The legal costs incurred in pursuing or defending a commercial claim can be substantial. Although the general rule in commercial disputes is that the loser pays the legal costs of the winning party, or at least a proportion of them, an award of costs is always at the discretion of the court and that rule can be displaced. The 'winning' party may still face an adverse costs order for a number of reasons including following an unsuccessful interim application during the claim, where success is only partial, if an opponent's Part 36 offer is not beaten or where there have been procedural breaches.
There are, however, a number of funding tools commonly available to help parties manage their potential exposure to legal costs.
Here we provide an overview of the types of funding most commonly available in commercial litigation and arbitration claims:
Note that a party does not just have to use one of the above tools. Many of them will be used in conjunction with one another. A single case may therefore feature a combination of after the event insurance (for own costs and adverse costs - see below), a conditional fee agreement and litigation funding.
The general rule is that the more cost and risk a client takes out of a case, the more their return from the case is reduced. Most insurers, funders and law firms do however require a client to have some 'skin in the game' to demonstrate its commitment to the case.
Before the event (BTE) insurance
BTE insurance is a form of legal expenses insurance policy that provides cover for a possible future legal problem. It is often part of a household or motor insurance policy but other obvious examples in a commercial context are directors' and officers' liability insurance and warranty and indemnity or business interruption insurance. Such cover is often limited in extent and may seek to impose restrictions on which solicitors can be instructed. Importantly, many will have time limits for notifying a claim to the insurer that need to be strictly observed. If you think you might have legal expenses cover for a legal issue that has arisen, you should look into it and notify your insurers as soon possible.
After the event (ATE) insurance
ATE insurance is taken out once a legal dispute has arisen. It can be sought at any stage of a case but tends to be easier to obtain, and cheaper, if taken out at the beginning of the dispute. It is generally obtained to cover an opponent's legal costs should a dispute be lost. Some or all of a party's own costs can sometimes also be covered.
Insurers generally require a legal opinion advising that the prospects of successfully bringing or defending the claim are 60% and above. Premiums are typically based upon a percentage of the adverse costs risk. The premium can be:
- a one-off premium payable at the outset;
- staged so the premium payable increases as the matter progresses and costs are incurred; or
- deferred and contingent upon success. If the case is lost, the premium is not payable.
The premium for a fully deferred and contingent policy is always much higher than for a staged premium. The premium is not recoverable from a losing opponent.
ATE insurance can be a standalone funding option or offered as part of a funding package.
It is also worth remembering that a properly worded ATE insurance policy can provide security for costs should a defendant make such an application.
Conditional fee agreements (CFAs)
A CFA is an agreement between a solicitor (or counsel) and the client whereby the solicitor forgoes a proportion of its usual hourly rates (sometimes all) in return for a proportionate success fee in the event the case is successful. A CFA can be a:
- 'no-win, no-fee' CFA whereby the solicitors' fees incurred are not payable if the claim is lost but those fees plus a success fee of up to 100% of those fees is payable in addition if the claim is won; or,
- more usually in commercial cases, a discounted CFA whereby a discounted (reduced) hourly rate is payable if the claim is lost but the full hourly rate plus a success fee is payable if the client wins.
A 'win' must be carefully and clearly defined in the CFA. The percentage of the success fee to be applied should be based on the risk involved in the 'win' not being achieved - so the riskier the case, the higher the percentage success fee.
As with an ATE insurance premium, the success fee is no longer recoverable from the losing opponent.
Damages based agreements (DBAs)
A DBA is a type of contingency fee agreement whereby the solicitor's fee is calculated as a percentage (up to roughly 50%) of the damages/compensation actually recovered by the client (as opposed to the damages awarded) in the event of a win (the contingency fee). The solicitor receives nothing if the client loses and 'partial' DBAs are not allowed. If the case is lost, although no contingency fee is payable to the solicitor, the client may still be ordered to pay an opponent's costs which can be covered by ATE insurance. If the damages awarded are not paid or recovered, the contingency fee is not payable.
Where a DBA is being considered, enhanced early investigation into the prospects of success, the realistic quantum of damages and recoverability of those damages is essential. Enforcement risks such as whether an opponent is creditworthy, has assets against which an award can be enforced - both within and outside the jurisdiction - need to be considered. A DBA may not be appropriate where all the assets are situated in a jurisdiction where enforcement will prove difficult.
Further, a DBA may not be financially viable if the value of the claim means that any contingency fee payable would not cover the legal costs actually incurred plus a reasonable uplift to reflect the risk taken of the case being lost.
Because of the 'all or nothing' nature of DBAs as currently regulated under the Damages-based Agreements Regulations 2013, they are still fairly uncommon in commercial claims. However, DBAs may be available in appropriate cases where funding packages can be put in place through insurance policies and/or third party funders to offset some of the risks in exchange for a share of the solicitors' contingency fee.
Litigation funding or third party funding
Mainly used in larger cases, an independent commercial funder agrees to fund some or all of the legal fees and expenses of bringing the claim in return for a share (typically 30% to 50%) of the damages received or a multiple (usually 3 or 4) of the amount funded, or a combination of both, if the case is successful. If the case is unsuccessful, the funder loses its investment, receives no success fee and has no recourse against the funded party. The fact that litigation funding is non-recourse is a primary factor behind its high cost.
As with ATE insurance, as the commercial funder's return is tied to the success of the case, they will only fund claims which have good prospects of success (generally over 60%) and good prospects of recovery/enforcement against the opponent - as with a DBA.
Often, the funder will require the client and its solicitor to share the costs risk with it by entering into a CFA or DBA with an ATE insurance policy to cover adverse costs. Without such a policy, the funder could find itself in the firing line for adverse costs if the claim is lost.
Why consider CFA, DBA or third party funding arrangements?
As well as enabling a client who cannot afford to pursue a claim to do so, such funding arrangements can offer clients:
- the benefit of sharing the risk of pursuing the claim in exchange for a proportion of the damages recovered;
- the ability to take the cost of funding the claim off the company's balance sheet altogether with a combination of ATE insurance, a CFA/DBA and third party funding; and
- the ability to level the playing field if up against an opponent with substantial or unlimited means.
However, it must be remembered that the benefits referred to above do come at a cost, which if a full package of funding is entered into (CFA or DBA plus ATE insurance and third party funding) can be substantial. In the appropriate case though, that cost may be well worth incurring if a claim with good prospects of success could not otherwise be brought.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.