Boom in litigation funding has transformed the dispute resolution landscape

There is little doubt that the growth of the litigation funding market coupled with, or perhaps fuelled by, developments in costs regulation and the increased focus on the management of corporate legal spend has fundamentally changed the dispute resolution landscape. By far the biggest impact has been on the pricing structures adopted by disputes lawyers with many creating specialist pricing teams to develop a more diverse menu of retainer options led by client demand.

Whilst solicitor firms have gradually been coerced into reducing their reliance on the hourly rate, barristers have traditionally been immune to such pressures. In most circumstances, the barrister will be instructed by a solicitor and will have limited interest in how the client funds their case provided their fees are paid. This may continue in some classes of disputes and for certain sets, but others will inevitably face increasing demand to show more commercial alignment or risk missing out on the prime instructions. This will be especially true of barristers growing their direct client base and those working with solicitors that now offer damages based agreements (DBAs). The DBA regulations stipulate that the barrister’s fees must roll into the DBA success fee and, as a result, barristers are likely to see increased pressure from solicitors seeking to minimise their cash outlay when acting under a DBA. The sets that meet the change in tide with innovative fee arrangements of their own are likely to reap the biggest rewards.

Sophisticated pricing teams can devise incredibly innovative fee arrangements that can be managed inhouse without the need for external support from third party funders or insurance providers. However, utilizing the funding and insurance market can vastly increase the options available whilst decreasing the burden on a firm’s internal accounts. As the market has developed, funding options have become increasingly diverse. Whilst the more traditional funding for one off cases remains the bread and butter of the industry, a variety of alternative options exist for those wishing to manage cash flow or risk on multiple cases under one arrangement or for clients seeking to release cash through the monetization of their claim.

These options are often directed at solicitors and their clients with barristers’ fees falling within the catch all “disbursements” pot. However, they can also be tailored to provide a stand-alone solution for barristers looking to take more control over their fee realisation.  Understanding the full breadth of the options available and how they can be combined can be invaluable when considering the most effective way to attract new work whilst seeking to maximise fee realisation.

A common misconception when discussing alternative fee arrangements is that the fees must be at risk. Whilst risk sharing for an appropriate success fee can be a lucrative option, it is not always the best option. Moreover, some clients are not interested in this approach as it can be perceived to mean compromising on quality. There are, however, various combinations of inhouse pricing structures and funding and insurance mechanisms that demonstrate commerciality without the need to take significant risk. The most common include litigation funding, deferred fee arrangements and damages-based agreements or conditional fee agreements underpinned by the relatively new concept of WIP insurance.

Litigation funding

Barristers that have not had cause to be involved in a funding agreement themselves are likely to have provided an opinion to a client that was intended to be used for the purpose of obtaining funding. Most will, therefore, be familiar with the process and criteria used by the key players to the extent that it need not be repeated here. Save to say that funding can be obtained by the client in order to pay their legal fees or can be obtained by a solicitor or barrister to facilitate their ability to offer alternative fee arrangements. Funding is the most obvious mechanism to adopt when cash flow is the key concern, but it comes at a hefty price as the funder’s success fee can be circa three times their investment plus the repayment of the original capital.

Deferred fee arrangements backed by litigation insurance 

Where the client cannot or does not wish to self-fund their case, but the economics of the matter do not allow for litigation funding, or where the client does not wish to part with a large chunk of their damages, a deferred fee agreement backed by insurance can often provide a tidy solution. Under this arrangement, the barrister agrees to defer some or all their fees until the conclusion of the case on the basis the client (or the solicitor if a DBA is in place) remains liable to pay them whether the case wins or loses. The client or the lawyer can then obtain insurance to indemnify the deferred portion of the fees in the event of a loss. This can work particularly well in circumstances where the solicitor is working under a DBA and wants the barrister to help them to minimize their cash outlay during the life of the case.

A word on litigation insurance – there is relatively little awareness of the important role insurance can play alongside, or as an alternative to, funding a dispute. Insurance may be available for a percentage of solicitor’s fees, for the full amount of counsel’s fees and other disbursements and/or to cover the risk of an adverse cost order and can often provide a more flexible and cost-effective route to cost certainty than funding where cash flow is not an issue. Moreover, the typical premium is usually a fraction of the cost of a funder’s success fee and, as such, insurance is available for a broader set of cases than litigation funding.

It’s worth noting that insurers will typically cover the risk of a paper judgment. If there is a shortfall between the legal costs outlay and the sums recovered, an indemnity would apply and the insurer will step in to pay the shortfall, thereby ensuring the recovery of the full fees.  Of course, the insurer will charge the client or the lawyer a premium for covering the deferred fees but, in most instances, the premium will only be payable if the client’s case is successful.

Damages based agreements/conditional fee agreements (CFA) underpinned by WIP insurance

Whilst many cases are ideally suited for a contingency fee, the economic reality of risking their full fees is often too much for a lawyer to stomach. A recent solution to this problem is the development of WIP insurance.

WIP insurance can cover a portion of the solicitor’s fee risk, under a DBA or CFA as well as 100% of Counsel’s fees. This type of insurance is proving popular on both sides of the Atlantic. However, it has the added benefit in England and Wales, where hybrid DBAs are unlawful, of enabling law firms to offer a full DBA to the client whilst ensuring they receive some fee income, regardless of the outcome of the case.

Under the insurance policy, if the case is lost, the insurer reimburses the law firm for an agreed portion of the fees. If the case is successful and the firm recovers its success fee, the law firm pays the insurer a premium from the success fee collected. The premium is only payable if the case succeeds and generates more than an agreed fee income. If the policy is taken out by a solicitor, the policy will typically cover 50% of their fees as well as 100% of counsel’s fees, however, it can be tailored to sit behind a barrister’s CFA or DBA (albeit DBAs are less common) as a stand-alone product to provide budget certainty needed to offer a risk sharing arrangement in return for a success fee.

It is likely that a combination of client pressure, the prospect of attractive returns and the comfort of WIP insurance will lead to law firms taking on more contingency fee arrangements. This, in turn, could result in solicitors taking a stricter approach to how and when they pay barristers’ fees and may, ultimately, dictate to whom they refer their work. Barristers that are largely reliant on traditional billing models may need to think more creatively about their pricing arrangements, but all is not lost. A variety of funding and insurance products already exist, and are continually being developed, that can help barristers not only maintain their current level of fee realization but can also improve their profitability.

By Verity Jackson-Grant, Director of Business Development at The Judge Global, Specialists in funding

Verity Jackson-Grant, Director of Business Development at The Judge Global, Specialists in funding & insurance for litigation

 

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