Legal funding: making the strength of your case pay

We can assist you with the following areas

What is legal funding?

One of the biggest reformation in recent years has been to commercialise the funding of the legal system in England & Wales.

Historically, access to justice (in respect of commercial or non-family civil claims) was restricted to your ability to pay or a complicated application for Legal Aid, where the state funded your legal advice and assistance.

This worked quite well but was costly to the taxpayer and whilst the principle was sound, the Legal Aid system was vulnerable to abuse.

From the 1990s, a resolution to this was to permit “no win no fee” agreements, referred to as Conditional Fee Agreements (“CFAs”) which provided a contractual arrangement with a client and a solicitor such that the solicitor would receive a premium on his/her fees if the client’s case was successful (as “success” normally meant that the other side paid such costs) but if the case was not successful then the solicitor would charge no fees.

More recently the law has been altered to prohibit the recovery of some of the legal fees due under CFAs. The premiums due under such arrangements are no longer recoverable following the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (“LASPO”) which, amongst many other legal changes, prohibited the recovery of any premiums as a legal cost payable to solicitors under a CFA.

What is litigation funding?

Litigation funding is similar to legal funding but for the difference that the legal services provided are only in respect of contentious proceedings issued at Court.

Whilst funding can be negotiated for pre-action or non-contentious legal services, litigation funding only refers to the point at which Court proceedings have been issued or are about to be issued.

How much does a solicitor cost?

A Solicitor’s fees are usually based on an hourly rate and time spent on a matter. The more time spent on a matter the higher the cost.

However, the two most important aspects for a client to understand is the complexity of a matter, which may require a lot of time considering and mentally working towards a solution (as well as the time drafting the various documentation to provide the solution that the client requires) and the hourly rate charge.

In the UK, the highest hourly rates charged tend to be dictated by region (London being the most expensive) and the degree of expertise of the department or fee earner providing the legal services. For example, an expert in company matters who is based in London will be more expensive than a solicitor with no such specialised expertise in the same location.

Commercial Litigation funding Options

There are a number of arrangements that a client can enter into with his/her solicitor to achieve certainty in relation to their individual needs. Please visit our webpages which deal with the following alternatives:

• fixed fees
• blended rates
• conditional fee arrangements
• discounted Conditional Fee Arrangements
• damages based agreements
• fixed fee retainers

The arrangement that is appropriate to you will depend upon a composition of your circumstances, your attitude to risk and your requirements for certainty.

What is a litigation funding agreement?

A Litigation Funding Agreement can be any agreement to enable you to fund a claim in Court against another person, company or other legal entity. Any arrangement which satisfies the needs of your instructed solicitors (i.e. that they get paid) and which is not illegal is in effect a litigation funding arrangement.

A litigation funding agreement can be entered into with your solicitor, either fixing an amount of cost payable for a specific stage, a specific piece of work or a specific period of time.

Types of alternative fee arrangements

Alternative fee arrangements largely depend on the client’s needs and their ability to fund legal fees. This is the same whether the legal costs are being incurred in litigation proceedings or event out of Court in negotiations or in respect of non-contentious transactional matters.

Some types of arrangement provide for little or no funds to be paid during the instruction or even at the end, but with a big concession of the rewards if they are successful.

Other types of arrangement provide mechanisms to have certainty on fees in blocks, bit with the need to keep paying such costs with no certainty as to when such blocks will cease to be required. This can work very well for cases with small distinct stages that require management, but is less attractive in circumstances where costs can escalate.

Fixed fee arrangement definition

Too often a solicitor is instructed on a general time cost basis and the client loses control or forgets that they are paying for every minute of the solicitor’s time, whether that is time spent reviewing huge volumes of documents, time spent on endless phone calls or in drafting large letters or complex documentation.

Time evaporates quite quickly in such circumstances and so it may be preferable for the client and his solicitor that a specific sum of money be agreed for a fixed block of work. This is what is meant by a fixed fee arrangement.

