Why CFA success fees, ATE premiums and funder returns should be recoverable in commercial litigation cases

Since Jackson LJ’s 2010 Review of Civil Litigation Costs (Jackson Review) led to the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO), it has been taken as read that conditional fee agreement (CFA) success fees and after-the-event (ATE) premiums are not recoverable. Calls to repeal the primary legislation have gone largely unnoticed and Part 2 of the Post-Implementation Review of LASPO in 2019 only entrenched this position further by declaring non-recoverability a success in terms of reducing litigation costs.

Remembering the genesis of the Jackson Review and LASPO

However, a decade is a long time, so it’s worth reminding ourselves that the genesis of the Jackson Review and LASPO was the rampant personal injury and clinical negligence markets of the 2000s. When in 1999 the use of CFAs (which were only allowed in 1995 after the Courts and Legal Services Act 1990 came into effect) were liberalised and ATE insurance was introduced by the Access to Justice Act 1999, the road traffic accident (RTA) market grew exponentially, driven by law firms with volume-based business models churning through cases knowing the costs could be recovered from creditworthy insurers.

In simple terms, the more cases originated, the more revenue. And with the focus on quantity over quality, even low prospect cases were commercially viable for law firms to take a punt on, provided there was sufficient volume so the losses could be smoothed out. What was intended as access to justice had the unintended consequence of becoming a nuisance, not just for the general public receiving calls asking about the car accident we had supposedly had but for insurers and more broadly for us – society – by increasing car insurance premiums. And it wasn’t just RTAs but clinical negligence and other “high volume” litigation markets, hence the Jackson Review.

By contrast, at the time, the commercial litigation funding market was still very nascent. The behemoth we know today as Burford was only founded in 2009 (they closed their first 3 deals that year). Most other “established” (as we know them today) funders hadn’t even raised their first funds. Most ATE insurers were focused on the personal injury space, the volume characteristics giving statistical parallels to other classes of insurance that better suited their actuarial models. Most commercial litigators – the target market for commercial litigation funding and commercial ATE – were still priding themselves on a fee-paying client base that put them above that lower class of lawyer seeking speculative fees on contingent work.

This explains why commercial litigation funding only accounted for 7 of the 584-page Jackson Review.

Why recoverability should be re-considered for commercial cases

This is not a criticism of the Jackson Review, but reflects the reality of the time, that Jackson LJ could not have properly considered the implications of a commercial ATE and litigation funding that didn’t substantively exist. Put another way, if the review was done today, would the treatment of recoverability in respect of commercial litigation cases still be treated uniformly with personal injury?

Notwithstanding that personal injury and commercial claims are so vastly different that they should be considered differently anyway, exceptions were made to the recoverability of ATE premiums, in particular defamation, privacy matters (including data breach) and clinical negligence, the latter having its recoverability firmly established thanks to the Court of Appeal’s 2019 judgment on a joint hearing relating to Peterborough & Stamford NHS Trust v McMenemy and Reynolds v NUHF Trust.

As for the recoverability of funder returns in commercial litigation, the recent judgment in Tenke Fungurume Mining SA v Katanga Contracting Services SAS shows it is alive and well. It may have been an ICC arbitration seated in London, but the Commercial Court refused to deem the award of funder costs as erroneous. This case doesn’t stand alone either – Essar Oilfields Services v Norscot Rig Management being another public reminder – on top of which there are surely other arbitrations (including one recently seen by LionFish) where third-party funding costs have been awarded, sometimes even being pre-agreed with the defendant as part of an agreement for providing security for costs.

On what basis should recoverability be allowed in commercial cases?

In finance, the starting point of any financial transaction is the cost of funding. It is the cost of money because money is not free. It’s therefore no surprise that when quantifying damages, interest – which in financial speak is the “funding cost” – is included. It would then follow when assessing costs, that the “funding cost” of litigation funding should also be included. After all, the “loser pay” principle revolves around the notion that reasonably incurred costs to secure justice are recoverable.

To look at it another way, if security for costs and third-party costs can be ordered against funders to give the defendant comfort of not being out of pocket if they succeed, why shouldn’t claimants be given the same level of comfort that they will not be left out of pocket if they succeed? Or on a common sense level, if the compensatory principle for a civil wrong, as Lord Blackburn said in Livingstone v Rawyards Coal Co, is to award damages to put the claimant in the same position, as best money can do, as if the wrong had not occurred, then why should the costs of seeking that compensation be taxed from the damages?

