Liability for your own and your opponent's legal costs will be one of the biggest concerns of any business involved in a dispute.
Since launching CONTROL, an innovative suite of litigation funding solutions, in 2008, Addleshaw Goddard has been a pioneer of litigation funding and at the forefront of sharing risk with clients on large and complex commercial cases.
We listen closely to what our clients say about the costs involved in bringing or defending legal proceedings. For businesses regularly involved in litigation, much of that cost is hitting the bottom line.
Our clients tell us they want:
- Greater certainty and predictability in the costs of cases
- Help with the cash flow implications of paying for litigation (which can create pressure to settle, or not start, otherwise good cases)
- Mitigation of potential liability for their opponents' costs (which can also create pressure to settle in otherwise good cases)
Over the years, we have formed strong relationships with the leading brokers, insurers and funders, gaining a wealth of experience of how different options work in practice. Even if external funding is not appropriate for a case, ATE insurance may still be helpful, or we may be able to offer a range of other fee options, including conditional fees, fee caps, blended rates and fixed fee arrangements, all with the aim of ensuring our clients have greater cost control and certainty.
We believe our approach to litigation funding sets us apart from other commercial litigation firms, and we are determined to remain at the forefront in this area. We provide an integrated solution, including conditional fee agreements, after-the-event insurance and third party funding to provide clients with greater certainty over the potential financial outcomes. Damages based agreements (DBAs) may also have a place in certain types of disputes, but in our view the regulations governing their use are currently unclear and could leave parties exposed to satellite litigation.
As well as giving you greater control over your financial exposure to litigation, the funding arrangements above may bring strategic advantages. If you choose to do so, your opponent can be put on notice that your case is being funded, and therefore has the backing of your lawyers or an outside investor who has assessed the merits of your case and decided to invest in it.
Your opponent will know that following these independent assessments of your legal position, unconnected parties are willing to 'buy into' the prospects of your success. This is a powerful message to send to your opponent and could be an advantage in any settlement negotiations.
CONTROL applies to both claimants and defendants. Conditional fee agreements and after the event insurance are in principle available to both. Currently third party funding is limited to claimants, or defendants with counterclaims, but the market is developing fast. Funders are looking at the possibility of funding defences in return for one off payments.
There are four different ways in which you may be able to lay off some of the risk of funding litigation, or postpone paying for it. Read more below.
- Conditional Fee Agreement
A CFA is an agreement between you and us under which you agree to pay our fees at less than standard rates if the case is not successful, and at standard rates plus a "success fee" (expressed as a percentage of the difference between the discounted rates and the standard rates) if you are successful.
The use of conditional fee agreements is regulated for contentious work. There is no restriction on the type of contingency fee that may be used for non-contentious work.
What are the advantages of a CFA?
There are three main advantages:
- Improved cash flow. You will be offered a discount on our standard hourly rates throughout the life of the litigation.
- Improved certainty on costs. You will be better placed to make a provision on your balance sheet for your legal costs, knowing that if the case is lost, you will only have to pay our fees at a reduced rate plus expenses.
- We share the risk with you.
An example of how we charge you under a CFA
Let us say that we agree a "no win, low fee" CFA with you under which we agree to discount our standard fees by 30% and there is a success fee of 100% of the 'deferred fees' (i.e. the difference between the standard rates and the discounted rates) if we win.
Throughout the life of the dispute, you pay our fees at the discounted rate of 70% of our standard rates plus disbursements. If success in not achieved, that is all you have to pay us.
If success is acheived, you pay us, in addition to the discounted fees and disbursements, the remaining 30% of our standard rates that were conditional upon the outcome, plus a success fee of 100% of our deferred fees. The total amount due to us on success is therefore 130% of our standard rates (i.e. 70% discounted fee +30% deferred fee +30% success fee).
How is the success fee calculated?
The success fee is calculated as a percentage of the deferred fees. In order to set the level of success fee, we quantify the prospects of success in percentage terms. Once we have assessed the prospects of success, we refer to a "Success Fee Calculator", to determine the appropriate level of success fee. The success fee cannot exceed 100% of the deferred fees.
