Third-party litigation funding – also called litigation finance or legal funding – is an arrangement in which an investor who is not a party to a lawsuit provides money to a litigant or a law firm. In return, the funder receives a share of any settlement or judgment. The idea is simple. The mechanics, the paperwork, and the rules that surround it are not.
This guide explains how a funding arrangement is typically assembled, how money moves when a case resolves, and how different jurisdictions treat the practice. It stays at the level of process and regulation, because the terms of any individual deal depend heavily on the case, the jurisdiction, and the agreement itself.
What third-party litigation funding actually is
The U.S. Government Accountability Office (GAO) defines third-party litigation financing as an arrangement where a funder that is not a party to a lawsuit agrees to provide funding to a litigant, usually a plaintiff, or to a law firm, in exchange for an interest in the potential recovery. In its 2023 report on the market, the GAO describes the arrangement as separate from the underlying claim: the funded party remains the one pursuing the case.
The defining feature is that the funding is generally non-recourse. If the claim is unsuccessful, the recipient typically does not have to repay the amount advanced. That single characteristic separates litigation funding from a conventional loan, and it shapes almost everything else about how these deals are priced and structured.
Funders are usually private firms that raise capital from investors such as pension funds and endowments, according to the GAO. The funder is not buying the claim itself in most structures; it is providing the resources for the claim to proceed while holding a contractual right to a share of the proceeds if it succeeds.
Two markets under one label
It helps to split the industry in two, because commercial and consumer funding serve different clients and use different money for different purposes. The GAO treats these as distinct markets, and the distinction matters for regulation.
| Feature | Commercial funding | Consumer funding |
|---|---|---|
| Typical recipient | Corporate litigant or law firm | Individual claimant |
| What it pays for | Legal fees, expert costs, case expenses | Living expenses such as rent or medical bills |
| Typical size | Often in the millions | Typically under $10,000 |
| Common disputes | Contract, antitrust, intellectual property, arbitration | Personal injury and similar claims |
Source: U.S. Government Accountability Office, “Third-Party Litigation Financing: Market Characteristics, Data, and Trends” (GAO-23-105210, published December 2022, publicly released January 2023).
Commercial funding is the larger and faster-moving market. In 2025, the litigation finance advisory firm Westfleet Advisors counted 39 active funders in the United States, committing roughly $2.8 billion across 346 new deals, as reported in March 2026. That followed two years of declining commitments, which gives a sense of how cyclical the market can be.
How a funding deal comes together
Most transactions follow a similar arc, whether the claim is a single commercial dispute or a portfolio of cases. The pace varies with complexity, but the sequence is fairly consistent.
Screening and confidentiality
A claimant or its lawyer usually opens with a short description of the case and a rough figure for the capital needed. Before substantive discussions, funders typically require a non-disclosure agreement, as the litigation funder Omni Bridgeway explains in its overview of the process. The NDA is not a formality: it helps preserve attorney work-product protection over the sensitive information shared during review.
Due diligence and case selection
Once confidentiality is in place, the funder asks for more detail – the factual background, the legal theories, preliminary damages estimates, the jurisdiction, and the proposed budget. The funder is assessing four broad questions: the legal merits, the likely duration of the case, the damages reasonably available, and whether a judgment can actually be collected.
Funders describe themselves as highly selective. The GAO found that demand grew between 2017 and 2021, with funding requests up about 27 percent and new funding agreements up about 19 percent, but it also noted that funders choose only the cases they consider most meritorious, since their return depends on success. One analysis of the report put the share of requests that turn into an agreement at roughly 5 percent, though the figure is an estimate rather than a universal benchmark.
The term sheet and the funding agreement
If the funder is interested, it typically issues a non-binding term sheet that outlines the amount and timing of capital, the return structure, and the repayment waterfall. Term sheets commonly come with a period of exclusivity while the funder completes diligence. Law firm guidance on these transactions suggests the full process, from first discussions to signed documents, often runs two to three months.
Diligence and negotiation usually run in parallel. The funder may engage outside experts for specialised areas of law, review financial records, and search for liens that could take priority over its repayment. The definitive agreement then sets out the funding schedule, the conditions for each advance, and what happens if the case changes materially before it resolves.
Deployment and monitoring
Capital is often advanced in tranches tied to milestones rather than as a single lump sum. Because the money is at risk, funders typically require regular case updates and a clear record of how the funds were used. Funding agreements also commonly provide for payments to be routed through a trust account, so proceeds are distributed in the agreed order when the case concludes.
How the funder gets paid: the payment waterfall
At the centre of every funding agreement is the waterfall – the order in which case proceeds are distributed among the claimant, the law firm, and the funder. A first and near-universal step is the return of the funder’s deployed capital. Beyond that, the structure varies widely.
Return structures generally fall into a few familiar forms, and the same deal may combine them. The table below summarises the common patterns; which one applies depends on the risk and duration of the specific case.
| Return structure | How the funder is paid | Typical context |
|---|---|---|
| Multiple of invested capital | A set multiple, such as 2x the amount deployed | Often steps up the longer the case runs |
| Percentage of recovery | A pre-agreed share of the proceeds | Common in class and collective actions |
| Target rate of return | An annualised return on deployed capital | Sometimes used in larger commercial matters |
Source: published term-sheet and waterfall explainers from litigation funders and law firm transaction guides. These are common patterns, not fixed rules; every agreement is negotiated individually.