This is where commercial litigation cases wildly differ from the personal injury claims that the Jackson Review reined in. Commercial litigation cases are each individually nuanced, fact and case-specific proceedings where a party is pursuing litigation to seek justice for a wrong they fundamentally believe happened at great expense.

This is very different from the reined-in personal injury case where the claimant would not have pursued damages and lived life happily ever after, had it not been for opportunistically being targeted by a law firm whose sole objective was to process as much caseload as possible to build revenue. In other words, the claimant and law firm were fortunate to find each other to identify a financial option of a very attractive, low cost, high return, favourable odds bet against an insurer.

It’s also worth adding that most commercial litigation funders in fact avoid the “high volume” market, perhaps validated after the recent issues afflicting “high volume” litigation funders such as Affiniti and Novitas. The focus for commercial funders is on commercial disputes that are ultimately “just business”, by which I mean disputes where the defendant has taken a commercially rational decision to monetise a situation at the expense of the claimant, gambling on (i) the claimant’s ability and likelihood of pursuing legal record, (ii) the likelihood of the claimant actually succeeding in court and (iii) the expected payout in case of an unsuccessful defence. On a probability-weighted basis, it’s actually quite a rational simple business decision because the reward outweighs the risk more often than not.

What precisely should be recoverable?

No prizes for guessing that claimant solicitors, insurers and funders would say “all of it”. But rather than live in fanciful hope, it is worth considering the recommendations in the Jackson Review for a scenario where recoverability was not abolished.

For example, Jackson LJ suggested non-recoverability where the defendant admits liability during an “amnesty period”, or in respect of any premium being attributable to any Part 36 cover, so as not to discourage appropriate settlements. He also talked about caps on ATE premiums and fixed success fees under CFAs, which are less relevant in commercial litigation matters where claim values are significantly higher than lower value personal injury claims.

These recommendations are not only useful seeds for the possible recoverability of CFA success fees and ATE premiums in commercial cases but also for funder returns. For example, take the idea of non-recoverability in case of a liability admission. That may have had a limited impact on a personal injury claim, but imagine the costs and time savings it would generate for all parties, including the courts, in a £50 million breach of contract dispute if the defendant just admitted liability from the outset. The defendant would be incentivised to settle and the courts would benefit from having less demand for hearings.

As for recovering costs, why shouldn’t claimants be allowed to claim back a significant part of their litigation funding costs? If not all, how about a formula-based portion, for example (i) 50% of the funders pricing, or (ii) a lower fixed multiple, or (iii) the average 10-year rolling IRR of all litigation funders, or (iv) one based on a financial model using established valuation methodologies (such as the ones I previously wrote about here) to determine an appropriate minimum return that reflects a reasonable recoverable cost for litigation funding. Again, in a personal injury or low-value matter, recovering funding costs disproportionately hinders the defendant, but in a £60 million misrepresentation claim between two corporates, how much more would a defendant be incentivised just to settled, thereby saving time and costs for all parties, including the courts?

And how about a means-tested approach? Jackson LJ said that CFA success fees should not be recoverable if the “…the claimant could have used other funding which would not have resulted in a CFA being used”. Applied to litigation funding, it would mean those using litigation funding for commercial purposes would pay varying degrees of the cost of funding measured against the extent to which the use of funding was a commercial decision. However, claimants who are victim to aggressive conduct by defendants whose strategy is to “bleed them dry” would have the ability to recover their funding costs.

Nothing ever stands still

Non-recoverability has been long accepted. Yet, it was based on a report whose genesis was not the commercial claims which form the backbone of today’s ATE insurance and litigation funding markets and which didn’t substantively exist at the time it was written.

At an objective level, there are certainly arguable, common-sense reasons as to why recoverability should be considered for commercial cases and what degree of recoverability should be permissible, now that we have a market with sufficient experience that provides a useful reference point.

So on that basis alone, it’s time that recoverability was at least revisited. After all, the legal system is evolutionary and one which could see some significant benefits from recoverability of CFA success fees, ATE premiums and funder returns being permissible in commercial cases.

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