Disputes are generally to be avoided. However, from a business perspective, litigation is not necessarily a thorn in the side; businesses will often be sitting on potential claims which could secure significant sums into their coffers if pursued to a successful outcome. These claims are essentially contingent assets.
The expense of pursuing a claim, and the risk that the cost will not be recovered, can be a barrier to pursuing claims. Businesses may have a specific concern about diverting cash away from immediate business objectives to cover legal fees. Third-party litigation funding can offer a way of unlocking these assets; the independent investor covers the ongoing legal costs related to pursuing the claim, which will only be recovered from the business if they are successful, in return for a profit on their investment. The funder will often also pay for After the Event (ATE) insurance so that the business is also protected against any award of costs against them should their claim fail. The business can pursue the claims without diverting cash away from business objectives, risk free. Third-party funding is also available for claims by individuals.
Funding Claims in Scotland
The potential for unlocking claims in this way has been limited in Scotland by restrictions on solicitors from entering into fee-paying arrangements whereby the contingent fee is a proportion of the sums secured through the claim, also known as Damages Based Agreements (DBAs). There is an express prohibition on such arrangements for Advocates, whereas there is no such prohibition in the Law Society rules for solicitors, but the courts will not enforce DBAs because of the concern that in a DBA arrangement a solicitor has a personal stake in the outcome and so becomes “principal as well as agent” (Quantum Claims Compensation Specialists Ltd v Powell 1998 S.C. 316). However, contingent fee arrangements, where the fee payable on success is a predetermined sum based on the solicitor’s hourly charge-out rate rather than a percentage of the winnings, known as Speculative Fee Agreements (SFAs), are currently enforceable.
Many third-party funding arrangements depend upon the funders being able to secure a slice of the winnings from successful cases (making their risk worthwhile) and as solicitors must be a party to the funding arrangement, this prohibition on Scottish solicitors has seriously limited third-party funding in Scotland. In England and Wales, where solicitors have been able to enter into and enforce DBAs since 1 April 2013, following the implementation of the Legal Aid, Sentencing and Punishment of Offenders Act 2012, there has been rapid growth in the litigation funding market.
The restriction on the use of DBAs in Scotland has been circumvented by some solicitor firms by setting up their own claims management companies (CMCs) which offer DBAs, predominantly in the personal injury field. However, this has been controversial as CMCs are unregulated in Scotland, unlike in England and Wales where CMCs are regulated by the Claims Management Regulator.
Making Damages Based Agreements Enforceable
The Scottish Parliament is currently considering legislation which would allow DBAs in Scotland. The Civil Litigation (Expenses and Group Proceedings) (Scotland) Bill (the Bill) was introduced to the Scottish Parliament on 1 June 2017. At this time it is only at the first of a three-stage consideration process, but if passed it will remove a significant limitation on funding arrangements in Scotland, enabling businesses, and individuals, to unlock their claims in the way already seen in England and Wales.
The Bill provides for the Scottish Ministers to set caps on success fees recoverable by solicitors. This would give clients peace of mind that they would still recoup a substantial percentage of any damages they secured if successful. In England and Wales, the Damages-Based Agreements Regulations 2013 include maximum percentage caps on sums payable to solicitors under DBAs, capped at 25% in personal injury claims, 35% in employment claims and 50% in all other civil litigation.
If the Bill is made law and Scottish solicitors are for the first time able to validly enforce DBAs, this should improve access to justice for parties with claims with reasonable to good prospects of success, ensuring that those who otherwise may not have been able to finance litigation have the option to do so. For businesses with claims, third-party litigation funding presents an opportunity to convert contingent assets into cash, risk free.
For updates on the Bill’s progress and other articles detailing important developments in Scots law please visit our website.