Litigation Funding

Caragh Bailey
10/08/2021
32
11 min read
Litigation Funding from Parachute Law

When you decide whether to bring or fight a claim, cost is often one of the biggest hurdles client’s face. Not only do you need to consider your own costs, you also need to consider the fact that you may end up having to pay the other side’s costs as well.

In recent years, there has been a shift in attitude towards how to fund litigation and now there are several options available to clients to help reduce their risk. This guide will give an understanding of your options and when they may be most appropriate for you.

What is meant by litigation funding?

No money for litigation? Litigation funding options from Parachute Law
Litigation funding refers to several different agreements which help to either fund litigation or to reduce the risk of high litigation costs. A lot of these options can be used by themselves or in conjunction with each other. In English law, the main funding options that are available include:

  • Conditional fee agreements (CFA’s)
  • Damages-based agreements (DBA’s)
  • After the event (ATE) insurance
  • Third party funding

How do litigation funds work?


Conditional Fee Agreements
In a CFA the client pays different amounts for the legal services that were provided depending on the outcome of the case. They can transfer the entire risk for the client’s legal costs to their solicitor or just part of the risk. They can essentially be structured in any which way. However, unlike DBA’s (discussed below), CFA’s do not ensure that the solicitor receives a contingent fee.

  • Classic CFA: The most classic form of a CFA is where the solicitor receives no fee if the client loses its cases, and if the client wins the solicitor will get their fees plus an increased percentage, which is most referred to as a no-win no-fee agreement.
  • Discounted CFA: Where the solicitor receives a certain percentage if the client loses, say anywhere from 50-75% and then full fees if the client wins.
  • CFA Lite : A no-win no-fee or discounted, but there is no additional fee and any success fee is capped at costs awarded or is agreed with the other side.

Who can use a CFA?
CFA’s were originally introduced in personal injury claims in order to provide access to justice to those who would have been eligible for legal aid. Today, CFA’s are available to all litigants, regardless of their circumstances.

They are available for the provision of ‘litigation services’ which is court litigation, arbitration, or any proceeds used for resolving disputes whether commenced or contemplated. Typically, they are used by claimants, however they can also be used by defendants.

Do you need to disclose a CFA?
Yes. Any party entering into a CFA that has a success fee that is recoverable from the other side needs to disclose the existence of the CFA to both the court and any other party to the case. However, the terms of the CFA do not need to be disclosed until the costs assessment.

How does a CFA actually work?
Commercial clients are more likely to use a discounted CFA than other types. Typically, it works like this:

  • The intention to use a CFA does not negate the need for an engagement letter between the solicitor and the client. It still needs to outline the rate at which the solicitor will bill at their normal rate, the scope of work, resources and reporting will also need to be outlined.
  • The CFA will then set out the definitions of the discounted rate that the solicitor and the client have agreed to. This will set out the normal fees payable by the client no matter the outcome and the way the success fee will be payable if the client wins the case.
  • Throughout the duration of the matter, the solicitor or firm, will continue to bill the client for work that is carried out at the agreed discounted rate (that was determined and set out in the CFA). This rate will be calculated at a percentage of the solicitor’s normal rates and make up the non-conditional fees. These bills will also include any disbursements, for example, court fees, counsel’s and expert fees, expenses, and other such fees of this type and they will generally be payable in the usual way.
  • Any balance that is beyond the agreed discounted rate are the conditional fees. These conditional fees will only become payable if and when the client wins the case. The definition of what constitutes a win will be defined in the CFA and it needs to be carefully considered. If the client is a claimant, generally speaking, winning will mean the other side was ordered to or has agreed to pay damages. If the client is a defendant, winning can mean that they settled below a certain amount or they have successfully defended their case at trial.
  • If the client win’s the case (based on what was defined in the CFA), the client may also have to pay the solicitor’s success fee if it’s been included within the CFA. This generally is calculated as a percentage uplift on the solicitor’s normal rate. The uplift will be set out in the CFA and cannot exceed 100%. The level of the fee is normally calculated by the risk to the solicitor if they lose in litigation, in which case the firm will not be paid their conditional fees. Typically, this is calculated by the merits of the case, as such the stronger the merits, the lower the success fee will be.
  • If the client succeeds at trial, the normal costs rules apply. In normal litigation, the client can normally expect to recover their costs from the other side but not the success fee that is included in the CFA (unless the CFA is a pre-commencement funding arrangement).
  • If the client loses the case, they will not have to pay the conditional fees or any success fee. However, they would typically be expected to pay the other side’s costs.

Advantages and disadvantages of a CFA
The main advantage of the CFA is that is it reduces costs in an unsuccessful case. Quite often the additional costs of the success fee can deter the use of these types of agreements. Generally, solicitors will only be prepared to use a CFA where they feel there is a good prospect of success.

Damages-based Agreements (DBAs)
Need financial help? Litigation funding options from Parachute Law
DBA’s can be used in all civil litigation matters where CFA’s are permitted. The only time they are not accepted is for criminal or family proceedings. There are, however, specific rules when using a DBA in the context of employment or personal injury matters.

