claim.
| Mechanism | Source of capital | How the provider is repaid | Typical use |
|---|---|---|---|
| Hourly billing | Client | Fees billed as work proceeds, regardless of outcome | Clients with capital and a lower appetite for funding risk |
| Conditional fee agreement (CFA) | Law firm | Base fee, plus a success fee, only if the case succeeds | Contentious matters where the firm shares risk; caps vary by case type |
| Damages-based agreement (DBA) | Law firm | An agreed percentage of sums recovered if success criteria are met | Permitted across most civil claims in England and Wales, subject to statutory caps |
| Third-party single-case funding | Specialist funder | A multiple of capital invested, a percentage of recovery, or both – only on success | Large commercial claims, arbitration, and collective actions |
| Portfolio / law firm funding | Specialist funder | Return paid from fee income and recoveries across several cases | Firms carrying long, capital-intensive case portfolios |
| Legal expenses / ATE insurance | Insurer | A premium, sometimes deferred and payable on success | Covering adverse costs and disbursements |
Compiled from guidance published by the Solicitors Regulation Authority, the Damages-Based Agreements Regulations 2013, the UK Civil Justice Council’s 2025 review of litigation funding, and the US GAO’s 2022 report. Caps and premium structures are jurisdiction-specific and subject to change.
Third-party litigation funding, step by step
Third-party litigation funding is a non-recourse arrangement: an investment firm pays some or all of a claim’s legal fees and costs in exchange for a return paid from the proceeds if – and only if – the claim succeeds. If the claim fails, the funded party generally does not repay the funder. The GAO described this as a core feature of the model, distinguishing it from a conventional loan.
The typical sequence is straightforward. The funder receives a request and performs its own due diligence on the merits, the likely recovery, and the defendant’s ability to pay. If it proceeds, the funding agreement sets out the commitment amount, the return structure (often a multiple of invested capital, a percentage of recovery, or a combination), the drawdown schedule tied to phases of the case, and provisions on control and termination. Because funders are repaid only on success, they tend to be selective; the GAO found that only a small fraction of cases seeking commercial funding are ultimately funded.
Funding can cover a single case, several cases, or a whole portfolio. Portfolio and facility-style arrangements allow drawdowns tied to each stage of litigation, which spreads risk across matters and can make pricing more predictable. The US market is estimated by industry analysts to commit billions of dollars a year to new deals; one widely cited market report counted 39 active funders and roughly $2.8 billion in new commitments across 346 new deals in 2025, though figures vary by methodology and should be read as estimates rather than a definitive total.
Financing at the law firm level
Increasingly, capital is provided to the firm rather than to a single claim. Under portfolio or law firm funding, a funder advances money against the firm’s anticipated fee income across a group of cases, commonly three or more. This can cover operating expenses while the cases run, effectively converting a purely contingent matter into a hybrid one, and the capital is generally non-recourse to the firm.
This model responds to a real cash-conversion problem. Claimant-side firms often carry long timelines between outlay and recovery, and the cost intensity of complex work has risen. Portfolio funding lets a firm invest in people and infrastructure without constraining client strategy or relying solely on partner capital. Industry commentary has described law firm funding as a steadily developing segment of the market, supported by institutional capital and used across commercial litigation, arbitration, enforcement, and collective actions.
Because the sums involved can be substantial and the cash cycles long, the role of external capital at claimant firms has been examined in recent industry reporting, which looks at how financing structures sit alongside a firm’s own resources when it carries a large portfolio of complex cases.
Insurance and the cost-shifting problem
In jurisdictions where the losing party can be ordered to pay the winner’s costs, the downside risk of litigation is not just a party’s own spending. After-the-event (ATE) insurance is designed to cover that exposure. It is typically purchased after a dispute arises and can cover an opponent’s costs, a party’s own disbursements, or both, depending on the policy.
Premiums reflect the insurer’s risk assessment and are commonly quoted as a percentage of the sum insured or as a percentage of costs incurred, in the region of 30 to 45 percent according to legal guidance – though this varies widely and can be higher for novel or high-risk matters. Since 1 April 2013, ATE premiums in England and Wales have generally not been recoverable from the losing party, save for a small number of excepted categories, which means the cost of the policy usually sits with the funded party or is built into the overall funding budget.
Insurance interacts with the rest of the funding stack. Some third-party funders expect ATE cover to be in place so that adverse costs are addressed, and courts have in certain circumstances treated a suitably worded ATE policy as provision of security for costs. The exact position depends on the policy terms and the applicable rules.
