Litigation Funding Options

1 – Funding Options.
2 – Hybrid Arrangements – Applying the Regulations.
3 – Agreement Terms.
4 – Other matters.

1 – Funding Options

Standard fee agreements – Hours x Rates or Fixed Fee agreements – Payment of costs in any event.

After The Event Insurance (ATE) – Insurance cover, taken out after the event giving rise to a claim. Mainly for adverse costs and own disbursements.

Before The Event Insurance (BTE) – E.g. an add-on to household or motor insurance. Insurers generally appoint their own solicitors but clients have the right to insist on their own.

Solicitor-funded arrangements – Solicitor agrees to accept payment at the end of the case. i.e. no advance/interim fees and paying all disbursements. The solicitor may be paid from the damages or costs recovered. There is nothing wrong in principle with these type of arrangements as confirmed in some recent cases: Dix -v- Townend & Frizzell Financial Services [2008] EWHC 9011 (decided by Deputy Costs Master Williams); Sibthorpe and Morris v London Borough of Southwark [2011] EWCA Civ 25; Flatman and Germany v Weddall and Barchester Health Care Limited [2013] EWCA Civ 278; Heron v TNT (UK) Limited and Mackrell Turner Garrett (a firm) [2013] EWCA Civ 469

Third Party Funding – Agreement between Client and Third Party Funder (TPF). TPF funds the solicitor fees and generally takes a percentage of the damages. However, the legal liability for paying the solicitors’ fees rests with client.

Group Funding Agreements – Agreements providing for the sharing of common costs within multi-party litigation/group litigation – e.g. a pro-rata division of common costs referable to the level of each participant’s claim. Also allows for CFA/DBA terms.

Examples of Conditional Fee Agreements (CFAs).

  • No win/no fee CFAs – Normal fees if client wins – no fees if client loses.
  • Discounted Fee CFAs – Normal rate if client wins – lower rate if client loses.
  • Fixed fee CFA – Fixed fee if client wins – no fee if client loses.
  • CFA Lite – Win/Lose as above – if client wins, fees are limited to the amount that is actually recovered from opponents by way of costs.
  • Collective Conditional Fee Agreements (CCFAs) – Regular business of a similar nature from e.g. insurers and government departments.
  • Note: Definition of ‘win’ – can be ‘obtaining an order for costs in your favour’.

Damages Based Agreements (DBAs).

  • The Solicitor is paid a percentage of the damages actually recovered (up to 25% in personal injury cases and up to 50% in all other cases (except employment claims) ‘the payment’.
  • For all cases (other than employment claims) VAT and Counsel’s fees are covered by ‘the payment’. Disbursements are not. So the Solicitor and Counsel get nothing if the case is lost.
  • The payment 25%-50% percentage limit only applies to first instance claims – DBA Reg 4 (4). There is no limit in respect of appeals.
  • For employment claims ‘the payment’ covers the solicitor’s fees and VAT. All other expenses are in addition.
  • The DBA cannot provide for any other form of payment other than ‘the payment’.
  • Costs must be taken from damages recovered (actual receipt) after giving credit for costs paid or payable by the opponent.
  • The DBA Regulations 2013 provide for a rigid funding regime – there is no scope for a hybrid arrangement and there has been relatively little uptake.

2 – Hybrid Arrangements – Applying the Regulations.

Example 1: Consider an agreement, for commercial litigation, that provides for hourly rates plus a success fee that tracks the level of damages e.g.

Hourly rate: £500 ph plus a success fee as follows:

  • 100% if damages are £1,000,000.00 or above
  • 75% if damages are £750,000.00 – £999,999.99
  • 50% if damages are £250,000.00 – £749,999.99.
  • 0% if damages are less than £250,000.
  • No fees if the case is lost.

The risk assessment is based on (1) merits of the case – risk of losing but also (2) risk of recovering less than a specified sum. And the success fees (and therefore the overall fees the solicitor receives) are determined by the level of damages obtained.

Is it a CFA?

s58 Courts and Legal Service Act 1990 – Conditional fee agreements.

(2) For the purposes of this section and section 58A—

(a) a conditional fee agreement is an agreement with a person providing advocacy or litigation services which provides for his fees and expenses, or any part of them, to be payable only in specified circumstances; and

(b) a conditional fee agreement provides for a success fee if it provides for the amount of any fees to which it applies to be increased, in specified circumstances, above the amount which would be payable if it were not payable only in specified circumstances. and

(c) references to a success fee, in relation to a conditional fee agreement, are to the amount of the increase.”

The agreement certainly provides for fees and expenses to be paid only in specified circumstances i.e. Win and Lose with a success fee that increases those fees. So it meets the definition of a CFA under this section.

Is it an enforceable CFA?

CFA – 58 Court’s and Legal Services Act 1990

(1) A conditional fee agreement which satisfies all of the conditions applicable to it by virtue of this section shall not be unenforceable by reason only of it being a conditional fee agreement; but (subject to subsection (5)) any other conditional fee agreement shall be unenforceable.