A DBA is an agreement where the solicitor will be able to take a share of the damages if the client is successful in their case. If the client is unsuccessful, the solicitor will not be paid.

A DBA is a contingency-fee agreement. It is similar to a CFA in that what the solicitor is paid is based on the outcome of the case. However, unlike a CFA, the solicitor’s fee is not calculated based on the work carried out, it is calculated based on the compensation that is recovered by the client. If the client wins, the solicitor will receive a percentage of the client’s damages, and if the client loses the solicitor receives nothing. This is why they are often referred to as “no-win no-fee”.
  • In commercial cases, the maximum cap that solicitors are allowed to apply is 50% of the damages.
  • In employment and personal injury cases, the maximum cap that the solicitors are allowed to apply is 35% of the damages.

The DBA Regulations set out how DBA’s work in practice.

What is a losing defendant required to pay?
If a claimant has entered into a DBA this should not affect the costs recovered from any unsuccessful defendant, subject to an exception. The claimant’s recoverable costs are assessed in the normal way, in regards to rates and number of hours spent on a matter, however, any claimant that is funded by a DBA may not recover more of their costs than the total amount that is payable under the DBA.

Do you need to disclose a DBA?
You do not need to disclose that a DBA is in place to the other side. However, if may be useful for tactical reasons as it signals the solicitor has belief in the merits of the case and may persuade the other side to settle the case.

After the event insurance (ATE)
ATE is insurance that protects potential claimants against the risk of losing a case. ATE insurance provides cover for the legal costs that are incurred when either bringing a claim or defending a claim in litigation or arbitration. It is typically purchased after the legal dispute has occurred and is available for all areas of litigation except for family and criminal law.

ATE is normally tailored to the specific needs of the client. It tends to cover the client’s liability for the costs of their own solicitors and the other sides solicitors in the event that they lose a case. The ATE premium is not recoverable from the other side in the event that you win the case.

Do you need to disclose ATE Insurance?
If a party is entering into an ATE insurance policy where the premium is recoverable (however, this is typically not the case), they must notify the Court and all the other parties involved of its existence and the level of the cover that is being provided. If the premium is not recoverable (this is the typical case), there is no obligation to disclose the existence of ATE insurance.

When can ATE insurance be used?
Not all cases are appropriate for ATE and it not reliant on any outcome involving damages.

  • It is available for both claimants and defendants
  • Normally used for multi-track cases
  • Unlikely to be provided where the case involves novel issues.

  • Removes the risks of having to pay the other side’s costs if you lose the case
  • Provides an incentive for the other side to settle if the premium is recoverable
  • The premium tends to be substantial
  • The policy tends to have a list of exclusions
  • An ATE policy is not always sufficient to defeat an application for security for costs

Third party funding
Third party funding is where someone who is not party of the dispute provides funds to a party to that dispute in exchange for an agreed return. This funding normally covers the party’s legal fees and any expenses that may be incurred. The funder can also agree to pay the other side’s costs if the party is ordered to do so by the court, and the funder can also provide security for costs. Third party funding is open to all forms of dispute resolution.

Third party funding traditionally has not been allowed in litigation; however, it now is permitted. Third party funding generally gives the funder a share of recoveries from the litigation. The funding agreement cannot give the funder an unreasonable return or the right to control the litigation.

  • Primarily appropriate for cases where they involve a claim for damages. As such, funding is generally only available to claimants or defendants with a counterclaim.
  • Unless the third party funder specialising in funding smaller claims, they generally only fund one-off cases where the likely damages are assessed at £10 million or more.
  • Funders require a good prospect of success.
  • Funders will need to know if the other side is able to meet the claim, costs, and interest in the case.

  • Necessity: litigation can be very expensive.
  • Risk management: Claimants can lay off some of the risk associated with the proceedings.
  • Validation: Funders only take on good claims, if they will take it on it means you have a good prospect of success.
  • Levelling the playing field: If the other side has deep pockets, it’s a way to boost your resources.
  • If you’re successful you will likely have to pay a significant portion of your recoveries to the funder.
  • Loss of autonomy of your case. While funders are not allowed to take undue control or influence, there is loss of autonomy as funders reserve the right to approve a settlement.
  • Substantial costs are incurred when packaging the matter for presentation to a funder.

Frequently Asked Questions
Litigation funding companies have large funds which they are able to use, to bank roll litigation for parties who do not have the funds themselves. They take a portion of the winnings of the case. Essentially, they are gambling on the results of the case. If they believe your claim is strong enough they will risk losing their money if you lose, on the hope that they will recover their money, and more, if you win.

Their role in the Judiciary system is to make justice more accessible to all.

Do you have a problem with your litigation funding?

The process for settling dispute can be long and costly. Get in contact with us for a case review to see how we can help.

We can assist with:
  • Pre-action negotiations
  • Application to court
  • Preliminary hearing
  • Mediation
  • Court appearance

We have on hand counsel to support your claim and offer guidance along the way.

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