Funding options for legal services - Alternative funding mechanisms

Learning Outcomes

After studying this article, you will be able to identify and explain the main alternative funding mechanisms available for legal services in England and Wales. You will understand the legal and regulatory framework for third-party funding, conditional fee agreements (CFAs), damages-based agreements (DBAs), and legal expenses insurance (LEI). You will also be able to apply these principles to client scenarios and recognise key ethical and professional conduct considerations relevant to SQE1.

SQE1 Syllabus

For SQE1, you are required to understand the range of funding options for legal services, with a focus on alternative funding mechanisms. As you revise, ensure you are familiar with:

• the main types of alternative funding for legal services (third-party funding, CFAs, DBAs, LEI)
• the legal and regulatory framework for each funding option
• the practical operation and limitations of each mechanism
• the ethical and professional conduct issues arising from alternative funding arrangements
• how to advise clients on the suitability and implications of different funding options in realistic scenarios.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. What is the main difference between a Conditional Fee Agreement (CFA) and a Damages-Based Agreement (DBA)?
2. Under what circumstances can a third-party funder be liable for the opponent’s costs in litigation?
3. What is the distinction between Before-the-Event (BTE) and After-the-Event (ATE) legal expenses insurance?
4. What ethical risks must a solicitor consider when advising a client on third-party funding?

Introduction

When clients seek legal services, the cost of pursuing or defending a claim can be significant. Alternative funding mechanisms allow clients to access legal representation without paying all costs upfront. These options include third-party funding, conditional fee agreements, damages-based agreements, and legal expenses insurance. Each mechanism has its own legal framework, practical requirements, and professional conduct considerations. Understanding these options is essential for advising clients and for SQE1 assessment.

Third-Party Funding

Third-party funding is an arrangement where an external funder (not a party to the dispute) pays some or all of the legal costs in exchange for a share of any damages or settlement if the case succeeds.

Key Term: third-party funding
An agreement where a non-party funds legal proceedings in return for a share of any recovery if the case is successful.

Key Term: maintenance and champerty
Historic doctrines prohibiting third-party support of litigation (maintenance) or funding in return for a share of the proceeds (champerty). These are now largely abolished for commercial funding.

Key Term: Arkin cap
A principle from Arkin v Borchard Lines Ltd [2005] limiting a third-party funder’s liability for adverse costs to the amount of funding provided.

Regulation and Practice

Third-party funding is not directly regulated by statute, but the industry is self-regulated through the Association of Litigation Funders (ALF) Code of Conduct. The Code sets standards for capital adequacy, transparency, and funder conduct. Solicitors must ensure that any funding arrangement does not compromise their independence or the client’s best interests.

Ethical and Professional Issues

Solicitors must:

• avoid conflicts of interest between funder and client
• maintain client confidentiality when sharing information with funders
• ensure the client retains control of the proceedings and settlement decisions.

Worked Example 1.1

A small business wishes to sue a multinational company but cannot afford the litigation costs. A third-party funder offers to pay all legal costs in exchange for 30% of any damages recovered. The funder agrees to pay any adverse costs up to the amount funded.

Answer: This is a standard third-party funding arrangement. The funder’s liability for adverse costs is capped at the amount funded (the Arkin cap). The solicitor must ensure the client understands the arrangement and that the funder does not control the litigation strategy.

Conditional Fee Agreements (CFAs)

A Conditional Fee Agreement (CFA) is a contract where a solicitor agrees to be paid only if the case is successful, often called a "no win, no fee" agreement.

Key Term: conditional fee agreement (CFA)
An agreement where the solicitor’s fee is payable only if the client’s case succeeds, with a possible success fee uplift.

Key Term: success fee
An additional fee (up to a statutory cap) payable to the solicitor under a CFA if the case is successful.

Key Term: LASPO 2012
The Legal Aid, Sentencing and Punishment of Offenders Act 2012, which changed the rules on recoverability of success fees and ATE premiums.

Key Features (CFAs)

• The success fee is capped (e.g., 25% of damages in personal injury claims).
• Since LASPO 2012, the success fee is paid by the client from damages, not by the losing party.
• Disbursements (e.g., court fees, expert reports) are usually payable by the client, win or lose, unless covered by insurance.

