UK: The Jackson Five: Funding

Last Updated: 23 September 2013
Article by Julia Staines

The majority of the recommendations made by Jackson LJ in his 2010 'Review of Civil Litigation Costs' have now been implemented. They fall into five key areas, all of which came into effect in April 2013.

  1. Costs
  2. Funding
  3. Case management
  4. Disclosure
  5. Part 36

In the July issue of CirculaR, we examined the issue of costs management in civil litigation. In this issue, it's the turn of Funding.

Key points: From 1 April 2013
  • Litigants are no longer able to recover success fees under Conditional Fee Agreements, or premiums paid for After the Event Insurance.
  • Damages Based Agreements are allowed in almost all contentious business.

Changes to the funding landscape have been afoot for a while. CFAs were introduced in 1990 in a fanfare of "justice for all". Suddenly, impecunious litigants were able to bring claims without risk of financial ruin. However it was felt that claimants' ability to litigate risk-free was inequitable, that lawyers were 'cherry picking' cases, and that it was not thought fair that even extremely rich litigants could place the entire costs burden on the opposing party.

Conditional Fee Agreements (CFAs)

A CFA (sometimes called a "No Win, No Fee") is an agreement between lawyer and client which means that the lawyer receives nothing if the case is lost, but receives the normal fees plus an agreed success fee in the event that the case is won. For CFAs entered into before 1 April 2013, the fees and the success fee would be paid by the losing party.

Post 1 April 2013, it's all change. CFAs have not disappeared; however (with the exception of insolvency and defamation/privacy proceedings) it is now no longer possible for successful litigants to recover success fees from the losing party.

After the Event Insurance (ATE)

Litigants may be able to insure the risk of adverse costs by taking out ATE. This used to be a no risk strategy, because the premium would only be payable if the policyholder was successful, and even then it would be paid by the losing party.

Under the new costs regime, premiums have to be funded by the policyholder.

Damages Based Agreements (DBAs)

DBAs are, in effect, contingency fees by the back door. In other words, the losing client does not pay its own legal fees, but the winning client gives an agreed percentage of the winnings to its lawyer. Previously such agreements were only allowed in tribunal work, but they are now permitted in all contentious business in accordance with the new Damages Based Agreements Regulations 2013 (the Regulations).

Points to note
  • CPR44.18 – the fact that a party has entered into a DBA will not affect the making of any costs order which would otherwise be made in favour of that party.
  • CPR44.18(2)(b) – the indemnity principle will still apply, so the party with the DBA may not recover more by way of costs from the other side than the total amount it is due to pay its lawyer under the DBA.
  • A party is not obliged to inform the opponent of the existence of a DBA.
  • A party with a DBA will still need to file and serve a Precedent H costs budget in relevant proceedings.
  • The losing litigant will still be liable for adverse costs (although ATE may be available).
  • The maximum contingency fee is set at 50% of sums recovered (25% in personal injury cases). This fee must include costs payable by the other side, so the payment to the winning lawyer must be net of these.

The Regulations set out the requirements with which a DBA must comply in order to be enforceable.

Problems with the Regulations
  • There is no mention of the possibility of a "hybrid" DBA (ie, charging a lower hourly rate in the event of a loss, and charging the success fee in the event of a win).
  • The DBA is based on "sums recovered" from the losing party. This will be affected by matters outside the lawyer's control – eg the solvency of the losing party, or where a successful counterclaim or set off reduces the amount ultimately recovered.
  • An incorrectly drafted DBA may render it completely unenforceable.

Again, this is an area we will be keeping a close eye on, but until the Regulations are re-drafted or clarified, the message is "proceed with caution".

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Julia Staines
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