Litigation funding is the term used to describe the arrangement where a bank, hedge fund or insurance company invests in a claimant's claim with a view to receiving a good return on its investment at the end of the case… Read More

Put very simply, a litigation funder provides money upfront to pay a claimant's own ongoing legal costs and disbursements of bringing a claim, such as the solicitor’s costs, Counsel’s fees, the expert’s charge, court fees etc.  In return, if the claimant is ultimately successful in his claim, the funder will be entitled to receive from the claimant a cut of the winnings or damages that are awarded against, or recovered from, the losing defendant.  The funder’s share is usually a percentage agreed in advance of between 20% and 30% of the monies received from the defendant.

Alternatively a funder sometimes agrees upfront with the claimant to receive from the claimant a multiple of the funds it advances in the event that the claim is successful.  The multiple is usually between two and seven times the total amount the funder provides for the claimant’s costs to enable the claim to proceed.

If the claimant is successful, the funder will usually also be entitled to seek reimbursement from the losing defendant for the majority of the costs the funder has invested in the claim.  However, the separate cut of the winnings that the funder receives (referred to above) is not recoverable from the defendant.

If the claimant is unsuccessful in his claim, in principle he would not be required to repay the funding that the funder would by then have paid out in legal costs to have enabled the claimant to pursue the claim.  Nor would any interest on such funding be payable by the claimant. Close

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A litigation funder will usually only invest in a claim if the following criteria are satisfied, which if fulfilled would tend to indicate that the claim is likely to be a good investment for the funder… Read More

1. The claim is realistically worth at least £200,000;
2. The claim has good prospects of success (the funder will not pay the claimant’s initial legal costs associated with investigating whether or not the claim does have good prospects of success); and
3. The defendant can afford to pay any damages that it might ultimately be ordered to pay to the claimant.
   
   If the claimant’s claim is not simply for a sum of money to be paid by the defendant but is instead a claim for a non-monetary objective such as, say, a house that the claimant intends to live in, litigation funding might not be an appropriate way forward for the claimant.  This is because (if his claim succeeds and the funder thereby becomes entitled to be paid out from the fruits of the claim) the house might have to be sold to pay the funder at the end of the case.  Having said that, many claimants would prefer to enter into a litigation funding agreement with a funder, even though it could result in the house claimed having to be sold at the end of the case if successful, rather than face the alternative of not being able to pursue the claim at all. Close

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Risks associated with entering into a litigation funding agreement include that its terms and conditions may allow the funder to stop providing funding in certain circumstances, for example… Read More

1. If it later transpires that in fact the merits of the claimant’s claim are less than 51% (rather than the claim having good prospects of success).  Indeed if it turns out that the claimant has failed to disclose all material information about the claim, the funder would usually be entitled to look to the claimant to reimburse the funder for the monies it has paid out.
2. If the costs of pursuing the claim turn out to be considerably higher than was envisaged when the funder and the claimant entered into the litigation funding agreement.

However, a funder will seldom be keen to terminate a funding agreement because doing so can result in the funder losing the monies it has invested in the claimant’s claim up to the point when the funding is stopped.

The detailed terms and conditions of any particular litigation funding agreement are usually set out in a formal litigation funding agreement entered into between the funder and the claimant.  Before signing up, it is important the claimant reads, fully understands and is happy to accept and comply with the terms and conditions.  Most funding agreements will require the claimant to instruct his solicitor to keep the funder fully informed of developments throughout the case. Close

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Litigation funding and after the event insurance are not mutually exclusive and are complimentary.  In cases where a litigation funding agreement is entered into between the claimant and the funder, the claimant will often also have entered into an after the event insurance policy with an insurer… Read More

A defendant who unsuccessfully defends a claim against a claimant that has the benefit of an after the event insurance policy will, in addition to the value of the claim, currently be held liable to pay the cost of a reasonable insurance premium.  However, a defendant who unsuccessfully defends a claim against a claimant that is being funded by a funder will not in addition be liable to pay the cut of the winnings that the funder receives.  This is a fundamental difference between litigation funding and after the event insurance, which in part (together with the fact that litigation funding is not cheap) explains why many more claimants currently obtain after the event insurance policies than litigation funding.  It is also often more difficult to obtain litigation funding than it is to obtain after the event insurance.

