Litigation Funding In Commercial Disputes: Risks, Opportunities And Emerging Considerations

Introduction

While third-party litigation funding (or litigation financing as it is sometimes referred to) (“Litigation Funding”) has emerged in its modern commercial form within the last three decades, the practice is not entirely new. Developing first in Australia in the 1990s and subsequently gaining prominence in the United Kingdom, the United States, Canada and other common law jurisdictions, Litigation Funding has evolved into a sophisticated financial mechanism designed to facilitate access to justice for claimants with meritorious claims but limited financial resources to pursue them in court.

In this article, we examine the nature of Litigation Funding, its models, challenges, regulatory trajectory, ethical implications and prospects within the Nigerian legal system.

Conceptual Framework: Nature of Litigation Funding

Litigation Funding is an arrangement where a third party known as the funder (who has no prior connection to the litigation) agrees to finance all or part of the legal costs of the litigation, in return for a fee payable from the proceeds recovered by the funded litigant. Most Litigation Funding arrangements are structured on a non-recourse basis, meaning that the funder’s return is contingent upon successful recovery of proceeds. By contrast, when no proceeds are recovered, nothing is payable, and the funder loses its investment.

In practice, funders may in addition to covering the standard legal costs, also provide an additional capital to cover potential financial exposures that may arise from the litigation, including adverse costs orders, security for costs, or other court-ordered financial undertakings.

Litigation Funding Models

There are several Litigation Funding models. Although claimants most frequently seek Litigation Funding, defendants may equally deploy it as a risk management mechanism. For instance, a defendant who has an adverse claim brought against him may decide to use Litigation Funding in defending the suit. In such cases, the funders may provide security or capital equivalent to the value of the claim to hedge against potential liability.

Another Litigation Funding model involves the transfer of legal interest in the cause of action. One way to do this is by assignment. In a contractual dispute, the claimant may simply assign his contractual rights to the funders in exchange for a discounted lump-sum payment reflecting the assessed value and risk profile of the claim. However, this requires careful scrutiny of the underlying contract to ensure that it contains no prohibition against assignment, otherwise the purported assignment may be ineffective. See Linden Gardens Trust Ltd. v. Lenesta (1993) 3 All ELR 417. Once there is a valid assignment, the funders (as assignees) step into the shoes of the claimant and take over the litigation in their own name.

Another model involves change of ownership whereby the funder acquires an equity stake or controlling interest in the claimant. This is often the case where the claimant is a corporate entity. However, while this model is commercially attractive, it may trigger regulatory scrutiny and rigorous due diligence. The underlying contract needs to be inspected thoroughly. This is because in many contracts, a change of control will most likely constitute an event of default on the part of the contracting party.

Whichever model is being used, Litigation Funding requires a complex process of risk assessment. During this process, funders generally assess several prerequisites such as the solvency of the litigant and their credit rating, prospects of success of the claim, possibility of enforcement, quality and experience of the legal team handling the dispute, cash outcomes, expected time for the litigation, absence of political or controversial subject matter etc. This is because funders do not want to make uninformed decisions by backing up frivolous or unenforceable legal claims.

Conceptual Tension: Litigation Funding vs. Maintenance and Champerty

The conceptual tension between Litigation Funding and traditional common law lies in the principles of Maintenance and Champerty. Maintenance occurs when a disinterested party encourages a dispute by providing funding for it. Champerty on the other hand is Maintenance for a profit i.e. where the disinterested party provides the funding in consideration for sharing in its proceeds. See Giles v. Thompson (1993) 3 All ER 321. 

The common law originally frowned at both Maintenance and Champerty as they were deemed to be against public policy. As a matter of fact, under the common law, they are both tortious wrongs and this legal position persists in Nigeria to this day. See Oloko v. Ube (2001) 13 NWLR (Pt. 729) 161 at 181A-E.

