Third Party Funding Agreements: What UK Businesses Need to Know

Whether you’re facing an expensive court case, considering a bold expansion, or just eager to ease the strain on your company’s cash flow, the idea of someone else footing the bill can sound pretty appealing. That’s where third party funding comes in - and it’s becoming an increasingly common tool for businesses across the UK, especially as legal costs and commercial risks rise. But, like any strategic move involving your company’s finances and risk, third party funding agreements come with their own complexities and legal nuances.

If you’re curious about how third party funding might apply in your business, or you’re weighing up your funding options, it’s important to understand what these arrangements actually are, the risks and rewards involved, and what to look for before you sign on the dotted line.

In this guide, we’ll break down everything UK business owners need to know about third party funding so you can make confident, informed decisions. Let’s dig in!

What Is Third Party Funding?

At its core, third party funding is when someone who isn’t directly involved in a legal dispute, project, or business venture provides financial backing to one of the parties. Most commonly in the UK, it’s used to help fund the legal costs of lawsuits or commercial arbitrations - for example if your company needs to bring or defend a big legal claim, a third party funder might pay your lawyers’ fees in return for a share of any damages or a success fee if you win.

Third party funding is also cropping up in other business contexts - from supporting high-growth startups, to bankrolling major projects, or helping companies recover debts. In short, wherever businesses face big, upfront costs that could lead to high rewards, third party funding may be an option.

In return, the funder usually gets:

• A share of any amount awarded or recovered if the case is won or the project is a success
• Nothing if you lose (though you usually still owe your professional advisers for their work)
• Sometimes, extra control or oversight over strategy, reporting, or settlement decisions

But before you jump at the chance to shift your risk - there’s a lot you need to consider before entering these agreements.

How Does Third Party Funding Work in the UK?

The third party funding landscape in the UK is mature but still developing, especially around transparency and regulation. Traditional funders include specialist litigation funders and private investment firms, but new players are emerging all the time, including alternative finance platforms and even insurers in some situations.

Here’s how the process often works:

• You contact a third party funder and present your case, dispute, or project
• The funder undertakes due diligence, assessing risk, likely costs, and the prospects of success
• If they’re happy, you enter into a third party funding agreement covering the details: how much funding is provided, how it’s paid, reporting requirements, and what the funder gets if the project succeeds
• The funder pays your costs according to the agreement, while you - or your lawyers or project team - keep them updated
• If you succeed, the funder receives a pre-agreed percentage, multiple, or fixed amount out of the proceeds. If you lose, they might get nothing, or be able to claw back their costs in certain circumstances (so always read the fine print!)

Litigation funders and arrangements for legal disputes are subject to some self-regulation under organisations like the Association of Litigation Funders (ALF), but there’s no overarching statutory regulation just yet, so it’s vital to have a robust, professional contract in place.

Why Would a UK Business Consider Third Party Funding?

Third party funding can offer some big benefits for UK businesses of all shapes and sizes. Reasons to consider it include:

• De-risking expensive legal action. Taking a claim to court or defending your company can be financially intimidating - third party funding lets you share or shift that risk to a specialist.
• Level playing field. Smaller firms or under-resourced companies can face off with bigger opponents with deep pockets, knowing they have backing behind them.
• Freeing up working capital. Funding arrangements mean your money stays in your business instead of locked up in litigation or big project outlays.
• Managing cashflow and budgeting. With a funder paying costs, your business avoids the spikes and surprises that can come with major disputes or projects.
• Unlocking opportunities. Sometimes, funding arrangements let you launch claims or take on projects you wouldn’t have been able to afford otherwise.

Used wisely, third party funding can be a smart piece of your overall risk management and growth strategy - but it’s definitely not a one-size-fits-all solution.

What Types of Third Party Funding Exist?

There are several main types of third party funding available to UK businesses, and the right one for you depends on your needs, sector, and strategic goals. Here are some of the most common:

1. Litigation Funding

This is the traditional third party funding model. A funder pays the legal fees and expenses for a court case or commercial arbitration, usually in return for a percentage of any money you win or recover. If you lose, the funder may lose their money - so they carefully vet the strength of your case before agreeing to fund it.

Litigation funding is particularly popular in sectors like construction, financial services, and commercial disputes, where claims can run into the millions.

2. Debt Recovery Funding

If your business has big unpaid invoices or debts, some funders specialise in covering the upfront costs of chasing that money down - often in return for a share of what’s recovered. This can help unlock cash otherwise stuck in the credit cycle.

3. Project or Business Venture Funding

Here, a funder backs a particular business venture, project, or even a start-up’s legal challenges, with payment often structured as an equity stake or revenue share. This is often more like traditional investment, but may have unique features or risk-sharing elements. Legal documents such as Share Subscription Agreements or SAFE Notes may also play a role here.

4. Insurance-Backed Litigation Funding

Sometimes, legal expenses insurance or “after the event” (ATE) insurance is combined with third party funding. These help cover not only your costs, but also the risk of paying the other side’s legal costs if you lose.

What Are the Legal Risks and Pitfalls of Third Party Funding?

