Litigation funding

A rise in the use of litigation funding

Historically, it was illegal for a third party, who had no active involvement in a dispute, to fund it. The law has since changed, and the business of investing in litigation claims is growing, with funding arrangements being an accepted and valued means of financing litigation.

The change in law has not been driven by the desire to fuel satellite litigation and a claims’ culture, but as a result of a wider recognition that access to justice was being limited to those who had significant available funds to fight their corner. It was not just the amount of a party’s own legal costs that was shelving good claims, but the diversion of that capital away from the other needs of the business, the risk of losing that capital if the claim was lost, and the risk of receiving a bill for the opponent’s costs.

All these factors have, in recent years, resulted in businesses abandoning good claims, chalking disputes up to experience and walking away.

There will still be situations where litigation is not commercially viable, but where the only barriers are the investment of capital in cost outlay and the financial risk of losing, businesses now have a plethora of funding options available to them, meaning that the claim can proceed at a reduced risk and sometimes risk-free.

A good claim is an asset to your business, and we can help you to realise that asset.

We can share the risk with you

We are confident in our judgment and strategy meaning that in appropriate cases we are willing to share risk, and in some cases offer no risk arrangements, in respect of our fees. 

Our team has over 40 years’ litigation experience and has worked with various funding arrangements for more than 15 years. This combined technical expertise and our flexible approach enables us to help you find the best funding solution. 

The common misconception of litigation insurance and funding

It is a common misconception that litigation finance and insurance are only for those who cannot fund litigation themselves. Whilst it does enable those without funds to bring a claim, it is equally applicable to businesses who have the funds to meet the cost of litigation, but who do not want to divert those resources away from the development of the business. Even large corporations are now financing disputes through third-party funding to remove the cost of litigation from their balance sheets. This creates an opportunity to hedge risk.

When might you wish to use litigation funding or insurance?

Some litigants apply for litigation funding to pay their legal costs because, without it, they would not be able to afford to pursue an action at all. But this is not the only situation in which litigants seek to use litigation funding. Some litigants, despite their ability to fund the litigation, would rather take the option of the support provided by a litigation funder. This may be because:

• they prefer to share or transfer the risk of pursuing the claim (even though they will have to pay some of the damages to the funder if they are successful);
• legal budgets are limited, and third-party funding allows a company with multiple claims
• to finance more actions than their limited budget would otherwise allow; and/or
• it is commercially convenient to take the cost of funding litigation off the company balance sheet completely.

Deciding how to proceed

Before you decide whether or not you wish to pursue or defend litigation, you will need to know how much the process will cost, when the fees will need to be paid and the options available for funding the likely costs. Litigation can be expensive. However, there are various ways in which the costs of litigation can be managed, budgeted or funded.

We take a flexible approach to funding and are willing to share some of the risk with you in appropriate cases. We have the knowledge and experience to present suitable options to you, including the combining of different funding arrangements to reduce your overall financial risks as much as possible.

We strive for a no-nonsense approach, offering transparent and clear information on the likely costs of resolving your dispute at the outset.

Finding the right funding solution - conducting a cost-benefit analysis

When considering the funding options available, we will conduct a cost/benefit analysis for you to work out what the likely costs and liabilities will be so that you can decide if the overall financial benefit it still one which is worth pursuing, once the expenses of litigating are paid for.

The balance of monies to you, after the dispute has been concluded either through settlement or final hearing, needs to be worthwhile.

Funding options

The types of funding that may be available and suitable for you will be dependent upon several factors:

• the merits of your claim;
• the remedy you are seeking;
• the value of your claim and whether you are bringing or defending a claim; and
• your view on investing capital into the litigation.

If the prospects of a claim are strong enough, we will work with you to seek to find a suitable funding arrangement to assist you in managing the costs of litigation. 

Normal hourly rates

Under this type of agreement, you will pay an hourly rate for the work. The amount that you will pay for your fees will be the same whether you win or lose. In addition, you will also be responsible for paying your expenses or disbursements.