How much of the fees charged under a successful CFA can a party to a dispute recover from the opposing party?
The normal rules of recoverability apply up to the full standard rates, i.e. including the deferred fees which become payable on success. The party on a CFA may claim from the opponent the discounted fees and the deferred fees (together known as "base costs"). The success fee (the additional 30% in the example given above) cannot be recovered from a losing opponent. If you are a claimant, the success fee will in effect come out of the damages. It is not a recoverable cost of litigation. The client can expect to recover approximately two thirds of each of the discounted fees and the deferred fees (i.e. together, the base costs) under conditional fee agreements entered into after 1 April 2013.
Is it necessary to notify the opponent that a CFA has been entered into?
No. After 1 April 2013, because you cannot recover it from your opponent, there is no need to inform your opponent if the CFA provides for a success fee.
How does one define success?
Success will be defined by reference to the likely remedies/outcomes of your dispute, often the recovery of money whether achieved through a court order or compromise, but there are many other possibilities. The definition is something that we will discuss and agree with you.
Will barristers work on a CFA?
The answer will depend in each case on the particular barrister. No set of barristers with whom we work regularly has a policy preventing their barristers from working on a CFA.
- Third Party Funding
TPF is the provision of funds by those who have no connection with the litigation in return for a share of the proceeds. It is available for litigation, arbitration and other forms of Alternative Dispute Resolution.
Is TPF lawful?
Yes, provided the funder does not exercise control over the dispute.
What are the advantages of TPF?
TPF gives the claimant:
- More certainty on financial exposure depending on outcome.
- More liquidity by not having to pay the day to day costs of the litigation.
Which cases are suitable for TPF?
Typically the funder will only consider those cases where:
- There is a good prospect of success (over 60%).
- The opponent has sufficient assets to pay and/or is backed by insurance.
- The estimated costs are proportionate to the claim value.
Who are the funders?
The funder can be any party with no connection to the claim, although they tend to be institutional investors, private equity funds, hedge funds and private investors. Funding large scale litigation can be an attractive investment opportunity as it bears no relation to economic conditions.
What will the funder fund?
The funder will fund all or part of the legal costs and expenses of taking the matter to trial. If full funding is not required, it may be possible to obtain funding in respect of any one or more of the following:
- A percentage of the legal fees that you will incur.
- Some or all disbursements, for example, expert's fees or counsel's fees.
- The opponent's costs that you may be ordered to pay if you lose.
What does the funder expect in return?
The days when litigation funders demanded a return of three times their investment in the case (i.e. the litigation costs paid by them) or one third of the damages, whichever was higher, appear to be coming to an end. Many funders are willing to look at other ways of obtaining a return on their investment, e.g. taking a percentage yield.
Is the funder's fee recoverable from the other party if you win the case?
No. The funder's fee comes out of the damages. It is not a recoverable cost of litigation.
A funder is interested in the case. What happens next?
The funder will perform due diligence on the case. We will supply the funder with a summary of the case, the key documents and a costs estimate. The funder may instruct external solicitors and/or a barrister, at its own cost or at your cost, to assess the case on its behalf.
How long will it take to obtain TPF?
It is likely to take a minimum of 6 weeks from the point of identifying the need for funding to completion of a funding agreement. It could take longer depending on the state of the evidence and the extent of due diligence required by the TPF. They may require a period of exclusivity. Some funders will agree to pay some or all of the legal costs and expenses incurred before the funding agreement has become unconditional. This is a matter for negotiation.
- After The Event Insurance
ATE insurance is an insurance policy taken out after a dispute has arisen to protect against the risk of having to pay the opponent's legal costs if you lose. The policy can often be extended to cover some or all of your disbursements, such as counsel's fees and expert's fees.
What does it cost?
As with any insurance, the insured must pay a premium. A broker will be likely to advise you, but it will be likely that the premium will be in the region of 25-60% of the amount of cover being sought. Unless you are in the Commercial Court, in cases worth less than £2m, from 1 April 2013 each party has to provide the other with a budget for the litigation at least severn days prior to the first Case Management Conference. That budget will be a guide as to what cover is needed for opponent's costs; in cases worth more than £2m, from 1 April 2013, judges may require costs budgets, but they are not automatic.
