QUANTUM – funding options to help reduce the risk in commercial litigation
QUANTUM is our "no win, no fee" package for clients looking to explore alternative ways of funding their litigation. The package includes several different alternative funding options that can allow you to minimise the risks and costs involved in pursuing litigation. These options can include: conditional fee agreements (CFAs); CFAs combined with litigation funding; damages based agreements (DBAs); and financial modelling and “cradle to grave” fixed fees.
Conditional Fee Agreements
Conditional Fee Agreements (or “CFAs”) are the most widely used form of alternative litigation funding. They are often referred to as “no win, no fee” agreements, because you don’t have to pay any solicitors’ fees if you lose the case, and possibly few, if any, expenses. The CFA with your solicitor will set out how your solicitors’ costs are dealt with, both in the event that you win the claim and if you lose. As part of the CFA process, you will normally have also taken out an insurance policy (known as “After The Event”, or “ATE”, insurance) which pays your opponent’s costs if you lose, so that you don’t have to. The ATE insurance policy can also potentially cover your own litigation expenses, such as fees for an expert or barrister.
A CFA can take a number of forms, ranging from “full” CFAs where the solicitor is paid nothing at all during the course of the proceedings or if you lose, to “discounted” or “partial” CFAs where the solicitor is paid some fees at a discounted rate during the course of the proceedings but is not paid anything further if you lose the case (meaning that you can pursue a case to conclusion without having to pay the solicitors’ full/normal fees). As part of our QUANTUM package, we consider “full” and “discounted” CFAs for suitable cases.
When are CFAs appropriate?
CFAs are potentially suitable in most litigation cases. However, because certain fees are not recoverable from the other side if you win (as explained in the following section), for a CFA to be a cost effective option, the value of the claim has to be sufficiently large to pay the fees that cannot be recovered directly from the other side and still leave enough for the claimant to consider the claim to be worth pursuing.
Also, in order for a CFA to provide maximum value, it is best to also have ATE insurance (otherwise if you lose the case, you will still have to pay your opponent’s costs, even if the CFA means that you do not need to pay your own solicitors anything further). ATE insurers will normally only insure a case if an independent barrister has confirmed that the prospects of success are good. Equally, your solicitors will normally only be prepared to take a case on under a CFA if the prospects of success are suitably high, given that your solicitors will not get paid (or will not get paid their full/normal fees) if the case is lost.
RB has relationships with a number of ATE insurance brokers, who can assist you in independently seeking suitable ATE insurance cover. As members of the Professional Negligence Lawyers Association, we also have access to ATE insurance products specifically designed for professional negligence claims.
It is also important to assess whether the other side will be able to satisfy any judgment made against them (as the damages obtained from the defendant would in turn fund the payment of a CFA Success Fee and ATE insurance premium, as explained below).
What happens if I win the case?
If you win, the Court will normally order your opponent to pay the majority of your legal costs (at your solicitors’ full rates, even if they acted under a “discounted” CFA) and other expenses, as well as any damages awarded.
However, under a CFA (whether it’s a “full” or a “discounted” CFA) there will also be a “Success Fee” payable, which is an uplift on your solicitors’ fees, designed to compensate them for having taken the risk of not getting paid (or of only getting paid at a discounted rate) if you lost. If you have an ATE insurance policy, the premium will also be payable if you win.
Since 1 April 2013, as part of the so-called Jackson Reforms, CFA Success Fees and ATE insurance premiums are no longer recoverable in commercial disputes from the losing side, if the Conditional Fee Agreement or ATE insurance policy was entered into after 1 April 2013. Therefore, if the CFA and ATE insurance policy was entered into on or after 1 April 2013, you will be liable for the Success Fee and the ATE insurance premium yourself in commercial disputes. In practical terms, the Success Fee and the ATE insurance premium will often therefore be paid out of the damages which the losing opponent is ordered to pay you at the conclusion of the case (if they have the means to pay).
However, the abolition of the recoverability of CFA Success Fees and ATE insurance premiums will not apply to defamation and privacy claims until appropriate costs protection rules have been introduced by the government (the date of which is still to be confirmed). Personal injury claims are also subject to further reforms that are distinct from commercial disputes.
In any event, you may still have to pay your solicitors at least some fees (over and above the Success Fee) if the sums recovered from your opponent are not enough to cover all of the fees due to your solicitors under the CFA.