The CFA Regulations (which specified many of the conditions applicable to it) were largely revoked in 2005 so, for commercial litigation, for example, as long as the CFA is in writing and the success fee does not exceed 100%, it will be enforceable. It does not even need to be signed.

Is it a form of DBA?

s58AA Damages-based agreements

(3) For the purposes of this section—

(a) a damages-based agreement is an agreement between a person providing advocacy services, litigation services or claims management services and the recipient of those services which provides that—

(i) the recipient is to make a payment to the person providing the services if the recipient obtains a specified financial benefit in connection with the matter in relation to which the services are provided, and

(ii) the amount of that payment is to be determined by reference to the amount of the financial benefit obtained;

So a DBA provides for ‘a payment’ (undefined) to be made to the solicitor in the event of obtaining a financial benefit for the client and the amount of the payment is determined by the amount of that financial benefit.

Example 1 includes a success fee (‘a payment’) that is determined by reference to the amount of damages awarded. So, arguably, it does meet the definition of a DBA under this section.

Is it an enforceable DBA?

s58AA Court’s and Legal Services Act 1990 [as amended by s45 Legal Aid Sentencing, Punishment and Offences Act 2012 (LASPO)]

(1) A damages-based agreement which satisfies the conditions in subsection (4) is not unenforceable by reason only of its being a damages-based agreement.

(2) But (subject to subsection (9)) a damages-based agreement which does not satisfy those conditions is unenforceable.

(3) ……

(4) The agreement—
(a) must be in writing;
(b) must not provide for a payment above a prescribed amount or for a payment above an amount calculated in a prescribed manner;
(c) must comply with such other requirements as to its terms and conditions as are prescribed; and
(d) must be made only after the person providing services under the agreement has provided prescribed information.

(5)-(8) ….

(9) Where section 57 of the Solicitors Act 1974 (non-contentious business      agreements between solicitor and client) applies to a damages-based agreement other than one relating to an employment matter, subsections (1) and (2) of this section do not make it unenforceable.

Prescribed terms for a DBA:

DBA Regulations 2013 – Regulation 1

(1) ….

(2) In these Regulations ……“payment” means that part of the sum recovered in respect of the claim or damages awarded that the client agrees to pay the representative, and excludes expenses but includes, in respect of any claim or proceedings to which these regulations apply other than an employment matter, any disbursements incurred by the representative in respect of counsel’s fees.

(3) Subject to paragraphs (4), (5) and (6), these Regulations shall apply to all damages-based agreements entered into on or after the date on which these Regulations come into force.

(4) Subject to paragraph (6), these Regulations shall not apply to any damages-based agreement to which section 57 of the Solicitors Act 1974(5) (non-contentious business agreements between solicitor and client) applies.

Explanatory note to the DBA Regulations 2013:

“DBAs are a type of ‘no win, no fee’ agreement under which a representative (defined in these Regulations as a person providing the advocacy services, litigation services or claims management services to which the DBA relates) can recover an agreed percentage of a client’s damages if the case is won (“the payment”), but will receive nothing if the case is lost”.

DBA Regulations 2013 – Regulation 4

(3) Subject to paragraph (4) [re. appeals], in any other claim or proceedings to which this regulation applies, a damages-based agreement must not provide for a payment above an amount which, including VAT, is equal to 50% of the sums ultimately recovered by the client.

So Example 1 does not provide for an agreed percentage of the damages, it provides for an agreed percentage of the costs (capped by the level of damages). As a DBA it would be unenforceable, not just for this reason but also because it provides for more than one ‘payment’ (hourly rate plus a success fee) and (as it relates to a commercial matter) is not inclusive of counsel’s fees.

DBA Regulations 2013 – Regulation 4

(1) In respect of any claim or proceedings, other than an employment matter, to which these Regulations apply, a damages-based agreement must not require an amount to be paid by the client other than—
(a) the payment, net of—
(i) any costs (including fixed costs under Part 45 of the Civil Procedure Rules 1998); and
(ii) where relevant, any sum in respect of disbursements incurred by the representative in respect of counsel’s fees, that have been paid or are payable by another party to the proceedings by agreement or order; and
(b) any expenses incurred by the representative, net of any amount which has been paid or is payable by another party to the proceedings by agreement or order.

Example 2: An agreement that provides for normal fees (hours x rates) until a Defence is filed, after which point it then converts into a DBA with retrospective terms so that the DBA ‘payment’ covers all work from the start date.

Example 3: An agreement that provides for (i) normal fees (hours x rates) under CFA terms (no-win no fee) until a Defence is filed after which point all work done from the date of the Defence is covered on DBA terms.

The problem with both of these arrangements is that, again, they both provide for two forms of payment (within one agreement) but the regulations only allow for one payment and more specifically, no payment other than ‘the payment’ is permitted.

Likewise, DBAs that provide for (i) different levels of payment according to different heads of damage; (ii) payments on account or (iii) discounted payments, would all, arguably, be in breach of the regulations.

