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  1. Analysis
January 1, 2009

Funding options for litigation

Conditional fee agreements (CFAs), often combined with insurance policies, have been used in the personal injury market for a number of years to enable parties to bring claims in circumstances where they might otherwise be unable to afford to do so.

By Verdict Staff

Conditional fee agreements (CFAs), often combined with insurance policies, have been used in the personal injury market for a number of years to enable parties to bring claims in circumstances where they might otherwise be unable to afford to do so. However, such products are not limited to that market and should be explored as a funding option in many commercial and recovery claims – including those in the motor finance industry. This is particularly so in this new era where, as reported in the last edition, arrears are on the increase, but a shortage of cash may engender a reluctance to litigate.
CFAs

So what is a CFA?  As the name suggests, it is an agreement between the solicitor and the client whereby the client agrees to pay all, or a proportion, of its solicitor’s costs on condition that the claim is successful. If the claim is not successful, then, dependant upon whether the agreement is a “no win, no fee” agreement or a discounted agreement, the client either pays no fees to its solicitor or only the agreed discounted amount, say 70 per cent of the solicitor’s usual hourly rate, plus disbursements.  If the claim is won, the client pays his solicitor the full agreed hourly rate, plus a success fee which can be up to 100 per cent of the hourly rate. Recovery of the costs incurred in the successful claim, together with the success fee, is then sought from the losing party. 

The benefit for the client is that the client and the solicitor share the risk of the litigation. If it is lost, no fees, or a reduced level of fees are payable to the solicitor (along with disbursements). If the claim is won, although the CFA will often provide that the client remains ultimately responsible for the solicitor’s costs, they will be recoverable from the losing party. It is a requirement that formal notice of the CFA is given to an opponent so that they are aware of the additional liability they may face in having to pay the success fee should they lose. Tactically, if a claim is strong, the giving of such notice can often lead to an early settlement offer by the other side to avoid paying the success fee on what could be substantial costs should the claim go to trial.

Insurance – before and after the event

CFAs are often combined with either before the event (BTE) legal expenses insurance or after the event (ATE) legal expenses insurance. Such insurance is available for use without a CFA and there is now a positive obligation on solicitors to discuss such insurance with their clients.  BTE insurance might cover both own and opponent’s legal costs up to a given level. Such insurance might have been specifically obtained or be an “add-on” to a director’s and officer’s policy or other insurance policy. They can be limited in both coverage and include a restriction as to choice of solicitor.

ATE insurance is, as the name suggests, acquired after the event, i.e. the claim to be insured has arisen. It can be taken out to cover an opponent’s legal costs and disbursements, own disbursements and own legal costs if a “no win, no fee” CFA is not also being entered into. The policy for such a premium can be between 25 to 40 percent of the total amount of fees and disbursements being insured. That premium itself can be insured, paid in stages, deferred until the proceedings have ended, or in certain circumstances, payment might be made contingent upon the claim being won.  

If the claim is won, the insurance premium, along with a proportion of the costs incurred, should be recoverable from the opponent as an additional liability so long as they have been given notice of it. If the claim is lost, the policy will cover the opponent’s legal costs and disbursements plus own costs (if such cover has been taken out) and the premium may also be payable.

Tactics and peace of mind

A combination of both a CFA and ATE insurance, or just ATE insurance on its own, can be a powerful weapon tactically as well as a sensible decision commercially. By giving notice to an opponent of the CFA and/or ATE policy, they will appreciate that the solicitors and insurers consider that the prospects of success for the case are such that it is worth them sharing the costs risks of it and that the costs consequences of losing will be more acute than usual. The ATE insurance will also give peace of mind that, win or lose, the costs of the litigation are contained.

The author is a partner in Wragge & Co LLP’s Finance, Insolvency, Recoveries and Sales team, and has considerable experience in acting for clients in commercial and recovery claims on both a CFA basis and in relation to the obtaining of ATE insurance.

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