Like anything involving external finance, third party funding comes with strings attached. Some of the key risks to watch out for include:

• Loss of control. Funders may want input on strategy or settlement decisions, or insist on regular reporting that can slow things down or compromise confidentiality.
• Costs if you lose. Many deals promise “no win, no fee” structures, but not all - always check for so-called “clawback” clauses or liability for some costs or expenses no matter what happens.
• Conflicts of interest. In some cases, your commercial objectives may clash with a funder’s wish to secure a quick return or keep costs down, especially when it comes to settling disputes early or holding out for more.
• Disclosure risks. You’ll usually need to share confidential financial, legal, and business information with a funder. If your agreement isn’t watertight, you could risk leaks or even waive legal privilege.
• Enforceability and regulation. While the UK is generally supportive of third party funding (and courts allow it in most scenarios), contracts can still be challenged for public policy or fairness reasons - so robust drafting is essential.

The bottom line? You’ll need a comprehensive contract - not an off-the-shelf template. This should cover everything from who pays what, when, and how, through to reporting, conflicts, confidentiality, termination rights, and dispute resolution. Start with professional legal advice before committing.

Key Points to Include in a Third Party Funding Agreement

Each arrangement can be unique, but most third party funding agreements should address the following essentials:

• Details of funding: How much is being provided, and what costs are covered?
• Repayment/Return structure: Is the funder entitled to a percentage, fixed sum, or other reward? When and how is it paid?
• Control and decision-making: What involvement does the funder have in strategy, settlements, or other key decisions?
• Confidentiality and privilege: How will your information be kept safe and privileged, especially if you’re sharing legal advice or documents?
• Termination rights: How can the agreement be brought to an end? What happens if you or the funder want out?
• Risk allocation: Who pays if costs go up, or you lose the case or project? Are there any hidden payback or penalty clauses?
• Dispute resolution: What process applies if you fall out with your funder?

If your arrangement relates to funding litigation, check that it complies with the Civil Justice Council’s guidance and, where possible, aligns with the Association of Litigation Funders’ code of conduct - these help ensure fairness and enforceability.

What Laws and Regulations Apply to Third Party Funding in the UK?

Third party funding isn’t directly regulated by a single Act of Parliament, but several legal principles and frameworks apply:

• Self-regulation via ALF: The Association of Litigation Funders has its own code of conduct regarding capital adequacy, transparency, and funder conduct. Not all funders are members, so check carefully.
• Public policy on champerty and maintenance: While the old doctrines that banned “morally improper” funding deals are now largely historical, courts can still intervene if a funding deal is unfair, oppressive, or contrary to justice.
• Legal professional privilege and confidentiality law: Third party funding raises unique challenges around client confidentiality and privilege, especially if sensitive information is disclosed to funders. Agreements must be professionally drafted to protect this.
• General contract law: As with any business contract, your agreement needs to be unambiguous, complete, and enforceable - you’ll want to include robust contract clauses to protect your interests.

It’s wise to seek legal advice when negotiating or reviewing a funding agreement to ensure you’re not breaching the Consumer Rights Act 2015 or data protection laws if consumer data is involved.

How Can You Protect Your Business Before Entering a Third Party Funding Agreement?

If you’re considering third party funding, get yourself protected from day one by:

• Carrying out rigorous due diligence on the funder (track record, financial strength, independence, and regulatory history)
• Clarifying your commercial goals and exit plans before you start negotiating
• Insisting on a clear, non-ambiguous contract - avoid generic templates or “one size fits all” agreements
• Making sure confidentiality and privilege are properly addressed in the contract wording
• Having a risk management and reporting process in place: who will liaise with the funder, and how will you keep them updated?
• Seeking legal advice before signing any agreement or disclosing confidential business information

If you’re also expanding or restructuring your business or team as part of a new funding deal, make sure you’re up to speed with associated restructuring legal steps and register the right company structure from the outset - as your funding arrangement can impact company ownership, risk and control.

What Alternatives to Third Party Funding Should You Consider?

If you decide that third party funding isn’t for you - or funders aren’t biting - there are several other ways to finance costly litigation or projects, including:

• Conditional Fee Agreements (CFAs): Also known as “no win, no fee” deals with your lawyers - your solicitors only get paid if you win or settle.
• After-the-Event (ATE) Insurance: Insurance covers the costs of losing a case, including the opponent’s legal fees.
• Litigation loans or credit lines
• Equity finance: Raising capital by selling shares in your business - for example through a share subscription agreement or SAFE note.
• Crowdfunding: In some cases, public crowdfunding or litigation crowdfunding can help, subject to strict rules and regulations.

Each alternative carries its own pros and cons around cost, control, and speed, so get advice on the right fit for your business goals.

Key Takeaways

• Third party funding can help your business manage risk, access justice, or seize opportunities without putting your working capital at stake - but it’s not suitable for everyone.
• These arrangements are complex and come with unique risks around control, confidentiality, costs, and enforceability. It’s crucial to understand the terms and get an agreement that truly protects your interests.
• The UK’s third party funding industry is largely self-regulated. Always carry out due diligence on funders and rely on a clear, robust legal contract.
• Don’t use off-the-shelf templates - a professionally drafted funding agreement gives you confidence on return structures, risk allocation, confidentiality, and dispute resolution.
• There are many alternatives to third party funding, from “no win, no fee” lawyer deals to insurance and crowdfunding. Weigh your funding options with tailored legal advice before taking action.

If you have questions about third party funding, want to review a funding agreement, or need guidance on legal funding options that best protect your business, we’re here to help. You can reach our friendly team at 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat.