Litigation Funding

Litigation funding and insurance

Litigation is expensive business and “how much will it cost?” is quite often the crucial question that clients want addressed at the outset. The costs of legal representation form a significant proportion of the overall cost of litigating – although increased court fees and experts’ fees both have their part to play.

Whilst to some extent you do end getting what you pay for selecting and using the appropriate fee-structure for your case can significantly reduce either the cost or risk of litigation. At CH Legal we do not believe that one size fits all and we are prepared to agree retainers and fee-structures to suit individual circumstances and pockets. Below is a brief synopsis of the some of the most common ways of funding your case.

 

 Private retainer

This is the way that most lawyers have traditionally worked and this still accounts for the way in which most litigation (outside of the personal injury arena) is conducted. Essentially the client pays his or her solicitor for the work done and then seeks to recover his / her costs from his/ her opponent upon successful conclusion of the case. This is usually done on a “time cost” basis so that an hourly rate for a particular grade of fee-earner is agreed and the cost depends on the number of hours worked on the case by the fee-earner.

The key issue with this type of retainer is that the cost can sometimes exceed the expectations of all concerned and clients can be left feeling as if the cost has run out of control. Lawyers are becoming much better at predicting the likely costs and the use of costs budgets has helped with this. It should also be possible to agree fixed costs for various stages of the litigation. This gives the client a little more certainty, but other problems still persist.

A private retainer will usually involve the solicitor billing (usually on a monthly basis) for the work done to date. In addition most firms will seek money on account for disbursements. These can be significant if experts are engaged. Having to find the money up front and along the way can put a serious strain on cash flow.

A further problem is the fact that even successful litigants are unlikely to be able to recover more than 2/3 of their legal costs from their unsuccessful opponent. This problem is exacerbated if anything other than an hourly charge-out rate is used to work out the cost – hence the reason why so little work is done by litigation lawyers on fixed fee private retainers. It is unclear how the courts will treat fixed fees agreed as private retainers when it comes to ordering unsuccessful parties to pay them.

 

Conditional fee agreement

This is the basis on which most personal injury cases are conducted by solicitors. The essential pith of this arrangement is that it removes some of the risk for the client. That is to say that the client does not pay his own solicitor if he loses. The flip side is that the client must, usually, pay his own solicitor a success fee if he wins to compensate the solicitor for the risk that s/he has taken.

Conditional fee agreements tend not be used outside of personal injury litigation, but nevertheless, can be used to effectively to conduct litigation in other areas, including commercial litigation. If a conditional fee agreement is used then most (but by no means all) of the costs (excluding the success fee – which is always payable by the winning party from his or her own pocket) are recoverable by the winning party from the losing party.

The advantages of a conditional fee agreement are clear. In effect the lawyer is being asked to assume some of the risk in return for greater reward. The disadvantages are that these types of agreement are unlikely to be available in anything other than the most routine of case (although there is some move towards “no win low fee” agreements), generally disbursements still have to be funded by the client as the matter progresses and the client has to pay a success fee which would otherwise not be payable.

 

Contingency fee agreements / Damage based agreements

A contingency agreement is essentially an agreement to pay a fee based upon a contingency (usually winning a case) which is typically expressed as a percentage of the amount of money that is obtained by the solicitor on behalf of the client. Up until recently it was not possible for solicitors to enter into contingency agreements with their clients in contentious matters. This was changed with the introduction of the damage based agreement regulations.

A damage based agreement is an allowable (or enforceable) contingency fee agreement in contentious matters. Damage based agreements have proved not to be popular not only because of the onerous and overly technical and proscriptive nature of the regulations, but also because they are unattractive from the lawyer’s perspective. Essentially, because the lawyer must give pound for pound credit for fees recovered from the losing party, the “success fee” element (or reward for taking the risk) is eroded – in extreme cases completely.

For these reasons, whilst technically available and a possibility, the take up of damage based agreements as a means of funding cases has been very poor.

