Why litigation funding can be the answer to a business litigant’s prayers
November 22, 2022
Getting involved in commercial litigation is every business’s worst nightmare. Whichever side of a dispute you are on, there is so much more at stake than the claim itself. On top of the management distraction and the frustrations at endless delays, costs loom large. Not only can your own costs be a formidable and potentially insurmountable barrier, but there is always the risk of having to foot the other side’s legal bill (‘adverse costs’).
Historically, other than insuring against these adverse costs, there was little a litigant could do to minimise their exposure. Fortunately, recent years have seen a fundamental shift in attitudes towards litigation funding and there are now various options available to a litigant to help reduce the risk and enable them to bring or defend a claim.
Conditional Fee Agreements (CFAs)
A CFA is an agreement under which the client pays different amounts for the legal services provided depending on the outcome of the case. CFAs operate to transfer all or part of the risk for a litigant’s own legal costs from them to the solicitor. They can be structured in a variety of different ways. CFAs do not provide for a solicitor to receive a “contingent” fee that gives them a share of any recoveries.
The classic CFA provides that the lawyer receives no fees if the litigant loses its case but will get his fees plus an increased percentage (which can be up to 100 per cent for commercial litigation and is called a ‘success fee’) of his normal fees if the client wins. This is often referred to as a “no-win no-fee CFA”.
Common variations include:
- “discounted CFA” where the lawyer receives a lesser percentage of his fee if the client loses the case but fees at the full rate and the success fee if it wins; and
- “CFA Lite” where the lawyer operates on a no-win no-fee or discounted CFA basis, but the additional fee and any success fee payable on success is capped at costs awarded or agreed with the other side.
The key advantage is the fact that CFAs can reduce costs in an unsuccessful case. However, the additional cost of the success fee and the front loading of costs may deter use. Lawyers will only be prepared to act under a CFA where there are good prospects of success.
Damages-based Agreements (DBAs)
A DBA is a contingency-fee agreement. It is similar to a CFA in that what the lawyer is paid depends on the outcome of the case. However, unlike a CFA, the lawyer’s fee is not calculated by reference to the work carried out, but will be an agreed share of the damages actually recovered by the litigant (not the amount awarded). Under current rules, the maximum percentage in a commercial case is 50% of the damages received. If the client loses, the lawyer receives nothing, but the unsuccessful litigant is still liable for expenses and for the other side’s costs awarded against them.
DBAs will only be available where there is a substantial claim or counterclaim. Because the contingency fee cap is set at 50 per cent of the sums ultimately recovered, the level of damages has to be sufficiently high to ensure that the fee covers the solicitor’s costs, counsel’s fees and an uplift to reflect the risk of a nil return should the client lose.
Solicitors will require good prospects of success and will need to conduct sufficient due diligence to satisfy themselves of the merits of the case. Each law firm will have its own risk profile, but generally it will need to be comfortable that there is at least a 70 per cent prospect of success to consider a DBA.
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After the event (ATE) insurance
ATE insurance is a type of legal expenses insurance that provides cover for the legal costs incurred in the pursuit or defence of litigation and arbitration. The policy is purchased after a legal dispute has arisen. ATE insurers offer a variety of cover, tailored to the specific needs of the litigant. Typically, the insurance covers the litigant’s liability for the expenses and disbursements of their own lawyers and the opponent’s legal costs in the event that the case is lost.
One drawback is that the ATE insurance premium, which can be substantial, will not normally be recoverable from the other side when a case is won, apart from in certain limited circumstances.
ATE insurance will not be available for marginal cases, nor where there are unusual or novel aspects to the matter. ATE policies will include a range of exclusions and must be negotiated with care.
Third party litigation funding
Third party funding is where someone who is not involved in a dispute provides funds to a party to that dispute in exchange for an agreed return. Typically, the funding will cover the funded party’s legal fees and expenses but can cover the other side’s costs if the funded party is so ordered, as well as providing security for costs. Its application can extend beyond litigation and arbitration to all forms of dispute resolution, and is available for a wide variety of commercial disputes.
As the use of third-party funding has increased, so have the number and range of institutions that are prepared to finance litigation and arbitration. In addition to specialised third party funders, insurance companies, investment banks, hedge funds and law firms have entered the market. A recent estimate of the UK market for third party litigation funding puts it at over £1bn. The market has doubled in the past three years.
This type of funding is typically available only for large claims and can involve paying over a substantial share of any damages recovered to the funder. Assembling the proposal to a funder will inevitably be a costly and time-consuming exercise.
We will look more closely at the third party funding options in the second part of this litigation funding blog.
Conclusion: options for litigation funding and professional support
Litigants, whether they are claimants or defendants, need no longer be intimidated by commercial litigation. There is a wide range of risk management routes they can consider, but the common theme for all of these options is that risk mitigation will only be available where their case has a reasonable chance of success.
It is also inevitable that obtaining the protection they need means that litigants must put together what can often be complex financial and commercial proposals, dealing with the background to the case and the claim itself. This will usually require input from forensic experts, experienced in such matters.
Success in litigation does not end with the court’s award or the opponent’s agreement to settle. Recovering damages and costs can be extremely challenging, especially where there are cross-border issues. Assistance from forensic specialists is also relevant here to identify and trace assets. Recovery may also involve enforcement of awards and consequential insolvency issues, where having restructuring and insolvency professionals on the team will be crucial.
If you are seeking professional advice for your business, Opus is here to help. You can speak to one of our Partners who can discuss options with you. We have offices nationwide and by contacting us on 020 3326 6454, you will be able to get immediate assistance from our Partner-led team.