Keen to learn more about litigation financing? Here are answers to some frequently asked questions.
- What is litigation financing?
Litigation financing is an umbrella term used to describe the different ways that parties to disputes can finance their case. There is a range of different ways parties achieve this. They can look to obtain third party funding or insurance against costs. They can also look to reduce or remove ongoing legal costs by sharing risk with their lawyers. The goal is always to assist with the financing of the dispute so that it can be fought effectively.
- What type of claim is suitable for commercial litigation financing?
All commercial litigation cases are potentially suitable for litigation financing, depending on which of the tools you look to use. You will always have to consider things like where the defendant has the money to satisfy a judgment, what the costs will be when balanced against the recovery and, of course, the merits of the claim. If you have a good claim then with the right blend of financing options, you can make your dispute cost effective to pursue. As a general rule (and this is by no means absolute), to pursue a dispute with the benefit of third party funding and/or damages based agreements, you should work to a ratio of 1:10 /costs: damages.
- What is a Conditional Fee Agreement (CFA)
A CFA is an agreement whereby a client funds part or all of their litigation by sharing the litigation risk with its solicitors. The solicitor and client agree that the solicitor's fees will be discounted during the life of the litigation. They further agree that the balance of the fees i.e. the difference between the discounted rates and the standard rates will only be payable be in the event of success (which can be defined however the parties wish).
In addition, in the event of a success, a success fee will be payable by the client. This will be calculated as a percentage uplift on the solicitor's fees on top of their normal fees. If the claim is not successful, the client will only be liable for the fees it has already paid at the discounted fee.
This was the first type of fee sharing arrangement allowed in the UK and is commonly known as "no win no fee" or "no win low fee". Please see our Financing Options section for more detail.
- What is a Damages Based Agreement (DBA)?
A DBA is an agreement whereby a client funds its litigation by sharing the litigation risk with its solicitors. However, unlike a CFA, the solicitor is not paid at all through the life of the litigation. Instead, the parties agree that if the claim is successful, the solicitor will be paid a percentage of the damages recovered from the losing party.
The fundamental difference between a DBA and a CFA is that with a DBA, the solicitor is paid out of damages recovered whereas with a CFA, the solicitor is paid a percentage success fee based on fees incurred. Please see our Financing Options section for more detail.
- What is 'After the Event Insurance' (ATE)?
ATE insurance is not strictly a funding tool because it does not have any impact on the ongoing costs of litigation. What it does do, is insulate you from the risk of having to pay significant costs if you lose your case. In English litigation, the ordinary position is that the losing party pays the winning party's costs. If you lose, an ATE policy will pay the opponent's costs so that you don't have to. More recently, insurers have been willing also to offer own costs insurance. In a similar way, if you lose, these policies will pay your own legal costs.
Because there is the possibility of obtaining cover for your own legal costs, these policies can be used effectively with CFAs and DBAs to produce a united financing package.
Some clients already have legal expenses insurance so will not need to consider this.
We can assist you with obtaining ATE insurance policies.
Please see our Financing Options section for more detail.
- What is Third Party Funding (TPF)?
Third Party Funding is the purest form of litigation financing. Under this arrangement, the client enters into an agreement directly with a third party funder. The funder agrees to pay the client's legal costs in return for, typically, either a share in the recoveries of the case or a multiple of its investment. Those returns will, however, only be payable on the successful conclusion of a case. The exact terms of the funding arrangement will be negotiated on a case by case basis depending on the strength and value of the case.
The litigation funding market has exploded in recent years and different funders focus on different areas of the market. There is therefore significant competition in the market and different funders will be keen to fund different types of claims. The market has developed to the point where funders are even willing to provide working capital funding to enable a business to "keep the lights on" whilst it pursues a case. Further, funders are willing to invest in exploring potential claims by putting in "seed capital" for initial investigations.
All of the terms of the funding including amounts to be paid, invoicing, recovery percentage payment etc. will be covered in a detailed funding agreement. Clients will ordinarily still have to pay disbursements such as Court fees and expert witness fees, but third party funding can be an effective way of minimising the cost of litigation.
Please see our Financing Options section for more detail.
- Can financing arrangements be used by defendants?
Yes. Funders will consider funding a defended case in certain circumstances. ATE policies – both adverse costs and own costs insurance – are open to all parties to a dispute. Similarly, CFAs are an effective way of sharing cost risks when defending a claim: success for the purposes of a CFA can just as easily be defined as avoiding liability in part or whole.
However, even if you are not funding the defence of your claim, having a strong understanding of litigation finance will allow you to understand your opponent and strategise effectively. Please see our Our approach section for more details.
- Would I have to tell my opponent that my claim is being funded?
Since 2013, there has been no general obligation to notify your opponents of any financing arrangements – whether that is an insurance policy, a third party funder or some financing arrangement with your solicitors. However, as the use of financing has spread, it has become common practice for parties to seek disclosure of financing arrangements. Having an understanding of the law in this area is critical to successfully fighting a financing case. Please see our Our approach section for more details.
- Why would I not want some form of litigation financing?
Litigation financing can assist most people with structuring their litigation to match their risk profile. The key is to find the right blend of financing options for you. Many of our tools can be used in tandem to produce a package which has an acceptable risk and return profile for you. Although funding might lower your cash flow costs, it might lead to increased costs following a success. Many clients are willing to pay extra to lower their risk. If, however, you do not want to risk paying success fees or sharing in your returns, then you may still benefit from some form of insurance.