Disputes 2016: Changes to funding arrangements

Damages Based Agreements

The government is currently considering a report by the Civil Justice Council on Damages Based Agreements (DBAs) and is expected to make changes to the regime in 2016.

DBAs, or contingency fees, became possible for the first time in litigation on 01 April 2013. Under a DBA:

• lawyers acting for the claimant are paid no fee while the case is underway, but are paid a percentage of the amount recovered in the event of the claim succeeding or settling
• costs can be claimed from a losing defendant on the basis of hourly rates and this is deducted from the amount payable by the client to the lawyers, and
• the amount recovered from the defendant cannot exceed what is owed to the lawyers under the DBA.

DBAs were heralded as one of the means by which access to justice would be ensured following changes to previously popular options, such as Conditional Fee Agreements, that made them less attractive to clients. However, very few DBAs have been entered into.

The main reason for this is that the regulations that introduced DBAs prohibited “hybrid” DBAs, under which a reduced fee would be payable while the case was underway, with a percentage of damages recovered to top this up in the event of success. Few commercial law firms are willing to risk the entirety of their income from a case on its ultimate success when their only information is what the client has told them. The current model also only works for claimants, with no ability for a defendant client and lawyer to agree the definition of success in a case. A further concern is that it is unclear how lawyers can be remunerated if the client terminates the engagement before the case has finished.

The Civil Justice Council’s review addresses all of these issues, though it does not propose immediate action on all of them and reaches no settled view on whether hybrid DBAs should be allowed. It does suggest amendments to clarify that “sequential hybrid DBAs” are possible: that is that a client may instruct a lawyer on a conventional fee paid basis at the outset of a case and switch to a DBA at a later stage. This would at least mean that lawyers can be paid for their work in the early stages when they will be building their understanding of the case and assessing its prospects, which may lead to more DBAs being agreed midway through cases. The report also recommends that the regulations be amended to allow parties to agree the cost implications of an early termination of a DBA and that parties be free to define success in the proceedings, which may lead to defendants being able to use DBAs.

The government is expected to publish proposed new legislation on DBAs later in 2016 and until we see that it is hard to predict whether the changes will open the way for this to become a popular form of funding. If a DBA has to be “all or nothing”, however, with no hybrid funding arrangements allowed, it is unlikely to usher in a dramatic change in their take-up.

Insolvency proceedings

Success fees under Conditional Fee Agreements (CFAs) and After the Event (ATE) insurance premiums ceased to be recoverable from the losing party in litigation in April 2013, under the provisions of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO). However, certain exemptions were granted, in particular for proceedings brought by liquidators, administrators and trustees in bankruptcy to recover the assets of insolvent companies. This was deemed necessary to enable proceedings to be brought by insolvent estates against those, most notably former directors, who may have misappropriated the assets, to the detriment of creditors.

In a ministerial statement published on 17 December 2015, the government announced that this exemption will expire in April 2016. As there is often no source of funds with which insolvency officeholders can bring proceedings, this is likely to reduce the number of insolvency proceedings and make those that do proceed less beneficial for creditors as funding may have to be sourced from third party litigation funders, who will require a high return on their investment which the creditors will have to bear.

Costs liability for third party funders?

In July 2016, the appeal in Excalibur Ventures LLC v Texas Keystone Inc will be heard in the Court of Appeal. In this case the claimant used third party litigation funders to finance the proceedings and those funders were ordered to pay the defendants’ costs on the indemnity basis when the claim ended in what the judge called “resounding and catastrophic defeat”. The funders have been granted leave to appeal against the order of indemnity costs, as they accepted advice from reputable solicitors on the prospects of the claim and did not have conduct of the proceedings.

Funders’ liability for adverse costs is capped at the amount they have themselves funded the claim, under the principle established in Arkin. In Excalibur, the judge ruled that this cap was the amount of funding provided, including that for security for costs, despite the fact that this money would already be in the defendant’s hands. The defendant was therefore able to claim more costs from the funders than would be the case if the money for security for costs was excluded from the cap. This part of the decision is also under appeal.

The outcome of this case will affect the ability of parties sued by funded claimants to recover their costs if they win. It is also likely to have an indirect effect on the cost of third party funding, as risks of adverse costs orders are inevitably priced into the funding model.