It is worth noting how the waterfall behaves when a case resolves well. The priority steps matter most when a recovery is modest and proceeds may be exhausted before every stage is reached. When a case resolves for substantially more than the funded amount, later steps allow the claimant to “catch up” and collect a larger share of the total.
The non-recourse trade-off
Because the funder absorbs the loss if a claim fails, the cost of capital is generally higher than a conventional loan. That is the mechanism, not a judgment about it: the funder is paid for taking on risk that the recipient would otherwise carry. The GAO framed the trade-off plainly in both directions – funding can help underfunded plaintiffs pursue meritorious claims, while also introducing a cost that claimants weigh against other options.
Non-recourse funding also carries accounting implications. Because the recipient is not obliged to repay on failure, some recipients treat the capital differently from debt on their balance sheets. Whether that treatment applies depends on how the arrangement is structured and on the relevant accounting rules.
Who sets the rules
There is no single global rulebook for litigation funding. The GAO found that the industry is not specifically regulated under U.S. federal law, though some states regulate consumer funding with limits on fees and other consumer protections. A patchwork has since expanded: several states enacted disclosure, registration, or foreign-funding restrictions in 2024 and 2025, and at least one federal bill targeting disclosure in large coordinated proceedings was introduced in 2026. The U.S. Judicial Conference’s Advisory Committee on Civil Rules created a subcommittee in October 2024 to examine whether uniform federal disclosure rules are warranted.
In the United Kingdom, a 2023 Supreme Court decision held that litigation funding agreements in which the funder’s fee is calculated as a share of damages fall within the statutory definition of a damages-based agreement, subject to strict rules on enforceability. Many funders responded by restructuring fees as a multiple of invested capital. The Civil Justice Council’s June 2025 final report recommended reversing that outcome through a “light touch” statutory regime that would include disclosure requirements and a prohibition on funder control of litigation. In the European Union, the European Parliament backed a proposed funding regulation in 2022, a Commission report followed in March 2025, and the Commission declined to adopt the proposal in November 2025, leaving national rules in place.
International arbitration has moved in a different direction. The ICSID arbitration rules, amended with effect from 1 July 2022, introduced an express obligation for parties to disclose third-party funding, including the name and address of the funder, so that conflicts of interest can be identified. That obligation is ongoing and updates must be filed as arrangements change. Across borders, the practical reality is that disclosure standards differ widely, which is one reason following international legal coverage of funding developments can help parties anticipate how a dispute may be treated in a given forum.
Who controls the lawsuit
A recurring theme in funding agreements and regulations is control. The prevailing model keeps the funded party as the party in interest, with the funder in a passive, financial role. Regulatory guidance reflects that expectation. The UK’s Solicitors Regulation Authority, for example, has published guidance on using or arranging third-party litigation funding that sets out what firms must assess before entering an arrangement, including conflicts, capital adequacy, confidentiality, and the handling of privileged information.
Several jurisdictions now write that principle into statute. Some state laws prohibit funders from directing litigation strategy, appointing or changing counsel, or settling a claim, and a number of funding agreements address the point contractually. Where a funder is granted approval rights over a settlement, that term tends to attract scrutiny, because it can affect how decisions are made.
Frequently asked questions
Is third-party litigation funding a loan?
Usually not, in the legal sense. The funding is generally non-recourse, meaning repayment depends on the outcome of the case. If the claim fails, the recipient typically owes nothing. That structure is why many jurisdictions and courts treat funding differently from lending, although some arrangements are structured as loans or purchases of proceeds.
What happens if the case loses?
Under a standard non-recourse arrangement, the funder loses the capital it deployed and receives no return, and the recipient has no repayment obligation. The agreement may still address exceptions such as fraud or a breach of the recipient’s covenants.
Does the funder control the lawsuit?
Typically not. The funded party generally remains in control of strategy and settlement. Many agreements, and a growing number of statutes, restrict funders from directing litigation decisions. The degree of influence a funder may have is one of the most closely negotiated points in any agreement.
How long does it take to arrange funding?
It depends on the complexity. Law firm guidance suggests the process from first discussions to signed documents often takes about two to three months, with the diligence period alone commonly running around a month. Portfolio deals and cross-border matters can take longer.
Does funding have to be disclosed?
It varies. There is no universal disclosure requirement. In the United States, the GAO found no nationwide requirement in federal litigation, though individual courts and a growing number of states require disclosure in certain cases. In international arbitration under the ICSID rules, disclosure is mandatory. In the UK and many other jurisdictions, general disclosure is not required.
Is third-party litigation funding legal?
It is widely permitted across major commercial jurisdictions, subject to conditions that differ from place to place. Once treated as unlawful maintenance or champerty, funding is now generally accepted in the United States, the United Kingdom, Australia, and elsewhere, though the rules governing disclosure, fees, and funder conduct continue to evolve.
The bottom line
Litigation funding works by shifting the cost and the risk of a legal claim onto an investor who is paid only if the claim succeeds. Everything else – the NDA, the diligence, the term sheet, the waterfall, the disclosure rules – exists to manage the uncertainty that comes with that bargain. The model is neither uniform nor static: the rules differ by jurisdiction and are still being written. For anyone weighing funding, the useful move is to read the specific agreement and understand the rules of the specific forum, rather than rely on how the arrangement worked somewhere else.
