Commercial Litigation Funding Options

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Private funding – hourly rates

This is the most common and traditional route of funding. An hourly rate is agreed between the parties at the outset taking in to account a variety of factors. Bills are generally rendered on a regular basis to include disbursements. A client care letter will address the more detailed provisions of the retainer.

Fixed fees

This may be negotiable for certain work of a clearly defined nature.

Conditional fee agreements (“CFA’s”) entered into after 1 April 2013 in commercial matters.

A CFA is defined as an agreement with a person providing advocacy or litigation services which provides for his fees and expenses, or any part of them, to be payable only in specified circumstances. In other words, it’s an agreement where a client pays different amounts for its legal fees depending on the outcome of the case. Generally, if the client loses the case, it will not be liable to pay for the fees and any expenses that are subject to the CFA. If they win, they will be liable to pay all fees and expenses, including the conditional fee and a success fee if provided for.

Proceedings include any sort of proceedings for resolving disputes (not just proceedings in a court), whether commenced or contemplated. In Gaynor v Central West London Buses Ltd [2006] it was found that advising on the merits of a case and writing a letter before action did not amount to litigation services unless the retainer expressly says it did.

A “win” needs to be expressly agreed and defined. It will likely be along the lines of an award of damages. That being the case, a success has been achieved even if there is no subsequent recovery, for example the defendant is made bankrupt. The wording will not be construed to include a “net gain”.

A success fee must be expressed as a percentage uplift on the amount that would be payable if there was no CFA. The maximum uplift in a commercial case is 100%. The level of the success fee is normally calculated by assessing (i) the risk of losing the litigation and (ii) the cost of funding the litigation.

If the court decides that a CFA is invalid and unenforceable, the client will have no liability to pay any of the fees under the CFA, including the success fee, and it will not be possible to recover any of them from the opponent because of the indemnity principle.

There is no requirement to notify the opponent of the existence or terms of a CFA.

There are different types of CFAs:

a. CFAs with no success fee where the firm agrees to forego all of its fees if the client loses and will recover its ordinary/base costs if the client wins.

b. CFAs with a success fee where the firm agrees to forego all of its fees if the client loses and will recover its base costs and a success fee calculated as a percentage uplift on the base costs if the client wins.

c. CFAs with a discounted hourly rate where the firm will be paid at a discounted hourly rate whatever the outcome of the proceedings but will forego the balance of its base costs if the client loses, and will recover all of its base costs with or without a success fee if the client wins.

It is possible for barristers to enter into CFAs which may or may not include a success fee with their instructing law firms or direct with the client.

Although most CFAs are entered into by claimants, there is no reason why a defendant should not enter into a CFA in relation to its defence or its counterclaim. There will be a need to carefully define “winning” and “losing”.

Damages Based Agreements (DBA’s)

The client will make a payment to the lawyer if they obtain “a specified financial benefit”, usually damages paid by the losing side. The amount of the payment will be determined as a percentage of the compensation received.

If the case is unsuccessful, the lawyer is generally not entitled to be paid. The client will still potentially be liable for adverse costs, although these may be covered by after the event (ATE) insurance (see below).

The existence of a DBA will not affect the making of any costs order that would otherwise be made in favour of that party. That party’s recoverable costs will be assessed in the normal way subject to the indemnity principle – an inability to claim from the other side more than a client’s liability to pay their own lawyer.

If the DBA does not comply with the relevant legislation and is, therefore, unenforceable, the client will not have to pay the representative anything under the DBA. In these circumstances, there would be no recoverable costs ordered from the losing side because of the application of the indemnity principle.

There is no requirement to notify the opponent of the existence or terms of a DBA.

A DBA must not require the client to pay anything other than the contingency fee referred to as the payment and any expenses incurred by the lawyer, net of any amount that has been paid or is payable by another party. The payment must be net of the following:

— Costs (including fixed costs under CPR 45) that have been paid or are payable by another party to the proceedings by agreement or order (where costs are defined as the total of the representative’s time reasonably spent multiplied by the representative’s reasonable hourly rate).

— Counsel’s fees that have been paid for as a disbursement by the representative, and that have been recovered or are recoverable from another party.

This means that any of the representative’s fees that are recoverable from the other side and any counsel’s fees incurred by the representative and payable by the other side must be set off against the contingency fee or payment reducing the amount that the client must pay to its lawyer out of damages recovered.

In commercial claims or proceedings at first instance, a DBA must not provide for a payment that is more than either 25% of the relevant sum recovered including VAT. Unlike with CFA’s, since the contingency fee is calculated as a percentage of sums ultimately recovered, the amount payable could be significantly reduced, or even eliminated altogether if, for example (a) the defendant was/becomes insolvent (b) contributory negligence is a factor (c) a counterclaim reduced the sum recovered by the claimant.

At the outset there must be a clear agreement about who will meet the liability for adverse costs if the client is unsuccessful and how that risk is to be addressed.

A DBA must be in writing and specify (a) the claim or proceedings, or parts of them, to which the DBA relates (b) the circumstances in which the representative’s payment, expenses and costs, or part of them, are payable; and (c) the reason for setting the amount of the payment at the level agreed. It is also prudent for all to record, the definition of success, how to calculate the lawyer’s reward, who pays disbursements/expenses, who is responsible for adverse costs, how to resolve settlement disputes between the lawyer and the client, when the lawyer and the client respectively can terminate the DBA.

It may be appropriate to consider a staged DBA whereby the percentage payable varies depending on the stage at which the case is successfully concluded (increasing the percentage the longer the case proceeds although the maximum percentage would still have to be within the cap. Parties could also consider staggering the percentage with reference to the level of damages.

A defendant could enter into a DBA but that would be unlikely unless they have a sizeable counterclaim.

After the event insurance (“ATE”) for policies taken out from 1 April 2013.

ATE insurance is an insurance policy that provides cover for the legal costs incurred in the pursuit or defence of litigation and arbitration after it has arisen.

As a result of changes brought in on 1 April 2013, the premiums is no longer recoverable from the other side, where the insurance policy is issued on or after that date save in excepted cases, publication and privacy proceedings or claims for damages in respect of diffuse mesothelioma.

CFA funded clients may wish to purchase ATE insurance (as CFAs assist in protecting a client from liability from their own costs but not adverse costs) but it may be available where no CFA is in place.

Generally speaking, insurers will expect a 60% likelihood of success and be satisfied that the other party is able to pay the premium. The premium may be payable up front, staged, deferred or contingent on success.

There is no requirement to notify the opponent of the existence or terms of ATE insurance but tactically, disclosure of an ATE policy may provide an incentive for the other side to settle. They will know that an insurer has separately analysed the merits of the case or defence and can give the impression the client is in the litigation for the duration.

Before the Event insurance

This is insurance which a client may already have before the legal proceedings arose as part of the client’s household or motor insurance and which covers some or all of the client’s potential costs liabilities in any subsequent proceedings.

Contentious business agreements (CBA)

These are agreements providing the lawyer will be remunerated by a sum or hourly rate at different rate than they would otherwise have been entitled to be remunerated.

There is no requirement to notify the opponent of the existence or terms of a CBA.

Third party funding

This usually involves a commercial funder agreeing to pay some or all of the claimant’s legal fees and expenses in return for a fee which is payable out of the proceeds recovered from the resolution of the claim (whether by judgment or settlement).

If the claim is unsuccessful, the funder loses its investment and is not entitled to receive any payment.

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The content of this update is for the purpose of providing general legal information. It does not constitute legal advice from a solicitor and should not be treated as such.