Funding options for legal services - Alternative funding mechanisms

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Overview

Understanding alternative funding mechanisms for legal services is vital for aspiring solicitors preparing for the SQE1 FLK1 exam. These avenues have transformed access to justice, offering innovative ways to finance litigation. This article examines key alternative funding choices: third-party funding, conditional fee agreements (CFAs), damages-based agreements (DBAs), and legal expenses insurance. We will explore their legal frameworks, advantages, challenges, and ethical considerations, equipping you with essential knowledge for both the SQE1 FLK1 exam and future legal practice.

Third-Party Funding

Third-party funding involves an external entity financing litigation in exchange for a share of potential damages or settlement. This has become particularly popular in high-value commercial litigation.

Legal Framework and Evolution

The acceptance of third-party funding marks a departure from historical doctrines like maintenance and champerty. Key developments include:

  • Criminal Law Act 1967, s.14(2): Removed criminal and civil liability for maintenance and champerty
  • Courts and Legal Services Act 1990: Introduced exceptions to the prohibition on conditional fee agreements
  • Arkin v Borchard Lines Ltd [2005] EWCA Civ 655: Established the "Arkin cap," limiting funders' liability for adverse costs to the funding amount

Regulatory Considerations

The Association of Litigation Funders (ALF) has set a voluntary code of conduct addressing:

  • Capital adequacy requirements
  • Restrictions on funders' ability to withdraw
  • Limitations on funders' control over decisions

Ethical Considerations

Third-party funding raises several ethical issues:

  1. Conflict of Interest: Balancing funder interests with the lawyer's duty to the client
  2. Confidentiality: Managing information disclosure to funders
  3. Independence: Preserving lawyer autonomy in decision-making

Conditional Fee Agreements (CFAs)

CFAs, or "no win, no fee" arrangements, allow lawyers to charge fees contingent on case success, greatly enhancing access to justice.

Legal Framework

CFAs are governed by:

  • Courts and Legal Services Act 1990 (amended by the Access to Justice Act 1999)
  • Conditional Fee Agreements Order 2013
  • Conditional Fee Agreements Regulations 2013

Key Features

  1. Success Fee: A percentage uplift on normal fees, payable only if the case succeeds
  2. Non-recoverability: Since April 2013, success fees are no longer recoverable from the losing party (Jackson Reforms)
  3. Qualified One-Way Costs Shifting (QOCS): Protects unsuccessful claimants in personal injury cases from paying the defendant's costs, subject to exceptions

Practical Considerations

  • Risk Assessment: Careful evaluation of case prospects
  • Client Communication: Clear explanation of CFA terms and potential liabilities
  • Costs Management: Ensuring proportionality throughout the litigation process

Damages-Based Agreements (DBAs)

DBAs are contingency fee arrangements where the lawyer's fee is a percentage of the damages recovered for the client.

Regulatory Framework

DBAs are regulated by:

  • Courts and Legal Services Act 1990 (as amended)
  • Damages-Based Agreements Regulations 2013

Key Provisions

  1. Fee Caps: Maximum percentages of damages claimable as fees (e.g., 50% in commercial cases, 25% in personal injury cases)
  2. Termination Clauses: Restrictions on a lawyer's ability to terminate and claim costs
  3. Information Requirements: Mandatory client disclosures about DBA terms

Ethical Considerations

  • Potential Conflict: Balancing financial interest with objective advice
  • Proportionality: Ensuring fee structures remain justified by work and claim value
  • Client Protection: Safeguarding vulnerable clients from unfair agreements

Legal Expenses Insurance

Legal Expenses Insurance (LEI) provides financial protection against potential legal costs, with two main types of coverage:

Before-the-Event (BTE) Insurance

  • Often bundled with other insurance products
  • Covers unforeseen legal expenses arising after policy inception
  • Typically offers broader coverage but lower limits

After-the-Event (ATE) Insurance

  • Purchased after a legal dispute has arisen
  • Protects against the risk of paying opponent's costs if the case is unsuccessful
  • Premiums often deferred and only payable on success

Regulatory Framework

  • Insurance Companies (Legal Expenses Insurance) Regulations 1990
  • Financial Conduct Authority (FCA) rules on insurance mediation

Practical Aspects

  • Policy Limits: Understanding coverage extent and exclusions
  • Insurer Involvement: Managing potential tensions between insurer cost control and lawyer's duty to the client
  • Disclosure: Ensuring proper disclosure of insurance arrangements to the court and opposing parties

Examples

Example 1: Third-Party Funding in Commercial Litigation

TechInnovate Ltd, a medium-sized company, seeks to sue MegaTech Corp for patent infringement but lacks financial resources. They engage LitFund, a third-party funder, who agrees to finance the litigation for 30% of any damages awarded, capped at £5 million. The agreement includes provisions for case evaluation, control limitations, ethical safeguards, and addresses potential costs liability under the Arkin cap.

Example 2: CFA and ATE Insurance in Personal Injury

Mrs. Smith, injured in a workplace accident, engages a solicitor on a CFA basis with a 100% success fee. She also takes out an ATE policy with a £50,000 deferred premium. The case settles for £200,000. After deducting legal costs (£50,000 base costs + £50,000 success fee) and the ATE premium, Mrs. Smith receives £100,000. This example demonstrates the interaction between CFAs, ATE insurance, and QOCS in personal injury litigation.

Conclusion

Alternative funding mechanisms have transformed access to justice, enabling clients to pursue legal claims regardless of their financial circumstances. Key points for SQE1 FLK1 candidates to remember include:

  1. The evolving legal framework surrounding third-party funding and its ethical considerations
  2. The structure and regulations governing CFAs and DBAs, including fee caps and success fee limitations
  3. The role of legal expenses insurance in risk management for both clients and lawyers
  4. The importance of transparency, client communication, and ethical considerations in all alternative funding arrangements
  5. The practical application of these funding mechanisms in various legal contexts

Understanding these alternative funding options is essential for providing comprehensive legal services and navigating the intersection of law, finance, and ethics in modern legal practice.