In the funding process an initial case assessment, helps decide on the potential arrangement and if a case is worth funding based on specific factors.
Funding arrangements typically include the following:
- Third Party Funding (“TPF”)
- After The Event Insurance (“ATE“)
- Conditional Fee Agreements (“CFA”)
- Damages Based Agreements (“DBA”)
So what is Third Party Litigation Funding?
Have you ever watched The Voice? It’s a bit like that, e.g. you sing (about your case) and hope a funder turns around for you. If not, think Dragons Den you pitch they invest.
In short, litigation funding is a way for a party to litigation to cover their costs. The funding covers legal fees, court fees and other associated fees. If the case is successful, the litigation funder will take a percentage of the award of damages and a success fee. On the other hand, if the case is unsuccessful the proposed funder loses their cash investment.
As the funding market continues to increase more funders have entered the market, and with new entrants, product offerings have become more diverse. This is great news for claimants who can choose funding to suit their exact circumstance whether it is a specific case or a multitude of cases.
In the UK, AIM (the Alternative Investment Market) has seen new litigation focused entrants. Last December, Manolete Partners raised an impressive £29 million backed by Jon Moulton financier. Shortly after Litigation Capital Management Limited followed Manolete’s success raising £20 million from its public listing.
These recent offerings have boosted speculation that funders may potentially offer more money to assist law firms in case building activities especially in group actions. The upsides do not stop there, as this could also see investment in a firm’s whole litigation portfolio and investment in the law firm itself.
How big does my claim have to be?
It is unsurprising that most providers will offer funding for higher value cases, however there are options for lower value cases using specialist funders who offer funding for cases valued at £200,000 or less. The most significant consideration for funders is the prospect of realising their investment from a healthy award of damages. As investors, funders will prefer to take on cases where they have a higher chance of seeing a return on their investment.
To attract funding, a case must be strong enough on its merits before the courts and have a strong prospect of success. It is also imperative that the defendant is solvent and would be able to pay an award of damages made against it.
Another important factor is the costs to damages ratio, as any costs associated in bringing a claim must be substantially less than the potential award of damages. This will enable funders to see a higher return on their investment. Some investors depict this as a ratio, but this is funder dependent.
Time factors also bear on a decision to provide funding, such as the time taken to argue the case, to getting a judgment and then weighing up the risk of appeal. It can be difficult to comment on strict timescales at the outset but funders will try to make a prediction.
The price of success?
The hard work has paid off and you have won your case, however clients should always be aware of success fees.
In the traditional sense, a success fee is a solicitor’s fee charged to a client upon winning a case and is usually calculated as a percentage. This is seen where a CFA is in place and allows a solicitor to increase its fee by up to 100%.
In litigation funding, the success fee is a percentage of the damages received by the claimant, so a successful claimant will pay the cost of the funding plus a success fee. It is important for clients to know the percentage of the fee and ensure that they have a good understanding of the amount they would be liable to pay a funder upon success.
Solicitors are under an increasing duty to ensure clients are aware of litigation funding insurance as it allows clients to insure their risk for costs they could incur if they are on the losing side of litigation.
Insurance can be a great alternative or even addition to using a funder. These types of policies insure against risk, as the losing side in litigation is usually order to pay their own costs and the winner’s costs. Depending on a client’s needs, there are a range of policies to cover different eventualities.
A unique feature of litigation insurance is that the premium is only payable on success. This is quite specific to litigation insurance and knowing these quirky elements of the insurance puts clients in a strong position when considering their options.
We know that our clients must have all available relevant information at their disposal. This means that firms’ should not only recommend their preferred product but also competitors, which may offer their client cheaper rates and bigger cost saving prospects. We want to inspire trust from our clients and we do this by knowing the market and advising on the right products.
CFA or DBA
Both CFA’s and DBA’s are more traditional forms of agreement made between a client and their solicitor at the outset of litigation.
Most commonly known as no win no fee, a CFA is an agreement, which is dependent on the outcome of the litigation. This means that if you lose, you may not have to pay your solicitor anything, and if you do, it would be a small percentage of their fees. However if you win the fee payable will determined by agreement between you and your solicitor, normally termed a success fee.
This is commonly viewed as a good way to apportion risk between the solicitor and the client.
This type of agreement means that if successful, a proportion of the damages received will become payable to the solicitor (usually at a predetermined rate). As you would expect the higher, the damages award the higher the solicitors’ fee.
DBA insurance can also be utilised to ensure that the solicitors’ fees are guaranteed in the event that you are on the losing side of litigation. This takes the pressure off when trying to pay your solicitor after the blow of being on the losing side of litigation.
How can we help?
At Howard Kennedy, we are positioned to provide well-rounded and commercial advice to clients entering into litigation. We understand that litigation can be long, complex and sometimes daunting. That is why we are on hand to answer our clients’ questions and concerns and to advise on the most cost effective insurance offerings available.