The use of conditional fee agreements (CFAs) and after the event (ATE) insurance enables litigants to bring claims which they may otherwise be unable, or unwilling, to pay for. By entering into a CFA and/or an ATE insurance policy, it is often possible to run a meritorious claim or defence for little or no cash flow risk, and potentially no risk at all as to recoverable costs, win or lose. Their use can also be a very effective negotiating tool.

In this, the first part of our 'before you take the plunge' series, we look at how they currently work in practice and how they look likely to change in the future following any implementation of Jackson LJ's recommendations on reforming civil litigation costs.

The current position

Conditional fee agreements

A CFA - whether a pure CFA ("no win, no fee") or a discounted CFA ("no win, reduced fee") - may be agreed between solicitor and client following a detailed assessment of the merits of the claim.

The benefits of CFAs include:

  • If the case is lost, you will not be required to pay all of your legal costs. The amount payable (i.e. nothing or a discounted fee) is agreed at the outset. You remain liable to pay disbursements (court fees, counsels' fees and experts' fees), and your opponent's legal fees and disbursements. However you can take out ATE insurance to cover off both these risks - see below.
  • If you win, a success fee of up to 100% of the charges can be added to the agreed hourly rate. The level of success fee is determined following a risk assessment: the more risky the claim or defence, the higher the percentage rate of the success fee. The court will order your opponent to pay at least part of these charges, including the success fee, unless there is good reason not to make such an order.
  • Your lawyers will have a financial interest in the success of the case and will be backing their own judgment.
  • It can be a good bargaining tool when attempting to settle a claim to have your lawyers on a CFA. Not only will your opponent be aware of a potential additional costs liability, it will also be aware that your lawyers consider the claim (or defence) to be a good one as they are willing to risk their costs of acting on your behalf.

After the event insurance

ATE insurance helps to cover the cost of litigation once a dispute has arisen, whether you are making or defending a claim. It can cover your opponent's legal charges and/or your own disbursements and/or legal charges. It can be combined with a CFA or used on its own. Subject to the merits of the case (typically a minimum 60% chance of success), you can seek a policy at any stage. Such cover can provide peace of mind against the possibility of paying the total litigation costs of both sides if you lose the case.

Premiums are generally in the region of 40% of the total legal charges you insure against, which can be a significant sum. Payment of the premium can however be deferred until the conclusion of the case, paid at a number of set stages, made contingent upon the case being won, or can be reinsured within the policy so that no premium is payable even if the claim is lost. If you win, your opponent will be liable for the insurance premium, providing it is reasonable.

Only reputable and financially secure ATE insurance providers should be used. Check the policy and any exclusion clauses carefully. Keep insurers up-to-date on key developments, changes in the prospects of success and any settlement negotiations to ensure that the policy cannot subsequently be avoided.

Tips:

  • Obtain several ATE quotes to show the premium was reasonable when you come to seek its recovery from the other side.
  • Consider carefully any clauses in the policy that might affect cover where credibility and oral evidence of witnesses is an issue.

Recoverability

Currently, both the success fee (CFA) and the premium (ATE insurance) are recoverable from a losing opponent, subject to notification of the funding having been given and subject to the success fee and/or the premium being reasonable.

The future

On 29 March 2011, the Lord Chancellor and Secretary of State, the Rt Hon Kenneth Clarke QC MP confirmed that the Government will implement the primary recommendations of Jackson LJ's Civil Litigation Costs Review. This means that, once legislation has been passed, neither the CFA success fee nor the ATE insurance premium will be recoverable from the losing party. CFAs with a success fee of up to 100% (in non-personal injury cases) and insurance cover will still be available. However, the funded or insured party will have to pay the agreed success fee or insurance premium itself.

Even when implemented, it is very unlikely that the changes will be retrospective. CFAs and/or ATE insurance will continue to be appropriate in the right case. The premium payable on a policy to meet the potential costs outlay of losing a case will continue to be substantially less than that potential costs liability and may well be worth incurring for peace of mind.

Other forms of funding are also possible. In larger claims, third party funding may be appropriate; as to which see part two of this series. Contingency fees, where costs are paid for out of damages recovered, will also be permitted following implementation of Jackson LJ's recommendations. We cover the essentials of contingency fees in part three of this series.