With the current uncertain financial situation due to the global pandemic, many businesses may not have the cashflow to enforce their legal rights. As a litigation law firm in London, our team highlights some of the options available where self-funding legal costs is an issue.
Third Party Funding
Third party funding from a specialist litigation funder is now commonplace for disputes. The basic concept is that in consideration to finance all or (more commonly) part of the legal costs of a case, a funder will charge a fee, payable from the proceeds recovered from the case (but only if successful). Third party funding is widely available in commercial disputes.
Important points to note:
- It is usually available to claimants only. However, defendants may also obtain funding if certain criteria are met;
- It may be used in both litigation and arbitration and it is not confined to English Court proceedings and domestic Arbitration;
- It is normally available in cases with good prospects of success (60% or above) and where the enforcement is not likely to be an issue;
- Funding is usually obtained with an insurance policy (paid for by the Funder) to cover the liability for the adverse costs.
Conditional Fee Agreement (CFA)
Another option is a CFA, where all or some of the solicitor’s fee will be deferred and dependent on winning the case. As an incentive to act on this case, the solicitor is entitled to charge a success fee on the deferred and contingent element of his fees. This fee is referred to as a “success fee” and is calculated based on the solicitor’s hourly charging rates. The success fee payable is a percentage increase on the solicitor’s charging rates, which is calculated based on the risk involved – the higher the risk, the higher the percentage.
Important points to note:
- CFA must be in writing and must state the percentage of the success fee;
- It cannot exceed 100% of the solicitor’s normal charges;
- It will not cover the liability for adverse costs;
- It is not confined to English Court proceedings and domestic Arbitration.
Damages Based Agreement (DBA)
A DBA is where a solicitor agrees to act on a contingent basis in return for a percentage of the damages in a winning case (either by settling a case at any stage or after the trial). Where the case is unsuccessful, the solicitor would not receive any fees.
- DBA must be in writing;
- Shall not provide for a payment above 50% of the sums recovered by the client;
- The cap is inclusive of VAT and barrister’s fees.
After the Event (ATE) Insurance
ATE insurance provides cover for litigation costs incurred by parties in litigation or arbitration. It is taken out after the legal dispute has arisen. It is distinct and wider in scope than the aforementioned options, as it covers almost all areas of litigation and is available to both claimants and defendants.
The important points to grasp:
- Largely confined to English court litigation and domestic Arbitration;
- Available only in multi-track cases, where there is no fixed recovery rate;
- ATE normally covers the client’s own disbursements and liability for adverse costs.
Why is it important?
Litigation may be expensive and sometimes even damaging for a business. The losing party will have to pay not only its own legal costs, but also those of a winning party. For this reason, a calculation of the overall costs of the litigation is close to impossible. The funding options described above are the effective solutions to minimise the risks associated with legal costs.