If you are successful, you may be able to recover from your opponent a contribution to the fees, expenses and disbursements that you have paid. If you are unsuccessful, then in addition to your own costs, you may have to pay some of the fees and disbursements incurred by your opponent.

Fixed fees

In low value and/ or straightforward cases, we may be able to offer fixed fees for the whole, or stages, of the litigation. In addition, you will also be responsible for paying your disbursements.

If you are successful, you may be able to recover from your opponent proportionate amounts of the fees and disbursements that you have paid. If you are unsuccessful, then in addition to your own costs, you may have to pay some of the fees and disbursements incurred by your opponent.

Third party funding

Litigation funding is where a third party, with no connection to the litigation, agrees to finance all or part of the legal costs of the litigation in return for a fee payable from the proceeds recovered by you in your claim. The fee is not normally payable if your claim is unsuccessful and therefore this funding does not operate as a loan. If the litigation is lost, a third-party funder will lose their investment, and no sums will be repayable.

A third-party funder can range from a small funder with limited investment capital to large international funders. Third-party funders are unconnected parties to the litigation and are investing in the litigation by funding the legal fees incurred in pursuing the litigation in exchange for a fee. Third-party funders’ fees are typically calculated as a multiple of the cash invested or a percentage of monies recovered.

This may be a suitable option if:

• you would prefer to focus on business capital and cash flow on the progress of your company;
• there is a commercial benefit to you in moving the cost of litigation off your balance sheet;
• you are willing to reduce the amount that you may recover in the litigation by way of payment to a third-party funder rather than investing funds throughout the duration of the matter;
• you are unable to afford to pay the costs and disbursements at present but will be in a position to pay off the litigation loan once your matter has resolved.

In assessing any potential investment in litigation, a third-party funder will have regard to the value of any claim, the prospects of the claim resulting in a successful outcome and the prospects of recovering any monies awarded as a result of the litigation.

It is common for the third-party funder to require the inception of an after the event insurance policy to reduce its potential exposure if the litigation is unsuccessful. Litigation funding may be used in conjunction with:

• After-the-event insurance;
• a conditional fee agreement under which the solicitor assumes the risk for some, or all, of the client’s legal fees if the client should lose.

Minimum and maximum amount funders will fund?

The minimum acceptable size of a case is usually a function of the costs; damages ratio the funder relies on. For instance, some funders advertise that they only consider cases where costs are anticipated to be no more than 1:6 to damages, whilst others focus on the higher value claims with a minimum of 1:10. Practically, it is often not commercial to apply for

funding for cases with a value of less than £250,000.

Conditional fee agreements (“CFA”)

These types of agreement are often referred to as ‘no win, no fee’ agreements. This description is somewhat misleading as this type of arrangement usually only covers your liability for your solicitor’s fees and not the other likely expenses or disbursements which are likely to be incurred such as Court fees, barrister and expert fees.

Conditional fee agreements cover your own solicitor’s costs, either in full or in part. Whether or not you pay all or some your solicitor’s costs is dependent and contingent upon the outcome of the case (see table below).

One of the benefits of this type of arrangement is that it transfers some of the risk of pursuing litigation to your solicitor. Under this type of agreement, in exchange for the solicitor agreeing that they will not seek recovery of some or all of their fees if a case is unsuccessful, you agree to pay the solicitor a success fee in addition to their normal fees if the case is successful. The success fee is calculated as a percentage of the normal fees and cannot be more than 100%.

It is important to note that if you are unsuccessful, then in addition to your own expenses and disbursements, plus any sums due to your solicitor under the conditional fee agreement, you may have to pay some of the fees and disbursements incurred by your opponent.

Subject to a full review and analysis of your case and the prospects of success, we potentially offer a myriad of conditional fee agreements including discounted conditional fee agreements, capped conditional fee agreements and ‘no win, no fee’ agreements.

Success fees

Historically, solicitors could offer clients a ‘no win no fee’ agreement in respect of their legal fees, meaning that if the case was lost, the client would pay nothing, but if the case was won, the losing party would pay the solicitor’s usual costs plus the success fee. The success fee was often 100% of the solicitor’s usual fees. This worked for the client, because the majority of the fees, including the success fee, were paid by the losing party provided they had received a prior warning that the solicitor was acting under a conditional fee agreement which included a success fee.