What are the tactical advantages of ATE?
There are two main tactical advantages:
- The insured will not be intimidated by the high costs estimates of the opponent because it will be the insurer who pays these in the event of a loss.
- If you choose to inform your opponent that you have ATE for the dispute, with the insurer's permission, your opponent will be aware that the merits of the case have been assessed by an independent insurer and the insurer has concluded that the case has good merits.
What type of cases are suitable for ATE?
ATE insurance is available for all types of cases except family and criminal cases and employment tribunal claims. ATE insurance can be taken out in respect of court, arbitration or appeal proceedings. It is available in principle to both claimants and defendants, although many insurers may only offer ATE insurance to claimants.
ATE insurance will only be available for those cases where the insurer considers that the prospects of success in the case are good. This means that the prospects of success must generally be 60% or more.
Who is the insurer?
You will need to find an established insurer via a competant broker. In cases requiring a significant amount of cover the insurer may be a lead insurer with a following market of co-insurers. The identity of the insurer is important, as the insurer should be properly regulated and have sufficient assets to provide the level of cover sought.
At what point should a party to a dispute consider ATE insurance?
ATE insurance is available at any time after a dispute has arisen up to final determination or trial. We will consider with you the likely terms of ATE insurance at the outset. The earlier you apply for ATE insurance, the better the terms are likely to be.
How does the insurer define "win" or "lose"?
This is a matter for negotiation with the insurer. If the solicitors are on a CFA, the insurer will generally want the definition of success to match that in the CFA.
In what circumstances does the premium have to be paid?
The premium will usually be payable if the case is won. The general rule is that the payment of the premium is deferred until the end of the case, and it is contingent on success (i.e. it only becomes payable if you win).
The premium may not have to be paid if the case is lost, even though the insurer indemnifies the insured for the insured risks.
In some cases the premium will be staged, so that the amount due to the insurer increases as various trigger points in the litigation arrive.
Is the premium recoverable?
No, since 1 April 2013 the premium is no longer recoverable from the losing party. The premium comes out of the damages awarded. It is not a recoverable cost of litigation.
Is it necessary to notify the opponent that an ATE policy has been taken out?
No, but as mentioned above, you may want to notify your opponent, with the insurer's permission, once you have taken out an ATE policy.
- Damages Based Agreement
A DBA is an agreement between lawyer and client under which the client agrees to pay the lawyer a percentage of sums recovered in a claim. The agreement would normally require payment in the event that sums are recovered either by settling the claim or after trial. DBAs were unlawful for contentious work (except in employment claims) until 1 April 2013.
What are the advantages of a DBA?
- Improved cash flow. You won't have to pay any legal fees (except expenses, such as expert's fees, but not including any barrister's fees) until sums are recovered with which to pay them.
- Improved certainty on costs. You will be better placed to make a provision on your balance sheet regarding legal costs, and if the case is lost you will not have to pay your own legal fees (other than AG's expenses, excluding barrister's fees).
An example of how we might charge you under a DBA
In circumstances where we agree a DBA with you under which we agree to take a percentage of sums recovered if we win, we must pay your barrister and VAT out of that percentage.
We would receive no fee at all during the dispute. If you lose we would not receive any fees. Even if you win but are unable to recover the damages awarded or settlement sum, for example because the defendent has gone into administration or has no assets, again we would not be paid.
How is the fee calculated?
The fee is simply a percentage of sums recovered.
What costs are recoverable from the opponent when a solicitor has acted for you on a DBA?
You can recover costs from a losing opponent on a normal hourly rate basis. Once these are recovered they will be deducted from the amount owed by you to us. But your opponent will not have to pay more than the percentage payable by you under the DBA. This will be particularly relevant where the fees incurred on an hourly rate basis are a high proportion of damages recovered.
Is it necessary to notify the opponent that a DBA has been entered into?
No. There are no requirements to notify the opponent.
