Litigation Funding and Costs

Litigation Funding and Costs

Lord Justice Jackson was commissioned in November 2016 to carry out a root and branch review of civil litigation costs, with a view of making costs provisions in litigation matters and going to court far more certain for parties. This long awaited review is due to be published imminently.

Over the past weeks and months, commentators have been speculating on the reports contents, the likely changes and indeed, the seismic changes that may arise in the wake of Lord Justice Jackson’s review. From speeches delivered by Lord Justice Jackson, it is clear that the key area of his review has focussed on the introduction of a regime where costs are recoverable by one party from another will be ‘fixed’. This is not an entirely novel concept, as this is in place on a limited number of cases.

The indications from speeches and press releases given on this subject is that Jackson is in favour of the regime to be extended to all cases where the value is up to £250,000. This has been supported by the Civil Procedure Rule Committee’s views which considered the proposals for a pilot scheme for fixed costs up to £250,000 which was debated in May 2017.

Other commentators have expressed a view that fixed costs will be introduced, but the limit for such costs should be in the £100,000. Whether this will be considered and amended in light of the pilot scheme at the London Mercantile Court and three courts in the Manchester and Leeds District Registries remains to be seen. This pilot scheme is likely to run for a period of two years and will be monitored with a view of a wider implementation if successful thereafter.

Alternative Funding Arrangements

Now, more than ever before, it is important for parties to consider alternative methods of funding which may be available to them in the pursuit of litigation. In fact, lawyers generally will now have more of an obligation to discuss alternative methods of funding with clients, in particular the availability of insurance backed funding for litigation, as claims could be issued against solicitors for failing to consider such alternatives. As lawyers, we are obliged by the SRA to discuss all available funding options with clients, including advising on the possibility of existing Legal Expenses Insurance policies or Before the Event insurance or indeed the availability of purchasing an After the Event policy and the requirements of such a policy.

Private retainers, i.e. a client paying for legal services from their own finances will continue to be an important method of legal funding, but clients should be aware of the alternatives available to them which include the following forms of funding:

Fixed Fees

Fixed fees can be used in conjunction with any of the other methods discussed below, but normally involve the client paying an agreed fee to his/her solicitor for a specific stage or work required as part of the litigation process.

The pilot scheme proposed for this area will involve the Court imposing a fixed fee on what can be recovered for each stage of the litigation process. Clarity will no doubt be provided in the client-solicitor retainer as a result, where fixed fees for certain parts of the work required are likely to be negotiated based on what may be recoverable from the Court. This model, it is perceived, may bring litigation more in line with other areas of the legal profession which currently offer fixed fee work, for example, conveyancing services or will drafting services.

Before the Event Insurance and After the Event Insurance

Before the Event Insurance, or ‘BTE’ as is it commonly known, is a type of insurance which covers policyholders against the potential legal costs of pursuing legal action or defending legal action brought against them. This type of insurance is often contained within existing house or car insurance and is often confused with legal cover. This insurance is, effectively, a stand alone policy within the policy, which allows the policy holder to consider legal funding to pursue or defend a claim by way of insurance backed funding. Trade unions or other associations often provide such funding as part of their membership. However, only the named policy holder/s or trade union member may use this type of funding.

After the Event Insurance, or ‘ATE’ policies as they are known, are insurance policies that may be taken out after an event has taken place. Such policies provide cover to policy holders for disbursements and any potential adverse costs orders they may face should their claim or defence be unsuccessful. If for example a policyholder loses its claim, the insurers will pay any adverse costs orders made against the policyholder along with any disbursements. Specialist insurance providers will assess the claim before cover is provided and a premium will be quoted for such cover based on the facts and circumstances of the proposed policy holder.

