A recent Reuters report concerning a law firm involved in the Johnson & Johnson baby powder litigation suing its own litigation funders has drawn attention to a growing issue in complex commercial disputes. While the case itself is overseas, the underlying themes are highly relevant to businesses operating in England and Wales.
Litigation funding is now a mainstream feature of commercial litigation. It allows companies to pursue substantial claims without diverting working capital. However, funding arrangements are commercial contracts. When the commercial expectations of funder and claimant diverge, the funding agreement itself can become the subject of dispute.
For directors, this is not simply a legal technicality. It is a governance and risk management issue.
What is Litigation Funding in England & Wales?
Third party litigation funding involves an external funder agreeing to finance some or all of the legal costs of a claim in return for a share of any damages recovered. It often operates alongside conditional fee agreements, damages based agreements and after the event insurance.
The legal framework has evolved in recent years. The Supreme Court’s decision in R (PACCAR Inc) v Competition Appeal Tribunal [2023] UKSC 28 prompted widespread review of funding agreements across the market, particularly where returns were calculated by reference to damages recovered. That decision demonstrated that funding documentation is not immune from statutory scrutiny.
In practical terms, litigation funding is lawful and well established in England & Wales. The key risk does not lie in the concept itself, but in the structure of the agreement.
Why do funding relationships break down?
Most funding disputes arise from predictable commercial tension.
Settlement is often the first pressure point.
- A claimant may wish to accept a commercial offer that secures certainty.
- A funder, whose return depends on the size of the recovery, may prefer to continue.
- Even where the agreement preserves claimant control, economic leverage can influence decision making.
- If expectations have not been aligned at the outset, disagreement can escalate quickly.
Termination provisions are another common trigger.
- Funding agreements typically allow withdrawal if prospects deteriorate or reporting obligations are breached.
- A termination at a late stage in proceedings can leave a company exposed to adverse costs risk and procedural disadvantage.
- What initially appeared to be risk sharing can shift abruptly back to the business.
Security for costs applications also create friction.
- Under the Civil Procedure Rules, a defendant may apply for security where there is reason to believe a claimant cannot meet a costs order if unsuccessful. The presence of litigation funding can become part of that discussion.
- Although funding does not automatically justify security, courts may examine the financial reality behind the claim.
There are also disputes about priority and distribution. Funding agreements usually set out how damages are divided between solicitors, funders, insurers and the claimant. If recoveries fall short of projections, or enforcement becomes more complex than anticipated, the allocation of proceeds can become contentious.
The Director perspective: risk beyond the claim
For directors, entering into a funding arrangement is a strategic decision. It should not be viewed as simply a legal cost management exercise.
A funding agreement may create contingent obligations. It may affect solvency analysis if the litigation fails. It may alter the balance of control in negotiations. If matters later deteriorate, office holders or creditors may scrutinise how the decision was made.
Good governance requires a clear record of the advice received, the risks assessed and the commercial rationale for entering into the arrangement. Where funding is properly structured and documented, that record will usually demonstrate a rational and defensible decision.
Is the UK market seeing more funding disputes?
As the litigation funding market matures, disputes about funding agreements are likely to become more visible. The sums involved are often substantial. The documentation is heavily negotiated. The commercial incentives are not always aligned.
That does not mean funding is inherently problematic. It remains an effective tool for many businesses. The lesson from high profile disputes is simply that funding agreements require the same careful attention as any other significant commercial contract.
A practical conclusion
Litigation funding can transform a company’s ability to pursue a claim. It can protect cash flow and manage risk. However, it also introduces a new commercial counterparty whose interests may not always mirror those of the claimant.
- The appropriate response is not caution for its own sake, but structured planning.
- Funding terms should be reviewed in the context of the overall litigation strategy and the company’s wider financial position.
Where that groundwork is done carefully, funding can operate as intended. Where it is not, a second dispute may arise alongside the first.
If you are considering litigation funding, or if a funding relationship has become strained, careful early advice can stabilise the position and reduce the risk of escalation.
