Conditional fee agreements and litigation costs insurance

Conditional fee agreements - CFAs - provide an alternative to the traditional way of funding litigation – writing a blank cheque to your lawyers - and if they are the way to go, as seems likely, in the future it might be useful to have this note as an introduction to the subject. CFAs are useful in all manner of commercial claims, as well as in areas like personal injury claims where they have already achieved notoriety, and given the expense of bringing (or defending) an intellectual property claim, they have a particular role to play in this area. A better solution in many ways would be to take out insurance before a claim is made: some general insurance policies cover legal expenses, including business policies, and perhaps the necessary cover is already there (or can be added on at modest cost).

A CFA is an agreement between a client and lawyer. The lawyer agrees to share the risk of litigation, coming to a financial arrangement on the fees payable according to how the case turns out.

In a “no win, no fee” arrangement, the client will pay a reduced fee to the lawyer if the case is lost. If it is won, though, the lawyer is entitled to their normal costs, calculated on the usual time basis. Some of the costs might well be payable by the other party. The lawyer can also charge a success fee.

In a shared risk arrangement,the client will pay a reduced fee to the lawyer if they lose but if they win the lawyer will be paid the normal fee, with some of it probably being paid by the loser. Again, the lawyer can also charge a success fee.

These arrangements are suitable for litigants without the means to fund litigation in the traditional way, provided they have a good case. If the case is weak, the lawyer is not likely to be prepared to assume any of the risk – though it is also true that if the case is weak it should be kept well away from the courts. The other side must be notified that there is a CFA, and this might well encourage them to settle: they will see that their exposure to costs is likely to increase, and they will also realise that the other party will not run out of money if the case goes to trial.

The success fee can be as much as 100 per cent of the normal fee. The lawyer will calculate it after a risk analysis, effectively weighing up the odds on success. This will require consideration of a number of factors, including:

• The merits and value of the claim;

• The likelihood of settlement;

• An estimate of the costs involved; and

• The likelihood of recovering normal costs plus the success fee from the other side.

The success fee can only be linked to the normal fee – it cannot be a proportion of the damages obtained in the case.

Responsibility for paying the success fee lies with the client, although it will often be recoverable from the other side. The party paying the success fee is entitled to have it assessed by the court, which will reduce it if it is not reasonable in light of the circumstances surrounding the case when the arrangement was made.

If the court does reduce the success fee payable by the loser, the lawyer cannot recover the shortfall from the client unless the court orders otherwise. However, if part of the success fee represents the costs to the lawyer of funding the litigation – for example, where the lawyer has paid court fees – this much is payable by the client in any event.

If the case is lost, the client will either pay nothing or a reduced bill to their lawyer, but the big drawback of a CFA is that the client remains liable for some of the winner’s costs depending on what the court orders. And if the winning party also has a CFA, the award of costs will include the success fee. The way to deal with this drawback is to buy an insurance policy, known as after-the-event (ATE) insurance, to cover an award of costs. The winning party will be able to include the premium in a claim for costs.

It is not only the existence of the CFA that has to be disclosed: the lawyer’s assessment of the risks has to be disclosed, too, which is an exception to the normal rules about legal professional privilege. Because the lawyer has a stake in the outcome of the litigation, they will take greater control of stratefy and resolution of the dispute too – the client might feel like a passenger.

ATE insurance gives the insurer a stake in the outcome of the litigation, too, and that might mean they are trying to control the case as well. These policies come in a wide variety, including policies to cover only an adverse award of costs and policies that cover both parties’ costs. Cover can be backdated to include costs already incurred, though it is naturally more economical to put the cover in place first. Cover is available for making and sometimes for defending claims, though it is usually taken out by claimants to cover the costs of bringing an action to defend their rights. The terms of the policy will tell you whether it will pay out if the case is settled before trial, and if so how much. The insured’s management time and expenses in fighting the case are not covered.

Cover can be put in place at any time before proceedings have been issued and afterwards too, though the later the policy is bought the more expensive it is likely to be.

The procedure is for the lawyers to submit a proposal form along with their risk assessment. This will deal with the merits of the case and the likely amount of costs. It will be supported by relevant documents such as pleadings and counsel’s advice. On the basis of this information, the insurer decides whether to go on risk and if so at what premium. The solicitor sometimes has delegated authority from the insurer to do the risk assessment themselves and agree cover up to a certain amount. There is sometimes an application fee to pay too, though this might be set against premiums.

Costs often escalate during litigation, so it might be necessary to buy additional cover. The policy should allow this to be done.

The premium will depend on the type and level of the cover. For ATE insurance, depending on the prospects of success, the premium is usually between 30 and 50 per cent of the costs to be insured – so, if the policy is to cover only the other side’s costs, it will be significantly cheaper than one that covers both parties’ costs.

The premium might have to be paid at the outset, or by instalments. Sometimes, it might not be payable until the end of the proceedings. If the case be won and costs awarded, the premium should be recoverable from the loser. However, the court will be concerned that the amount of the premium is reasonable and proportionate. It is even possible to insure the premium itself, in case you lose.

It might be that the winning party has to pay some of the other side’s costs. This could happen, for example, where an offer or a payment into court has been made and the winning party has rejected it. Then the insurer will only be liable to contribute to the extent that the costs exceed the damages recovered – in other words, the litigant meets the costs out of the compensation first.

This note is intended to give some general information about CFAs and litigation costs insurance. For more information and advice on suitable insurance policies, you should consult an insurance broker. Temple Legal Protection Ltd provide IP cover: their website cannot give much detail - I imagine they need to have a lot of information before they can commit themselves. There are other insurers and brokers too, just Temple are the ones I know best.