Furthermore, it would also be impermissible, under the regulations, to agree to take half your hourly fees and half the percentage payment (e.g. 50% of hourly rates plus half of 50% of damages) and/or; take half the payment on entry of Judgment and the other half when the Judgment sums are paid.

Lexlaw Ltd v Mrs Shaista Zuberi [2017] EWHC 1350 (Ch) – This was a claim in respect of unpaid solicitor’s fees by Lexlaw, which Mrs Zuberi disputed on various grounds. Clause 6.2 of the Damages Based Agreement between the Claimant and the Defendant provided:

“With the exception of the circumstances set out in clause 6.3 (in which you agree not to terminate this Agreement), you may terminate this Agreement at any time. However, you are then liable to pay the Costs and the Expenses incurred up to the date of termination of this Agreement within one month of delivery of our bill to you.”

The fact that ‘the agreement’ provides for both “the payment” and also for “costs and expenses” to be paid under different circumstances suggests the agreement may not be compliant with the DBA Regulations. The court referred the matter for trial.

Example 4: Two Separate Agreements: Client agrees to pay ‘normal fees’ up to commencement of the claim. At the same time, the client enters into a separate (concurrent) agreement, being a DBA, in respect of the work to be done on the remainder of the case.

Some commentators suggest there would be no problem with two separate agreements provided they run sequentially (i.e. different payment terms in respect of different stages of the case) – but where do you draw the line? How about a normal fees agreement up until disclosure with a DBA covering work done after that date? Or how about a DBA that starts the day before the trial starts? Two agreements or one, the Court is likely to look at the ‘entire retainer’ and determine the position accordingly.

One way to ensure compliance with regulation would be for the second DBA agreement to be in retrospective terms covering all the work done, from day one, with the solicitor giving credit for (repaying) any sums received under the previous retainer. The court recently accepted a change of funding from a DBA to CFA just two weeks before trial in Dial Partners LLP & Anor v Eastern Airways Int. Ltd and Ors [2018] EWHC B1 (Costs).

The future for Hybrids

Consideration was given to revising the DBA regulations in 2015 but that was put on hold. As such there has been very little uptake of DBAs in England and Wales. In Scotland Hybrid CFAs are now permissible under the Civil Litigation (Expenses and Group Proceedings) (Scotland) Act 2018. This may lead to changes in England in due course.

DBA Insurance

This is a new insurance policy based on the DBA model recently launched by broker, TheJudge.co.uk. Here, the solicitor enters into a DBA with the client but takes out the DBA insurance to cover an agreed proportion of their fees in the event that the claim does not succeed. There is no upfront premium. If the claim is a success, the solicitor pays the agreed premium out of the DBA Payment.

3. Agreement Terms – CFAs

The CFA regulations were largely revoked in 2005. The most recent ‘regulation’ is, therefore, the Conditional Fee Agreements Order 2013 which although these set out additional conditions for personal injury CFAs, for other matters there are only two requirements for a CFA.

The CFA must not relate to family and criminal proceedings and the success fee must not be more than 100% of the base profit costs. Because of this there is now a tendency to write CFAs in a simplistic format – i.e. merely recording basis of charging in the event of a win or lose (and any success fee).

Example 5 – Solicitor acting under a CFA moves to a new law firm. A new CFA is entered into.

  • When does the old CFA come to and end and what are the terms for termination?
  • On what date does the work under the new CFA commence – Are there retrospective provisions?
  • What are the terms for the division of funds in the event of a recovery that is all-inclusive of damages and costs? Does the liability for payment of the solicitor’s fees take priority?
  • What are the protections for the client’s damages – are the contracts fair?
  • In whose favour will a costs judge decide areas that have been left to doubt – the lay client or the legal expert?

All these questions arise if the agreements do not specifically provide for them.

What terms are often missed?

  • Adequate identification of parties and the claim or claims to which the agreement relates.
  • What is (and is not) covered by the agreement – i.e. counterclaim/ detailed assessment/ appeal?
  • Definitions of win and lose – what is ‘success? What happens if the claim is lost?
  • Provision for interim awards of costs. e.g. what happens if you lose but get interim costs?
  • Allocation of funds – all-inclusive settlements – who gets priority when it comes to paying disbursements, counsel’s fees, profit costs, success fees, previous solicitor’s costs, damages and recovered costs ?
  • Termination of the agreement – preserving the solicitor’s entitlement to the fees (and success fee) in the event of transfer to another law firm?
  • Risk assessment.

4. Other matters

  • Notices of funding – There is no longer any need to give notice of a funding agreement (CFAs) entered into from 1st April 2013 but this could change if DBA regulations are amended to allow for Hybrid Arrangements and could change for third party funding arrangements.
  • Explanation of funding arrangements in Bill of Costs – This is a requirement in all cases and where a CFA has been entered into before 1st April 2013, including the requirement to provide details of the definitions for win/loss and the risk assessment/basis for claiming a success fee at the level claimed.

Further reading: 

Bolt Burdon Solicitors v (1)Aijaz Tariq (2) Azeem Tariq (3) Amees Tariq [2016] EWHC 811 (QB).