Fixed fee agreements are extremely useful for you as the client, as they give an element of certainty to what you are going to spend on legal costs. For the solicitor, they manage the client’s expectation but also limit what the solicitor has agreed to do for the client, which gives both certainty.

Blended rate legal fees

When a law firm is instructed, the cost of the legal services provided is usually charged on the basis of the time spent multiplied by the hourly rate of the solicitor or other individual doing the work. With experience, the cost rises.

For example, a paralegal may provided a good service to you and be relatively inexpensive, but for more complex work, requiring a more sophisticated knowledge of the law, they may not be appropriately qualified and a solicitor with more legal training and more experience of complex matters may be more suitable. For even more complex matters, it may be necessary to employ a very experienced solicitor or even a partner.

The theory goes that a more experienced lawyer should require less time to understand and advise on any legal dilemma, and thus the difference in cost should not be too severe.

However, upon instructing any law firm, there is often suspicion as to how the law firm will charge the client and who will do the work. A unqualified or junior solicitor may be appropriate where matters are more straightforward, but may spend a considerable amount of time where matters are complex and may ultimately become uneconomical. Alternatively, a partner who deals with straightforward tasks that can be easily performed by a junior solicitor may result in a overcharge of such legal services.

Litigation funding risks

Litigation is the process of issuing Court proceedings to seek a specific Order or declaration that otherwise isn’t available and cannot otherwise be enforced. For example, with debt recovery, whilst someone may owe you money, forcing them to pay is impossible without the Court’s assistance.

To gain such assistance, an application has to be made to Court which may then be contended by your opponent’s evidence and so the process of litigation seeks to slowly resolve this dispute, eventually arriving at a Court Order which may then be enforced.

You may be a claimant, or applicant, seeking such an Order, or you may be a Defendant, or Respondent, opposing the claim or application. Either way, once the litigation is concluded the the question is: who pay’s your legal fees?

In the Small Claims Court this is not an issue, as the legal costs recoverable are usually very small. However, in all other Courts, these legal costs can be quite substantial.

What are the different Types of Legal Costs?

Legal costs are the sums due from a client for his/her solicitor’s fees and are often a necessary cost of any large transaction or dispute. Where a dispute exists that is required to be resolved in Court proceedings (litigation) then there may be an opportunity to recover some or all of such legal costs from your opponent.

Conventionally, legal costs are paid like any other business service – you agree the scope of work to be done and agree the basis for charging for those services, which normally is on the basis of an agreed hourly rate and the time spent by the solicitor.

The higher the rate, the more experienced the solicitor will be and the likely better quality of service you will receive, or alternatively an experienced and more expensive solicitor will provide the answer you desire in a shorter timescale or more in accordance with your commercial needs.

However, time passes quickly and a solicitor is introduced to your problem without any previous knowledge or familiarity with the parties involved, the background to some of these matters and the documentation. It takes some time to read into a matter, fully understand what is going on and then move towards providing a accurate and relevant advice.

This can be costly but there are alternative types of ways (or agreements) in which legal costs can be paid, either directly with your solicitor or via funding sought from a third party.

What is Security for Costs?

An application for Security for Costs is only available to a Defendant to a litigated claim. A Claimant cannot make this application to try and indirectly strike out a defence, although there remains the power to strike out the defence itself.

Security for Costs is the payment of a sum of money into Court, to be held by the Court against the Defendant’s exposure to legal costs arising. Even where a funding arrangement exists, such an application can be made as the Defendant will have a costs liability upon conclusion of the proceedings either with his/her solicitor or a financier, or both.

A Security for Costs application is an application made to the Court within the existing claim proceedings and is normally sought very early on. There are certain conditions which the Court usually requires as part of granting such an Order, the most important of which is where there is evidence to believe that the Claimant, if unsuccessful, will not be able to pay the Defendant’s legal costs.

If an Order for Security for Costs is made in the Defendant’s favour, the claim will not proceed until the stated amount of security has been paid into Court by the Claimant.

Third Party Costs Definition

Litigation Funding is the financial arrangement by which a law firm’s client makes arrangements to pay the law firm’s fees, in circumstances where they cannot normally pay such fees up front.

