Alternative Funding Arrangements in European Civil Litigation

1. Meaning and Scope

Alternative funding arrangements are methods of financing litigation or legal claims other than the traditional model in which a claimant pays the lawyer directly from personal or corporate resources.

They are particularly important in complex civil, commercial, competition, consumer, insolvency, mass-claim, environmental, and cross-border litigation where the cost of proceedings may be disproportionate to the claimant's available resources.

Major forms include:

third-party litigation funding;

conditional-fee arrangements;

contingency or success-fee arrangements where permitted;

after-the-event (ATE) insurance;

before-the-event legal-expenses insurance;

litigation funding by investment funds;

portfolio funding;

claim aggregation and representative actions;

litigation crowdfunding;

trade-union or association funding;

legal-aid schemes;

damages-based agreements in jurisdictions where permitted.

European law does not have one harmonized regime governing all alternative litigation funding. The legality and regulation of particular arrangements vary considerably between jurisdictions.

The principal legal concerns are:

access to justice;

champerty and maintenance;

lawyers' professional independence;

conflicts of interest;

confidentiality and privilege;

control of litigation;

disclosure of funding;

recovery of costs;

funder's liability for adverse costs;

consumer and collective-action protection.

2. Why Alternative Funding Matters

Traditional litigation financing creates an obvious problem:

A claimant may have a legally strong claim but insufficient resources to litigate it.

This is particularly important in:

competition claims against large corporations;

shareholder litigation;

environmental claims;

mass consumer claims;

intellectual-property disputes;

insolvency litigation;

complex commercial arbitration;

cross-border litigation;

collective redress.

Alternative funding can therefore promote access to justice.

But it can also create risks.

A funder may have a financial interest in the litigation that differs from the claimant's interests.

For example:

Claimant wants a judgment → funder wants an early settlement.

That creates a potential conflict over control of the proceedings and settlement strategy.

3. Third-Party Litigation Funding

Third-party litigation funding occurs where an entity that is not a party to the dispute finances litigation in exchange for an agreed financial return.

A simplified structure is:

Claimant

↓

Funding agreement

↓

Third-party funder pays litigation costs

↓

Claim succeeds

↓

Funder receives agreed return

The return may be calculated by reference to:

damages recovered;

a multiple of the investment;

a percentage of recovery;

another contractually permitted formula.

If the claim fails, the funder's investment may be lost, depending on the agreement.

4. Conditional Fees

Under a conditional-fee arrangement, the lawyer's remuneration may depend partly upon the outcome of the litigation.

The lawyer may receive:

ordinary fees;

an additional success fee;

or another permitted success-related remuneration.

The precise legality and recoverability of such arrangements depend on the jurisdiction.

They must be distinguished from third-party litigation funding because the funder is usually the claimant's lawyer rather than an independent investment entity.

5. Damages-Based Arrangements

In some jurisdictions, lawyers may receive remuneration calculated partly as a percentage of the damages recovered.

These arrangements raise particular concerns about:

professional independence;

proportionality;

informed client consent;

conflicts of interest;

transparency concerning deductions from damages.

They are not universally available throughout Europe.

6. After-the-Event Insurance

After-the-event insurance (ATE) is insurance purchased after a dispute or potential claim has arisen.

Depending on the policy, it may cover:

the claimant's own legal costs;

adverse costs;

expert fees;

disbursements;

other litigation expenses.

ATE insurance can be combined with third-party funding.

For example:

Litigation funder → finances claimant's legal expenses
ATE insurer → protects against adverse-cost exposure.

7. Before-the-Event Legal Expenses Insurance

Before-the-event insurance is purchased before the dispute arises.

It may provide legal assistance or cover legal expenses arising from specified disputes.

It is particularly significant for:

consumers;

employees;

motorists;

homeowners;

businesses.

The existence of legal-expenses insurance can affect whether a claimant actually needs third-party litigation funding.

8. Legal Aid as an Alternative Funding Mechanism

Legal aid is not normally considered commercial litigation funding, but it is an important alternative financing mechanism.

It is particularly relevant to:

low-income litigants;

human-rights claims;

family proceedings;

asylum and immigration cases;

cases involving fundamental rights.

European human-rights law recognizes that formal access to courts is insufficient if individuals cannot practically participate in proceedings.

9. Major Case Laws

Case 1. Arkin v Borchard Lines Ltd and Others

Court: Court of Appeal of England and Wales
Year: 2005

Facts

The case concerned litigation financed by a professional funder. The claimant ultimately failed and significant questions arose concerning the funder's exposure to adverse costs.

Decision

The Court of Appeal developed an important approach to the liability of litigation funders for adverse costs.

The court treated the funder's exposure, in the circumstances of the case, as connected to the amount of funding provided.

Principle

A litigation funder can potentially face an adverse-costs order.

