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Choosing wisely - Andrew McAuley explains the new funding opportunities for commercial clients

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From 1 April this year, the way in which clients can fund their legal cases substantially changed as a result of the Jackson reforms.

If lawyers are to be successful in this new era, they will need an excellent knowledge of litigation funding. Below is a summary of the main ways in which clients can now fund cases, with a focus on commercial litigation.  Before the event insurance Commonly known as BTE insurance, this type of funding involves investigating whether a client has any pre-existing legal expenses insurance. Lawyers should reasonably consider policies of insurance with clients, to see whether such a policy can be used to provide indemnity cover. Lord Justice Jackson focused on BTE in his final report on civil justice reform, and saw it as a way in which litigation should be funded in the future. This received much criticism, as most lawyers find BTE insurance painful. There are issues over the rates paid to firms on BTE insurers’ panels; indemnity/cover pre-issue, and the notorious reporting requirements. Furthermore, at the conclusion of the case, a lawyer will make a claim for costs to the insurer. This is often heavily disputed, as the costs are paid on the ‘standard basis’, which leaves the lawyer with a shortfall.

On a traditional private fee paying basis, the client will usually pick up the shortfall. These factors make BTE an unattractive funding option for many lawyers. BTE is unlikely to become a significant source of funding post-Jackson.

Private Fee-Paying

Here, the client pays by the hour, and is usually sent invoices on a monthly basis. The client is in complete control, and can pay for a Rolls-Royce service or an economy class service.  Private fee-paying retainers have received much criticism, but they will remain the most attractive funding option for lawyers post-Jackson. The main attractions are:

But what we should really start to see develop is fixed fees. Firms such as Riverview Law, which makes offering fixed-price solutions a key selling point, are a good example. The market is likely to demand more fixed fees in the future, and law firms need to be able to offer these. If they do not, they will lose business. Firms offering fixed fees should try to ensure that the fixed fee is paid upfront, which will significantly improve cashflow. Fixed fees can be a good earner if they are set up properly, with the right client. But if the fees are not clear and the client is not managed, then law firms will lose money on such arrangements. The key will be to define precisely what the fixed
fee covers, and ensure that any deviation is dealt with immediately. Mistakes will be made, but the key will be to learn from those mistakes.

After the Event Insurance

Before Jackson, ATE insurance was a great product for clients. The premium was recoverable from the opponent, and self-insured. It was a no-brainer for clients – as win or lose, they did not pay the premium, and had protection from an adverse costs order. The Jackson reforms mean that the premium is no longer recoverable from the opponent.
Many casualties were expected in the ATE insurance market, but the table of ATE insurers on pages 26 to 31 of this publication shows that ATE insurers still see a future for their industry.  Most of the ATE insurers have launched new funding products which include outset, deferred, staged and contingent payment options. Premiums have substantially reduced for personal injury cases, due to the introduction of qualified one-way costs shifting (QOCS). ATE insurance will still be attractive for clients, particularly those
involved in commercial litigation. Clients will, for example, be happy to pay a deferred premium on successful conclusion, as it will give them peace of mind from a large adverse costs order. But clients with deep pockets and strong claims may well take the risk, to save having to pay the premium. Lawyers must continue to ensure that they discuss ATE insurance with clients in detail. The civil justice reforms have not ended the world of ATE insurance. They have simply moved the goal posts. ATE
insurance must not become a forgotten funding option. It remains very important, and each client should be taken through the potential costs and benefits of ATE.

Conditional Fee Agreements

CFAs will undoubtedly remain popular. The success fee is no longer recoverable from the opponent, but instead, is now paid by the client.  The maximum success fee is still 100%, with the only limit in cases concerning a personal injury claim (where the success fee is capped at 25% of damages).  Law firms should continue to expect a large demand for CFAs – so they must ensure that precedent documentation is changed, and complies with the post-April rules. This type of funding will still be popular with clients, because the law firm is taking a risk and has a financial interest in the outcome of the case.

