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Costs Recovery and Litigation Funding

In November 2016, Lord Justice Jackson was commissioned to carry out a review of the costs of civil litigation, to develop proposals to make the costs of going to court more certain, transparent and proportionate. His final report was published on 31 July 2017 and proposes some extensions to the circumstances in which the costs recoverable by one party from another will be “fixed”. Currently, such fixed costs recovery applies only in limited cases. Lord Justice Jackson’s key recommendations in his final report are that fixed recoverable costs should be extended to the whole of the fast track (which applies to cases typically up to £25,000 in value), and that a new “intermediate track” with fixed recoverable costs should be introduced for certain types of cases of “moderate complexity” up to £100,000 in value. He also called for the rolling out of a voluntary “capped costs” pilot scheme for business and property cases up to £250,000 in value, rules for which have been approved by the Civil Procedure Rule Committee.

In light of the above, it is now more important than ever for in-house counsel to consider alternative and innovative funding options which may be available when considering litigation.

Indeed, lawyers who fail to provide sufficient advice to their clients about potential litigation funding options available to them, specifically the availability of a form of legal costs insurance, discussed below, could potentially find themselves facing claims from former clients. Lawyers in England and Wales are obliged by the SRA to discuss all available insurance options with their litigation clients and must advise whether specially purchased insurance should be obtained and check whether insurance may already exist.

The option of a private retainer will remain an important method of funding but there are also alternative methods of funding which should be considered and which are discussed in brief below.

Fixed Fees

Fixed fees can be used in conjunction with any of the other funding options below, but traditionally involve a party agreeing to pay its solicitors a fixed sum of money for a stage of the litigation process.

It is thought that under the pilot scheme referred to above the court may impose a fixed fee recovery on each stage of the litigation process and it may well be that it is open to a client to agree terms with their solicitor which limits their costs by reference to what would ultimately be recoverable from the unsuccessful party in the litigation.

Before the Event Insurance/ After the Event Insurance

Before the Event Insurance (“BTE”) is a type of insurance which covers policyholders against the potential legal costs of bringing a legal action or defending a claim brought against them. BTE is generally paid on an annual basis to an insurance company. For individuals, it is often sold as part of a home or car insurance package, and is also sometimes offered as a benefit to members of a trade union or association.

After the Event Insurance (“ATE”) on the other hand is insurance taken out after an event has occurred, to insure the policyholder for disbursements and any adverse costs orders should they be unsuccessful in their case. Typically, if the policyholder loses their case, the insurers will pay any adverse costs orders made against the policyholder and any disbursements. This kind of insurance is typically offered by insurers and claims management companies.

BTE and ATE already play a prominent role in litigation and this is likely to continue, both for corporate entities and individuals alike. Indeed, the introduction of fixed costs should make the potential exposure of insurers more certain and therefore the process of obtaining insurance and pricing could be streamlined. Whilst professional indemnity insurance is usually (and frequently mandatorily) taken out by professional bodies and is advisable to corporate entities as a whole, it will now be of even more significance to commercial clients to ensure that they have the appropriate procedures in place to manage litigation risk.

ATE is highly recommended in most claims which are likely to be issued/defended, regardless of any other funding option.

Conditional Fee Agreements

Conditional Fee Agreements (“CFA”), colloquially (but inaccurately) known as “no win no fee agreements”, are traditionally a popular way of funding litigation. Under a CFA, if the client loses there is no charge for legal fees but they have to pay disbursements and (unless qualified one way costs shifting applies as it does, for example, in personal injury claims) usually the opponent’s legal charges. If the client is successful, a ‘success fee’ on top of the normal hourly rate is charged. The opposing party may be ordered to pay a contribution to part of the normal charges but usually any shortfall is still recoverable from the client subject to the usual assessment procedures.

However, one of the major implications of the original Jackson Reforms is that certain elements of costs associated with CFA funding, such as the success fee and ATE premium taken out to cover the potential adverse cost risk, are no longer recoverable from the other side. This could therefore seriously impact on whether or not a claim is considered to be economical to pursue taking into account the costs of funding the same and the likely success fee in comparison to the amount claimed. Discounted Conditional Fee Agreements Another form of funding, which is probably used more frequently in commercial litigation matters compared to CFAs because of the complexity, nature and the associated risks involved with commercial litigation cases, is a Discounted Conditional Fee Agreement (“DCFA”). A DCFA takes a similar form to a CFA however; rather than the client paying no solicitors fees if their matter is unsuccessful, they are liable for the lawyer’s fees at an agreed discounted hourly rate in any event. If the claim is successful, then the client is liable for the solicitor’s costs at the solicitor’s normal hourly rates, plus any success fee (although this is traditionally considerably lower than that charged on a CFA, if it is charged at all).

Damages Based Agreements

Whereas “conditional fees” are based on an uplift (or reduction) to the solicitor’s usual charges, “contingency fees” are based on a percentage of the damages received. The Jackson Reforms meant that contingency fee agreements are now allowed in this country for funding court cases. This method of funding, known as a Damages Based Agreement (“DBA”), provides for a 'payment' (which is to cover the combined total of the solicitors fees and counsel's costs, but excluding expenses) which is to be paid only in the event of making a recovery from the opponent. The payment cannot exceed a cap expressed as a percentage of the amount of damages received, and in commercial litigation cases this cap is set at 50%.

An unsuccessful Defendant ordered to pay the costs of the Claimant will not be held liable for an amount equivalent to the contingency fee. Rather, the Defendant will be liable for costs assessed on the 'conventional basis' i.e. with reference to an hourly rate and an amount of time spent, but subject to the indemnity principle such that the paying party shall not have to pay more than the payment provided for under the DBA. It is widely thought that DBAs may not be considered to be attractive in many commercial litigation matters because of the effect of the rules surrounding them. One of these is that ultimately the lawyers take the solvency and enforcement risk.

Third Party Funding

Third Party Funding (sometimes known as “litigation funding”) is an arrangement between a specialist funding company and the client where the funder agrees to finance some or all of the client's legal fees in exchange for a percentage/share of the damages and is traditionally considered suitable for larger value claims.

Third party funding can be used in conjunction with many of the funding options above, with the legal fees being on an hourly rate, fixed fee agreement, CFA or DCFA. Whatever the funding method, ATE is usually strongly recommended as with the other options.

Going Forward

The future of costs recovery in litigation remains an uncertain one but this should not put off commercial clients seeking redress through the litigation process or by way of alternative dispute resolution (“ADR”). A number of options are available to fund litigation going forward, and to protect against the adverse costs risk, and the most suitable option for each individual claim should be discussed with your solicitors.

Published: 1 August 2017

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Summer 2017

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Natasha Guthrie