In principle, Litigation Funding amounts to Champerty and would ordinarily be prohibited in common law jurisdictions. To remove this barrier, this common law position has been altered by statute in many jurisdictions. In Australia for instance, the New South Wales’s Maintenance, Champerty, and Barratry Abolition Act of 1993, abolished Maintenance and Champerty as actionable wrongs. Judicial affirmation followed in Campbells Cash and Carry Pty Ltd. v. Fostif Pty. Ltd. (2005) 63 NSWLR 203 where the High Court of Australia recognised the legitimacy of commercial litigation funding. These legislative and judicial efforts paved the way for Litigation Funding in Australia.

In Canada, the Criminal Code consolidation exercise of 1953 abolished all common law offences. By this, Maintenance and Champerty were abolished as crimes in Canada. However, they remain torts in some jurisdictions in Canada e.g. Ontario. In the United States, the position varies depending on the state. For instance, in the state of Florida, a cause of action for Champerty or Maintenance is no longer legally actionable.

In the United Kingdom, since the enactment of the Criminal Law Act, 1967, (the “CLA”) Maintenance and Champerty have ceased to be criminal or tortious, although funding agreements remain susceptible to challenge on public policy grounds.¹

Modern judicial authority recognises that for this “public policy” ground to apply, a funding arrangement must disclose an element of impropriety. This could be wanton or officious meddling, disproportionate control or profit, or a clear tendency to corrupt justice in the litigation². To determine this, English courts now consider a lot of factors such as (i) the extent to which the funder controls the litigation; (ii) the level of communication between the funded party and the Solicitor; (iii) the extent to which the funded party is provided with information, and is able to make informed decisions about the litigation; (iv) the amount of profit that the funder stands to make relative to the total damages; (v) whether there is a risk of inflaming damages; and (vi) whether there is a risk of distorting evidence.

However, from the early 2000s, UK Courts have reasoned that Litigation Funding agreements are not in conflict with public policy. In 2002, the England and Wales Court of Appeals held in Factortame et. al. v. Secretary of State for Transport (2002) 3 WLR 1104 that “public policy” no longer categorically opposes alternative funding agreements and therefore was not necessarily sufficient for striking down such agreements.

In particular, the seminal case of Arkin v. Borchard Lines Ltd. et. al. (2005) EWCA Civ. 655 introduced a principle now known as the "Arkin Cap" in relation to Litigation Funding arrangements in the UK. This case effectively revolutionized the Litigation Funding market in the UK. In that case, the funded claimant lost and (as they were not able to recover their costs from the claimant) the defendants applied for an order making the funders liable for their costs. The Court of Appeal held that the funder was only liable for costs up to the amount of its own contribution, but that to impose liability over this limit would represent too great a risk for litigation funders. However, the court noted that if the agreement had been champertous on grounds of public policy, liability could in theory have been unlimited.

Since the Factortame and Arkin judgments, the Litigation Funding industry in the United Kingdom has boomed significantly leading to the establishment of Litigation Funding firms and the Association of Litigation Funders (the “ALF”). In 2011, the ALF issued the Code of Conduct for Litigation Funders which was later revised in 2014. In 2024, the European Law Institute also published its Principles Governing the Third-Party Funding of Litigation. 

However, the recent decision of the UK Supreme Court (“UKSC”) in R (On the Application of Paccar Inc. et. al.) v. Competition Appeal Tribunal (2023) UKSC 28 has seriously impacted the Litigation Funding industry in the UK. In that case, the UKSC held that a Litigation Funding arrangement where the funder receives a percentage of the damages recovered by the funded party amounts to a Damage Based Assessment (“DBA”)³ under UK statutory law and would be unenforceable except it complies with s. 58AA(3) of the UK Courts and Legal Services Act, 1990. The UKSC held that the funders in Paccar were providing 'claims management services' because their remuneration under the Litigation Funding Agreements (LFAs) was determined by a percentage of the damages recovered. Consequently, such LFAs were classified as Damages-Based Agreements (DBAs) under Section 58AA of the Courts and Legal Services Act 1990, rendering them unenforceable unless they strictly complied with the DBA Regulations 2013. In contrast, litigation funding agreements where the funder’s fee is structured as a multiple of deployed costs generally remain outside the DBA regime.