However, litigation funding is usually obtained to pay a claimant’s own costs and sometimes to comply with a court's security for costs order requiring money to be paid into court as security for the defendant's costs in case the claimant's claim ultimately fails.
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Almost everyone who issues a court claim inherently runs the risk, should the claim fail, of ultimately being ordered to pay the defendant's legal costs and disbursements. This is of course in addition to the claimant having to pay his own solicitors' costs and disbursements associated with pursuing the claim.… Read More

After the event insurance (also known as ATE Insurance) can potentially provide a degree of reassurance to a claimant because it reduces his overall costs risks associated with the claim.  ATE Insurance is a form of legal expenses insurance obtained by the claimant 'after the event' in time that brought about his entitlement to bring the claim. Close

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Unlike litigation funders, ATE insurers do not provide cash flow or funding for a claimant's ongoing solicitors' bills and disbursements associated with pursuing the claim.  Accordingly, even where ATE insurance is in place, the claimant still has to pay interim legal bills as the claim progresses.… Read More

ATE insurance insures the claimant against the risk that he might be ordered to pay the defendant's costs and disbursements if the claimant's claim is ultimately unsuccessful.  ATE insurance usually also covers the claimant's own disbursements should they lose their case.

In rare cases, the ATE Insurance market might also consider providing cover for a portion of the claimant's own solicitors' fees. Close

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As with any insurance policy, the person insured (i.e. the claimant) is responsible for payment of the premium.  However, the premium payment terms of many ATE Insurance policies are unusual in that the premium is often payable not when the insurance is taken out but instead at the conclusion of the case.  This is called a ‘deferred premium’ arrangement.
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Even more importantly, the terms of the policy are often such that the premium only becomes payable if the claimant’s claim is successful.  This is called a ‘contingent premium’ arrangement (i.e. contingent on the claimant winning the case).  At the end of the case, the claimant is currently able to seek to recover the cost of the ATE Insurance premium from the losing defendant.  This is in the same way as any successful claimant would seek to recover from the defendant his other costs and disbursements associated with bringing his claim.

The Goverment has recently announced that it plans to remove the claimant's right to recover an ATE premium from the losing defendant.  It is not clear when the change will come into effect, however, your solicitor will advise you of the effect this could have on you when discussing the details of your matter.

For the avoidance of any doubt, in a case where the claimant’s claim is unsuccessful, an ATE insurance policy with a 'contingent premium' is designed still to pay out even though the insurer does not receive any premium for the policy in such circumstances.  This is providing the claimant has not breached the terms of the policy.

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Under the present law, a successful claimant can seek to recover the cost of an ATE premium from the losing opponent.  One risk in taking out an ATE Insurance policy is that, even if the claimant obtains judgment in his favour (such that the premium becomes payable), there could nonetheless be circumstances whereby the claimant might not be able to recover the ATE Insurance premium in full from the losing defendant.  This might happen, for example, (i) because the Costs Judge at a detailed assessment of costs hearing decides not to order the defendant to pay the full cost of the premium and/or (ii) because the defendant cannot afford what he is ordered to pay to the claimant.… Read More

In such circumstances the claimant would still remain legally responsible to ensure the cost of the ATE Insurance premium is paid to the insurer.  The insurer could potentially seek payment of the premium from the claimant.  This is because, by having obtained judgment in the claimant's favour, the case would usually be deemed to have been a success as defined under the terms of most ATE Insurance policies.

Also, for the avoidance of doubt, if the defendant cannot afford what he is ordered to pay to the claimant (in terms of damages and/or costs), the ATE insurer would not step into the defendant's shoes and pay the claimant on the defendant's behalf.  In other words ATE Insurance is not a form of credit risk cover.

ATE insurers do not provide cash flow or funding for a claimant's own ongoing solicitors' costs and disbursements incurred in pursuing the claim.  Accordingly the claimant needs to be able to provide sufficient financial resources himself (or separately from a litigation funder) to ensure the case reaches its natural conclusion.  An ATE insurer may not be obliged to cover the claimant's liability to pay the defendant's costs (nor the claimant's disbursements) where the claim simply discontinues because the claimant cannot, or will not, commit funds to see the case through to a conclusion.… Read More

On its own the court does not normally consider the existence of an ATE Insurance policy to be adequate ‘security for costs’ for the defendant’s costs should the claim fail.  Accordingly a claimant ordered to provide security for costs would usually have to provide the security monies from its own resources or do a deal with a litigation funder to provide the security.  The claimant may ultimately be unable to raise the necessary finance and therefore be unable to continue pursuing the claim.  In such circumstances the ATE insurer may not be obliged to cover the claimant's liability to pay the defendant's costs (nor the claimant's disbursements) even though the claimant would probably become liable for such costs. Close

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At the time of applying for ATE Insurance, the level of cover/costs indemnity needed for the entire duration of the case needs to be considered carefully together with the claimant's legal representatives. It is important to ensure that enough cover is purchased. Top-up insurance is commonly available where there is an overrun but it is only offered at the discretion of the ATE insurer, who would need to be convinced that the claim still has a good prospect of succeeding.