On 1 April 2013, the Legal Aid, Sentencing and Punishment of Offenders Act 2012 removed the ability to recover a solicitor’s success fee and after the-event insurance premiums from the losing party.

This means that clients now have to meet the cost of any success fee or insurance premium themselves, and so it is vital that a cost/benefit analysis is carried out to make sure that any funding arrangement put in place is financially worthwhile for you.

Damage based agreements (“DBA”)

This type of agreement is similar to a conditional fee agreement, however, instead of your solicitor charging you on a time spent basis, the solicitor’s fees for the work conducted in pursuing the litigation is charged as a percentage of the damages recovered. The percentage is agreed at the time the parties enter into the agreement and can be no more than 50%. In addition to any sums due under the damage based agreement, you will also be responsible for paying your expenses or disbursements (barrister’s fees will, in certain circumstances, be included under the terms of the damage based agreement).

If you are unsuccessful, then in addition to your own expenses and disbursements, you may have to pay some of the fees and disbursements incurred by your opponent.

Subject to a full review and analysis of your case and the prospect of success, we may offer this form of funding.

Existing insurance

If you are considering pursuing or defending a claim, it is worth checking any existing insurance policies that you may have. Commonly, legal expenses insurance is often included as an additional benefit on insurance policies and premium banking packages.

You may also have purchased a specific product to cover certain risks which may provide cover for legal fees for the litigation you are contemplating. This applies to individuals and businesses.

If you have existing insurance, there are usually time limits for making a claim for your legal costs, and so it is important to discuss any potential existing insurance cover with us at the earliest opportunity and provide us with copies of the relevant policies.

If you do not comply with the requirements of the insurer, you may lose the benefit of any cover that is available to you. If you are not sure whether you have this cover, you should make enquiries with your insurance broker and/or insurers as to whether you have any such cover and if so, you should inform us immediately.

Whether your existing insurer will agree to provide cover for this particular dispute will depend upon the insurer’s review of the case. We cannot guarantee that the insurer will agree to provide cover for any particular dispute or that the extent of the cover available will be sufficient to cover all of the potential legal costs.

If you do not ask us to review your existing policies or contact any potential insurer, we will presume that you have checked your policies and you are satisfied that there is no possibility of legal expenses insurance being available to you.

If the level of cover is unlikely to be sufficient to cover your own fees and disbursements as well as your opponent’s fees and disbursements, it may be possible to ‘top-up’ your existing insurance by buying additional insurance.

Buying insurance

If you have no existing insurance cover that can help fund the dispute, or you need additional cover, it may be possible to buy ‘after-the-event insurance’ (“ATE insurance”). This is insurance that can be taken out after the dispute has arisen.

A summary of the benefits of after-the-event insurance:

• it can be purchased after the dispute has arisen;
• the premium can in some cases be deferred until the conclusion of your case;
• the premium can in some cases be self-insuring if you lose;
• it is a method of buying off the risk of payment of costs to your opponent and your own disbursements in return for a payment of a premium by you; and
• it can be used alongside other funding arrangements to reduce your exposure for all types of litigation cost.

After-the-event insurance is a type of legal expenses insurance policy that provides cover for the legal costs incurred in the pursuit or defence of litigation and arbitration.

It is distinct from pre-purchased ‘before-the-event’ (“BTE”) insurance policies which are commonly provided in conjunction with, for example, business or house insurance, and which have a strict incident reporting deadline and a requirement that the incident post-dates inception of the policy.

Reducing exposure with after-the-event insurance

After-the-event insurance can be purchased for nearly all areas of litigation, with the exception of matrimonial or criminal law, to cover some of the expenses of litigation, such as the risk of paying your opponent’s legal fees and disbursements, plus your own disbursements should you be unsuccessful in the litigation. 

In this way, after-the-event insurance covers any exposure not covered by a conditional fee agreement. Own costs cover can be obtained, but this is less common.

