The issue of funding litigation has always been a challenge for companies. The normal expectation is that a winning party will have their legal costs (or a large proportion of them) paid by the other side. But this might have a considerable effect on cashflow if the matter proceeds to a trial which could be many months or even years away or a business may not be in a position to fund the cost of pursuing a valid claim in the first place.
Whilst historically solicitors were not able to charge on any basis other than an hourly rate, the rules were relaxed in the 1990's to allow claims to be brought on the basis of Conditional Fee Agreements (CFA). This is an arrangement where a lawyer agrees that their fees will only be payable in the event of a successful outcome. The lawyer also charges an additional success fee (being a percentage of the basic fees) in the event of a successful outcome (in order to reflect the risk that the lawyer gets nothing if the case fails).
In April 2003, the options increased further when Damage Based Agreements (DBA) were introduced. These agreements also provided that the client didn't pay the lawyer unless they won but allowed the lawyer to charge a percentage of the damages recovered by the client.
The take up of DBAs has been slow as there has been an ambiguity as to whether the solicitor is entitled to charge anything to the client if the client dis-instructs before the conclusion of the claim. This left solicitors exposed to the risk of incurring substantial fees but making no recovery even if the claim was ultimately successful.
The recent Court of Appeal case of Zuberi v Lexlaw has helped to clarify what is acceptable to include in a DBA to mitigate against the risk of a client trying to terminate the agreement to avoid paying the pre-agreed percentage to their lawyer. In such circumstances, the Court confirmed the lawyer is entitled to revert to an hourly rate method of charging for the work undertaken up to that point.
With CFAs and DBAs there is still a risk that if the client loses then they are likely to have to pay a proportion of the other side's costs, but there are lots of insurance products available to cover off this risk.
So, what does this mean for clients?
This judgment is likely to be significant comfort to lawyers which will mean that DBAs are likely to become more widely available as a funding option for clients.
In the current economic times, any arrangements which might allow clients to pursue claims with the certainty of knowing that they will not have to pay anything to their lawyer unless they win will surely be welcomed.
If you have a potential claim and are considering your funding options, please do get in touch to see how our Dispute Resolution team can help. We actively consider the use of CFAs and DBAs (together with other funding arrangements) on a case by case basis and we have good relationships with brokers and third-party funders which we leverage to help our clients.