The Jackson reforms to litigation funding costs have now been effective for over a year now, having coming in force on 1 April 2013.
The changes that were implemented through the Legal Aid, Sentencing and Punishment of Offenders Act (LASPO) have had a significant influence upon commercial litigation. After-the-event (ATE) insurance premiums and solicitors’ success fees in no win, no fee agreements are no longer recoverable from the losing side; meaning legal fees have become more of concern for businesses contemplating litigation.
One option, third party funding, which Lord Justice Jackson strongly supported, is becoming more accessible but businesses are often unaware of it.
What is Third Party Funding for Litigation?
Third party funding is the provision of funds by a party that is unconnected to a proposed claim to cover all or some of the costs of the case in exchange for a share of the damages if the claim is successful. This form of funding generally covers legal fees, expenses and costs.
Third party funding is different from other forms of litigation funding such as conditional fee agreements (no win, no fee), damages based agreements and ATE. The first two of these are agreements between the client and their lawyer; ATE is simply a form of legal insurance that requires payment of a (normally hefty) premium.
Third party funding is usually provided by specialised investment funds such as hedge funds that are seeking a return for their investors. Opportunities arise for these funds where businesses have strong claims but are unable to litigate them due to the potential cost risks – for example where businesses simply cannot afford the outflow of cash or where they face larger, well resourced adversaries.
How Does Third Party Funding Work?
Typically third party funders will agree to help fund litigation in return for a proportion of the potential damages, normally 30%-40%. Funders are not allowed to control the claim.
Due to the nature of third party funders they normally require certain parameters to be met before agreeing to fund litigation including for example:
· Low costs ratios (legal costs: damages claimed) between 1:4 and 1:10
· High minimum thresholds for damages claims – e.g. £1m
· High probability of success – 60%-70%
· Recoverability prospects must be good – the opponent must be sufficiently resourced to pay the potential claim
Third party funding represents a useful option for businesses that have strong, high-value claims against well-funded opponents. There are some obvious downsides such as the high proportion of damages that funders usually require if successful but these are likely to be offset by the opportunity to recover monies that would otherwise go unclaimed.