However, the case became particularly influential because of the so-called Arkin cap, under which a funder's liability was traditionally considered in relation to the amount of its funding.

Importance

Arkin became a major reference point for litigation-funding risk.

However, it should not be treated as establishing a universal modern cap applicable in every case. Later jurisprudence has developed the law concerning funder liability.

Relevance

The case demonstrates that alternative funding does not necessarily isolate the funder from the consequences of unsuccessful litigation.

10. Excalibur Ventures LLC v Texas Keystone Inc

Court: Court of Appeal of England and Wales
Year: 2016

Facts

Excalibur pursued substantial commercial litigation supported by third-party funders.

The litigation failed and substantial adverse-cost consequences followed.

Decision

The Court of Appeal upheld substantial costs consequences against the litigation funders and emphasized the importance of the funder's involvement in assessing litigation risk.

Principle

A litigation funder cannot necessarily treat itself as a completely passive financier.

A funder that substantially participates in litigation may need to undertake appropriate due diligence concerning:

merits;

proportionality;

costs;

litigation strategy;

risks.

Importance

Excalibur significantly qualified simplistic assumptions that a litigation funder's exposure will automatically be limited by the amount originally invested.

Relevance

The case is important when evaluating funder due diligence and adverse-cost exposure.

11. R (PACCAR Inc and Others) v Competition Appeal Tribunal

Court: UK Supreme Court
Year: 2023

Facts

The case concerned litigation-funding agreements used in collective competition proceedings.

The central question was whether certain litigation-funding agreements constituted damages-based agreements (DBAs) within the relevant statutory regime.

Decision

The Supreme Court held that certain agreements under which funders received payment calculated by reference to damages recovered fell within the statutory definition of a damages-based agreement.

This created significant uncertainty for existing litigation-funding structures.

Principle

The legal characterization of a funding agreement depends on its substance and statutory definition, not merely the label used by the parties.

Calling an agreement a “litigation funding agreement” does not necessarily prevent it from being regulated under another legal category.

Importance

PACCAR became one of the most important modern European cases concerning commercial litigation funding.

It demonstrates that funding arrangements must be carefully structured in accordance with the relevant statutory framework.

Relevance

The case is particularly important for:

collective actions;

competition claims;

mass claims;

damages-based funding;

funder remuneration.

12. Trendtex Trading Corporation v Credit Suisse

Court: Court of Appeal of England and Wales
Year: 1982

Facts

The case involved questions concerning litigation financing and the common-law doctrines of maintenance and champerty.

Principle

English law historically regarded certain forms of third-party intervention in litigation as potentially objectionable because they could encourage improper litigation.

The court examined the circumstances in which financial assistance to litigation could become unlawful maintenance or champerty.

Importance

The case belongs to the historical foundation of the modern litigation-funding framework.

Modern commercial litigation funding has developed considerably beyond the position reflected in the older maintenance and champerty jurisprudence.

Relevance

It demonstrates why the legality of alternative funding cannot be assessed solely by asking whether a third party is financially supporting litigation.

The court must consider:

purpose;

control;

improper interference;

financial interest;

public policy.

13. Giles v Thompson

Court: House of Lords
Year: 1994

Facts

The case concerned the common-law doctrines of maintenance and champerty.

Decision

The House of Lords examined the historical purpose of those doctrines and emphasized that their application must focus on whether litigation financing involves improper interference with the administration of justice.

Principle

The presence of financial interest in litigation is not automatically unlawful.

The crucial question concerns whether the arrangement undermines the integrity of the litigation process.

Relevance

This principle remains useful when analysing:

third-party funding;

litigation investment;

funder control;

settlement decisions;

conflicts of interest.

14. Factortame Ltd v Secretary of State for Transport (No. 8)

Court: House of Lords
Year: 2002

Facts

The litigation arose from the extensive Factortame proceedings involving fishing rights and European Community law.

Questions concerning costs and the financial consequences of large-scale litigation became important.

Principle

The case forms part of the broader jurisprudence concerning costs, access to justice and litigation management.

Relevance

Large-scale commercial litigation demonstrates why litigation costs can themselves affect the practical ability to vindicate legal rights.

Alternative funding can therefore serve an access-to-justice function where traditional funding is inadequate.

15. DEB v Bundesrepublik Deutschland

Court: CJEU
Case: C-279/09
Year: 2010

Facts

DEB, a German legal person, sought legal aid in proceedings concerning compensation connected with EU law.

The case raised questions concerning access to justice and whether legal-aid requirements could apply to legal persons.

Decision

The CJEU examined access to a court in the context of Article 47 of the EU Charter.

The Court recognized that effective access to justice may require consideration of a party's financial circumstances and the practical ability to participate in proceedings.

Principle

The right to an effective remedy cannot be understood purely formally.