Clients will increasingly be interested in discounted or hybrid CFAs – particularly corporate clients with volume work. Under a discounted CFA, the client pays at least a reduced rate, win or lose. If the case is successful, then the client pays the full rate, plus a success fee which should reflect the reduced risk taken by the law firm.  This method of funding is good for law firms, as it means that they can invoice the client monthly for their time (at the discounted rates) and it maintains cashflow. If the case is won, there is still the ‘bonus’ success fee for the firm.

Damages-Based Agreements

Under a DBA, lawyers can take a slice of the client’s damages. The maximum percentage is 50% (or 25% in a personal injury claim). Base costs are still recoverable inter partes, and the client is given credit for base costs recovered against the charge under the DBA.  The Damaged-Based Agreements Regulations 2013 have been poorly drafted. Law firms should approach with caution, as there will be insurers queuing up to invest money to test the enforceability of a DBA before the courts. The revised regulations are expected from October, so a sensible lawyer will wait until then before entering such an agreement. Furthermore, the Law Society Gazette has recently reported
that DBAs are on the radar of the Legal Services Board (LSB), which highlights the risks (see tinyurl.com/m42t2lg).  DBAs are a good idea, as they give greater flexibility to litigation funding. But a full DBA is unlikely to be attractive to a client when they can enter a full CFA. Under a DBA, there is also the uncomfortable situation where the claim settles pre-issue, and the law firm receives a very significant mark-up on time spent. Such a situation could lead to a complaint, which may end with a regulator asking the firm why it did not act under a CFA. The conflicts and difficulties to which DBAs could give rise are clear.

What would make DBAs popular is if they could be used in the same way as discounted/hybrid CFAs; with the client paying an agreed (discounted) hourly rate, together with a percentage of the damages recovered if the case is successful. This gives the law firm the cashfow benefit of monthly billing, and the firm also has a real interest in the
case being successful.

It appears that law firms want this type of funding, and it would be popular with clients. In fact, Mr Justice Ramsey, the judge in charge of implementation of the civil justice reforms, commented on this at the annual Association of Costs Lawyers Conference in May. He said that, if the market demands this type of funding, then he expected it to
become available. It is envisaged that the revised regulations will cater for such hybrid arrangements – so law firms should keep close tabs on these, and be ready to offer this as another source of funding.

Third-Party Funding

Law firms are now much more aware of third-party funding, and its use is expected to increase.  To secure third-party funding, an application is usually submitted to the funder together with a costs budget. It is important to get the costs budget right, as the funder will pay the law firm in accordance with the costs budget. Law firms should therefore involve a costs lawyer when preparing the costs budget, given its importance.  If the application is successful, the funder will pay the lawyer’s fees on a monthly basis – which is great for a law firm’s cashflow. Also, the funder takes an agreed slice of the damages if the action is successful.

Third-party funders are likely to use ATE to prevent the risk of an adverse costs order. This is a pretty good source of funding for a client with a large claim but no liquid cash.
Lawyers with any high-value claims should be considering third-party funding and discussing it with the client at the outset, together with all other funding options.

Public Funding

Public funding, of course, means legal aid. Lawyers must remember to discuss public funding with clients at the outset, and investigate where appropriate. Failure to do so can have severe consequences; remember the case of David Truex, Solicitor (a firm) v Kitchin [2007] EWCA Civ 618, which held that a solicitor was bound at the outset to consider
whether a client might be eligible for public funding. Do not fall into the same trap.

Standing out

Lawyers with a good knowledge of litigation funding can really differentiate themselves in this post-Jackson world, by being creative and flexible. Furthermore, a good knowledge of litigation funding will ensure that a client retainer is set up efficiently. This is fundamentally important given that ‘funding costs’ are no longer recoverable interpartes.
Law firms with a suite of compliant retainer documentation and lawyers who are confident, creative and knowledgeable in litigation funding be the ones to find the opportunities - and, crucially, the riches – post-Jackson.

Source: LITIGATION funding AUGUST 2013

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