These litigation funding arrangements are usually entered into between the solicitor and the client directly, where they agree a circumstance in which the solicitor’s fees will become payable (usually at the successful conclusion of the instruction).

More information about these types of arrangement can be found here.

However, sometimes the law firm may not be as inclined to enter into such an arrangement or may be concerned as regards the risk it faces. As an alternative to combat this fear, the solicitor/law firm instructed can have its fees paid up front by a litigation funder, who is a finance organisation engaged in investing monies for litigation funding, on the basis of gaining a much larger return from the dispute or any legal proceedings issued. More information about such arrangements can be fund here.

Such third party funders are interested in the proceedings only for their potential financial return. They have no personal involvement with the proceedings themselves, unless they have sought assignment of any rights upon which such a claim is brought.

However, the funding of such arrangements can in some way associate these third parties to the proceedings and therefore their funding of the associated legal costs can have consequences.

How does no win no fee work?

“No win no fee” is a popular definition bandied about in many advertisements by, for example, claims management companies and solicitors in the press. The statement in itself is fairly self-explanatory, although it does not go into great detail as to the mechanics of the agreement you may enter into.

This statement usually describes the fee arrangement entered into between a client and his/her solicitor and is generally relevant to issued Court proceedings, or litigation, where there is an ability to clearly define “win”, although it can also apply to negotiated “wins” where a solicitor advises on and assists with claims or the liquidation of an asset, for example a shareholding in a small or medium-sized company.

The most common form of a “No win no fee” arrangement is commonly referred to as a Conditional Fee Agreement. A Conditional Fee Agreement is an arrangement whereby a solicitor will not be paid his fees until conclusion of the instruction, with a “win” (to be defined) leading to such fees accruing at the solicitor’s standard rates plus a % uplift to reflect the risk taken by the solicitor, and the reward arising as a result.

What is a conditional fee agreement?

A Conditional Fee Agreement is an agreement between a lawyer and their client to an arrangement whereby the solicitor’s legal costs incurred WILL NOT be paid by the client in the event the aim or purpose of the lawyer’s instruction, usually defined as “Success”, is not achieved.

However, to balance out this risk, the reward for the solicitor under the Conditional Fee Agreement in achieving the result, or success, is that the Solicitor will become entitled to his/her standard time costs (usually charged on the basis of a hourly rate multiplied by the time spent on the work, referred to as “Time Costs”) PLUS an uplift, or premium, calculated as a % of such Time Costs.

For example, if a solicitor is employed on a Conditional Fee Agreement with a premium of 100% of Time Costs, in the event the instruction leads to a successful outcome then the solicitor will be entitled to 200% of their hourly charges, or fees (plus VAT)

Conditional Fee Agreement Regulations

The Courts and Legal Services Act 1990 brought in the idea of a Conditional Fee Agreement, or CFA, which is an agreement whereby the solicitor’s legal fees are conditional upon certain circumstances occurring, namely that their client is successful in either their claim or their defence.

In exchange for entering into the CFA, the solicitor (who has taken the risk that his/her fees are dependent on the strength of their client’s case) will be able to claim an uplift on such fees payable if their client’s case is successful.

The principle came into great use with the solicitor’s fees (including the “uplift” on their rates, often up to 100%) became wholly recoverable as a legal cost against their client’s opponent. This provided access to justice for those with strong claims or defences but who would not otherwise be able to afford to pay the associated legal costs.

However, with time, the effect of these arrangements were not all positive and circumstances began to occur whether the legal fees under the CFA outweighed the sum claimed or the size of the proceedings. Accordingly, from 6 April 2013, these regulations changed with the advent of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (“LASPO”) which took effect from the beginning of April 2013.

Conditional Fee Agreements what you need to know

A Conditional Fee Agreement if an agreement between a solicitor and his client that the Solicitor’s legal fees (i.e. his and his staff’’s hourly charge out rates multiplied by the time spent on your matter) will only become payable in the event certain conditions are met. A more detailed explanation can be found here.

