third-party funding
By Davy Karkason
Founding Attorney

Third-party funding occurs when a third-party investor who is not involved in the legal dispute agrees to cover all or part of the legal (and related) expenses of litigation or arbitration. In return, if the party involved is successful, the funder will receive a percentage of the amount awarded. While originally used in litigation, third-party funding agreements are being increasingly used throughout the world and have been seen more and more in commercial and investment arbitrations.

Disputes that May Utilize Third-Party Funding

There are a variety of disputes that may utilize third-party funding agreements, such as:

  • Breach of contract claims
  • Fraud claims
  • Trust claims
  • Insolvency claims
  • Intellectual property/patent infringement claims
  • Business defamation
  • Tax disputes
  • Shareholder disputes
  • Antitrust/competition claims
  • Professional liability claims
  • Class actions
  • And more!

When to Use a Third-Party Funding Agreement

Third-party funding agreements are often used when the claimant: 

  • Has suffered such damages that it can’t afford the litigation or arbitration process. 
  • Could potentially afford the expenses but wants to use the money and resources it has on running its business.
  • The claimant needs quick cash.

Is Third-Party Funding Legal?

Third-party funding is not always legal. It depends upon the jurisdiction involved and the laws and regulations of that jurisdiction. In an effort to increase access to justice for all parties, many jurisdictions now allow for third-party funding. This is because there are no costs associated with third-party funding. 

Generally, third-party funders operate on a contingency basis, recovering 25-50% of the final amount awarded. 

It’s important to note that while the case may be funded by a third party, it’s still between the attorney and claimant to choose what is the best course of action. 

While funders can be found across the world, they are mostly located in North America, Europe, and the Asia-Pacific region. 

Factors Funders Consider

Third-party funders won’t just shell out money for any case. They take certain factors into consideration when deciding whether they wish to be involved. Such considerations include:

  • The type of dispute
  • The amount of the dispute
  • The complexity of the dispute
  • The associated cost estimate
  • The ratio of the claim value to the costs
  • The legal team involved and each attorney’s experience
  • The jurisdiction involved
  • The procedural timeline
  • The solvency of the defendant
  • The probability of winning the claim

Obtaining Funding

When a party wishes to obtain funding, its legal team will generally prepare a detailed proposal, which answers many of the aforementioned considerations. After this, a list of third-party funders will be created. This can be done on your own or with the help of a third-party funding broker. 

Prospective third-party funders will then sign a non-disclosure agreement and review the claim. If they are interested, they will likely provide an outline of the terms of the agreement. The outline is reviewed and may be refined. After selecting a third-party funder, the parties will negotiate and the funding agreement will be finalized. The entirety of the process can last anywhere from a few weeks up to half a year. 

While third-party funding can be extremely beneficial, enabling more access to justice, it isn’t without some downsides. It can be expensive, you must disclose information about your case and your business, and you can lose some autonomy; while funders are usually prohibited from exerting any undue influence in the arbitration, they may still reserve the right of approval over the settlement.  

U.S. Counsel Services for Foreign Businesses 

If your business is located outside of the United States but you engage in U.S.-based operations, it’s critical that you seek legal counsel from an attorney who understands the complex issues involved. Whether you have ongoing legal issues related to a business expansion or are simply engaged in a singular transaction, the lawyers at Transnational Matters can assist with all of your American endeavors.

When it comes to foreign and domestic businesses, we can assist with your transactions and general corporate needs. Contact our experienced transnational litigation and arbitration attorneys today!

About the Author
As a lawyer and the founder of Transnational Matters, Davy Aaron Karkason represents numerous international companies and a wide variety of industries in Florida, the U.S., and abroad. He is dedicated to fighting against unjust expropriation and unfair treatment of any individual or entity involved in an international matter. Mr. Karason received his B.A. in Political Science & International Relations with a Minor in Criminal Justice from Nova Southeastern University. If you have any questions about this article you can contact Davy Karkason through our contact page.