Funding Landscape Prepares For Change

The message is simple.  Businesses face increased costs of litigation with the introduction of new reforms that will come into effect on all funding arrangements agreed after 1 April 2013.   
 
Commercial claimants have, for a number of years, been able to fund their claims by way of a Conditional Fee Agreement (CFA) backed by after-the-event insurance (ATE).  This system was based on the “no win no fee” system popular in personal injury cases, and was becoming an increasingly popular alternative to the traditional “pay as you go” basis of funding litigation.  It means that the legal cost of bringing the claim can be significantly reduced, and in some cases removed completely, whilst the risk of having to bear the other side’s costs, if unsuccessful, is removed through the use of ATE (the premium for which only becomes payable upon success and can be claimed from the opponent as part of the costs). 
 
In essence, this means that an unsuccessful Claimant faces a significantly reduced bill and, if successful, the majority of his costs, including the uplift claimed by the lawyers and the ATE premium, are borne by the other side.  This imbalance, which significantly favours the claimant and resulted in large costs bills for insurers and the NHS in personal injury and clinical negligence cases, is what the reforms are intended to address.
 
In late 2012 a report from a working party set up by the Civil Justice Committee outlined in broad terms how contingency fees will work in commercial litigation after their introduction from 1 April 2013.  Under a contingency fee agreement a business can agree to pay its solicitor through taking a percentage of the damages awarded, as opposed to paying on the traditional hourly rate.  For small businesses the report suggests that success fees should be capped at 50% of the damages awarded ensuring the business recovers at least 50% of its damages although for larger businesses it has suggested that it should be a matter for negotiation.  However the regulations implemented these changes have still not been drafted and there will be little time for litigators to assess them and prepare for the change.
 
What is clear however is that the changes will have a significant effect on the ability of businesses with limited cashflow to bring commercial claims and will limit the recoveries that they will be able to make when they do so.  The current system of conditional fees, backed by after-the-event insurance, means that claims with a good prospect of success can be run at minimal or no cost to a claimant and with no risk of adverse costs should they lose.  Since the system has been introduced we have worked successfully with a large number of businesses in funding ultimately successful claims in this way which have realised significant benefits for the businesses in circumstances where they would otherwise not have been pursued the claim, either because they did not have the cash to do so, or because they did not wish to take the risk which litigation on a traditional basis inevitable involves.
 
Under the new system if a claimant company wants to bring a claim any "success fee" which it agrees with its solicitor in return for a reduced hourly rate, and insurance premium to cover its costs liability, will need to be paid out of the damages meaning that the business receives significantly less by way of damages than it ordinarily would.  In many cases, and particularly those where damages are less than £100,000, this will make the funding of a claim in this way uneconomical for both the solicitor and the client. 
 
Undoubtedly the market will mature after 2013 with a growth in litigation funding and insurance products aimed at such cases.  However with the market still awaiting even a draft of the regulations and many insurers and funders looking at piloting schemes in the short term it is likely to be at least 12 to 18 months before these products are either widely available or financially viable.  Even when these products are available they will come at a cost to the claimant, one which will no longer be recoverable from their opponent whatever the result.
 
The changes will not affect any funding agreements entered into before 31 March, irrespective of when the litigation to which they relate concludes, and therefore there is still a limited window of opportunity for businesses to take advantage of the current favourable regime.  However such claims will need to be investigated and assessed by both solicitors and insurers, and with many insurers looking to close their books to any new claims prevarication in instructing solicitors could be costly.  There is rarely a good time to involve your business in litigation.  However, with the funding landscape about to change dramatically those businesses that have a claim but are concerned about the risk and costs of bringing it should seek advice immediately.
 

Lee Fisheris a partner with law firm Morgan Cole.  He specialises in dispute management and intellectual property matters.  Further information is available at www.morgan-cole.com. 

Lee can be contacted at lee.fisher@morgan-cole.com or on 029 20 385385.