Three’s not a crowd when funding is needed

by William Evans

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23 Jul 2012

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JUNE SAW ROYAL ASSENT of the Legal Aid, Sentencing and Punishment of Offenders Act, bringing some changes to the way practitioners fund legal cases in the future. In particular, restrictions and rules for litigation or third-party funding have been introduced and will likely come into force in April 2013.

Litigation funding is a commercial arrangement whereby a legal action is paid for by a third party in return for a benefit, usually a portion of any winning proceeds. Its use in the UK has risen, with a recent estimate stating that £457m of third-party funding had been committed to 187 cases in the UK so far, and that 62 of these were in the last year. Although, given the confidentiality of these transactions, we will probably never know the true extent of funds committed.

For practitioners and clients alike, the days when engaging in litigation meant paying a lawyer by the hour, come what may – and then taking an additional hit if you lost and had to pay the other side's costs – are over. You can still work that way if you want, and there will be no shortage of lawyers wanting to work with you, but lawyers are under a professional obligation to discuss the many other ways now available to fund your case, which often involve them sharing the risk.

Several ways to fund litigation will be affected by the new changes. One of the most significant is that After the Event (ATE) insurance premiums will no longer be recoverable from the losing party after April 2013. ATE premiums are paid at the start or just after proceedings begin and are recoverable from the losing side. Its retraction may provide difficulties for practitioners, especially as ATE providers may start asking for premiums to be paid up front.

The changes will also see a new funding option introduced: Damages-Based Agreements (DBAs) will be allowed and should encourage a more competitive market place where solicitors will be more consumer/client-oriented. Under a DBA, you pay a lower hourly rate and then pay the solicitor a proportion of your damages if you win. This directly aligns the lawyer's interests with yours. These arrangements are loosely based on the contingency fee arrangements which are commonplace in the Unites States. However, regulations around DBAs, and particularly whether there will be a cap on what cut the lawyer can take, are still under discussion.

The future is likely to see a flexible melding of DBAs (Damages Based Agreements), CFAs (Conditional Fee Agreements), ATE, BTE (Before the Event Insurance) and third-party funders all collectively help fund future legal cases. More routes to sharing costs make sense. This is a nascent and fast-growing area. Change and evolution will be constant so these must be constantly scrutinised and appraised.

For the next few years. the recently formed Association of Litigation Funders of England and Wales will endeavour to implement guidelines to ensure that through litigation funding there is no rogue terminating of cases, that care is taken so the funder cannot control a client's case and, most importantly, that a funder does not run out of money during a case. These assurances should allay any criticisms of litigation funding which have cropped up in the past.

However, most unfortunately, there has been a rise in the number of the companies masquerading around the market. These companies find a case, misrepresent their financial position, then look to raise the money on a one-off basis, usually by looking to insure the capital invested with an ‘own costs' insurance policy, thus protecting the invested funds at the very least.

The current rise in these organisations has been fuelled by the perceived high rewards available to funders. It is true – the rewards are high, but so are the risks. Real funders operate their businesses on a portfolio basis in order to spread the risk. They will also be a member of the Association.

Changes in the recoverability of ATE insurance premiums may make it more difficult for office holders in insolvencies to bring legal actions and chase down delinquent directors, particularly if funds are scarce and premiums have to be paid up front.

Litigation funding offers a real alternative for the funding of these cases. Indeed, it is where the third-party funding market grew from.

There are more options available for funding litigation than ever before. Third-party funding is very much on the increase and a valuable tool for use by many insolvency practitioners.

William Evans is a barrister with Vannin Capital

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