Litigation Costs Are Capital: Understanding Interest on Advanced Case Expenses

Advancing litigation costs is common practice. Whether the interest on borrowed funds can travel to the client depends on ethics rules most firms have never read closely.

March 12, 2026

Modern litigation increasingly requires significant upfront investment. Experts, discovery vendors, medical records, depositions, court costs, and investigation expenses can easily reach thousands, and sometimes hundreds of thousands, of dollars before a case resolves. For clients pursuing contingency matters, these costs can create a substantial barrier to accessing the courts.

Law firms frequently advance these expenses so that clients can pursue valid claims without paying costs during the litigation. In some cases firms fund those expenses from internal capital. In other situations the firm may borrow funds from a lender to cover those costs while the case is pending.

When a firm uses borrowed funds in this way, the financing is typically structured as a recourse obligation of the law firm. The firm therefore remains responsible for repaying the lender regardless of the outcome of the case, even though litigation expenses may later be reimbursed by the client from any recovery.

This raises an important question. If a law firm borrows money to fund litigation expenses, can the interest incurred on that borrowing be passed through to the client?

The Ethical Framework

In many jurisdictions, including New York, professional responsibility rules allow lawyers handling contingency matters to advance litigation expenses on behalf of clients. Under the New York Rules of Professional Conduct, a lawyer may advance litigation expenses in a contingent matter provided the client remains ultimately liable for those expenses.

Although the law firm may borrow funds and remain responsible for repayment to the lender, the client may remain responsible under the retainer agreement for reimbursing litigation expenses from any recovery.

The New York State Bar Association has addressed this issue directly. In Ethics Opinion 754, the Committee concluded that plaintiff’s counsel in a contingent matter may, under certain conditions, pass on to the client as costs the interest charged to the lawyer on borrowings used to fund litigation expenses.

New York State Bar Association ethics opinions are advisory and therefore serve only as persuasive authority rather than binding precedent for courts or disciplinary authorities. See N.Y. State Bar Ass’n Comm. on Prof’l Ethics Op. 754 (2002); see also Op. 729 (2000); Op. 1061 (2015); Op. 1181 (2020)

Ethics guidance addressing this issue generally identifies several important conditions. First, the client must be clearly informed in advance that interest may be charged on advanced costs and must consent to that arrangement. Second, the interest rate must be reasonable and tied to the lawyer’s actual cost of borrowing. Third, the client should have the opportunity to pay expenses as they arise if they prefer to avoid interest charges. When these conditions are satisfied, the interest may be treated not as an additional legal fee but as reimbursement for the lawyer’s actual cost of borrowing funds used to advance litigation expenses on the client’s behalf.

More recent ethics guidance has also recognized that the economic cost of capital may be considered even when a lawyer advances litigation expenses using the firm’s own funds rather than borrowed money, provided the charge reflects the lawyer’s actual or reasonable cost of funds and is properly disclosed to the client. See N.Y. State Bar Ass’n Comm. on Prof’l Ethics Op. 1181 (2020).

Why This Structure Exists

Litigation today is increasingly capital intensive. Advancing case costs allows clients to pursue their claims without needing to fund the litigation while the case is ongoing.

When a law firm borrows to finance those costs, allowing the firm to recover the cost of borrowing reflects the economic reality that capital has a price. The financing cost is therefore tied directly to the expenses incurred to prosecute the case.

Recourse Cost Financing Versus Litigation Funding

It is also important to distinguish traditional expense financing from non-recourse litigation finance. In recourse cost financing, the law firm borrows funds and remains responsible for repayment regardless of the outcome of the case. The client remains responsible for reimbursing litigation expenses from any recovery. Non-recourse litigation finance operates differently. In those arrangements repayment is contingent on the success of the case, and the financing provider assumes the risk that the case may not produce a recovery.

Both approaches address the same underlying issue: litigation requires capital. They simply allocate risk in different ways.

Transparency With Clients

Regardless of the financing structure used, transparency with clients is essential. Clients should understand how litigation expenses are advanced, whether interest may apply, and how those costs will be handled when a case concludes. Clear disclosure at the outset of the attorney client relationship helps ensure that both lawyer and client have aligned expectations regarding the financial structure of the case.

As litigation continues to grow more complex and resource intensive, thoughtful and transparent approaches to financing litigation expenses will remain an important part of ensuring that clients with meritorious claims are able to pursue them.