Both BTE and ATE policies already play a key role in litigation funding and this is likely to continue in the future. With the introduction of the fixed costs pilot scheme and the likely approach taken by Lord Justice Jackson towards a fixed costs regime for civil claims, the potential exposure on costs for insurers and policy providers will not doubt add certainty to their costs exposure, with the process of obtaining and indeed being approved for such funding being far more streamlined than it has been in the past. Certainty in an area of law and funding where there has been significant uncertainly can only be welcomed. Indemnity insurance is mandatory for a number of professions, such as for law firms and accountants; however, it will no doubt become far more of an issue for other commercial and private clients to have insurance in place to cover legal costs and manage their exposure and risk in litigious matters in the future.

Conditional Fee Agreements (“CFA”)

CFA’s are often described as a “no win, no fee agreements”. This expression is not always accurate but nonetheless, such agreements have become popular as an alternative method of funding litigation over the past few years.

The basic premise of a CFA agreement is that if a client is unsuccessful, having agreed such a CFA with his/her solicitor, the solicitor will not charge for the legal fees incurred but the client will have to pay disbursements incurred and usually pay the opponent’s legal costs – in litigation, the unsuccessful party will always be liable to pay the successful party’s costs and disbursements (subject to an assessment as to their reasonableness). Under a CFA, if a client is successful, a ‘success fee’ on top of the normal hourly rate charge will be added to the amount due and payable. The opposing party may be ordered to pay a contribution to part of the normal charges, but if there is a shortfall, this is due and payable by the client under the agreed terms of the CFA.

However, Lord Justice Jackson in his changes under the Jackson Reforms a few years ago, abolished success fees and ATE premiums taken out by clients in pursuance of their litigation which were recoverable from the other side. As a result, the viability and indeed the whole concept of CFA’s as being a worthwhile option to funding litigation may well be curtailed, as solicitors and clients will need to consider whether it is both economical to pursue litigation as well as assess the risks of such litigation in light of what can be recovered under the proposed fixed costs regime that may be implemented in future. Success fees will also be scrutinised against the amounts claimed and whether such sums can be recovered for clients.

Discounted Conditional Fee Agreements (“DCFA”)

Another firm of funding, similar to a CFA, often used in commercial litigation matters is the option of a Discounted Conditional Fee Agreement. This form of funding is often used in commercial matters, due to the complexity, nature and associated risks associated with such claims, but more and more of these Agreements are seen in other areas of litigation.

A DCFA is similar to a CFA but rather than the client not paying the solicitor no fees should a client’s mater be unsuccessful, the client to such an agreement is liable for his/her lawyer’s fees at an agreed discounted hourly rate. If the claim is successful, the client is liable to pay the full amount of the solicitors’ costs at the normal hourly rate (not the discounted rate) along with any success fee where applicable.

Third Party Funding

Third party funding or what is often referred to as “litigation funding” is an arrangement between a specialist funding company and a client, where the funder agrees to provide finance for some or all of the client’s legal fees in exchange for a percentage/share of the damages.

This form of funding can often be used with the other alternatives mentioned above, where legal fees are charged on an hourly rate basis, fixed fee, CFA or DCFA. This is often used in large value claims as opposed to smaller value claims, due to the risks and returns available, making this far more of an acceptable proposition for such funders.

The Future

The future of costs and litigation funding, in light of Lord Justice Jackson’s likely reforms looks to be uncertain. There is no doubt that fixed costs will be implemented, this adding certainty for clients on what can and cannot be recovered from an unsuccessful party. However, now, more than ever before, the importance of Alternative Dispute Resolution will come to the fore and demonstrate why an early settlement of a claim, before it reaches the Court doors, would be deemed a far better outcome than having to incur additional costs, which may be curtailed to a fixed recoverable amount which are likely to be proposed by Lord Justice Jackson.

Funding options and alternatives to the traditional private retainer will always be available for clients, but minimising the risks associated with adverse costs and choosing a funding option that not suits the client but also protects the client from adverse costs will be a far more prominent in discussions between solicitors and clients in future.

If you have any queries on litigation matters, funding or how we could assist you with your matter, please do not hesitate to contact us for a non-obligation discussion on enquiries@sinclairslaw.co.uk or by calling 02920 388 398.

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