You will be provided a guidance note on what you need to consider before signing a Conditional Fee Agreement.

The conditions applicable to a Conditional Fee Agreement normally refer to the outcome of the instruction being a “success” as defined in the agreement. For litigation, “success” will usually mean that the claim leads to judgment in the claimant’s favour or, for Defendants, that the claim is successfully defended (usually with the claimant being required to pay the Defendant’s legal costs.

There are however a number of very important aspects of a Conditional Fee Agreement that you need to know.

How much do no win no fee solicitors take?

A “no win no fee” arrangement historically referred to a Conditional Fee Agreement. However, following changes to legislation from 2013, these have become less used. However, they can still be used on a “no win no fee” basis where the client is prepared to accept further costs arising in the event they are successful.

A more detailed explanation as to how a Conditional Fee Agreement works can be found here.

Alternatively, a more recent development is the advent of a Damages Based Agreement, which provides for a “no win no fee” arrangement on the basis of a damages claim, where the solicitor takes a % of the damages recovered or the judgment handed down. A more detailed explanation as to how a Damages Based Agreement works can be found here. This is also often referred to (particularly in the US) as a Contingency Fee.

CFA success fee recoverability

We refer to our separate page which deals with Conditional Fee Agreements at the following link.

The Legal Aid, Sentencing and Punishment of Offenders Act 2012 (“LASPO”), which took effect from April 2013, introduced key changes to the ability of a client to recover their legal costs (including the premium) under a CFA.

This was in reaction to claims where small sums claimed were outweighed by huge legal fees which were further uplifted by the premium due under a CFA.
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What is a success fee?

A Conditional Fee Agreement (“CFA”) between a solicitor and his/her client requires an ability to define “success” for the purpose of triggering the solicitor’s fees. Where “success” is difficult to define or could exist in a variety of situations, then a solicitor will not normally enter into a CFA.

If “success” can be defined, then a CFA agreement can be entered into whereby the solicitor is not paid any of his fees UNTIL “success” (as defined by the CFA).

In the event “success” is obtained – normally by way of the failure of a claim (were you are the defendant) or the success of a claim (where you are the claimant) then the solicitors fees will become due, comprising his/her time spent at his/her standard charge-out rates plus an uplift on such rates.

Example conditional fee agreement

An example of a Conditional Fee Agreement which would be appropriate would most commonly be where you have a claim for recovery of damages or a loss which you could not otherwise afford to pay the legal costs of litigating. With a Conditional Fee Agreement, there will be very little or no costs incurred in taking the legal proceedings through to the end of trial, and the legal costs that become payable in the event of success (comprising standard hourly rates plus a % uplift in the event of success) will be recoverable at the standard rate and the award or damages recovered will be sufficient to more than pay for the premium or uplift.

This example is very popular, although is not the only example of where a Conditional Fee Agreement is appropriate.

Conditional fee arrangements advantages and disadvantages

The Legal Aid, Sentencing and Punishment of Offenders Act 2012 (“LASPO”), which took effect from April 2013, introduced key changes to the ability of a client to recover their legal costs (including the success fee) under a Conditional Fee Agreement.

In summary, it prohibited a claimant or defendant from recovering the success fee. Accordingly, whether a CFA has been entered into or not by a party, it would only be the standard rates charges by a solicitor that can now be recovered from your opponent in litigation proceedings.

Collective conditional fee agreement

A Conditional Fee Agreement is an agreement, generally between the client and his/her solicitor, such that the solicitor’s legal fees will only be payable in certain circumstances. Full details of Conditional Fee Agreements can be found here.

Collective Conditional Fee Agreements were brought into force with the Collective Conditional Fee Agreements Regulations 2000, which commenced from 30 November 2000. They provide for the use of a Conditional Agreement in a more commercial context and where a litigation funder (be that a lender or any other type of financier) are a party to the agreement. More information about 3rd party funding can be found here.

Generally, a Collective Conditional Fee Agreement can be used for class actions, where there is more than one type of client pursuing a remedy via a claim brought by a number of individual parties, or where there is an ongoing Collective Conditional Fee Agreement governing more than one set of proceedings.