Worked Example 1.2

A solicitor agrees to act for a client in a personal injury claim under a CFA. The solicitor’s normal fee would be £2,000. The CFA provides for a 25% success fee. The client wins £10,000 in damages.

Answer: The solicitor is entitled to £2,000 plus a £500 success fee (25% of £2,000). The success fee is paid from the damages. The client receives £9,500 after paying the solicitor’s total fee.

Damages-Based Agreements (DBAs)

A Damages-Based Agreement (DBA) is a contingency fee arrangement where the solicitor receives a percentage of the damages recovered if the case is successful.

Key Term: damages-based agreement (DBA)
An agreement where the solicitor’s fee is a percentage of the damages awarded, payable only if the client wins.

DBAs are regulated by the Courts and Legal Services Act 1990 and the Damages-Based Agreements Regulations 2013. The fee is capped (e.g., 25% in personal injury, 50% in other civil cases). If the client loses, the solicitor receives no fee.

Key Features (DBAs)

• The DBA must be in writing and comply with statutory requirements.
• The solicitor’s fee is deducted from the damages recovered.
• The client may still be liable for disbursements and the opponent’s costs if the case is lost.

Worked Example 1.3

A client enters a DBA with a solicitor for a commercial claim. The DBA is set at 30%. The client wins £100,000 in damages. The opponent is ordered to pay £20,000 towards the client’s costs.

Answer: The solicitor is entitled to £30,000 (30% of £100,000). The £20,000 paid by the opponent is set off against the solicitor’s fee, so the client pays the remaining £10,000 from their damages.

Legal Expenses Insurance (LEI)

Legal Expenses Insurance (LEI) covers the cost of legal advice and representation. There are two main types:

Key Term: legal expenses insurance (LEI)
Insurance that covers legal costs for specified types of disputes, either before or after a dispute arises.

Key Term: before-the-event (BTE) insurance
LEI purchased before any dispute arises, often as part of home or motor insurance.

Key Term: after-the-event (ATE) insurance
LEI purchased after a dispute arises, usually to cover the risk of paying the opponent’s costs if the case is lost.

Features

• BTE insurance covers a range of potential disputes, subject to policy limits and exclusions.
• ATE insurance is commonly used with CFAs or DBAs to protect against adverse costs.
• The Insurance Companies (Legal Expenses Insurance) Regulations 1990 give clients the right to choose their own solicitor once proceedings are issued.

Worked Example 1.4

A client is injured in a road accident. Their home insurance policy includes BTE legal expenses cover up to £50,000. The insurer appoints a panel solicitor, but the client wants to use their own solicitor.

Answer: Under the Insurance Companies (Legal Expenses Insurance) Regulations 1990, the client can insist on using their chosen solicitor once proceedings are issued, subject to the insurer’s approval of reasonable costs.

Ethical and Professional Conduct Issues

Solicitors must ensure that alternative funding arrangements do not compromise their independence, create conflicts of interest, or breach confidentiality. They must provide clear, written information to clients about the funding arrangement, risks, and potential liabilities. The client’s best interests must always come first.

Exam Warning

Solicitors must not allow a third-party funder or insurer to control the conduct of litigation or settlement decisions. The client must retain control, and the solicitor must act independently.

Revision Tip

When advising on funding, always check for existing BTE insurance before recommending a CFA, DBA, or third-party funding. Failure to do so may breach professional obligations.

Summary

Key Point Checklist

This article has covered the following key knowledge points:

• Alternative funding mechanisms include third-party funding, CFAs, DBAs, and legal expenses insurance.
• Third-party funding involves an external funder paying costs in exchange for a share of damages if the case succeeds.
• CFAs are "no win, no fee" agreements with a capped success fee, payable by the client from damages.
• DBAs allow solicitors to take a percentage of damages as their fee, subject to statutory caps.
• Legal expenses insurance may be BTE (before a dispute) or ATE (after a dispute), covering legal costs and sometimes adverse costs.
• Solicitors must ensure funding arrangements comply with legal and ethical requirements, including independence, conflicts, and client information.

Key Terms and Concepts

• third-party funding
• maintenance and champerty
• Arkin cap
• conditional fee agreement (CFA)
• success fee
• LASPO 2012
• damages-based agreement (DBA)
• legal expenses insurance (LEI)
• before-the-event (BTE) insurance
• after-the-event (ATE) insurance