News & Events
Essentials for business: litigation funding
In his latest article, Mike Wilson, partner in our Litigation and Dispute Resolution team explores some of the more innovative options that can be used to fund commercial disputes
The landscape in litigation funding has changed dramatically in recent years and the traditional retainer, where a solicitor charges their client an hourly rate regardless of the outcome, is no longer the only option. With the rules on funding having been reformed and relaxed, alternative funding methods are now available, allowing lawyers to take a more progressive approach to sharing risk with their clients and paving the way for a number of commercial third-party funders to enter the market.
Litigation is often expensive, and costs can be an important consideration when deciding whether to bring or fight a claim. It is a longstanding principle in civil litigation that ‘costs follow the event’, meaning that, in most cases, the losing party in a court case must not only pay their own legal costs, but also those of the other party, with the amount of those costs being assessed by the court if it is not agreed. There are some exceptions to this in ‘small claims’ (those under £10,000) where costs are not usually recoverable and ‘fast track’ claims (generally those between £10,000 and £25,000) where the recovery of some costs, such as trial costs, is fixed and capped. The courts are also taking a much more proactive approach to the management of costs in higher value claims with detailed costs budgets being set at an early stage and the recovery of costs being limited by those budgets.
A potential litigant therefore has to consider not only its own legal costs, but also the risk that it might be ordered to pay costs to the other side. It is for this reason that many, otherwise good, claims are not pursued, but alternative funding methods can offer a solution.
The main methods of funding a case, as an alternative to the traditional model, are:
- Conditional fee agreements (CFAs) – this is an arrangement under which the amount the client pays for the legal services provided to them is dependent on the outcome of the case. It can include a full ‘no win, no fee’ agreement, where the solicitor receives no fees if the client loses its case, and his normal fees plus a ‘success fee’ if the client wins. In commercial cases, a ‘discounted CFA’ is more common, where the solicitor receives a percentage of their fees (often between 50% and 75%) if the client loses their case and fees at their normal rates plus a (lower) success fee if the client wins. The success fee is an additional amount payable as a percentage uplift of fees. It is not recoverable from the other party and reflects the solicitor’s share of the risk in the case. A ‘CFA lite’ is where the solicitor acts on a no-win, no fee or discounted CFA but the additional fee and any success fee are capped at the costs awarded or recovered from the other side. CFAs can be used in a wide range of cases. They do not usually cover expenses (or disbursements) such as court fees or expert’s fees, which must be paid by the client or funded in another way. Counsel (a barrister) can also be instructed under a CFA, or their fees can be treated as a disbursement.
- Damages-based agreements (DBAs) – a DBA is a type of contingency fee agreement between a solicitor and their client whereby the solicitor will receive a fixed sum or a percentage of the client’s damages if the client wins their case. In commercial cases, this is up to a maximum of 50% of the sums recovered. If the client loses their case, the solicitor receives nothing. Like CFAs, DBA do not usually cover disbursements. The fact that a party has a DBA should not affect the costs that can be recovered from the other side if they win, which will be assessed by the court in the usual way.
- After-the-event (ATE) legal expenses insurance – whereas CFAs and DBAs deal with funding for a party’s own costs, ATE insurance can be used to cover the risk of liability for the other side’s costs, i.e. adverse costs. An ATE insurance policy is purchased after a legal dispute has arisen and provides cover against adverse costs, up to the indemnity limit on the policy. The premium payable to the insurer can be paid up-front as a one-off premium or staged at certain milestones in the case. It can also be deferred and contingent so it is only payable at the end of the case and only payable if the case is won. The ATE premium is not recoverable from the other side. ATE insurance can be combined with a CFA or DBA or a traditional retainer. It can also be combined with ‘disbursement funding’, which some insurers offer as an add-on to pay for expenses or disbursements, such as court fees or expert’s fees, but not usually counsel’s fees. Disbursement funding is essentially a loan on which interest and drawdown fees are usually payable. If the client loses their case, the loan and disbursements are covered by the ATE insurance.
- Third party funding – this is where a third party funder provides funds to cover a party’s legal fees and disbursements in return for an agreed return. They will usually also provide ATE insurance cover or agree to pay any adverse costs. Litigation funding or ‘litigation finance’ is a rapidly growing and competitive market. It is available for a wide range of commercial disputes and can be used for all forms of dispute resolution, not just litigation. A funder will undertake extensive due diligence to ensure a claim has good prospects and that other party can pay. Their return will be tailored to the case but is typically calculated as a percentage of any damages, a multiple of the funding provided, or a combination of both. Litigation funding can be combined with other funding methods, including a CFA, DBA and ATE insurance. How any recovery is to be divided between the party, the funder and the solicitor is known as the ‘waterfall’. Another recent trend is portfolio funding, where funders provide a funding package that covers a portfolio of cases.
Funding can be complex, with different criteria and pros and cons for each method, but potential litigants should be encouraged by these developments. Lawyers are now more willing than ever to view litigation as a risk-sharing partnership with their client and should actively seek to help them identify suitable funding structures from the outset and revisit them as a claim progresses. The key ‘take-away’ point is that there should no longer be any reason why a ‘good’ claim cannot be pursued for want of funding.