However, a Collective Conditional Fee Agreement may work in a slightly different way as to a conventional Conditional Fee Agreement entered into between a solicitor and his client, mainly as a result of the close involvement of the third party funder.

What are damages based agreements?

As a standard, clients of solicitors firms will usually agree to pay the solicitor his/her fees on the basis of their hourly rate and the time spent on the matter. A solicitor will almost always require that any such anticipated costs are paid in advance to their client account, where the monies will be held on account for this purpose.

However, for a lot of individuals and companies, there may not be the funds available to pay a solicitor’s fees, which are rarely inexpensive. At the same time, the client may have a very strong claim or defence and so it may be preferable for both the client and solicitor to enter into an arrangement for the solicitor’s fees to be paid directly from the proceedings.

Please see our webpage here for more information on the various types of funding arrangement you can enter into with your solicitor.

One of the most popular types of arrangement, which has been encourage by national government for the purpose of funding a solicitor’s fees in contentious litigation proceedings, is a Damages Based Agreement. More comprehensive information on a Damages Based Agreement can be found here.

A Damages Based Agreement (or “Contingency Agreement”) is one where the solicitor agrees that instead of his professional fees being paid on the basis of his hourly rate and time spent on the matter, it is determined by an agreed % share of the proceeds of the claim to be issued or an interest they are seeking to recover.

Damages Based Agreement Regulations

Damages Based Agreements provide an arrangement between a solicitor and their client whereby the solicitor agrees, in exchange for charging his professional fees on a time cost basis, to share in the outcome of the instruction.

For non-contentious, or out of Court, instructions this is largely unregulated subject to normal contractual restrictions applicable to all commercial arrangements.

However, in litigation proceedings, historically this was not encouraged and indeed was not as attractive as the solicitor could not accurately forecast the risk v reward and the client would have no ability to recover his/her other legal costs, including those of their barrister (who would often not be subject to such an agreement).

The reason was that this was considered a breach of the Indemnity Principle – which provides that a party to litigation cannot claim legal costs that they do not have to pay (as the separate underlying legal costs are forfeited under a Damages Based Agreement).

More information concerning the Indemnity Principle can be found here. However, from 2013, legislation has changed this position.

How do Damages Based Agreements work?

Damages Based Agreements are agreements between a client (be that an individual or company) and a third party that, in exchange for funding their legal costs, they will surrender a proportion of the recovery made.

Whilst mainly relating to litigation proceedings, they can also extend to non-contentious or out of Court negotiations and settlements where substantial correspondence or documentation is required to be analysed and dealt with.

In litigation proceedings, a Damages Based Agreement will generally be appropriate for Claimants only, and they have little or no use to a Defendant (unless there exists a counterclaim). A Damages Based Agreement can be entered into either with a client’s solicitor or a third party funder/financier.

The Damages Based Agreement works in exactly the same way as any client retainer or (for third party funders) funding agreement with regard to how legal costs are to be paid.

What is a Contingency Fee?

A Contingency Fee is a fee contingent upon a defined outcome or event and in the UK is generally referred to as a Damages Based Agreement.

In terms of legal fees, a contingency fee is usually contingent upon a recovery of a claim (for litigation proceedings) or recovery of an asset or outcome (for pre-action or non-contentious proceedings).7

The Contingency Fee is a fee based on risk and reward, with the client facing the risk of usually higher legal costs but against the reward of an absence of a need to fund their lawyers and no legal costs if they are unsuccessful.

What is a Contingency Fee lawyer?

A Contingency Fee lawyer is generally a solicitor (in the UK) who is willing to act under the terms of a Damages Based Agreement, which provides that his/her legal fees will only become payable in the event that your claim or transaction (whether in or out of legal proceedings) is successful.

How much are lawyers’ Contingency Fees?