This decision created an upheaval in the UK Litigation Funding industry since many litigation funding agreements were based on a percentage of damages recovered. The Paccar decision compelled funders and claimants to (i) swiftly renegotiate and restructure existing arrangements, and (ii) avoid English law as governing law or England as arbitral seat in their funding agreements to mitigate the risk of legal challenge. Simultaneously, industry stakeholders warned that this regulatory uncertainty was eroding confidence in London as a premier jurisdiction for complex, high-stakes litigation.⁴ The UK government responded to the ‘Paccar problem’ by introducing the Litigation Funding Agreements (Enforceability) Bill 2024 in the UK Parliament to reverse the Paccar decision to preserve London’s reputation as a global hub for dispute resolution. The Bill was intended to (i) re-establish the understanding before the Paccar decision that litigation funding is distinct from contingency fee agreements and not subject to the same statutory constraints, thereby effectively excluding Litigation Funding Agreements from the scope of DBAs, and (ii) apply retrospectively. Sadly, this Bill did not complete its passage through the UK Parliament before the 2024 general election was called and was eventually suspended after the change of government. Also, the UK government commissioned the Civil Justice Council (“CJC”) to consider creating a separate legal regime for Litigation Funding in the UK. In its final report of June 2025, the CJC recommended some measures to address the situation, including: (i) legislation to clarify that Litigation Funding is not a form of DBA; and (ii) the introduction of a formal and independent legal regime for Litigation Funding. The Bill, if enacted under the present government will now take prospective effect as recommended by the CJC.

Applications of Litigation Funding and the Functional Justification for its Use

Litigation Funding is mostly used in commercial disputes. In the UK, it is uncommon to see Litigation Funding in personal injury claims or other consumer-based claims. Also, Litigation Funding by its nature is mostly available for monetary claims. It is hardly used for non-monetary claims except where the outcome can be monetized within a short period of time after litigation. In alternative, a funder may consider receiving payment in kind such as equity in the funded party (where it is a corporate entity) or future royalties.

The justification for Litigation Funding rests primarily on access to justice. By externalising litigation costs, Litigation Funding enables meritorious claims to proceed notwithstanding financial constraints.

Additionally, Litigation Funding serves as a risk allocation mechanism, permitting parties to invest in business opportunities for more predictable returns using funds which would otherwise have been used for legal expenditure.

Ethical Considerations

Modern judicial analysis focuses less on the mere existence of funding and more on the presence of impropriety- such as excessive control, disproportionate profit, or interference with the administration of justice. Courts therefore examine factors including the degree of funder control, transparency between solicitor and client, proportionality of returns, and risks of evidentiary distortion.

Ethical concerns arise particularly where the funders are the legal practitioners handling the litigation, therefore possess a financial stake in the outcome. The rules of conflict of interest become relevant. This is an ethical rule which prevents legal practitioners from acting in a case in which they have personal interest that may conflict with that of the client. In this regard, it is helpful to avoid giving the legal practitioner (who is also the funder) too much influence over critical decisions in the litigation. This minimises the risk of conflicts of interest, as well as champerty which may eventually invalidate the Litigation Funding arrangement on ground of public policy.

Litigation Funding also raises the issue of confidentiality. For instance, a litigation funder may want to see documentary evidence or other correspondence in order to assess the strength of the claim. A legal practitioner cannot generally disclose this evidence without the client’s consent, especially in respect of privileged communication. Due to this, funders often sign an agreement that allow for/provide that (i) limited waiver of privilege by the litigant; (ii) all disclosed information will be held in complete confidence by the funder and will not be disclosed to other persons; and (iii) there is an express acknowledgement that the parties intend to have a common interest in the litigation and are therefore covered by common interest privilege in anticipation that they will subsequently enter into a Litigation Funding agreement.

Litigation Funding in Nigeria: Risks and Recommendations

Although Litigation Funding is now well developed in many jurisdictions, it is yet to be recognized in Nigeria, where the common law torts of Champerty and Maintenance continue to pose significant doctrinal obstacles.

