Originally from Handbook on Third-Party Funding in International Arbitration, Second Edition

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In many countries, access to justice requires substantial capital – litigating is expensive, arbitrating often even more so.   Many factors contribute to the costs, such as court fees or administrative (and arbitrators’) fees for arbitration institutions, lawyers’ fees, depositions, interrogatories, motions, witness preparation, hearings, consultants, expert reports, and investigations, let alone appeal or setting aside proceedings and enforcement.

Consequently, claimants are often unable to pursue their claims due to the high costs associated with lawsuits, and thus choose to delay or even abandon legal recourse. This is why litigation finance emerged.   It means, in essence, that a third party unrelated to the lawsuit provides capital to a claimant involved in litigation/arbitration in return for a portion of any financial recovery from the lawsuit.

Third-party funding (TPF) is, however, only one facet of litigation finance but is often used synonymously. In the following, without addressing specificities from jurisdiction to jurisdiction, we will first differentiate between different types of TPF, then provide a high-level overview of alternatives to TPF (often solutions from the insurance industry, which are sometimes used in combination with TPF), and in addition highlight the – sometimes minor – differences between those. This glossary-style article is thus meant to serve as an introduction to the world of legal finance by first providing a definition of respective financial instruments, then assessing its strategic implications and benefits in a nutshell and concluding with challenges and limitations associated with it. The main aim of this contribution is to help interested readers navigate the sea of terminologies and different tools available in the litigation finance market, by focusing on the most prominent instruments.