The lawyer’s fees under a Contingency Fee (which in the UK is generally referred to as a Damages Based Agreement is determined by the following factors:

• the value of the claim/asset; and
• the risk of non-recovery; and
• the resources required to be employed (in terms of either the number of solicitors or the seniority of the solicitors required to be involved).

It is impossible to determine how much the fees are without proper consideration of your individual circumstances.

However, to justify the risk of entering into a Damages Based Agreement, the solicitor will usually seek a percentage in excess of the sums they would otherwise estimate on a time cost basis, including all possible outcomes (including any interim applications or counterclaims in litigation proceedings).

The reason for this is that, once the Damages Based Agreement is entered into, there is no escape for the solicitor.

Damages Based Agreements v Conditional Fee Agreements

The Conditional Fee Agreement (or “CFA”) was brought in in the 1990s to assist parties, who could not otherwise afford access to justice through legal aid or by use of their own resources, by providing access to legal advisors without having to immediately pay for them.

Alternatively, a Damages Based Agreement (“DBA”) is a more modern creation (often referred to as a Contingency Agreement) and, as with Conditional Fee Agreements, it is an arrangement between a client and their solicitor wherein the solicitor’s legal fees are only payable in the event the instruction is successful (as defined within the DBA).

The advantage of a DBA is that it can apply to both contentious litigated legal proceedings and non-contentious instructions to recover, for example, shareholding interests.

The advantage of a CFA is that it can be less expensive, whilst still depending on a successful outcome.

Hybrid Damages Based Agreements

Damages Based Agreements generally refer to the agreement between a solicitor and his/her client as to the basis of the solicitor’s fees, namely that they will be based on the damages recovered by the client. This is usually a fixed percentage of the amount recovered for your interest or upon judgment handed down in litigation proceedings.

More information about Damages Based Agreements can be found here.

However, a Damages Based Agreement places a lot of risk on the solicitor, both in terms of the risk of recovering their costs and of the obligations under such agreements in accordance with the regulations governing such agreements.

To mitigate this, the ideal solution would be a Hybrid Damages Based Agreement which combines the Contingency Fee aspect of a Damages Based Agreement together with an underlying arrangement to provide for the solicitors at a low negotiated rate sufficient to at least cover the solicitor’s costs of managing such risks.

What are disbursements in law?

Disbursements are expenses charged by a solicitor and will comprise all direct costs and expenses paid for by the solicitor when acting on behalf of their client. This may include a barrister’s fees, administrative costs, meeting venue costs, fees of an expert witness and travel costs.

Disbursements are the direct costs that Solicitors incur when providing legal services. This term is effectively identical to expenses, comprising external costs not comprised within the time spent in reviewing or advising on any technical legal matters.

Any “no win no fee” agreement, such as a Damages Based Agreement or a Conditional Fee Agreement, will not normally include the disbursements under the agreement, as such costs are directly incurred by the solicitor and would mean that the agreement has incurred a direct cost to the solicitor in the event that there is no win.

After The Event Insurance Definition

After the Event Insurance refers to insurance in respect of litigation relating to an event that has already occurred. After the Event Insurance provides insurance against the costs risk of such litigation.

After the Event Insurance provides cover against a fixed level of legal costs which, in the event such litigation is unsuccessful, will be paid by the insurer. These costs are usually the estimated legal costs of the opponent, although in certain circumstances they can additionally include the insured party’s own legal costs (in the event the claim is unsuccessful and such costs cannot be recovered).

What is third party funding?

Going to Court, or any matter requiring legal advice and the instruction of a solicitor, is an expensive business. Solicitors charge by the hour, will not be aware of your circumstances (and thus have to initially spend a lot of these costly hours reading into matters) and are not always guaranteed to provide you with a solution or value for your money.

Access to justice remains something of great importance in the UK, but with civil justice comes the cost of legal advice. Assistance to pay such costs has diminished in recent years as a result of the lack of legal aid provided by the government for most cases.

In its place has been many attempts to legislate for certain types of arrangement to enable access to legal advice and assistance to be funded by the client’s strength of claim or defence. Such attempts have included Conditional Fee Agreements, Damages Based Agreements and third party funding.