Relevance to alternative funding

This case provides the fundamental-rights foundation for understanding why mechanisms such as:

legal aid;

litigation insurance;

conditional fees;

third-party funding

can have an important role in ensuring effective access to justice.

The case does not establish a general EU right to third-party commercial litigation funding.

16. Steel and Morris v United Kingdom

Court: ECtHR Grand Chamber
Year: 2005

Facts

The applicants were sued in defamation proceedings by McDonald's. They had very limited financial resources and were unable to obtain conventional legal aid for the proceedings.

The case was extremely complex compared with their financial circumstances.

Decision

The ECtHR found a violation of Article 6 because the applicants had not enjoyed sufficiently effective access to court and equality of arms.

Principle

Access to justice must be practical and effective, not merely theoretical.

The complexity of litigation, financial inequality and ability to present one's case can be relevant to Article 6.

Relevance to alternative funding

The case explains the fundamental policy reason behind alternative litigation financing.

Where one party possesses enormous financial resources and the other does not, the formal existence of a court may not by itself ensure meaningful equality.

Alternative funding may therefore promote:

equality of arms;

access to evidence;

expert representation;

effective presentation of complex claims.

17. Zubac v Croatia

Court: ECtHR Grand Chamber
Year: 2018

Facts

The case concerned procedural access to the highest national court and the consequences of procedural requirements for the applicant's ability to obtain judicial determination.

Principle

Restrictions on access to a court must pursue a legitimate aim and maintain a proportionate relationship between the means employed and the objective pursued.

Relevance to funding

Although Zubac is not a litigation-funding case, it is useful when considering the broader principle that procedural requirements cannot make access to justice excessively difficult.

Funding rules, court fees, security-for-cost requirements and procedural restrictions can all affect the practical accessibility of litigation.

18. Key Legal Issues in Alternative Funding

A. Funder Control

One of the most important issues is:

Who controls the litigation?

The claimant should ordinarily retain meaningful control over decisions affecting their legal rights.

Potentially problematic provisions may give a funder extensive control over:

choice of lawyer;

settlement;

amendments to pleadings;

discontinuance;

appeal;

expert evidence.

The more control the funder exercises, the greater the possibility of conflicts and regulatory concerns.

19. Funder's Return

A funding agreement should clearly specify:

amount funded;

percentage of recovery;

multiple of investment;

priority of repayment;

treatment of costs;

treatment of interest;

treatment of settlement;

what happens if the claim fails.

PACCAR demonstrates why the precise method of calculating the funder's remuneration can have major legal consequences.

20. Adverse Costs

One of the most significant risks is the possibility that the claimant loses and must pay the opponent's costs.

Funding structures can address this through:

ATE insurance;

funder indemnities;

security-for-cost arrangements;

staged funding.

Arkin and Excalibur demonstrate that funders may themselves face significant exposure to adverse costs.

21. Conflicts of Interest

Conflicts can arise when:

Claimant's interests ≠ lawyer's interests ≠ funder's interests.

For example:

claimant wants vindication;

lawyer wants fees;

funder wants maximum financial return.

A settlement offer may therefore generate different incentives for each participant.

Funding agreements should establish mechanisms for dealing with conflicts.

22. Lawyer Independence

A lawyer's professional duty is owed to the client, not to the funder.

A funding agreement should not improperly permit the funder to dictate professional legal judgments.

Issues may arise concerning:

legal strategy;

advice;

settlement;

confidentiality;

privilege;

choice of experts.

Professional rules differ across European jurisdictions, but lawyer independence is a fundamental concern.

23. Confidentiality and Privilege

Funding discussions can involve disclosure of:

litigation strategy;

legal assessments;

expert reports;

internal documents;

settlement prospects;

weaknesses in the case.

The parties must consider whether sharing information with a funder affects:

legal professional privilege;

confidentiality;

disclosure obligations.

The answer depends heavily upon the applicable national law.

24. Collective Actions

Alternative funding is particularly significant in collective litigation.

Examples include:

consumer claims;

competition claims;

data-protection claims;

environmental litigation;

securities claims.

A funder may finance hundreds or thousands of relatively small claims that would otherwise be uneconomic individually.

However, collective funding creates additional concerns concerning:

claimant consent;

funder influence;

distribution of damages;

conflicts among class members;

transparency;

judicial oversight.

PACCAR demonstrates how funding structures can become especially significant in collective competition proceedings.

25. Alternative Funding and Access to Justice

The strongest argument in favour of alternative funding is:

Legal rights are meaningless if individuals cannot practically afford to enforce them.

This principle is supported by the broader jurisprudence of:

Steel and Morris v UK;

DEB;

Zubac.

Alternative funding can reduce the economic imbalance between:

individual claimant

and

multinational corporation or government institution.