We are committed to working with our clients to identify and put in place the most appropriate funding and risk management solution for each individual case.
It is always necessary to understand the dispute and your objectives before preparing a costs estimate and advising you on your exposure to adverse costs and your funding options. We may do that initial work on our standard hourly rates.
In cases where risk sharing is appropriate, partial conditional fee agreements remain our preferred funding option. On larger cases we may advise a package involving this firm, an insurer and a third party funder. Even where we are not able to offer a CFA we may offer fee caps, pooled funding arrangements and other innovative pricing arrangements. Find out more below.
- Assessing your case
Establishing whether or not you have a good case (or part of a case) is the first step in the litigation funding process.
A substantial part of the financial risk that you face in a dispute may be transferred. There are considerable benefits to you if you can do this. However to do so, whether you are a claimant or a defendant, you will need to have a good chance of succeeding on some or all of your case.
We will identify with you the specific risk factors in your case in order to assess your prospects of success. We will analyse:
- The facts of your case and the people who are likely to give evidence on your behalf
- The documentation you have that is relevant to your dispute
- The legal basis for the claim against your opponent, or the legal basis for your defence
- Your chances of succeeding
- The strength of any claims made or threatened against you by the defendant
- The level of damages/losses that you can expect to recover from your opponent
- The ability of your opponent to pay you
It is not always possible to answer all these questions - to give a clear, unqualified view on your chances of success - at the start of a commercial dispute. Where it is possible, we will do so. Otherwise, we will advise you at the earliest opportunity we can if we consider that you might benefit from some form of funding solution. We have experience of implementing different forms of litigation funding both at the outset and part way through disputes. We have also been successful in putting in place funding for parts of cases, such as interim hearings or appeals, where we believe our client will succeed, regardless of what may happen during the remainder of the dispute.
If we think you have good prospects of success for some or all of your case, we will agree with you what you want to achieve and therefore precisely what "success" will mean. The chances of achieving your objectives are often better than the chances of succeeding in full on all aspects of the claim. Understanding this is important, as it may affect the litigation funding terms that are available to you.
Finally, in addition to you having a good case, it is vital that your opponent has the ability to pay you. Insurers and third party funders will favour strongly those cases where your opponent is backed by insurance or has significant assets in the UK or at least the EU.
- Estimating the costs
The cost of litigating in the English Courts can be high. Despite this, all too often businesses do not budget properly for litigation costs. We will provide you with a realistic estimate of what it will cost you to take your case to trial and how much of that you can expect to recover from the other side if you win.
Our tailored estimate will identify for you in simple terms:
- The likely stages that will arise in your dispute
- The corresponding cost of each stage
- A timetable showing when the costs for each stage are likely to fall due
The estimate will include all legal costs and expenses that we think you can reasonably expect to incur over the life of your dispute. This will include our fees, and those of counsel, experts and all other likely expenses connected with seeing the dispute through to its end. It will also, so far as possible, estimate your potential liability for your opponent's costs if you lose. Armed with this information at the outset you will be able to:
- Budget accurately for the costs that lie ahead
- Measure progress against budget as your dispute evolves
- Make decisions about whether to settle or continue the claim based on accurate forecasts
Since our estimate is not an agreement to carry out the work at a fixed price (unless we expressly agree otherwise with you in writing) we will review the costs estimate with you regularly. This will ensure that if the developing circumstances of your case require us to increase or reduce the estimate you will know as soon as possible and can plan your business on relevant and accurate information.
Legal costs and expenses play an ever more important role in the litigation decision making process. We acknowledge that it is essential for us to identify at an early stage and keep updated the level of financial exposure you may face, and for that analysis to be as accurate as it can be. We achieve this by:
- Monitoring costs on all our cases, identifying trends and applying that knowledge to our costs estimating process
- Training our lawyers to accurately estimate the legal costs and expenses of litigation and other forms of alternative dispute resolution
- Using our internal costs estimating tool that allows all our lawyers to supply you with a bespoke estimate
Although you may face many risks in litigation, we believe that legal costs and expenses should be capable of being defined with reasonable accuracy. With this in mind, we will help you understand the financial parameters of your dispute at an early stage and allow you to budget properly for the costs that lie ahead.
