Apart from the fact that the costs of litigation are provided (or covered) by someone else, third party funding is very different from ATE insurance type solutions. For one thing, courts have no statutory authority to order payments of costs to third party funders.
The usual end result of most commercial litigation – and a substantial proportion of litigation between individuals – is a court-ordered payment. The right to receive, and indeed the right to commence proceedings to recover, such a payment is quite simply an asset; and the right to share in such a payment is also an asset.
Where an asset exists, it has a potential value to a third party. Where the asset is a court-ordered payment, the third party may be prepared to fund the costs of obtaining the payment. And that’s how third party funding works.
For the third party, the right to share in a possible payment is a species of investment. Where the risk/return ratio is satisfactory, it may be a very desirable investment. The third party funder, therefore, reaches an agreement with the litigant that it shall have a share in the eventual payout; in return it makes or contributes to the payment of the legal costs as the claim proceeds.
Of course, this being litigation and there already being a way of insuring against the risks of unsuccessful litigation – ATE insurance – the third party funder will usually arrange insurance of that type. Thus, if the litigation is unsuccessful, it will only be out of pocket to the extent of the insurance premiums, rather than the full amount of the party’s legal costs.
