CFAs, DBAs, and third-party funding: the UK options explained

Most commercial disputes in the UK are lost before they begin, not on the merits, but because the party with the stronger case cannot afford to pursue it. That is the operating problem litigation finance exists to solve, and yet the market's understanding of what litigation finance actually is remains surprisingly shallow. Ask a senior in-house lawyer to explain the difference between a conditional fee arrangement, a damages-based agreement, and third-party funding, and you will frequently encounter either a confident but inaccurate answer or an honest admission that the distinctions have never been properly explained. This essay sets out to correct that. The three principal structures available in England and Wales are not interchangeable labels for the same idea. They are legally distinct instruments with different regulatory footprints, different risk allocations, and different commercial consequences. Understanding those distinctions is not a technical nicety. It is a prerequisite for making sound decisions about how to fund a dispute.

For a broader orientation to the field, the litigation finance pillar on this site provides the surrounding context. This essay focuses specifically on the structural mechanics of each option and what they mean in practice.

What the market usually gets wrong

The dominant misconception is that litigation finance is a single product. In popular usage, the phrase is often applied loosely to any arrangement in which someone other than the client bears some or all of the cost of litigation. That framing is understandable but operationally misleading, because it collapses three instruments that operate through entirely different legal and commercial mechanisms.

A conditional fee arrangement, commonly called a CFA, is a contract between a solicitor and a client. The solicitor agrees to defer some or all of their fees, recovering them only if the case succeeds, typically with an uplift on the base fee. The client remains the party funding the litigation in the sense that they retain the risk of adverse costs orders and disbursements unless separate after-the-event insurance is arranged. The capital at risk belongs to the solicitor in the form of deferred time, not to an external investor.

A damages-based agreement, or DBA, is also a contract between solicitor and client, but the fee structure is different. Rather than a deferred hourly rate with an uplift, the solicitor takes a percentage of the damages recovered. The Legal Aid, Sentencing and Punishment of Offenders Act 2012 introduced DBAs into contentious work in England and Wales, but the regulations governing them have been widely criticised as unworkable in their original form, and the market's uptake has been limited as a result. The Law Commission and successive reform consultations have acknowledged the structural problems, and there is an ongoing conversation about whether the regulatory framework needs to be rebuilt rather than merely amended.

Third-party funding is categorically different from both. Here, an external commercial funder, a specialist investment vehicle rather than the law firm, provides capital to cover legal costs in exchange for a return tied to the outcome of the case. The funder is not a party to the litigation. They have no formal role in the proceedings. Their return is typically structured as either a multiple of the capital deployed or a percentage of the recovery, whichever is higher. The client retains the cause of action. The funder bears the financial risk of the litigation costs they have agreed to cover, subject to the terms of the funding agreement.

These are three distinct instruments. Conflating them leads to poor decisions about which structure is appropriate for a given dispute, which counterparties need to be involved, and what the real cost of funding will be.

What actually changes when you look at the operating layer

Once you separate the three instruments, the operational differences become significant. The most important distinction is who bears what risk and at what point in the process.

Under a CFA, the solicitor is bearing the risk of their own time. They are not providing capital in the conventional sense. They are deferring their fee income. This means the client still needs to fund disbursements, which in complex commercial litigation can be substantial, covering expert witnesses, counsel's fees at the junior and silk level, court fees, and the costs of disclosure exercises. Unless the CFA is combined with after-the-event insurance and a disbursement funding facility, the client's exposure remains material even under a no-win no-fee arrangement. The phrase no-win no-fee is therefore accurate only in a narrow sense. It describes the solicitor's base fee. It does not describe the client's total financial exposure.

Under a DBA, the percentage cap on the solicitor's fee is set by regulation and differs depending on the type of claim. In employment matters the cap has been in place for longer and the market has adapted. In commercial litigation the regulatory framework has been more problematic. The prohibition on hybrid DBAs in their original regulatory form, meaning arrangements that combined a reduced hourly rate with a contingency element, removed much of the commercial flexibility that practitioners needed to make the instrument work. Reform proposals have been circulating for several years, and the direction of travel is towards greater flexibility, but the current regulatory position means DBAs remain underused in commercial disputes relative to their theoretical potential.

Third-party funding operates on a different logic entirely. The funder is underwriting the litigation as an investment. Their diligence process is therefore closer to credit analysis than to legal advice. They will assess the merits of the claim, the enforceability of any judgment or award, the financial standing of the defendant, and the likely quantum of recovery relative to the projected cost of the litigation. Funders typically require a minimum ratio between the expected recovery and the funding required, and they will decline cases where that ratio is insufficient to justify the risk-adjusted return. This means third-party funding is not available for every case that has legal merit. It is available for cases that have legal merit and sufficient commercial scale.

