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New Rules for Funding Litigation
The Legal Aid, Sentencing and Punishment of Offenders Act 2012 has brought in a number of new rules as part of Lord Justice Jackson’s reforms to civil litigation that have changed the way in which litigation can be funded and how that funding can be recovered from the other party to the litigation. Since 1 April 2013 law firms have been able to represent litigants through Damages Based Agreements (DBAs) under which their fees are paid as a percentage of the damages recovered by their client.
In the US this sort of contingency fee arrangement has been commonplace, but until now has been unavailable in civil court proceedings in the England as it was thought to breach the laws of champerty where someone ‘maintains’ another person’s litigation in return for a share of the proceeds of the litigation. However, changes in government policy involving the restriction of public funding and placing greater emphasis on access to justice have led to a change in the way in which these principles are applied by the courts.
Funding litigation through insurance is now commonplace, and funding is even available through private equity houses, banks and hedge funds that are prepared to consider funding litigation as an investment opportunity. The new changes to the funding rules have been driven by the need to provide access to justice for litigants while trying to realign the risk of litigation between claimants and defendants.
Conditional Fee Agreements
A major change in litigation funding took place in 1995 with the introduction of conditional fee agreements (CFAs) which allowed lawyers to work for clients under ‘no win no fee’ arrangements. The Courts and Legal Services Act 1990, as amended by the Access to Justice Act 1999, provides the legislative framework for CFAs and they been a major form of funding, particularly for claimants in personal injury claims.
A CFA is: "an agreement with a person providing advocacy or litigation services which provides for his fees and expenses, or any part of them, to be payable only in specified circumstances". Under most CFAs, a client will only have to pay his lawyer any fees if he wins the case. In some more complex cases, the lawyer may require the client to pay some fees at a reduced rate if the client loses so that the risk of losing is shared between the lawyer and the client.
Under most CFAs, if the case is successful, the lawyer may charge at his normal rate (the base costs) and may charge a success fee in return for taking the risk of receiving reduced fees, or no fees, if the case is lost. Any success fee agreed between the lawyer and client must be set out in a written CFA. The success fee must be calculated by the lawyer after a proper risk analysis of the case, and it must reflect the merits and value of the claim, an estimate of the costs that will be incurred and the risk of losing.
In most cases, there is no usual rate of uplift, but the Courts and Legal Services Act sets the upper limit for a success fee at 100% of the base costs. Under the Legal Aid, Sentencing and Punishment of Offenders Act 2012 from 1 April 2013 there is now a cap in personal injury claims on the level of the success fee so that it cannot be more than 25% of the damages claimed.
Insurance
A CFA will protect a claimant from liability for his own legal costs should he lose his case. However, if he does lose, the court is likely to order that he pays the other party’s costs and a CFA cannot protect him from that liability.
The other party’s costs may be covered by legal expenses insurance, (for instance household or car insurance policies) which provide cover for legal expenses in particular types of claim.
If a client does not have before the event insurance, he may consider taking out after the event (ATE) insurance to protect against the risk of paying another party’s costs. Many insurance companies now offer insurance that will cover the insured’s own expenses and his opponent’s costs and disbursements if the legal action is abandoned, discontinued or lost at trial. ATE insurance is also available to cover the costs of both sides if a party does not have a CFA with his lawyer.
The premium payable for the ATE policy will depend on the risks involved in the case, the likely level of the costs and whether the premium is paid up front. In some cases, the premium may be staged so that it will increase as the case progresses and so that the earlier the case settles, the lower the premium will be. As well as the initial premium, some insurance companies charge a 'renewal' premium on the anniversary of the insurance. This means that if the case takes a long time, you will have to pay a percentage of the original premium on each anniversary of the insurance until the case has been concluded.
Recovery of Success Fees and Insurance Premiums
In cases before an English court, the court will usually make a costs order in favour of the successful party. This means that if you win your claim you will be able to recover your costs from the other party. For CFAs entered into before 1 April 2013, the winning party could claim from the losing party, the success fee that he had agreed to pay his lawyer. The new rules have now removed the right to recover success fees so that claimants now have to pay that success fee out of the damages they recover.
Prior to 1 April 2013 the cost of the insurance premiums could also be recovered from the other party if the claimant obtained a costs order against them. However, the insurance premium is no longer recoverable and claimants now have to bear the cost of the premium out of the damages recovered.
The new reforms have introduced an increase of 10% in the level of damages for pain and suffering in personal injury claims to offset the increased costs of success fees and ATE insurance on claimants.
Professional Third Party Funders
Another method by which litigants can afford the costs of litigation that has increased in the last 10 years is third party funding. In summer 2007, the Civil Justice Council published its recommendations to the Lord Chancellor on the future funding of litigation. It recommended that: ‘properly regulated third-party funding should be recognised as an acceptable option for mainstream litigation’. The number of professional litigation funders (who lend money so that litigation can be pursued, and make their profit from sharing in the damages when the claim succeeds) has increased and there are now a number of brokers in the market.
To date professional third party funding has been geared towards high-value commercial disputes where there is a very good chance of success. This model of funding works where costs are in proportion to the damages at stake in the claim. Funders will usually want a legal opinion on the merits of a case. They often require an opinion that there
is at least a 60% probability of succeeding in a claim and that the likely legal costs to be proportionate to the value of the claim.
Damages-based Agreements
Since 1 April 2013 lawyers have now been able to act for litigants in claims for a share of the damages. The agreed share is subject to a cap of 50% of the fees including VAT and barrister’s fees. At present the Damages-Based Agreements Regulations 2013 appear to preclude partial or hybrid arrangements where a lawyer could receive a reduced hourly rate whatever the outcome of the case and a contingency fee if the claim is successful.
It is too early to know how wide spread use of these arrangements will be, but they are likely to be used more in higher value risker claims where lawyers are willing to share the risk for the possibility of sharing in the damages recovered. There has not been a great take up as yet of DBAs because of the uncertainty over hybrid arrangements. Third party funders have now begun offering partial funding arrangements that in effect reduce the risk for lawyers by providing a reduced hourly rate whatever the outcome.
Conclusion
There is a conflict between providing access to justice for all, regardless of their means, and ensuring that the civil justice system is not abused for commercial gain. The way in which litigation is funded in the UK has changed substantially in the last 15 years and the new reforms increase the risks to litigants of using CFAs, while introducing the option of DBAs so that more litigation will be funded out of the damages recovered.
Contact Details
If you would like further advice about any of the issues considered above please contact Paul Northwood on 01869 331753, or email him at paul.northwood@northwoodreid.com .
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