A significant development occurred with the enactment of the Arbitration and Mediation Act, 2023 (the “AMA”) which formally recognises third-party funding in arbitral proceedings⁵. While comprehensive reform addressing Litigation Funding remain outstanding, the AMA’s intervention signals a gradual shift and raises the question whether similar reform should extend to litigation before Nigerian courts especially given that the AMA legitimizes third-party funding in arbitration-related litigation before Nigerian courts

Whilst the impulse to advocate for the liberal recognition of Litigation Funding is strong, one must approach unbridled recognition with caution. For many reasons, the AMA’s recognition of third-party funding in arbitral proceedings cannot be a perfect template for such advocacy.

Historically, the objection to champerty was rooted in the fear that third parties would ‘stir up’ disputes for profit. In a legal system already burdened by systemic delays, unrestricted funding could encourage speculative or weak claims, increase tactical litigation aimed at extracting settlements, and further congest the courts. These risks are materially reduced in arbitration for several reasons. First, arbitral disputes are typically commercial in nature. Second, proceedings are founded on a pre-existing agreement- meaning that parties have already contemplated dispute resolution in advance. Third, arbitration is grounded in party autonomy: the parties select their tribunal and define procedural framework. In such a controlled environment, the risk of third parties instigating disputes for profit is considerably diminished, as proceedings cannot arise in the absence of a prior agreement to arbitrate Unfortunately, the same cannot be said for the state court system where access is a constitutional right once there is a perceived violation of rights. The open-access nature of litigation increases the risk of opportunistic or profit-driven litigations. In a court system already significantly burdened, liberal funding could increase the volume of litigation claims and potentially prolong disputes through aggressive litigation strategies designed to maximise recoverable damages rather than promote early settlement.  

However, despite the potential dangers with recognition of Litigation Funding, outright prohibition is retrogressive. Given Nigeria’s expanding commercial landscape and the increasing complexity of cross border disputes, a calibrated legislative framework regulating Litigation Funding - rather than an outright prohibition – may better balance access to justice with public policy safeguards. If Litigation Funding were to extend beyond commercial disputes into personal claims or other civil claims, there is risk that third-party funders would encourage frivolous litigation for potential financial gain thereby congesting the courts. Further there is also the risk of exploitative profit arrangement owing to asymmetric bargaining power between funders and litigants. It is recommended that whilst Litigation Funding should be recognised in Nigeria, it should be limited, at least initially, to commercial disputes. Further legislative reform is required to ensure implementation is structured, supervised and predictable.

Conclusion

Litigation Funding has evolved from a controversial practice to an established component of modern dispute resolution financing. When properly utilized, it hedges against litigation risk and also ensures access to justice.

While the Arbitration and Mediation Act 2023 represents an important doctrinal shift, it does not, without more, justify unqualified liberalisation of Litigation Funding before Nigerian courts. A structured, supervised, and predictable regulatory framework—rather than either prohibition or unbridled recognition—offers the most balanced path forward, and as the global funding market matures, the trajectory suggests that this approach may soon assume a more prominent role within the Nigerian dispute resolution landscape.

Footnotes

1 This is by reason of s.14(2) of the Criminal Law Act, 1967 which provides that the abolition of crimes and torts Maintenance and Champerty shall not affect any rule of law that renders contracts of such nature as being contrary to public policy.

2 See the decision of the Irish Supreme Court in Persona Digital Telephony Limited et. al. v The Minister for Public Enterprise, Ireland et. al. (2017) IESC 27

3 A Damages-Based Agreement (DBA) is a form of contingency fee arrangement- typically between a claimant and a provider of litigation or ‘claims manage services’- wherein the funder’s remuneration is calculated as a percentage of the damages recovered. Under section 58AA of the Courts and Legal Services Act 1990, DBAs are legally unenforceable unless they satisfy specific statutory conditions and formal requirements.

4 For instance, Christopher, chief executive of Burford Capital, said the economy was taking a hit as companies like Burford are no longer naming London as an arbitral seat or selecting English law as a dispute resolution mechanism in their international contracts. See https://www.lawgazette.co.uk/news/fewer-dollars-for-uk-economy-as-top-lit-funder-spurns-english-law/5123346.article (accessed on 6 March 2026) 

5 S. 61 of the Arbitration and Mediation Act 2023

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