What happens if I lose the case?
If you lose the case, under the CFA you will not have to pay your solicitors anything (or, if it is a “discounted” CFA, you will not have to pay them anything over and above the discounted rates you have already paid).
The ATE insurance will pay your opponent’s costs, and may also pay some of your third party expenses (although you may need to pay any third party expenses not covered by the ATE insurance or CFA). You may also need to pay the premium on the ATE insurance policy, unless the premium is “self-insured” (meaning that the ATE insurance policy pays its own premium as one of your expenses in the event that you lose the case).
What are the benefits of having a CFA?
The primary benefits of having a CFA are that it will:
- Reduce the solicitors’ costs that you have to pay if you lose the case and allow you to manage your legal costs expenditure during the case. Under a “full” CFA you will pay your solicitor nothing at all, and with a “discounted” CFA you will only be paying the solicitors’ discounted rates, rather than their full rates.
- As CFAs and ATE insurance are normally only available in cases where an independent barrister has confirmed that the prospects of success are good, it also may cause your opponent to re-evaluate the strength of its position. Equally, your opponent will know that it cannot simply wage a “war of attrition” by unnecessarily complicating matters in the hope that you will run out of money to pursue the claim all the way to trial.
Combining CFAs with third party litigation funding
“Third party litigation funding” generally involves the client using the value of a litigation claim as an asset to obtain funding from a third party. The third party will then cover some or all of the expenses of bringing legal proceedings, in exchange for a return tied to the outcome of the case (such as a portion of damages).
As part of our QUANTUM package, we can look into the suitability and availability of using third party litigation funding in conjunction with a CFA in relation to our costs. In suitable cases, a solicitor could agree to enter into a “discounted” CFA which provides the client with, for example, a 40% discount on the solicitor’s normal fees, and then the third party litigation funder could agree to pay 40% of the client’s costs, meaning that the client is able to pursue the claim while only paying 20% of the solicitor’s normal costs itself.
Many businesses are also completely unaware that they can use the value of their litigation claim as collateral to secure financing which can then be used by the company for general corporate purposes, unrelated to the funding of the litigation itself.
Damages Based Agreements
Since 1 April 2013 it has also been possible, for the first time in England and Wales, for solicitors to enter into Damages Based Agreements (or “DBAs”) with their clients. A DBA is a new form of “no win, no fee” agreement, not dissimilar to the US-style contingency fee agreement. If the case is won the solicitors’ fees are calculated as a percentage of the damages received by the client, rather than based upon the time which the solicitors have spent on the matter. There are prescribed rights of recovery from your opponent in relation to part of your solicitors’ fees if you win, but if the case is lost, no solicitors’ fees are payable to the solicitors under the DBA.
However, this is a relatively new area of law, and there are still significant uncertainties regarding how the new rules governing DBAs will work in practice. Because of these uncertainties, and the current lack of interest in the legal market for DBAs, we are waiting for clarification on these issues or for the relevant regulations to be amended, before considering any DBAs.
Financial modelling and “cradle to grave” fixed fees
At RB, we work with both in-house counsel and company executives using bespoke financial modelling to assist with the risk analysis of cases. This can often involve “decision trees” and other forms of probability charts that analytically assess the potential risks and rewards of an ongoing dispute, so that informed decisions can then be made as to their future progression, including the most suitable available forms of funding.
Our QUANTUM package is designed to be flexible enough to meet our client’s funding needs in a variety of situations. As well as “full” and “discounted” CFAs, third party litigation funding and ATE insurance, we can also consider the suitability of other forms of flexible funding arrangements, such as using the financial modelling of a case to agree a quote for a “cradle to grave” fixed fee to take the claim through to conclusion, based on a variety of factors such as the value of the dispute, the complexity of the legal issues, the type of disclosure required, the number of witnesses to be called, the need for expert evidence and the length of the trial. Once the global fixed fee is agreed, payments can then be made in regular, predictable, monthly instalments.
This article only summarises some of the funding options that may be available to you. You can click here for further information on how third party litigation funding may be of assistance to you, or if you would like to discuss how we might be able to assist you in managing the costs and risks of litigation using our QUANTUM package, please contact Stuart Evans by emailing Stuart or by calling him on 01293 527744, or speak to your usual contact in the Commercial Disputes Team.