Litigation Funding

Insights - 29/01/2021

Dear lawyer: Can’t I just pay you a share of the winnings? (Yes, actually – you can!)

Finding innovative ways to fund litigation has been a theme of the last 20 years, ever since it became lawful for your solicitor to fund your claim for you, using a Conditional Fee Agreement (“CFA”), with the advent of the 2000 CFA Regulations.

Very simplistically, under a CFA, your solicitor does not get paid unless the case “wins”; and if the case wins, your solicitor is paid her usual time-costs plus a success fee, a percentage of those time costs, which cannot exceed 100%.

Terminating a CFA

The Law Society’s standard form CFA contains provisions that allow a solicitor to be paid if the client chooses to terminate the CFA. Quite right too – why should a solicitor, who has funded the case, be deprived of payment for her work, because on a whim, the client chooses to terminate the agreement and instruct another firm, or abandon the claim?

Another advantage of the CFA funding model is that hybrids are permitted. For example, the solicitor and client can agree that the solicitor is paid at 50% of her normal hourly rate during the case, and in the event of a win, is paid the remaining 50%, upon which a success fee is paid.

Damages Based Agreements Regulations

In litigation, until 2013, it was not lawful for solicitors to be paid a percentage of the “winnings” (properly, “damages”). In 2013, the Damages Based Agreements Regulations were introduced. These made it lawful for solicitors to fund litigation for their clients in exchange for a share of the damages, a Damages Based Agreement (“DBA”).

Very simplistically, the DBA Regulations said that a solicitor could fund a client’s case by agreeing to be paid a percentage of the damages, capped at 50% in commercial cases, 25% in personal injury cases and 30% in employment cases.

DBAs have never taken off as a funding method, because unless the regulations say that unless a DBA complies scrupulously with the regulations, it is unenforceable. More importantly, no termination provision is included in the regulations, so that if the client, on a whim, terminated the DBA, the solicitor would not get paid.

These faults made DBAs very unattractive and they were seldom used; in fact, the Law Society refused to publish a precedent DBA.

Moves have been afoot for some time to amend these regulations and in fact, new draft regulations had been drafted for a working group.

Zuberi v Lexlaw

However, the Court of Appeal has got there first, with its decision on 15 January 2021, in Zuberi v Lexlaw.

Mrs Zuberi brought a financial misselling claim funded by her solicitors, LexLaw, under a DBA. The DBA provided for her solicitors to be paid 12% of her damages if the case won, and a lesser sum if Mrs Zuberi terminated the DBA. Mrs Zuberi won her claim and then asserted that her solicitors were not entitled to be paid, because the termination provision made the entire agreement unenforceable.

Unsurprisingly, given the winds of change that had been blowing from the working group and other sources, the Court of Appeal decided that the DBA Regulations do not prevent termination payments being made to solicitors. So far so good. But the way in which the Court of Appeal reached its decision has potentially, as one commentator put it, “blown the doors off”.

The Court of Appeal ruled that the scope of a DBA does not cover the entirety of the retainer between the solicitor and client, but only that part that deals with how the damages are to be shared. This means that not only can a solicitor be paid in the event of termination but can also be paid on a time-costs basis if the claim is lost. A DBA is now capable of being much more than just a pure contingency agreement.

What makes this judgment so exciting is that it makes it possible for a range of funding agreements to be used. For example:

  • Sequential DBAs: a client pays a solicitor on a time-cost basis up to a certain point in the claim, and then the claim is funded on a DBA;
  • Distinct parts of the case can be funded, each on their own DBA, with different % payment from damages, with the rest funded on a time-costs basis;
  • A solicitor could be paid a percentage of damages in the event of a win, and time-costs (or a percentage of time-costs) if the claim is lost.

The reasoning in the minority judgment of Lord Justice Newey (from which the majority did not distance themselves) suggests that it might be possible to go further still, and agree that a solicitor could recover up to 50% of the damages and full-time costs, even if that meant exceeding the overall cap of 50% of the damages.

I think it unlikely that many solicitors will want to run the risk of pushing the boundaries that far, even if their clients were willing to enter into such an agreement. It is safe to say that a combined time-costs and % damages claim would be lawful and enforceable if the overall cap of 50% is applied.

It is very good news for clients that a new tool in the funding toolbox has been handed to us.

If you have any questions about conditional fee arrangements or any other queries please contact our team.

Disclaimer:

Although correct at the time of publication, the contents of this newsletter/blog are intended for general information purposes only and shall not be deemed to be, or constitute, legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. Please contact us for the latest legal position.