Regulation: three different approaches
The legal framework for funding is not uniform, and the differences matter for how a case is structured.
United States. Federal law does not specifically regulate third-party litigation financing as an industry, according to the GAO. Some states regulate consumer funding, for example by limiting fees or interest, and courts have in some instances required disclosure of funding arrangements, but there is no nationwide disclosure requirement. The GAO also identified persistent gaps in market data, including the absence of reliable figures on funders’ rates of return and total amounts deployed.
United Kingdom. In 2023 the UK Supreme Court held, in R (PACCAR) v Competition Appeal Tribunal, that certain litigation funding agreements providing for a percentage of damages were a form of damages-based agreement, which called the enforceability of many such agreements into question. In June 2025 the Civil Justice Council published its final report on the review of litigation funding, making 58 recommendations. These included reversing the effect of PACCAR by legislation, replacing self-regulation with a “light-touch” statutory scheme, and applying additional protections to consumer and collective claims – such as independent legal advice, standard agreement terms, and court consideration of whether a funder’s return is fair, just, and reasonable. The Council rejected caps on funders’ returns.
European Union. As of 2026 there is no comprehensive, harmonised EU regulation of third-party funding. The European Parliament issued recommendations on responsible private funding of litigation in 2022, and the European Commission conducted a mapping exercise of member-state practices in 2025 before deciding not to propose EU-level legislation at that stage. Article 10 of the Representative Actions Directive (EU) 2020/1828 addresses funding in consumer representative actions specifically.
Why the market keeps expanding
Several forces are pushing in the same direction. Litigation volumes and the cost of pursuing and defending disputes have risen, and a single large commercial dispute can consume a legal budget over several years with uncertain timing. For corporate claimants, non-recourse funding can preserve operating capital, move litigation spending off the income statement, and shift downside risk to a third party while allowing the claimant to retain counsel of its choosing.
Funding is also being used for more than paying bills. Monetisation arrangements allow a party to convert part of the expected value of a pending claim, judgment, or arbitration award into cash sooner, which can be redeployed into the business. Market-size estimates vary considerably between research firms – some place the global litigation funding market in the low-to-mid tens of billions of dollars for 2026, and forecasts through the early 2030s diverge – so any single figure should be treated as an estimate rather than a settled fact.
Questions to weigh before financing a case
- What does the funding actually cover? Fees, disbursements, adverse costs, or a combination.
- How is the return calculated? A multiple of invested capital, a percentage of recovery, or both – and when is it triggered.
- What control does the funder have? Terms on settlement approval, case strategy, and termination vary by agreement and jurisdiction.
- What happens if the case loses? Non-recourse funding generally means no repayment, but the precise protection depends on the contract and any insurance.
- Is the arrangement permissible and disclosable? Rules on enforceability and disclosure differ by jurisdiction and by whether the claim is commercial, consumer, or collective.
Frequently asked questions
What is third-party litigation funding?
It is an arrangement in which an investor that is not a party to a lawsuit provides capital to fund the claim in exchange for a return paid from proceeds if the claim succeeds. It is typically non-recourse, meaning the funded party does not repay the capital if the claim fails.
Is litigation funding the same as a loan?
Generally, no. Because repayment usually depends on the outcome, commercial third-party funding is structured as a non-recourse investment rather than conventional debt, although some portfolio arrangements have features that analysts treat more like financing facilities.
Who pays if the case loses?
Under a typical non-recourse arrangement, the funder absorbs its investment. The funded party may still face adverse costs if it loses in a jurisdiction where the losing side pays the winner’s costs, which is why ATE insurance is often part of the structure.
Is litigation funding regulated?
It depends on the jurisdiction. There is no industry-specific federal regulation in the United States, some states regulate consumer funding, the United Kingdom is moving toward a light-touch statutory framework following the Civil Justice Council’s 2025 recommendations, and the EU has not adopted comprehensive harmonised rules as of 2026.
Can a law firm use funding across more than one case?
Yes. Portfolio and law firm-level funding arrangements commonly cover several matters at once, secured against anticipated fee income, which spreads risk and can smooth a firm’s cash flow while long cases run.
As disputes grow larger and more cross-border, the practical question for most firms is less whether external capital exists and more how to structure it so that risk, control, disclosure, and recovery are allocated clearly from the beginning. Litigation finance has settled into a set of recognisable instruments used alongside insurance, settlement strategy, and balance-sheet planning – and understanding their mechanics has become part of ordinary case preparation rather than an exceptional step.