- Identifying financial risks
There are many risks involved in litigation. Some risks are unpredictable: such as not knowing how the documentation your opponent may have will affect the claim. Being aware of such risks is the limit of your control. The financial risks of any dispute are, however, a different matter: they can be identified and measured; they can be controlled.
The financial risk you face in any dispute is a combination of:
- The amount of your claim
- The amount of your opponent's claim, if there is one
- Your legal team's costs and expenses
- Your opponent's legal costs and expenses
- Market and time related financial risks of interest and exchange rates
If your claim is successful, even if you have no funding arrangement in place, you should recover the amount of your claim, interest, and around two-thirds of your own legal team's costs and expenses (the balance of which you will have to pay). This is your best expected outcome.
If you lose your claim, you will have to pay your opponent's claim (if there is one) and interest on that claim, plus around two-thirds of your opponent's legal costs and expenses, as well as your own legal team’s costs and expenses. This is your worst expected outcome.
The total financial exposure you face in a dispute is the difference between your best expected outcome and your worst expected outcome. We will produce this figure for you, based on our estimate of your own and your opponent's legal costs and expenses.
It is this figure that is used as your starting point for identifying the level of your financial exposure and is the basis for considering whether or not some form of funding arrangement, under which some of the financial risk might be transferred to someone else, might be acceptable to you.
- Transferring risk
Once we have identified the total financial exposure you face on your dispute, we will quantify for you how much of that financial exposure you can transfer using the methods of funding set out below.
Each funding alternative transfers a separate and distinct portion of financial risk that you face. A combination of methods of funding can reduce your exposure.
Conditional Fee Agreement (CFA)
Under a CFA, Addleshaw Goddard will agree to discount its fees by a fixed percentage from the time that we agree a discounted rate with you, up to a specified point in the case, normally the final decision or settlement of the dispute. During the life of the dispute, prior to determination by the Court or earlier settlement, all you will have to pay us is:
- Our fees calculated at the discounted rate
- Our expenses (which may include counsel's and experts' fees)
If you lose the case, this is all you will ever have to pay us. A CFA allows you to transfer to us the cost differential between our normal rates and our discounted rates if you lose - the loss will be borne by Addleshaw Goddard, not you, if "success" (as defined in the CFA) is not achieved.
After the Event Insurance (ATE)
A CFA does not control your exposure to your opponent's costs if you lose the case. An ATE insurance policy, which can be purchased after a dispute has arisen, helps with this: it indemnifies you against liability to pay your opponent’s legal costs and expenses if you lose up to a specified limit. It may be possible to extend the scope of this indemnity, if you lose, to cover the expenses that we might incur on your behalf, such as counsel's fees or expert's fees and even, in certain cases, a proportion of our fees.
An ATE policy can be a powerful risk transfer tool, shifting a significant degree of financial exposure away from you and onto the insurer if you lose. However, you will have to pay the premium out of your damages if you win.
Third Party Funding (TPF)
A third party funder may provide funding for your legal team's costs and expenses (including counsel’s and expert’s fees). If you lose the case, the funder will bear these costs and you will have nothing to repay. By entering into a third party funding agreement, you can therefore transfer the financial exposure to some or all (you can "part third-party fund") of your own legal costs and expenses: you incur no actual cost of the day-to-day running of the litigation. In return, however, the funder will require a share of your damages if you win.
Damages Based Agreement (DBA)
Under a DBA you agree that you pay your lawyer a percentage of sums which you recover in a claim, whether by settling it or after a trial. You would have no liability to pay any legal costs except third party expenses, such as for expert evidence, during the life of the dispute, nor if you failed to recover damages.
A DBA would allow you to transfer all your own costs risk (including the costs of instructing counsel) to your lawyers. You would still have a potential liability for your opponent's costs if you lose.
- Other benefits of funding
The Courts in England and Wales have made it clear that legal costs and expenses should not hinder access to justice.