 

Legal Expense Insurance

Suitable legal expense insurance can be invaluable in litigation. Prior to now when talking about legal costs and expenses we have focussed on the clients own costs – i.e. the cost of hiring your  lawyers and paying disbursements such as court and expert fees. As, already mentioned, most of these  costs (but not all) are recoverable from the losing party on successful conclusion of the case. However, what happens if the case is lost? As the losing party, whilst you may have nothing to pay your own lawyer if you have persuaded him/her to work on a conditional fee agreement, you will still have to pay the winning parties legal costs – which may be substantial. This is where legal expense insurance comes into its own.

Legal expense insurance generally takes two forms. The first is “before the event” legal expense insurance. As the name implies this type of insurance is taken out before the event occasioning the need for it arises. Typically before the event insurance is sold as an add-on to household or motor insurance policies at little or no cost.

When before the event legal expense insurance works it generally provides cover for the clients own costs, disbursements and, most importantly, adverse costs (which are costs that would otherwise be payable by a party should s/he lose the case). The problem with before the event legal expense insurance is that it is frequently unsuitable. Typically it is sold as a loss leader by insurers as a means of capturing clients for profitable areas of legal work. This means that the cover is usually riddled with holes rendering the policy all but useless in the event that a claim needs to be made on it, policy holders are restricted to using “panel firms” and the rates paid to law firms for running the case are generally uneconomic if a proper service is to be provided. So, whilst before the event insurance is great in theory in reality the way that it is currently sold frequently means that the policy is entirely unsuitable for most litigants, restricts choice of legal representative and tends to lead to poor service.

After the event legal expense insurance is purchased after the need for it arises. It can be bespoke to the case and individual circumstances or more generalised. It is usually versatile and does not restrict legal representation. It is typically self-insuring so that if the case is lost then the policy holder does not pay a premium. However, the premium is payable by you if the case is won – and this premium is not recoverable as a disbursement from the losing party. Additionally, after the event legal expense insurance does not typically cover your own legal costs and the usual issues around claim rejection can apply.

 

Third party funding

In larger cases it might be appropriate to consider third party funding. In summary this involves a client entering into a damage based agreement with a third party. The agreement typically provides that the third party funder will become entitled to anywhere between 25-50% of the damages in return for which the third party agrees to fund ongoing legal expenses.

Third party funding works best where the damages are likely to be substantial, but the business or individual in question either does not have the funds to pursue the case or is not comfortable with the litigation risk. Typically this might be a “bet your business” scenario. For example, a business may find that its intellectual property or other rights have been infringed. The cost of litigation may be substantial and the prospects, whilst good, are by no means certain. The dilemma for the business may be that if it does nothing then its right may continue to be infringed so as to adversely affect profitability in the short to medium term. On the other hand if it chooses to litigate the costs might be such that losing may involve the business having to go under. The “third way” may be to involve a litigation funder and thereby transfer some of the risk.

Third party litigation funding is still in its infancy in the UK and the usual teething problems are only just beginning to emerge. Firstly, it is important to check that the third party funder has sufficiently deep pockets to provide proper cover – cases inevitably end up taking longer and costing more than anticipated. Secondly, most third party funders are still not interested in the smaller case and remain exceptionally picky about the sort of cases that they will fund – going to the right funder with the right case is key. Thirdly, there remains a tendency for funders to attempt to parcel off some of the risk to the lawyers involved by insisting that they work on reduced hourly rates or on “no win low fee” agreements. Although there are always cases where this is suitable it does, at first sight, appear to defeat the object.

 

Which funding arrangement is suitable for me?

Funding legal costs is becoming an area of expertise in its own right. It will surprise no one to learn that there is no simple right or wrong answer when it comes to selecting an appropriate form of funding. Much depends on the circumstances. However, what is clear is that selecting the appropriate form of funding can be crucial in mitigating risk and maximising the potential upside.

It is now possible, like never before, to mix and match the various types of funding to suit. Increasingly novel and hybrid forms of funding are emerging out of the four or five basic models. These continue to evolve to offer clients value for money and align risk and reward for all involved.

 

MOHAMMED ASIF MALEK