Funding commercial disputes when times are hard

As a result of the lockdown and Government restrictions, many businesses and individuals have faced, and are facing, significant problems in their commercial contractual relationships. Breaches of contract relating to coronavirus can cause serious financial loss but even if parties have good grounds for taking legal action to recover damages, it is entirely understandable that they will be reluctant to part with cash to cover their legal fees, particularly in the current economic climate.

Following on from last week’s discussion on how to vary contractual obligations, where commercial discussions are not successful legal action may be the only option, especially for business critical issues. An inability to fund legal action can mean a party missing out on a chance to recover loss. However there are options for funding claims (and in some cases defences) which should be explored. We take a look at a few of the most common below:

1. Legal Expenses Insurance: These are policies that cover legal costs up to a specified amount for disputes that arise after the policy has been entered into. It is always worth checking whether commercial disputes and similar claims are covered by an existing insurance policy, either a business or an individual insurance policy, because it is increasingly common for legal costs to be covered by a number of different types of policies.
2. Damages Based Agreements (“DBAs”): These agreements came into force under the Damage Based Agreement Regulations 2013; DBAs allow solicitors to enter into formal agreements with their clients where they share the risk of pursuing the claim and agree to accept a percentage of the damages recovered if successful as payment of their fees.
3. Third Party Funding: Specialist litigation funders provide working capital for solicitors’ fees and other costs, such as barristers’, experts’ and Court fees, where a claimant would otherwise not be able to fully fund legal action. The funder typically charges interest on the funds provided and takes a share of the damages recovered in successful actions as payment;
4. Conditional Fee Agreements (“CFAs”): These agreements involve the solicitor (and sometimes the barrister), agreeing not to charge the client anything, or a reduced fee, if the claim is unsuccessful, and charging a ‘success fee’, usually calculated as a percentage of the fees incurred and payable by the client out of their damages, where the claim is successful;
5. After the Event Insurance: Third Party Funding and CFAs above are typically combined with After the Event Insurance (“ATE”), which can be obtained by a claimant (and less regularly a defendant) from specialist insurers to cover any costs award made against the client if the claim (or defence) is unsuccessful. ATE premiums can themselves be insured and deferred so that they are only payable in the event of success.

The above are just some examples of the funding options available to parties, in certain circumstances, contemplating litigation but without the financial means to pay their legal advisers using traditional models. There are also other options or combinations that may be more suitable to your particular circumstances. Irwin Mitchell would be happy to discuss the options with you. Please contact Stephen.murphy@irwinmitchell.com if you have any queries.