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The ATE Insurance contract between the insurer and the claimant requires the claimant to act 'with utmost good faith' at all times.  This requires the claimant to provide all material facts to the insurer, whether or not he is asked for such information and whether or not the information is unhelpful to the claimant's case… Read More

Also the claimant must co-operate with the insurer and with the claimant's solicitors throughout the case.  Where the insurer or the solicitors do not consider that the claimant is co-operating with them, the insurer may terminate the claimant’s ATE cover with immediate effect.

The claimant must also comply with any terms and conditions of the ATE policy in respect of settlement offers.  For example, if the insurer does not approve a rejection by the claimant of a settlement offer received from the defendant, the insurer may terminate the ATE cover from that point.  The reasoning behind this is that, by rejecting the defendant's settlement offer, the claimant may expose himself (and therefore also the ATE insurer) to potential adverse costs consequences if at trial the claimant fails to obtain a judgment more advantageous than the defendant’s earlier settlement offer.  The claimant can proceed with his claim but he will not have the benefit of ATE Insurance from that point forward.

Many ATE insurers are keen to agree minimum settlement figures with the claimant at the outset and some are happy to work with the claimant and his solicitors to consider the reasonableness of each settlement offer as and when it is made.  In most cases the insurer, once notified of the existence of an offer, will support the view of the claimant's lawyers as to whether or not the offer is reasonable and whether it should be accepted or rejected.

Failure by the claimant to comply with such requirements on him set out in the ATE policy can invalidate the ATE Insurance and result in a dispute between the claimant and the ATE insurer.

The detailed terms and conditions of the ATE policy may also include provisions favourable to the ATE insurer that apply, for example, where the insured claimant is successful in one part of his claim but unsuccessful in another part of his claim.  In these circumstances an insurer may be entitled to some or all of the monies received by the claimant from the defendant in respect of the successful part of the claim.  The ATE insurer would then use such sums to offset costs the ATE insurer is obliged to pay to the defendant in respect of the unsuccessful part of the claimant’s claim.

Similarly, the ATE policy may include provisions favourable to the ATE insurer that apply, for example, where there is more than one defendant or more than one claimant.  It is important to ensure you are happy with the contents of such clauses before signing up to the ATE policy.

Nonetheless, most ATE Insurance policies will also contain a mediation or arbitration provision with a view to resolving any dispute that may arise between the ATE insurer and the claimant.  ATE policies are also designed to be flexible given the unpredictable way in which litigation can develop.  For instance, the policy can be drafted to cover the adverse costs risk that the claimant may be exposed to in the event that he fails to obtain a judgment more advantageous than the defendant’s earlier settlement offer. Close

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Aside from the financial aspects, one potential benefit for a claimant of obtaining litigation funding and/or ATE Insurance is that he will be able to notify the defendant he has obtained such risk protection.  This might in turn encourage the defendant to settle the dispute on terms more favourable to the claimant because the defendant will then know that:… Read More

1. The claimant is facing less financial risk going forward, such that the claimant is likely to be more ready, willing and (financially) able to continue to pursue the case all the way to trial rather than have to abandon the claim;
2. An independent, hard nosed, third party insurance company or funder is prepared to invest in the claim, which probably tends to indicate that the claim is likely to succeed.  This is because litigation funders and ATE Insurers generally only invest in claims that that they consider, after considerable investigation and deliberation, have a good prospect of success; and
3. The ATE Insurance premiums are often staged to increase as the case progresses. This means that the earlier the case settles the lower the premium will be. This acts as an incentive to the defendant to try to conclude matters swiftly since the claimant is currently entitled to seek to recover the cost of the premium from the losing defendant.

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The decision whether or not to take out an ATE insurance policy or to enter into a funding arrangement rests of course with the client. We have no interest, financial or otherwise, in recommending one product over another.… Read More

Given the need to demonstrate the reasonableness of the level of the ATE Insurance premium as well as ensuring our client secures offers of insurance in the first place, we believe the advice of a specialist independent broker is vital. We may, therefore, instruct leading independent broker, TheJudge, to source a litigation funder or ATE insurer on our client’s behalf. The client is, however, free to appoint an alternative broker should they wish to do so.

Needless to say, if the client simply does not wish to transfer the risk they are not obliged to take out a policy of insurance nor seek litigation funding. Close

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We cannot provide financial advice but if you are interested in finding out more information we can put you in touch with a specialist litigation funding & ATE insurance broker who will be able to provide you with information on the range of different products that are currently available in the market.… Read More

In the meantime, if you would like any further information or want to discuss an area or matter of interest to you, please speak to your usual Mishcon de Reya contact or with Neville Illingworth-Law.

Neville Illingworth-Law
Tel +44 (0)20 7440 7272
neville.illingworth-law@mishcon.com

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