Low going

Litigation funding is changing. David Engel highlights the elements that will go to make an altogether more sophisticated regime

Funding options can offer greater certainty on, and control of, costs, even in big-ticket commercial litigation. A litigation funding package typically comprises one or more of a conditional fee arrangement (CFA) with the solicitors and/or barristers, an after-the-event (ATE) insurance policy and third-party funding, where an investor funds the litigation in return for an upside if the litigation is successful.

What all three elements have in common is the concept of conditionality. If the client loses, the backer – whether law firm, insurer or funder – loses out; if the client wins, the backer gains. This is plainly a very different model from the traditional one, where the lawyers get paid the same, win or lose.

What’s good for the goose…

What this is really about, then, is the lawyers aligning their financial interests with their clients’. The most obvious example is CFAs. The ‘no win, no fee’ CFA with a 100 per cent uplift for success has attracted flak, some of it justified, from a number of quarters. However, that model is relatively unusual in commercial litigation.

Much more usual is the ‘no win, low fee’ CFA, where the client has the benefit of a substantial discount (sometimes up to 50 per cent) on the lawyers’ standard rates. If the case does not succeed, that is all the client pays. If successful, the client pays the difference between the discounted rate and the standard rate, plus an uplift for success. However, that success fee is unlikely to be 100 per cent or anything like that figure.  

This avoids the two major perceived vices of the ‘no win, no fee’ CFA. First, the party is not seeking to recover a 100 per cent uplift from the losing side. Second, since the party is funding the litigation on a continuing basis, it is still incentivised to control costs.

Increasingly, such new-model CFAs are being used in commercial litigation by defendants as well as claimants, at any stage in proceedings, and also for individual steps in the action, for example for a specific application or appeal. Just as CFAs have evolved, so also ATE cover is becoming more flexible and sophisticated.

Insurers are now willing to underwrite not only liability for opponents’ costs in the event of losing, but also insureds’ own disbursements, including counsel and expert fees. Significantly, there are also signs of insurers’ willingness to cover at least some of insureds’ own solicitor fees.

Liability to pay the insurance premium is typically deferred and contingent. That is, liability is deferred until the conclusion of the action and is contingent upon success. If the claim or defence fails, no premium is payable, despite the fact that a claim has to be made under the policy.

If it is successful then the premium, which can be substantial, forms part of the successful party’s legal costs, to be recovered from the losing party. Provided that the level of the premium is reasonable (see the Court of Appeal decision in Rogers v Merthyr Tydfil (2006)), it is currently recoverable in full from the losing party. This may change in the future.

The Ministry of Justice (MoJ) has consulted on recoverability of ATE premiums and it is likely that recoverability will be reduced or even prohibited in certain types of litigation.

Third-party funders have had some difficulty in selling their wares on this side of the Atlantic, not least because under the traditional model, in the event of success, they typically require one-third of the damages or three times their investment in the case, whichever is higher. However, a different model may now be emerging, whereby –funders are less fixated on taking a proportion of the damages and more interested in obtaining a decent return on their investment.

A new way

So where does it all go from here? It is likely that in the course of this year the MoJ  will, in light of the Jackson Report and subsequent consultation, introduce changes to the litigation funding regime.

The extent to which those impact on commercial litigation will have to be seen, but it is likely that the most radical changes will be directed to specific types of litigation, such as personal injury and clinical negligence. With the latter it is often the public purse that bears the cost of 100 per cent success fees and 100 per cent recoverable ATE premiums.

Other types of litigation where special interests are engaged, such as freedom of expression in media cases, could also be impacted. Commercially, it may well be that we are moving towards an era of co-funding where, in the right case, the litigation is funded jointly by the law firm, the ATE insurer and the third-party funder.

What might that look like? The law firm enters into a ‘no win, low fee’ CFA providing for a discount of one-third on its normal rate. The ATE insurer provides cover for adverse costs, own disbursements and a third of its own solicitor fees. The third-party funder funds the litigation to the extent of one-third of the solicitor fees. The cashflow position is therefore very beneficial to the client, but with both the insurer and the third-party funder breathing down its neck, the law firm will still be incentivised to keep costs down.

And a little further out still, maybe the ATE insurer and the funder will be one and the same entity.

David Engel is a litigation partner at Addleshaw Goddard