Generally, the premium paid for an after-the-event insurance policy is not recoverable from your opponent if the litigation is successful (there are exceptions for some personal injury, clinical negligence, and defamation disputes). However, payment of the premium for an After-the-event insurance policy is often deferred until the conclusion of the litigation, and the premium is often self-insured, which means that it is not payable if the litigation is unsuccessful.

After-the-event insurance is generally available for:

• claimants and defendants;
• claims for more than £10,000, provided the premium is proportionate to the value of thclaim;
• litigation in the English Courts and domestic arbitrations and tribunal work. It cannot cover matters in other jurisdictions because of regulatory or licence requirements.

After-the-event insurance is unlikely to be provided where the case involves novel legal issues. If it is offered, the premiums are likely to be very high, given the additional risk to the insurer.

Whilst we are not insurance brokers, we can help you make an application to an insurance broker and/or after-the-event insurer and advise you upon the suitability of the terms of any insurance policy for the dispute. We cannot guarantee that an application for insurance will be successful, that the extent of the cover available will be sufficient to cover all of the legal costs, or that payment for the premium will be deferred and/or self-insuring.

In order to consider whether insurance may be offered, an insurer will usually require a detailed case summary and the opinion of a barrister that your prospects of success are greater than 60%.

You will need to pay for our services in preparing the application and obtaining an opinion from a barrister. The costs of doing so will not be recoverable from your opponent.

If an after-the-event insurance policy is purchased, it is important to comply with the terms of the policy which will include providing reports to the insurer on the progress of the case; any offers that are made during the litigation and the prospects of the litigation.

Litigation funding loan

You can explore the possibility of obtaining a specialist litigation loan to fund your costs and/or disbursements as they are being incurred. This may be a suitable option if you are unable to afford to pay the costs and disbursements at present but will be in a position to pay off the litigation loan once your matter has resolved.

Loans are provided as a facility which allows you to draw-down what you need and when you need it, that is, when the costs and disbursements need to be paid. Interest is usually charged only on the amount you draw-down and not on the full loan. Hence, you only pay interest on the amount you use. These loans are usually repayable whether or not you are successful in the litigation. Litigation loan providers may also require security for the loan. Sometimes litigation loan providers offer an insurance policy, at an additional cost, to repay the loan if you are not successful. Some litigation loan providers offer loans that do not have to be serviced during the course of the case, i.e. there are no monthly payments.

Membership organisations and associations

If you are a member of an organisation, trade union or similar association, you may have legal expenses insurance or other funding assistance as a benefit of your membership which may help you to pay the costs of this matter and/or with your opponent’s costs if unsuccessful.

If you have this benefit, there are usually time limits for making a claim for cover or funding, and so it is important to discuss this with us at the earliest opportunity. If you do not comply with the requirements of the organisation, you may lose the benefit of any cover or funding that is available to you.

If you are not sure, you should make enquiries with your membership organisation as to whether you have any such cover or assistance and if so, you should inform us immediately.

Whether any insurance or other funding assistance is available to you for this particular dispute will depend upon the organisation’s review of the case and/or your eligibility. We cannot guarantee that the insurer will agree to provide cover for this particular dispute or that the extent of the cover available will be sufficient to cover all of the legal costs.

Mainstream financing

You can explore the possibility of borrowing monies to fund your own costs and disbursements as they are being incurred and your opponent’s costs should your claim be unsuccessful.

In some cases, we may be able to apply for and obtain specialist litigation loans to assist you in funding your case.

Legal aid

This is a form of financial support for people who cannot afford legal services. Legal aid is not available to businesses and is only available for certain types of dispute, subject to certain conditions. You will need to make enquiries whether legal aid is suitable for the particular dispute and whether you may qualify for it.

Personal loans/credit cards

You can explore the possibility of borrowing monies to fund your own costs and disbursements as they are being incurred and your opponent’s costs should your claim be unsuccessful. This is a matter for you and is not something that we will advise you on.

If the prospects of a claim are strong enough, we will work with you to find a suitable funding arrangement to enable you to seek redress and manage the costs of litigation.