Litigation funding agreements: what to actually negotiate

A litigation funding agreement is not a commodity document, yet the negotiation of one is frequently treated as though it were. Parties and their advisers spend disproportionate energy on the headline return multiple and comparatively little on the structural provisions that will govern the relationship if the case becomes difficult, expensive, or protracted. That imbalance is commercially dangerous. The terms that determine who controls the litigation, who can exit it, and how proceeds are distributed in a partial recovery scenario are not standard across the market. They are negotiated, and the outcomes of those negotiations matter enormously.

This essay sets out the provisions that deserve serious attention, explains why they are frequently underweighted, and identifies the commercial consequences that follow when they are not properly understood before execution.

What the market usually gets wrong

The dominant misconception in the funded litigation market is that the funder's return multiple is the primary economic variable. It is visible, it is comparable across term sheets, and it gives advisers something concrete to present to a client. But a multiple applied to committed capital is only one component of the economic equation. The other components, including the definition of recoveries against which the multiple is applied, the treatment of adverse costs awards, the scope of the funder's right to approve or withhold approval for settlement, and the priority waterfall in a partial recovery, can each shift the effective economics by a margin that dwarfs the difference between competing headline multiples.

This misconception persists for several reasons. Funders present term sheets in formats that emphasise the multiple because it is the most legible number. Legal advisers who are not specialist in litigation finance may not have seen enough agreements to know which provisions are genuinely standard and which are negotiating positions dressed as market practice. And clients, who are often under financial pressure by the time they seek funding, are motivated to close quickly rather than to interrogate terms that appear technical.

The result is that agreements are executed with provisions that the funded party does not fully understand and that will, in a contested or adverse scenario, operate in ways the party did not anticipate.

The provisions that actually govern outcomes

Four categories of provision deserve sustained negotiating attention in any litigation funding agreement.

The definition of recoveries. The funder's return is calculated against recoveries, but the definition of that term is not uniform. Some agreements define recoveries as gross proceeds before deduction of legal costs. Others define them as net proceeds after costs. The difference is material. In a case where legal costs are substantial relative to the award, a gross-based calculation will deliver a significantly higher return to the funder than a net-based one, and the funded party will receive correspondingly less. Parties should also examine whether the definition includes non-monetary relief, whether it captures settlement proceeds in a form other than cash, and whether it extends to costs orders obtained during the proceedings rather than only at final resolution.

Settlement approval rights. Most litigation funding agreements give the funder some form of right in relation to settlement. The question is how extensive that right is and what procedural constraints govern its exercise. A provision that requires funder consent before any settlement can be accepted gives the funder effective veto power over resolution. That veto may be exercised in the funder's economic interest rather than the funded party's. A funder that has deployed capital and is approaching the end of a committed funding period may have different settlement incentives from a claimant who wants certainty, or from a defendant who wants finality. Provisions that require consent should be accompanied by a defined process, a timeframe for response, and a mechanism for resolving disagreement. Without those constraints, the consent right is an open-ended lever that can be used to delay or block resolution.

Termination and step-in rights. Funders typically reserve the right to terminate the funding agreement in defined circumstances. Those circumstances vary. Some agreements permit termination if the funder forms a view that the case has become unmeritorious or that the prospects of recovery have materially diminished. Others tie termination rights to specific trigger events such as an adverse interlocutory ruling or a failure to meet a procedural milestone. The distinction matters because a broad discretionary termination right leaves the funded party exposed to withdrawal at a point when finding alternative funding is difficult or impossible. Parties should seek to define the trigger events with precision, to require notice and a cure period where the trigger is a remediable failure, and to understand clearly what happens to costs incurred if the funder terminates. The agreement should also address whether the funder has any step-in right, meaning the ability to take over conduct of the litigation, and under what conditions that right can be exercised.

The priority waterfall in partial recovery. Litigation does not always produce a clean win. Partial recoveries, whether through a settlement below the claimed amount or through a judgment that awards less than the full claim, are common. The priority waterfall determines who receives what from a partial recovery and in what order. A waterfall that places the funder's committed capital and return ahead of the funded party's net recovery can leave the funded party with very little or nothing from a recovery that appears, on its face, to be a meaningful outcome. Parties should model the waterfall against a range of recovery scenarios before execution, not only against the optimistic case. The results of that modelling should inform the negotiation of the waterfall structure, including whether a floor or minimum return for the funded party can be agreed.