26. But Alternative Funding Can Also Create Risks

Alternative funding is not automatically beneficial.

Risk 1 — Commercialization of litigation

Investment incentives may encourage claims primarily because they are financially attractive.

Risk 2 — Funder control

The funder may attempt to influence litigation strategy.

Risk 3 — Settlement pressure

The funder may prefer a quick settlement that maximizes return.

Risk 4 — Excessive deductions

A claimant may recover damages but retain only a fraction after:

legal fees;

funder's return;

insurance premiums;

other costs.

Risk 5 — Confidentiality

Sensitive litigation information may be disclosed to the funder.

Risk 6 — Insolvency of funder

If a funder becomes unable to finance the proceedings, the claimant may face serious difficulties.

27. Disclosure of Funding

Funding disclosure can be required or encouraged in some contexts, particularly where courts need to assess:

conflicts;

security for costs;

funder identity;

ability to satisfy adverse-cost obligations.

However, disclosure rules vary significantly between jurisdictions and types of proceedings.

A funding agreement should therefore be assessed under the procedural law governing the litigation.

28. Security for Costs

A defendant may argue:

“The claimant cannot satisfy an adverse-costs order, therefore security should be provided.”

The court may consider:

claimant's financial position;

existence of a funder;

funder's ability to satisfy costs;

likelihood of success;

procedural fairness;

applicable national rules.

This is an important area in cross-border litigation.

29. Portfolio Funding

Portfolio funding is different from funding a single claim.

A funder may finance:

Claim A + Claim B + Claim C + Claim D

under one broader arrangement.

This allows the funder to diversify risk.

It may be attractive to:

law firms;

companies with multiple claims;

insolvency practitioners;

mass-claim organizations.

But it may also create conflicts because weak claims can be cross-subsidized by stronger claims.

30. Litigation Crowdfunding

Crowdfunding involves multiple individuals or organizations contributing relatively small amounts toward litigation.

It can support:

public-interest claims;

environmental litigation;

human-rights cases;

consumer actions.

But regulatory questions can arise concerning:

securities laws;

consumer protection;

solicitation;

transparency;

professional conduct;

management of client money.

31. Comparative Case Table

32. Six Core Legal Tests for Alternative Funding

A funding arrangement can be evaluated using the following framework.

Test 1 — Legality

Is the funding mechanism legally permissible in the jurisdiction?

Test 2 — Independence

Does the arrangement preserve the lawyer's professional independence?

Test 3 — Control

Who controls litigation strategy and settlement?

Test 4 — Costs

Who bears adverse-cost exposure?

Test 5 — Fairness

Does the arrangement leave the claimant with a reasonable share of the recovery?

Test 6 — Transparency

Are the claimant, court and relevant parties adequately informed where disclosure is legally required?

33. Practical Structure of a Litigation Funding Agreement

A properly structured agreement will normally need to address:

Parties

Funded proceedings

Amount of funding

Permitted expenditure

Funder's return

Payment waterfall

Adverse costs

Insurance

Settlement

Termination

Appeal

Confidentiality

Privilege

Conflicts

Control of proceedings

Regulatory compliance

Dispute resolution

Governing law

34. European Perspective

There is considerable diversity across Europe.

Some jurisdictions have historically been suspicious of third-party litigation funding because of doctrines concerning:

maintenance;

champerty;

professional independence.

Other jurisdictions have developed relatively sophisticated commercial litigation-funding markets.

Consequently, the correct legal question is not:

“Is litigation funding legal in Europe?”

It is:

“What type of funding arrangement is being used, for what type of claim, before which court, under which national law, and subject to what regulatory restrictions?”

Cross-border disputes make this particularly complicated because the law governing the funding agreement may differ from the procedural law governing the litigation.

35. Conclusion

Alternative funding arrangements are an important component of modern European access to justice. Third-party funding, conditional fees, damages-based arrangements, legal-expenses insurance, ATE insurance, legal aid and collective funding can enable claimants to pursue disputes that would otherwise be economically impossible.

The most important authorities include:

Arkin v Borchard Lines — funder exposure to adverse costs;

Excalibur Ventures v Texas Keystone — funder due diligence and costs;

PACCAR — statutory characterization of damages-based funding;

Trendtex — historical maintenance and champerty principles;

Giles v Thompson — improper interference with litigation;

DEB — effective access to justice;

Steel and Morris v United Kingdom — practical equality of arms;

Zubac v Croatia — proportionality of barriers to judicial access.

The central legal balance is therefore between access to justice and protection of the integrity of the judicial process.

Alternative litigation funding is most defensible where it enables a claimant to obtain effective access to justice while preserving the claimant's autonomy, the lawyer's professional independence, the court's control over proceedings, transparency where required, and protection against excessive or improper financial influence by the funder.