Clients, Companies and Legal Teams: What Are Your Litigation Funding Options?
The litigation funding and insurance market is growing rapidly. Whether you are a solicitor advising your client, in-house counsel considering your options or a company deciding how to finance a claim this guide is designed to help explain all your options.
Perhaps you have suffered a breach of contract or a large company is infringing your patent. You feel you have a case and perhaps you have spoken to a solicitor who has confirmed this.
Alternatively, you are the solicitor who feels your client has a meritorious claim. Your client might be worried about how to finance the legal costs and the financial strain this might place on their business.
Do you just let Goliath walk all over you or do you fight? The good news is that the options for pursuing a genuine case have grown. However, most businesses aren’t aware of the options available. They are hesitant about the benefits of the various options they have. This article will cover the tools you have at your disposal to seek justice for your clients or your business and not risk your livelihood in the process.
ATE Insurance stands for after the event insurance. All solicitors will be aware of this but for your clients reading this and company owners let us explain. This is mostly used by claimants but can also be used by defendants. If you feel you have suffered a wrong and wish to pursue a claim then ATE insurance is strongly advised. Perhaps one of your suppliers has breached their contractual obligations and you wish to pursue them for damages.
If you decide to pursue your claim against the company that has breached the contract you would purchase ATE insurance for the following reason. If your claim is unsuccessful then you become liable for the defendant’s costs. ATE insurance covers these costs for you and thus eliminates any further financial risk to your business.
If you are considering pursuing a claim then it is important you purchase the cover as soon as possible. Costs of disbursements incurred before the insurance policy was purchased are unlikely to be covered. Even if you are working with your solicitor on a CFA basis you may still become liable for the defendant’s costs.
The ATE insurance above limits your exposure to liability for the other parties costs. The next question is how do you plan to pay for the costs to pursue the case. Your legal team will be expensive and there are numerous costs associated with bringing a claim.
You and your legal team can seek litigation funding. There are a number of professional funders and brokers you can speak with. Litigation funding is where a professional fund will provide the financing for you to pursue your case. They do of course expect a healthy share of the rewards for the risk they are taking.
Important Tip! Litigation funding is still a small industry. If you do decide to shop your case to the market you must be diligent in your approach. It is worth speaking with a broker or other legal finance professional. If one funder turns you down it may harm your chances when pursuing a deal with others.
There are 2 main reasons companies and clients seek litigation funding.
- They lack the funding to pursue the claim. You and your legal team are 65% to 80% sure the claim will be successful. However, you have just had other expenses in the business and don’t have the cash to afford the legal expenses. Perhaps you run a product based business and all your cash is being poured back into purchasing more stock. Moreover you may be the victim of changes to an international investment treaty. This could have removed all your companies income.
In this instance, you would look to litigation funding. If a funder agrees with your legal team regarding the likelihood of success they may agree to cover the costs. They will, of course, expect a healthy share of the damages recovered. This could be as much as 40% of the damages secured.
- You may have the cash but have other plans for this money. Perhaps using the funds for the litigation would mean a pause on expansion to a new territory or not as much money to allocate to R&D on a new product. It may be the case that other members of your board are not as sure about pursuing the claim. Utilising litigation funding will allow you to transfer the risk by having a third party cover the costs of the litigation.
Often we hear from law firms that businesses are concerned over the influence funders may have on the case. It is important to note that from a legal and ethical standpoint funders are merely there to supply funding. They do not interfere with the case in any way once it has commenced.
Funders will conduct their own analysis and their view on the chances of success if very valuable. The funders hire the best, brightest and most experienced minds so any input they provide is very valuable.
It is worth noting that legitimate funding agreements from professional litigation funders are non-recourse. That means if your case is unsuccessful you are not liable for any of the costs.
Legal Costs Insurance
Insurance products can be used to de-risk litigation and not just against adverse costs. They can be used to insure your own side costs and disbursements.
If you decide you wish to pursue a claim but don’t want to share your winnings with a funding company, or your legal team you can purchase legal costs insurance. You can usually cover up to 75% of your legal teams fees. A premium is paid, usually in three stages to reflect the dispute resolution process. If the dispute settles early then the next instalment is not payable. The premium is a percentage of the total amount of indemnity required.
Here is an example to explain how this option would work for claimants:
This example uses own side costs, own side disbursements and adverse costs being insured in a £30 million case. For the purpose of illustration I have kept the numbers simple:
– Own side fees are £1m
– Own disbursements are £1m
– Adverse is £1m
I’ve used £30m as the quantum because from discussions I find funders typically want a ratio of 1:10 for funding to damages.
Case loses with insurance
The £3m costs as outlined above are insured. Matter goes to trial. Premium is therefore £900K. Matter loses. The client would be paid £1m adverse, £1m disbursements and £750K of own side costs (as there is a 25% deductible). Therefore, client has paid £900K premium and potentially the £250k own side fees (the 25% deductible) so a total of £1.15m however, the insurance policy has paid out £2.75m
Case wins with insurance
Matter wins at court. Award of £25m.Client has paid £900K premium so walks away with £24.1m plus costs so in excess of £25.5m total.
Insuring is by no means an alternative to funding. However, the core focus of this product is for corporate’s who can afford to pay for the litigation but do not want to risk their capital. Insuring provides a way to monetize their claims at minimal risk. Yes with insurance there is something to pay but the upside is so much higher, corporates need to consider this. Further, they buy insurance for every other element of their business so it should not be a foreign concept to them.
CFA stands for Conditional Fee Agreement. It is a legal funding mechanism that means the risk of pursuing a claim is shared by you and your legal representation. You only pay for your lawyers work on the condition that your case is won and you receive compensation. You may still have to cover a percentage of the costs. Every CFA is different and will depend on the deal you strike with your legal team.
Depending on the type of case, some legal costs and expenses can be recovered from the losing party at the end of the claim. However, the changes to conditional fee agreements implemented in April 2013 mean that the ‘success fee’ element of legal costs can no longer be recovered, so this is payable via a deduction from of your compensation (your damages). This is similar to finding a funder to back your case. You will owe them part of the damages if your claim is successful.
Solicitors also have the option to enter into a DBA (Damages Based Agreement) with you. This came into force on the 1st of April 2013. If your claim is successful then your solicitors fees are calculated as a percentage of the damages received by you, the client instead of being based upon the time your solicitors have spent on the matter. There are prescribed rights of recovery from your opponent in relation to part of your solicitors’ fees if you win, but if your case is lost, no solicitors’ fees are payable to your solicitors under the DBA.
This is a relatively new area of law and there is still uncertainty regarding how DBAs will work in practice.