To this end, legislative and judge made change has:
- Simplified CFAs in an attempt to encourage solicitors to back their own advice to clients and share some of the litigation risk by using CFAs more frequently.
- Encouraged the use of third party funding as a method of providing access to justice for those who cannot afford, or do not wish, to pay the cost of taking their case to trial.
- Encouraged the use of DBAs by lawyers taking a share of the client's damages if the client wins, in return for forgoing payment if the client loses.
If you have a good case, you could take advantage of these funding structures. By using one or more of a CFA, DBA, ATE insurance and third party funding (TPF), you may be able to do one or more of the following:
- Define more clearly what financial risk you are exposed to in each of the possible outcomes of your case (CFA, ATE and TPF).
- Pay a reduced rate (CFA, DBA or TPF) or nothing at all to bring your dispute to Court (TPF).
- Exclude the risk of paying your opponent's costs and expenses, and possibly some of your own disbursements and fees, if you lose (ATE).
As well as giving you control over your financial exposure to the litigation, these funding arrangements may also bring strategic advantages:
- If you choose to do so, your opponent can be put on notice that your case is being funded, and therefore has the backing of your lawyers or an outside investor who has assessed the merits of your case and decided to invest in it. Your opponent will know that following these independent assessments of your legal position, unconnected parties are willing to "buy into" the prospects of your success. This is a powerful message to send to your opponent and could be an advantage in any settlement negotiations.
- The cost of funding
The ability to transfer financial risk in a dispute is undoubtedly a significant and very positive development for anybody contemplating legal proceedings.
However, whether you will choose to take advantage of one or more of the litigation funding options will of course depend on the cost. Not surprisingly, the party sharing your risk will also want to share in your success. The extent of the impact on your financial recovery will depend on the type and combination of litigation funding arrangement put in place.
Conditional Fee Agreement (CFA)
If you lose your case, you will only ever have to pay us our fees at the agreed discounted rate, plus expenses and VAT. If you are successful, you will have to pay us the (1) discounted rate plus (2) the difference between the discounted rate and our normal hourly rates, plus (3) a success fee, expenses and VAT. (1) and (2) can be claimed from your losing opponent and are subject to the normal rules of costs recovery. (VAT is only recoverable from an opponent to the extent that you are not able to recover it from HMRC). The court may assess the costs claimed.
After the Event Insurance (ATE)
As with any insurance, you must pay a premium to obtain cover. If you lose the case and you have insurance, the insurer will cover you for your opponent’s costs and expenses that you may be ordered to pay, but may not charge you for this (i.e. it may waive the premium). If, however, you do not lose the case, you will be liable to pay the premium to the insurer.
The premium for ATE Insurance is likely to be in the region of 30% - 60% of the level of cover that you need (i.e. enough to pay your opponent's legal costs and expenses if you lose). Although this additional cost might at first appear unattractive, ATE insurers may be prepared to:
- Defer payment of the premium until the end of the litigation.
- Make actual payment of the premium contingent on success, so that it only becomes payable if you win your case.
This would mean that although you are liable to pay the premium from the time that you enter into the ATE insurance policy, you do not actually have to pay anything unless and until the case is determined and then only if you win. The ATE premium will not, however, be recoverable from the losing party but you may have no premium to pay if you lose, even though you will have the benefit of the indemnity from the insurer.
Third Party Funding (TPF)
In return for funding your own legal team's costs and expenses, the third party funder will typically look to take a multiple of the amount it was prepared to fund or 25% - 40% of the proceeds that you recover from your opponent. This is a significant portion of your claim to give away, so you need to consider carefully whether you are prepared to enter into this sort of arrangement. Third Party Funding tends to be more suitable for larger claims, where the legal costs and expenses of bringing the case, whilst still high, are a relatively small proportion of the overall claim value.
Damages Based Agreement (DBA)
If you lose your case you will only ever have to pay the lawyer's expenses paid to third parties such as experts. If you win and recover damages, you will have to share with the lawyer an agreed percentage of the sums you recover from your opponent, but you would recover a proportion of these from your losing opponent. The court will usually order the losing party to pay the winning party's costs on the usual basis.