To the rescue: could third-party funding save small firms

Third-party funding is likely to play a vitally important role in litigation now that Jackson is in and the abolition of recoverability of success fees and after-the-event insurance premiums has taken place.

High street firms in particular may find a relationship with a third-party funder more attractive than trying to borrow from a bank or being a minor owner of an alternative business structure (ABS) or being swallowed up by a bigger firm. Third-party funders have a far greater understanding than banks of the legal process and law firms; it is their core business.

Properly run and regulated, third-party funding may be the salvation of independent law firms and their clients and could indeed be the private sector’s answer to the abolition of legal aid – and as will be seen below it has striking similarities to the old legal aid scheme. In particular, the receipt of payment of costs on account as the case progresses allows smaller firms to ameliorate the cash-flow problems of dealing with substantial cases under conditional fee agreements.

Professional funders

Third-party funding has come to mean funding of litigation by a professional funder or investor with no previous interest in the case in return for a share of the damages in the event of success. Unfortunately the Code of Practice uses the term “Litigation Funding” which is obviously a misnomer. I use the term third-party funding. It does not include funding by, for example, insurers or trades unions.

A typical third-party funding agreement provides for payment of some or all of the client’s own legal costs on an interim basis with the third-party funder’s fee being either a percentage of any damages received or a multiple of the amount of funding provided.

Confusingly the third-party funder’s fee is often referred to as a success fee but it has nothing to do with a conditional fee success fee, although a third-party funded case may well be conducted under a conditional fee agreement. Consequently I use the term “funder’s fee”.

Few cases have been funded by third-party funders and the demand outstrips supply, and funders have been highly selective in the cases that they choose to back. In particular, very few personal injury cases have been funded in this way, but that is changing rapidly now that the Jackson reforms are in place.

Funders’ fee

The third-party funder’s fee is typically two to four times the investment. Thus an investment of £100,000 will result in a fee of £200,000 to £400,000.

If the funder’s fee is calculated by reference to damages then the funder will generally expect between 25 and 45 per cent of those damages.

Under The Damages-Based Agreements Regulations 2013 the maximum that a solicitor can charge is:

? personal injury 25 per cent

? employment 35 per cent

? all other work 50 per cent

There is no limit on the third-party funder’s fee and thus lawyers may choose to act as third-party funders rather than under a conditional fee agreement, or a damages-based agreement, although acting as a third-party funder does create a potential Arkin liability for adverse costs – see below. Such a risk in relation to adverse costs does not exist in conditional fee cases – see Hodgson & Ors v Imperial Tobacco Ltd & Ors [1998] EWCA Civ 224 (12 February 1998) – but on the face of it, it applies to damages-based agreements, although it is likely that the courts will apply the Hodgson exception to damages-based agreements (but Jackson LJ takes a different view and believes that solicitors acting under ?a DBA risk adverse costs orders being made against them).

Third-party funders may become alternative business structures running cases through the medium of conditional fee agreements, thus avoiding the adverse costs risk. They will still be able to take 45 per cent or 50 per cent, or whatever, without exceeding the success fee cap, as much of the fee will be solicitor and own costs on a no win lower fee agreement and/or an after-the-event insurance premium.

The same result can be achieved by using the Underwoods method and third-party funders are now becoming increasingly involved in lower value cases and smaller firms of solicitors.

More attractive

The significant change that makes third -party funding potentially much more attractive now in all cases is not so much a legal one as a marketing one, albeit one caused by Jackson’s legal reforms.

The combination of inadequate and uneconomic new portal fees and the abolition of recoverability of the success fee and after-the-event insurance premium have forced solicitors to start charging clients solicitor and own client costs or go bust. The days of clients keeping 100 per cent of damages are over.

Twenty five per cent of damages on top of recoverable costs has become the universal solicitor and own client charge in the few months since Jackson All Fools Day – 1 April 2013, but solicitors are not fools and have again proved the old saying about them being poor at anticipating change but brilliant at implementing it.

Thus the client is going to lose 25 per cent anyway and may pay an after-the-event insurance premium on top and possibly disbursements as the case progresses.

In personal injury cases we have, in six months, moved from a position where third-party funding had no attraction to clients to a situation where, if the percentage is right, the client is significantly better off with third-party funding as the third-party funder will cover adverse costs and also pay the disbursements, representing a saving to the client in each case.

Third-party funding also generally provides payments on account of costs to solicitors as the case progresses, with those costs being repaid to the third-party funder by the solicitor if the case is won but retained by the solicitor if the case is lost. In that sense it is based on the old legal aid model, with the key difference being that the third-party funder takes a percentage of damages. It is for all intents and purposes a private contingency legal ?aid fund.

Very obviously the fact that solicitors are being paid on account, win or lose, means that they will take on some cases that they would not take on under a no-win no-fee agreement.

This too has benefits for clients; more cases will be taken on, not just slightly riskier cases but also those that involve solicitors being kept out of their money for a long time, classically clinical negligence and high value personal injury and commercial cases.

The scheme is analogous to acting under a no win lower conditional fee agreement but with the third-party funder, not the client, paying the lower fee in the event of defeat. Although we never thought of it in those terms, legal aid was in reality a no win lower fee agreement, with the Legal Aid Board paying the lower fee in the event of defeat, recovering costs if the case was won, funding disbursements and covering the adverse costs risk.

Thus for the client there is no downside save for the fact that the third-party funder will have a say in whether or not to accept a Part 36 offer etc.

The third-party funder’s percentage take is critical but products are likely to come on the market involving a deduction of 25 per cent to 30 per cent of damages in personal injury cases with that sum including payment on account of costs and the disbursements and an adverse costs indemnity.

The rates paid to solicitors on account are likely to be akin to legal aid rates – around £70 per hour. I, for one, would sign up. SJ