The regulatory position for third-party funders in England and Wales is also distinct. Funders are not currently regulated by the Financial Conduct Authority in the way that, say, consumer credit providers are. The Association of Litigation Funders operates a voluntary code of conduct that its members subscribe to, covering capital adequacy requirements and conduct standards. Whether that voluntary framework is sufficient has been a live question in the market, and there are periodic calls for statutory regulation. The Supreme Court's decision in PACCAR in 2023 introduced significant uncertainty about the enforceability of certain funding agreements by treating some of them as damages-based agreements under the relevant statutory definition, which had not been the market's understanding. The legislative response to PACCAR remains pending, and the uncertainty it created is a live operational issue for anyone entering into or relying upon a funding agreement.

Commercial consequences

The choice between these structures has direct commercial consequences that extend beyond the immediate question of who pays the legal bills.

For law firms, the CFA model creates a balance sheet exposure that is not always well understood at the firm level. Deferred fees are not just a client service decision. They are a capital allocation decision. A firm running a large portfolio of CFAs is effectively operating as a lender to its own clients, and the concentration risk in that portfolio matters. Firms that have grown their CFA books without adequate portfolio management have found themselves in difficulty when a cluster of cases resolves adversely in the same period.

For clients, the DBA model in its current regulatory form creates uncertainty about what the final cost of a successful outcome will be. A percentage of damages sounds straightforward, but the interaction between the DBA fee, any adverse costs order against the defendant, and the treatment of interim payments can produce outcomes that are difficult to model in advance. Clients entering DBAs without detailed financial modelling of the range of outcomes are accepting more uncertainty than they may realise.

For third-party funders, the PACCAR decision and its aftermath represent a genuine structural risk to the market. If funding agreements are reclassified as DBAs, they become subject to the regulatory requirements that apply to DBAs, including the percentage caps, and agreements that do not comply with those requirements may be unenforceable. The practical consequence is that funders and their legal advisers have had to revisit the drafting of funding agreements to reduce exposure to the PACCAR classification, and some transactions have been delayed or restructured as a result.

These are not abstract legal points. They affect the economics of individual transactions and the operational capacity of the firms and funders involved. Anyone advising on or entering into a litigation finance arrangement needs to understand which instrument they are using and what the current regulatory position for that instrument actually is.

Where the market is likely to move next

The direction of travel in the UK litigation finance market points towards greater sophistication rather than simplification. Several trends are worth tracking.

First, portfolio funding arrangements are becoming more common. Rather than funding a single case, funders are increasingly providing capital against a portfolio of claims held by a law firm or a corporate. This changes the risk profile for the funder, since losses on individual cases can be offset against gains elsewhere, and it changes the commercial relationship between funder and firm. Portfolio arrangements require more complex documentation and more ongoing relationship management than single-case funding.

Second, the regulatory environment is likely to become more formal. The PACCAR decision accelerated a conversation about statutory regulation that was already underway. Whether the outcome is a bespoke regulatory regime for litigation funders, an extension of existing financial services regulation, or a legislative fix targeted specifically at the PACCAR problem, some form of regulatory development is probable within the next few years. Firms and funders that are building their practices on the assumption that the current voluntary framework will persist indefinitely are taking a risk.

Third, the DBA market may yet develop if the regulatory reform process produces a workable hybrid model. The theoretical advantages of DBAs for clients are real. A structure that aligns the solicitor's financial interest directly with the client's recovery is commercially attractive. The obstacle has been regulatory, not conceptual, and if that obstacle is removed, the instrument may find wider adoption.

For a more detailed treatment of how these developments interact with the broader economics of dispute resolution, the writing archive on this site covers adjacent topics including funder due diligence, portfolio construction, and the regulatory outlook.

What this means in practice

The practical implication of all of this is straightforward. Before any decision is made about how to fund a dispute, the parties involved need to be clear about which instrument they are using, what the regulatory position for that instrument currently is, and what the full range of financial outcomes looks like across the plausible scenarios for the litigation.

A CFA is not the same as a DBA. Neither is the same as third-party funding. Each has a different risk profile, a different regulatory footprint, and different commercial consequences for the law firm, the client, and any external capital provider. The phrase litigation finance is a useful shorthand for the general field, but it is not a substitute for understanding the specific instrument in use.

The UK market for dispute finance is mature relative to many other jurisdictions, but maturity does not mean the market has resolved all of its structural questions. The PACCAR uncertainty, the ongoing DBA reform debate, and the question of statutory regulation for funders are all live issues that will shape the operating environment over the next several years. Practitioners and clients who understand the distinctions between the available instruments, and who track the regulatory developments affecting each, will be better placed to make sound decisions than those who treat litigation finance as a single undifferentiated product.

If you are considering a dispute finance arrangement and want to discuss which structure is appropriate for your circumstances, the contact page is the right starting point. And if you are new to this area and want to understand the broader landscape before focusing on any specific instrument, the litigation finance overview provides the necessary context.