With several recent surveys suggesting that a growing number of clients now want to discuss alternative fee arrangements, including conditional fee agreements, damages-based agreements and after-the-event insurance and funding, it is becoming clear that lawyers may need to change the way they approach cases – if they are to structure satisfactory funding packages for their clients.

Lawyers tend to focus heavily on the merits of the case, with issues of quantum and enforcement secondary concerns. This may seem logical for those wishing to enter into a funding arrangement other than a private-fee paying retainer, but it is important to remember that if the economics don’t stack up, the merits are meaningless.

The Funding Dynamic
For a long time, the focus was on the legal merits. Before the Legal Aid, Sentencing and Punishment of Offenders Act 2012 came into force, both ATE insurance premiums and CFA success fees were recoverable from the other side for successful cases. So for the last 12 years, while some consideration had to be given to proportionality and the opponent’s ability to satisfy a judgment, by and large, these issues received less scrutiny than is now needed under the post-1 April regime.

For example, a private individual may have a civil claim worth £20,000, which will cost around £40,000 to run to trial, with an adverse costs risk of another £40,000 if the case is unsuccessful. The claimant may not have sufficient means to fund the litigation but, under the old rules, he was able to bring a case on the basis that his lawyers work on a 100% CFA and carry his disbursements, with an ATE policy covering the other side’s costs risk if the case lost. Assuming the case went to trial and succeeded, the final stage ATE premium could have been as much as £20,000 (that is, 50% of the sum insured), with the lawyers looking to recover their base fees plus a 100% uplift. The client, in this instance, would receive his £20,000 damages and claim his costs (including the ATE premium and CFA success fee) from the losing party. All was well. However, if that same client brings his case in the post-LASPO world, the ATE premium alone would engulf the entirety of his damages, therefore making the case uneconomic to run.

Despite this dramatic change to the funding dynamic, many applications for insurance cover are still being submitted without due consideration to the new balance which must be struck – with the result that many cases are being turned down by insurers, regardless of underwriters’ views on the merits.

In contrast, solicitors applying for third-party funding seem to appreciate that funders have always prioritised the issue of quantum, and taken a keen look at the enforcement strategy and consequential budget. This is because the funding success fee is not – and never has been – a recoverable cost, and so it has always come out of the client’s damages at the conclusion of a successful outcome.

Lawyers do appreciate that an award in the claimants’ favour will be of little comfort to a funder if it cannot be easily enforced. But applications for third-party funding are often deficient in two other key areas:

1) The realistic settlement value is not visible enough to the funder – it is, of course, very difficult for a lawyer to judge the realistic settlement value in the early stages of funding discussions. The better the instructions from the client, and the more the issue of discounting value for litigation risk has been explored, the more comfortable the funder will be about quantum.

2) Tactics and strategy to keep the case moving forward quickly are not given necessary weight. The majority of funders are unlikely to have the appetite for a long project, preferring to invest in cases which are likely to conclude within two to three years.

Whether the application is for ATE or third-party funding, it is important that lawyers consider carefully the following factors when making an application:

1. Budget
The starting point in any funding arrangement is to ask how much needs to be funded. Double the budget, and you should expect to double the funder’s return.

Even at the outset, funders will expect the budget to be fairly detailed, including allowing for ‘contingencies’; specifically for situations where the case does go over budget. By ignoring the issue of enforcement, for example, solicitors will also inevitably fail to budget for the costs that may be involved in trying to enforce a successful award. Therefore, while it can be difficult to budget for any enforcement phase, especially at the early stages of a case, funders will expect this point to be considered.

Post-LASPO, the budget is also a more important consideration for ATE insurers. They will want to see that the costs of running the case through to trial have been duly considered by the client’s legal team. They will also want to ensure the cost of bringing the case is proportionate to the level of damages claimed.

2. Project Plan
For funders, as important as the aggregate budget figure is the rate at which capital will be deployed. Unless a quick return is expected, a deal where the funder is asked to immediately pay out the majority of the budget (for example, to reimburse sunk costs) is likely to cost more, and be less attractive, than an arrangement where the funding will be gradually drawn down over a period of years with the possibility of a settlement in the meantime, even if the aggregate funding commitment in both scenarios is identical. Where the margins may be on the tight side, this is an important consideration, as cheaper funding terms might make marginal deals become workable.

3. Quantum
On one view it should not matter how much the claimant is ultimately likely to recover, as the cost of the capital should be the same whether the claim is for £1m or £10m. In reality, it is relevant because third-party funding is non-recourse. Consequently, funders are not only offering liquidity but, importantly, they are also accepting risk. If the claimant is unsuccessful, the third-party funder will lose their investment in the case. As a result, funders set their pricing to accomodate the possibility of receiving a lower than expected investment return or, worse still, losing the capital they deployed in the case – it is a business of high risk for high rewards.

While the margins can be tighter on the ATE insurance side, because an ATE premium will usually always be cheaper than a funding success fee, insurers will need to see that the likely level of recovery (which requires them to look at the minimum settlement figure rather than the full potential value of the claim) is not enough to discharge all of the client’s liabilities, yet still provide the client with a satisfactory return.

It is only once these points have been satisfactorily addressed that it is worthwhile for insurers and funders to take a deeper look into the merits of a case. It is equally important that law firms considering DBAs adopt this mindset if they are to make this newly-introduced form of risk-sharing sufficiently profitable.

Many applications are made without due consideration of the issue of proportionality, making them appear, on the face of it, uninsurable or unfundable.

However, it may still be possible to tailor suitable funding packages for many of these cases, provided solicitors and their clients are willing to compromise and employ creativity to ensure that all committed parties are comfortable with their element of risk and return. In some instances, this might require the law firm to enter into a partial fee arrangement, reducing the level of their own fees that need funding, and/or it may require the client to take on more of the disbursements, thereby limiting the total funding commitment and, as a result, the amount of damages that must be forfeited in the event of success. In some instances, the client may agree to pay those costs in the interim, but still require some costs protection, to which ATE may be the answer.

Whilst ATE does not fund legal expenses as and when they are billed, the insurance does provide an indemnity for legal costs if the legal action is unsuccessful, thus acting as a loss-mitigation tool which can form the basis for companies or individuals to deploy their own capital, assuming that third-party funding of the entire case is not a viable option. ATE premiums tend to be described as a fraction of the cover provided rather than as a multiplier, making it a cheap and efficient way to transfer risk where the claimant is capable (and willing) to fund the litigation themselves.

By looking at ways to keep the budget tight and structure the funding tools to keep any success fees at a manageable level, some form of risk protection should be available for the majority of clients wishing to bring a valid claim. It is important, however, that issues of budget, quantum and enforcement are considered at the outset. Insurers and funders view a large number of proposals. They will only support cases that are well-presented and workable on the figures – they will not expect to do that work for the solicitor. Failure to address these points may jeopardise a client’s chances of obtaining ATE insurance or third-party funding, regardless of the underlying merits of the case.