Commercial consequences of inadequate negotiation

The consequences of executing a litigation funding agreement without adequate scrutiny of these provisions fall into three broad categories.

First, there is the economic consequence. A funded party that has not properly understood the recovery definition, the waterfall, and the interaction between them may find that a successful outcome delivers a fraction of what was anticipated. This is not a theoretical risk. It is a structural feature of agreements that are executed without modelling the economics across a range of scenarios. The funded party's legal advisers have a professional obligation to ensure the client understands what they are signing, but that obligation is difficult to discharge if the advisers themselves have not worked through the implications of the specific drafting.

Second, there is the control consequence. A funded party that has conceded broad settlement approval rights and broad termination rights to the funder has effectively transferred significant control over the litigation to a third party whose interests are aligned but not identical. Funders are sophisticated commercial actors with portfolio considerations that a single funded party does not share. A funder managing a portfolio of cases may make rational decisions about individual cases that are suboptimal for the specific funded party. Understanding this dynamic before execution, and negotiating provisions that preserve meaningful autonomy for the funded party, is a material commercial objective.

Third, there is the relationship consequence. Litigation is inherently unpredictable. Cases that look straightforward become complicated. Costs escalate. Timelines extend. A funding agreement that was negotiated quickly and without adequate attention to the provisions governing adverse scenarios will be tested precisely when the relationship between funder and funded party is under most strain. Provisions that are ambiguous or that were not properly understood at execution become disputes in their own right. Those disputes consume time, cost money, and can compromise the conduct of the underlying litigation.

For law firms advising funded parties, these consequences carry their own professional and reputational dimensions. Firms that develop genuine expertise in litigation finance and in the negotiation of funding agreements are better placed to serve clients and to build durable relationships with funders. Firms that treat funding agreements as administrative steps in the process of getting a case funded are exposed to the risk that a client's outcome is determined by terms the firm did not adequately scrutinise.

Where the market is likely to move next

The litigation funding market is maturing, and that maturation is producing pressure in two directions simultaneously. On one side, funders are becoming more sophisticated in their drafting, incorporating provisions that protect their position in an increasingly wide range of scenarios. On the other side, regulatory attention to the terms of funding agreements is increasing in several jurisdictions, with particular focus on whether the terms of agreements are fair to funded parties and whether funders exercise inappropriate control over litigation.

In England and Wales, the Civil Justice Council's review of litigation funding has brought renewed scrutiny to the question of what terms should be permissible in a funding agreement and whether some form of regulatory framework for funders is appropriate. The outcome of that review is likely to influence market practice, but it will not substitute for careful negotiation. Regulatory minimum standards, if they emerge, will set a floor, not a ceiling. The space above that floor will remain a matter of commercial negotiation.

The practical implication is that parties and their advisers should not wait for regulatory clarity before developing the analytical frameworks needed to negotiate funding agreements effectively. The market is moving, and the parties who understand the operating layer of these agreements now will be better positioned regardless of how the regulatory landscape develops. For a broader view of how the funding market is structured and where it is heading, the litigation finance overview provides useful context.

What this means in practice

Negotiating a litigation funding agreement well requires treating it as a substantive commercial transaction rather than a precondition to getting a case funded. That means reading the definition of recoveries carefully and modelling the economics against multiple scenarios before accepting any term. It means understanding the settlement approval provisions and ensuring that any consent right is accompanied by procedural constraints that protect the funded party's ability to resolve the case on terms that serve its interests. It means scrutinising the termination provisions and understanding precisely what circumstances would allow the funder to withdraw and what the consequences of withdrawal would be. And it means working through the priority waterfall with enough rigour to understand what a partial recovery would actually deliver.

None of this requires adversarial positioning towards funders. Funders are commercial partners, and the best funding relationships are ones where both parties understand the terms they have agreed and have confidence that those terms will operate fairly across the range of scenarios that might arise. That confidence is built through negotiation, not assumed from it.

For parties considering funded litigation, the starting point is to engage advisers who have genuine experience with funding agreements and who will treat the negotiation of those agreements as a substantive part of their mandate. For law firms, the starting point is to build that expertise deliberately rather than acquiring it incidentally. The terms of a litigation funding agreement are not boilerplate. They are the commercial architecture of the funded relationship, and they deserve to be treated as such.

If you would like to discuss how funding agreement terms interact with specific litigation strategies, the contact page sets out how to get in touch.