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Insights

05 May 2020

The costs of conflict

In these difficult times most businesses are experiencing cash constraints and effective costs management is crucial. For those already involved in disputes and for those contemplating bringing or defending claims the costs of the dispute resolution process, and how those costs are cash flowed, are now, more than ever, key considerations.

In any dispute there are two basic types of costs: the costs that you will incur in funding your own lawyers and the costs that you may have to pay to your opponent in the event that you lose the dispute (commonly known as ‘adverse costs’). The extent of the exposure to adverse costs will depend, to an extent, on whether the dispute arises in a common law or civil law jurisdiction. Common law jurisdictions tend to favour the ‘loser pays the winner’s cost' approach. Civil Law jurisdictions tend to favour minimal costs consequences for a losing party (albeit that a party still has to fund his or her own lawyers). Across the GCC we have legal systems in which both civil and common law jurisdictions operate.

Until recently the only option available to a prudent Claimant or Respondent to mitigate the risk of adverse costs was to obtain insurance. However, the last few years have seen a fundamental shift in attitudes towards the funding of litigation as well as more flexible insurance products and as a consequence there are now more options available to a party to a dispute to help reduce that risk.

The four main funding options now available are: conditional fee agreements (CFAs); damages-based agreements (DBAs); after the event (ATE) insurance; and third party funding (TPF). CFAs and DBAs are agreements a client enters into with its lawyer and in basic terms are agreements whereby the risks and rewards of a dispute are shared. ATE and TPF are agreements between a client and non-lawyer third parties. Each of the options can be used separately or in conjunction with each other and their use provides a party to litigation or arbitration with increased opportunities to mitigate or negate its exposure to its own legal costs and potential adverse costs. CFAs operate to transfer all or part of the risk for a client's own legal costs from the client to the lawyer. The usual form of CFA provides that the lawyer receives no fees if the client loses its case, but if the client wins the lawyer is entitled to his/her normal fees plus an increased percentage (usually up to 100 per cent) of his/her normal fees. There are also now a number of variants available such as "discounted CFAs" whereby the lawyer receives a lesser percentage of his/her fee (say 75 per cent) if the client loses the case but fees at the full rate and the success fee if it wins; partial CFAs where only a proportion of the lawyer’s fees are deferred to the conclusion of the case and "CFA Lite" where the lawyer operates on a no-win no-fee or discounted CFA basis, but the additional fee and any success fee payable on success is capped at costs awarded or agreed with the opponent. 

A DBA is a contingency-fee agreement. It is similar to a CFA in that what the lawyer is paid depends on the outcome of the case. However, with a DBA the lawyer's fee is not calculated by reference to the work carried out but by reference to the compensation recovered by the client. If the client wins the lawyer will receive a percentage of the client's damages. If the client loses, the lawyer receives nothing. In most jurisdictions the maximum amount recoverable by the lawyer is 50 per cent of the damages recovered by the client and as such DBAs will only be available to claimants or counterclaiming defendants where the level of damages will be sufficiently high to ensure that it covers the lawyer’s fees and an uplift to reflect the risk of being paid nothing should the client lose. ATE insurance provides cover for the legal costs incurred in the pursuit or defence of litigation and arbitration and is purchased after a dispute has arisen. The insurance will typically cover the client's liability for the expenses and disbursements of the client's own lawyers and adverse costs in the event that the opponent wins. 

There are four main types of premiums with ATE insurance:

  • One-off premiums that are payable up-front;
  • Staged premiums so that the premium payable increases as the dispute progresses and thus remains proportionate to the costs incurred;
  • Deferred premiums that are only payable at the conclusion of the case; and
  • Contingent premiums that are only payable if the case is won. If the case is lost, the premium is not payable.

Third-party funding involves someone who is not involved in a dispute providing funds to a party to that dispute to cover legal fees and expenses in exchange for an agreed return. The funder may also agree to pay the opponent's costs and provide security for costs. In addition to funding one-off cases, third party funding is now available to cover a portfolio of cases where the risk of no return for the funder can be spread across a number of cases.

The funder's return, and the way it is calculated, will always be tailored to the particular case and various factors will be taken into account, including: the size of the expected damages, the likely length of the matter and the level of risk. It could be calculated according to a fixed percentage share (typically 30 per cent to 50 per cent of recoveries), a multiple of the funding to be provided (usually a multiple of three or four) or a combination of both.

With disputes funding come certain disclosure obligations. For example, the Abu Dhabi Global Markets (ADGM) Courts, Civil Evidence, Judgments, Enforcement and Judicial Appoints Regulations 2015 expressly addresses litigation funding agreements (Article 225). Conditions that must be satisfied for a litigation funding agreement to be valid in the ADGM include that any such agreement must not relate to proceedings that cannot be the subject of an enforceable conditional fee arrangement, that the funding agreement must be in writing, that the funder must be a legal person and that notice of the agreement must be given to all other parties.

Also on March 14, 2017, the DIFC implemented Practice Direction No. 2 of 2017 on Third Party Funding in the DIFC Courts which sets out the requirements that funded parties must observe in the DIFC Courts including: the requirement that the funded party must put every other party on notice of the fact that it has entered into a litigation funding arrangement and of the identity of the litigation funder and that the DIFC Courts have inherent jurisdiction to make costs orders against third parties, including third party funders.

On March 4, 2020 Charles Russell Speechlys launched a new initiative for clients called Feesible. Feesible is a suite of funding solutions for clients providing a mix of the four options mentioned in this article.

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