Recovering Funding Costs in Litigation: A Modest Proposal

Money often costs too much …

Ralph Waldo Emerson, Wealth (1841)

A party who has had to rely on third party funding to pursue a claim will agree with the Sage of Concord.  Commercial funders of litigation typically require a multiple of their outlay in return for their funding.  It is very expensive money. 

To make matters worse, in the kind of case where it is most often required, defendants with very deep pockets can drag out proceedings and so put great pressure on claimants who know that not only will each further step in the proceedings cost them money – like any other litigation – but that the cost of each such step will be deducted from their eventual damages at least twice over.

Prior to the Jackson reforms of 1 April 2013, parties to litigation in England and Wales could recover some costs associated with funding their claims.  They could recover success fees payable to their lawyers and the premiums payable to their after-the-event (“ATE”) insurers for covering their exposure to adverse costs. 

They were unable to recover the costs of third party funding because English law had long considered that the cost of funding litigation was not money paid to solicitors for the ultimate benefit of the client and was therefore not a cost the client could recover from another party.  The Court of Appeal confirmed that was still the case in Motto v. Trafigura Limited [2011] EWCA Civ 1150.

As matters stand now, however, they can recover none of these things.  By contrast, parties to arbitration can recover funding costs.  This firm has recovered solicitors’ success fees and funding costs in an ICC arbitration award, which was upheld by the Commercial Court in Tenke Fungurume Mining SA. v. Katanga Contracting Services SAS [2021] EWHC 3301 (Comm).

The Supreme Court’s decision in R. (PACCAR) v. Competition Appeal Tribunal [2023] UKSC 28, which caused dismay amongst litigation funders, appears to have triggered calls for reform of this area of the law.  One of the results of that decision was that the Lord Chancellor asked the Civil Justice Council (“CJC”) to consider the whole area of litigation funding.

On 2 June 2025, the CJC published its Review of Litigation Funding (the “Review”).  Of greatest interest to those involved with litigation funding will be recommendation 41, which is:-

“Recoverability of litigation funding costs should be permitted in exceptional circumstances. The CPR and CAT Rules [i.e. the procedural rules of the Courts and the Competition Appeal Tribunal] should be amended to provide such a discretion.”

The authors of the Review note that “the majority of respondents [to the CJC’s consultation exercise] were in favour of extending the definition of costs to enable funding costs to be recovered in exceptional circumstances to meet the justice of the case.”  Their argument was that it was “necessary to secure effective access to justice” and that “litigation funding enables claimants who lack the means to pursue meritorious claims to access justice.”

There was less consensus, however, about how that aim would be achieved.  “It was submitted, for instance, that Bates v. The Post Office was a paradigmatic example of the type of case where recoverability should be allowed.”  The reasons given were that the claimants lacked funds because of the defendant’s own prior conduct and that the way in which the defendant conducted the following litigation was unreasonable and increased the claimants’ costs and funding costs unnecessarily.

The authors of the Review did not consider going back on the Jackson reforms and permitting recovery of lawyers’ success fees or ATE premiums.

In Appendix A to the Review, the authors of the Review suggest some legislation in the form of a putative Litigation Funding, Courts and Redress Act 2025 and some new Court rules.  Those proposed rules are:-

“CPR X.3

Recovery of Funding Costs as costs (s.8 of the Act)

(1) In this Part, “funding costs” has the meaning given in s.8(7) of the Litigation Funding, Courts and Redress Act 2025.  [This is defined in a footnote to the draft legislation as “the funder’s return” and explicitly excluding success fees or ATE premiums]

(2) In any proceedings to which this Part applies, the court may order a party to recover all or part of any funding costs by way of costs but only where the court is satisfied that there are exceptional circumstances which justify such an order being made.

(3) In deciding whether the circumstances are sufficiently exceptional to make the order within the meaning of rule X(2) the court will have regard to the following factors:

(a) the conduct of the parties, and in particular the conduct of the paying party, whether before or during or after the proceedings, and

(b) the conduct of the funder, whether before or during the proceedings, and

(c) the extent to which the funding costs were incurred by reason of the conduct of the paying party, and

(d) the amount of the funding costs and whether the funding costs were reasonably incurred, and

(e) whether the proceedings could have been pursued by the receiving party without incurring the funding costs, and

(f) the financial consequences of making the order from the perspective of both the receiving party and the paying party, and

(g) notwithstanding the exceptional nature of the order, it is in the interests of justice to make the order.

(4) Any order made under rule X(2) for the payment of any funding costs, shall be subject to detailed assessment.

…”

The use of the phrase “exceptional circumstances” is often a recipe for arguments.  Any lawyer will say his or her client’s case is unusual and deserves special treatment.  However, the proposed drafting gives an implicit definition to what that phrase means here.

First, there are references to the conduct of both the paying party and the funder (in proposed sub-sections (a) and (b)), so we can expect the importation of arguments about indemnity costs and whether a paying party has behaved in a way that is “out of the norm” such that they should pay costs on a different basis than most parties.

Second, there appears in proposed considerations (c) and (e) to be an element of causation to the test.  If a party could have brought a claim without the need for funding but the paying party’s conduct forced them to seek funding, that appears to be in favour of making an order.  This is likely to place a burden on claimants with regard to financial evidence and what attempts (if any) they made to finance the case without recourse to funding.  They may need to consider disclosing privileged exchanges with lawyers.

Third, there is the usual test in costs cases at proposed consideration (d) of whether it was reasonable to incur the cost or not.  This may lead to arguments about industry norms – and may even help to promote them over time – but we can expect significant disputes over what such industry norms are if this becomes law.

Finally (in proposed considerations (f) and (g)), there are considerations of fairness as between the parties, in particular the financial consequences for both sides of making the order.

None of this is actual legislation yet – but it is a very good indication of the likely direction of travel in the near future.  For example, on 4 July 2025, the Court of Appeal handed down judgment in Sony Interactive Entertainment Europe Limited v. Alex Neill Class Representative Limited (and a number of conjoined appeals) [2025] EWCA Civ 841.  All those cases concerned the enforceability of litigation funding agreements which had been amended in response to the Supreme Court’s decision in R. (PACCAR) v. Competition Appeal Tribunal.  The Court of Appeal upheld them all.

It remains to be seen what legislation or changes to the relevant rules will in fact be made.  The CJC has put forward its views and the Lord Chancellor will consider them.

In this firm’s view, the CJC could have gone further in looking to maintain a balance between claimants and defendants.  In a case where it is apparent to the Court that a defendant has deliberately sought to exhaust a claimant’s resources with a view to defeating the claim or coercing the claimant into accepting a poor settlement, the Court should have the power to go further and make an award which includes any relevant success fees and ATE premiums.  By making that power “exceptional”, the balance of power between claimants and defendants in this kind of case will be struck fairly.

Simon Winter

Ghaffari Fussell LLP