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Litigation Funding - New Rules After 01 April 2013

Rutherfords LLP acts for many clients on a ‘no win no fee’ basis. This is called a Conditional Fee Agreenment (CFA). This is almost always possible since 1995 for clients who has been injured in an accident (providing their prospects of success is reasonably high) and sometimes possible for commercial claims. The claim was backed by an insurance policy to ensure the client against losing (at no cost).

On 1 April 2013, the new funding regime for civil litigation came into force in line with Lord Justice Jackson's proposals and as enacted in the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPOA).

The Regime Before 01 April 2013

A successful CFA claimant was likely to recover the vast majority of their costs from the losing defendant. This included the solicitor’s base costs (the solicitors normal hourly rate), the solicitor’s success fee (the extra fee for the solicitor for the risk that he is taking as he will be paid nothing if the case is lost), the expenses of the case and the insurance (insurance to cover the risk of losing). This was truly no win no fee.

The Regime After 01 April 2013

Under the new regime the level of personal injury damages are increased by 10% but neither the success fee nor the insurance costs are recoverable from the losing defendant. The likely consequences of this new regime is that the successful claimant is likely to have to pay a potentially significant amount of his solicitors costs at the end of the case if he wins.

The purpose of conditional fee agreements (CFAs) and after the event (ATE) insurance is to assist access to justice and the use of this funding mechanism has enabled many personal injury claims and some other consumer claims to be litigated 'costs free' by claimants. They have also allowed a large number of commercial claims to be litigated at a much reduced cost exposure.
Under the reforms, the ability for a lawyer and their client to enter into a CFA and for claims to be backed by ATE insurance remains. However, from 1 April the implementation of LASPOA brings to an end to the recoverability of both the success fee in CFAs and the premium for ATE insurance from the losing party. Instead, the success fee and the premium (if applicable) will be payable by the client himself which makes those arrangements much less desirable (for both the client and the lawyer).

The New Arrangements
Solicitors are able to act for their clients on a (1) Conditional Fee Arrangement (CFA) or on a (2) Damages Based Agreement (DBA)

(1) Damages-based agreement (or contingency fee agreement).

Under a DBA, the lawyer's fee will be an agreed percentage of the client's recovered damages, rather than based on an hourly rate.
• DBAs will be allowed in employment, personal injury and commercial claims.
• There will be a cap on the amount of damages that can be recovered by way of the DBA fee. This will be 35 percent in employment cases (as is currently the position), 25 percent in personal injury cases and 50 percent in all other commercial cases, whether involving individuals or corporations.
• The successful party can recover its solicitor's base costs (i.e. the lawyer's hourly rate and disbursements) from the losing party on the current conventional basis. Where the fee agreed under the DBA exceeds those base costs, the client will pay the difference between those two figures out of their damages (up to the limit of the DBA fee).

(2) Conditional Fee Agreement (CFA)

Solicitors are also able to act for their clients on a CFA arrangement. Under a CFA the solicitor charges a success fee (to represent the risk). The success fee is not recoverable from the losing defendant and has to be paid by the claimant from their damages.
• CFAs are allowed in employment, personal injury and commercial claims
• The CFA success fee cap is limited to 100% of the costs and limited to no more than 25% of the damages.

A complex decision process will need to be discussed at the outset of a case (and decided upon by the client) as to how the client wishes to fund the case. Whether a CFA or a DBA will be better for the claimant will depend on all the circumstances of the case and is very hard to estimate.

This is a worked example i.e.
Damages       £10,000
CFA fee          25%
DBA  fee         25%
Base costs      £2,000

In the above example;
Under a CFA
Damages                                 £10,000
CFA success fee                        £  2,500 (25% of £10,000)
Client receives (net)                 £   7,500 (£10,000 – £2,500)
Solicitor is paid                        £   4,500 (£2,000 + £2,500)

Under a DBA
Damages                               £10,000
DBA fee                                 £  2,500
Client receives (net)                £  9,500 (£10,000 – 2,500 DBA fee + 2,000 recovered base costs)

The above is just one of a myriad of possible scenarios. You will see that the position for the client and for the Solicitor will change depending on the relationship between damages, base costs, success fee and CFA/DBA fee. The outcome is very difficult to foresee for each case.

For more information and advice on CFAs, DBAs, third party funding, ATE insurance and funding of claims generally, please contact Steve Wengraf on 01827 311411 or s.wengraf@rutherfordslegal.com.

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