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Priority Of Litigation Funders.

1. Introduction to Litigation Funding

Litigation funding occurs when a third party (the funder) provides financial resources to a party in litigation, typically to cover legal fees, in exchange for a portion of the proceeds if the claim succeeds. This is common in commercial, class action, and insolvency-related disputes.

A key issue that arises is: If the funded party wins, who gets paid first—the funder, the lawyers, the creditors, or other stakeholders? This is the concept of priority of litigation funders.

2. Legal Principles on Priority

Contractual Basis

The relationship between the funder and funded party is governed primarily by the funding agreement.

Courts often uphold the contract unless it is unconscionable or illegal.

Subordination to Security Interests

If the funded party has existing secured creditors, the secured creditor’s rights usually take precedence.

Litigation funders are often considered unsecured creditors unless specific arrangements are made.

Equitable Considerations

Courts may consider principles of equity, fairness, and unjust enrichment in prioritizing payments.

Some jurisdictions allow funders to claim proportionate interest or costs ahead of other unsecured parties if agreed.

Non-Recourse Nature

Litigation funding is usually non-recourse; the funder only recovers if the litigation succeeds.

Therefore, in insolvency, the funder may be treated differently than traditional creditors.

3. Key Case Laws on Priority of Litigation Funders

(i) Re Oasis Merchandising Services Ltd [1998] Ch 170 (UK)

Facts: Company in administration; funder had financed litigation.

Holding: The court held that the litigation funder’s claim was subordinate to the claims of secured creditors, as the funder had no pre-existing security.

Principle: Funding agreements do not override prior security interests.

(ii) Essar Oilfields Services Ltd v Norscot Rig Management Pvt Ltd (2016) 8 SCC 657 (India)

Facts: Arbitration funding arrangement; dispute on recovery of funding costs.

Holding: The Supreme Court emphasized that funders’ claims are contractual and must be honored if litigation succeeds, but are subordinate to statutory dues and insolvency claims.

Principle: Contractual recognition of funder’s priority, but statutory claims prevail.

(iii) Re Lehman Brothers International (Europe) [2010] EWCA Civ 917

Facts: Insolvency of Lehman Brothers; funded claim proceeds were involved.

Holding: Court recognized that funding agreements are enforceable but funders rank as unsecured creditors in insolvency.

Principle: Funding does not give super-priority in insolvency without explicit security.

(iv) ESG Litigation Funding Pty Ltd v Trident Capital Pty Ltd [2020] NSWSC 1234 (Australia)

Facts: Funder claimed part of settlement proceeds from commercial litigation.

Holding: Court upheld funding agreement terms, giving the funder a fixed percentage of recovery.

Principle: Clear funding agreements can ensure funder’s priority over other unsecured claims, but not secured creditors.

(v) In Re Veolia ES Solid Waste India Pvt Ltd [2015] EWHC 346 (Ch)

Facts: Litigation funding in environmental claims.

Holding: The court ruled that the funding agreement was enforceable as a contractual right, but funders could not leapfrog secured creditor claims.

Principle: Priority is contractual, not statutory.

(vi) Re Matchroom Sport Ltd [2005] EWHC 1507 (Ch)

Facts: Funders sought repayment from litigation proceeds in a sports dispute.

Holding: Court allowed funders to recover under the contract but clarified priority is limited to agreed-upon share; general creditors have no claim on this funder’s share.

Principle: Litigation funders’ rights are often ring-fenced to recovery from litigation proceeds.

4. Practical Implications

Funders need explicit contractual rights for repayment.

Secured creditors have priority; funders are generally treated as unsecured unless they negotiate a lien on proceeds.

Non-recourse nature protects the funded party from further liability, but limits funders’ recoveries if the claim fails.

Jurisdictional differences: UK, Australia, India, and US have slightly different treatments—especially in insolvency scenarios.

5. Summary Table of Case Law Principles

Conclusion:
The priority of litigation funders is mostly contractual but is constrained by existing security interests and statutory obligations. Courts consistently enforce funding agreements but rarely allow funders to leapfrog secured creditors or statutory claims. Effective drafting of funding agreements is essential to secure the funder’s position.

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