Funding Commercial Disputes
3rd April, 2019
How a dispute is to be funded is a key consideration for both solicitors and clients. This article sets out the main alternative funding options to paying based on hourly rates and time spent as the case progresses.
Commercial disputes have traditionally been regarded as money pits that at best tie up working capital on a grudge purchase and at worst place a strain on cash flow that has the potential to sink clients. However, it need not be so; for the right case there is opportunity for solicitors to share the risk with their clients and to avoid the traditional cash flow drain effect of litigation.
Conditional Fee Agreements (“CFA”)
A CFA (more commonly known as a “no win, no fee” agreement) is an agreement between the client and the solicitor where the solicitor agrees to accept either a lesser fee, or no fee at all, if the client loses the case. In the event of a successful outcome though, the client pays a “success fee” on top of the standard rates (the standard charges are based on agreed hourly rates multiplied by time spent). The success fee is a percentage of the standard charge. The level of success fee is dependant on the solicitor’s assessment of how likely it is that a win will be achieved. The higher the prospects of success, the lower the uplift.
CFAs are the most widely known and widely used risk sharing option but it must not be forgotten that, even if the case is lost and no fees are payable to the solicitor, the client still carries the risk of having to pay the other side’s costs. However, it is often possible to take out insurance (known as After the Event Insurance) to cover the risk of losing and being ordered to pay the other side’s costs which reduces the risk the client takes.
If a win is achieved, the client can usually recover the majority of their standard costs from the opponent but cannot recover the uplift and / or the After the Event premium.
Because it is not possible to recover the success fee or insurance premium, CFAs tend to be most suitable for larger claims (over £100,000) where there is the prospect of the client recovering enough to cover the success fee and insurance premium and still financially benefit from the case.
Damages Based Agreements (“DBA”)
Under this type of arrangement the solicitor and client agree that the fee will be a percentage of the amount recovered from the claim. This cannot be more than 50% if entered into once Court proceedings are issued but can be more prior to that step. If the client recovers nothing, they pay the solicitor nothing.
Because DBAs are based on the amount recovered they do not work for Defendants (unless they have a counterclaim that substantially exceeds the value of the claim; nor for that matter do CFAs).
A DBA gives certainty from the outset and spreads the client’s risk because they do not have to pay if they do not make a recovery. As with a CFA, insurance can be taken out to cover the opposition’s costs in the event that the case is lost, therefore minimising the risks involved for the client.
Due to the nature of court cases and the timeframes involved, it can be extremely difficult to accurately predict what the costs of a dispute will be.
However, the Court process breaks down into stages and it may, in some cases, be possible for solicitors to work on a fixed fee for each particular stage of the case, using a set of assumptions that will be agreed between solicitor and client. This gives the client the certainty of knowing what the fees will be up to a particular, clearly defined point. If the case proceeds to the next stage the solicitor can then, if appropriate, agree a further fixed fee to progress the case. It is important to understand that if there is an agreement to work on a fixed fee the solicitor takes the risk that more work will be required than envisaged. The certainty of fixing the fee therefore eliminates that risk for the client and therefore fixed fees do not represent the lowest amount that solicitors estimate they can do the work for; the certainty of a fixed fee comes at a price.
Even though a solicitor agrees to do particular work for a fixed fee that does not mean the Court will order the other side to pay the client that amount even if the case is won. The amount the Court awards may well be less than the agreed fee but the client remains liable for the full agreed fee.
Third Party Funding
There are venture capitalists who will “buy” a percentage of any amount a client receives from a claim in return for providing the funds to pay for pursuing the claim. Because of the risks involved third party funders usually want substantial percentages of any recovery and generally they are only interested in very high value cases (around £500,000 plus) meaning this will not be a realistic option for many cases.
The risk of having to pay the other side’s costs is a major factor when deciding how to deal with a dispute.
However, there are two main types of Insurance available to cover this risk:
“Before The Event” Insurance
Some of the insurance policies which clients will have in place already may include legal expenses cover. This can be used, subject to the terms of the policy, to cover a client’s legal costs in connection with a claim. Solicitors can review insurance policies with clients to see whether they could be useful in helping to fund legal costs. Although the insurer might try and steer a client to the insurer’s panel solicitor, clients are entitled to refuse and to have their own choice of solicitor handle the case.
“After The Event” Insurance (also known as ATE)
As its name suggests, this is a policy taken out once the event giving rise to the claim has happened.
There are various different kinds of ATE policies including ones where the client pays the premium upfront, policies where they pay the premium in stages as the case progresses and policies where they only pay the premium at the end of the case (and only if they win). This latter kind of policy has obvious benefits but the premiums, if the case is successful, are substantial because of the risks involved for the insurer. ATE premiums can not be recovered from the opponent.
The benefit of ATE policies is that they will, subject to complying with the terms of the policy and subject to the limit of indemnity in the policy, pay the other side’s costs if the client loses. So for the cost of the premium clients can, in conjunction with a CFA or DBA, substantially reduce their risk of litigations.
All the above options are ones we will consider for appropriate cases and we are always willing to have no obligation, no charge conversations about disputes clients may have, including how they can be funded.