How to fund the costs of litigation is almost always a concern for potential Claimants, but this concern is perhaps more pronounced in the current Covid-19 climate. Each party is responsible for its own litigation costs as the claim progresses. When the case comes to an end, costs are dealt with either through a settlement agreement or, if the claim proceeds to trial, the judge will decide which party should pay the costs. Normally the losing party is ordered to pay the reasonable costs incurred by the winning party.
This blog will examine three of the possible ways in which on-going litigation costs can be funded and how to secure insurance cover to protect against the risk of a claim being unsuccessful and the losing party being ordered to pay the winning party’s costs.
Conditional Fee Agreement (CFA)
In short, this arrangement is often referred to as a “no win, no fee agreement,” whereby the solicitors, and possibly also the barristers involved in the case, will charge either reduced hourly rates or nothing as the case progresses. This is on the basis that, if the claim settles or is won at trial, the client will pay the normal hourly rates in addition to a success fee (sometimes referred to as an uplift). The success fee is charged in part because a CFA arrangement means that the solicitor carries a risk of being paid nothing if the claim does not succeed.
The success fee can be up to 100% of the usual hourly rate so, for example, if the solicitor’s hourly rate is £200 plus VAT, upon success s/he will be owed £400 plus VAT per hour if the success fee is set at 100%. Due to changes in the law a few years ago, whilst the success fee used to be recoverable from the losing side, it is no longer recoverable in most types of civil claims. Accordingly, any success fee would have to be paid by the client, usually out of the proceeds of the claim.
Given the risk of non-payment, or partial payment, which the solicitors (and possibly also the barristers) will carry, a CFA is usually only offered for claims with a good chance of success.
Third party funding
Third party funding is a mechanism whereby an investor will fund all or a portion of the costs of a claim (including solicitor’s fees and disbursements) in return for a share of the damages recovered at the end of the case. If the claim is lost, there is nothing to pay to the funder. The percentage share taken by the funder will vary from funder to funder and case to case, but the normal range is between 25 – 40% of the damages recovered. Consequently, funders will generally not be interested in non-monetary claims.
In order to obtain third party funding, it is important that the potential damages pot is sufficiently high, because the funder will only be taking a percentage of it. It is also important that the merits of the claim are strong. Funders need returns from successful cases to cover their capital outlay for the duration of their investment.
Damages Based Agreement (DBA)
A DBA is an arrangement whereby the solicitors agree to accept a percentage of damages recovered when the claim is settled or after trial. DBAs allow for the solicitor to share the risks of the litigation with their client. They are similar to a US style contingency arrangement. Simple in construct but with some elements of underlying complexity. DBAs are a fairly new animal – until April 2013, they were unlawful for contentious work. Now however they are increasingly an option for Claimants.
Unless the claim involves personal injury, clinical negligence or an employment dispute, the percentage of damages that the solicitor can take is capped at 50%. DBAs are only available to claimants (or counterclaimants) and not defendants to an action, because the payment to the solicitor under the DBA is part of the damages recovered in the claim.
If the claim is unsuccessful, the solicitor will not be paid for the work done under the DBA, so it is important that the potential damages pot is sufficiently high and that the merits of the claim are strong.
After The Event insurance (ATE)
Parties can take out an insurance policy after a claim has arisen in order to protect themselves from having to pay their opponent’s legal costs and expenses if the claim is lost. The insurer undertakes to pay the other side’s costs if the claim is unsuccessful. The amount of premium payable will vary but it tends to be around 20% of the amount insured. Sometimes ATE insurance is available with deferred and self-insured premiums, meaning that the premium is not payable until the end of the case and only falls due if the claim is successful. As might be assumed, a contingent premium payable out of the proceeds is very high – up to 85% of the cover.
The ATE premium is no longer a recoverable cost of the litigation, save in limited types of claims, due to changes introduced in the law introduced in April 2013. This means that, even if a party succeeds in their claim, the ATE premium is a cost they will have to bear themselves.
Edwin Coe regularly work with different third party funders, as well as brokers to obtain ATE policies for clients. We are well placed to advise in more detail on funding options and costs protection available to potential litigants.
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Please note that this blog is provided for general information only. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content of this blog.
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