Standalone DBAs can align law firm and client interests in UK securities litigation, but face significant hurdles, including high costs, adverse cost exposure and security for costs risk. These factors can make DBAs impractical without additional funder support. Third-party funded DBAs may address these some of these challenges to offer institutional investors a de-risked, commercially feasible route into complex English securities claims.
This is a particularly timely question. While third-party funding is well-established in the UK, the market has been reassessing its structures following the Supreme Court's decision in PACCAR and in the light of reforms suggested by the Civil Justice Council.
The traditional third-party funding model can deliver significant benefits to parties who would otherwise be unable to pursue meritorious claims due to factors such as the financial burden, downside risk and opportunity cost of litigation. Over recent decades, third-party funding in England and Wales has grown significantly. An obvious use-case for third-party funding is in complex group litigation, such as securities litigation under section 90 and section 90A of the Financial Services and Markets Act 2000 (“FSMA”).
Sections 90 and 90A remain relatively untested in the English courts, meaning these claims continue to carry considerable legal risk. However, a number of important decisions and settlements have contributed to increased interest and momentum in this type of claim, as has the availability of third-party funding and evolution of funding models.
Third-party funding is often used in combination with other types of funding or risk sharing structures, including after-the-event insurance (“ATE”), contingency fee arrangements or damages-based agreements (“DBAs”) between the client and its lawyers, and alternative structures such as portfolio arrangements and law firm funding are becoming increasingly common.
A structure that can work particularly well for institutional investors wishing to participate in a UK securities action is a third-party funding backed DBA, alongside an ATE policy.
A DBA is a type of fee arrangement whereby a law firm’s remuneration is linked directly to the outcome of the case. Unlike traditional hourly billing, the client does not pay any legal fees during the course of the litigation. Instead, if the claim succeeds, the law firm will be entitled to an agreed share of the proceeds recovered by the client. If the claim is unsuccessful, or if the recovery is lower than anticipated, the law firm may not receive any payment or only a reduced amount at the end. This can be attractive for clients as it ensures alignment of interests between client and counsel and significantly de-risks participation in legal proceedings. Similar fully contingent arrangements will be familiar to many institutional investors with experience of US securities class actions.
In the UK context, however, while DBAs may be attractive for small cases, they are unlikely to provide a complete funding solution for complex claims such as securities actions in the English courts. A number of particular features of the English legal system and legal market contribute to this:
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High costs and long duration – In the context of these relatively novel and typically high-stakes claims, the cost of suitably qualified lawyers and experts can be significant, in particular given defendants will often contest them vigorously and stretch out durations, potentially with interim challenges and appeals to higher courts on particular issues before the claim even reaches trial. For many law firms, carrying such significant unpaid fees (perhaps millions of pounds’ worth) for such a prolonged period may simply not be viable.
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Disbursements often not covered under DBA – Securities actions typically involve additional large expenditure besides the law firm’s fees, including the fees of barristers (specialised trial advocates, themselves a particular feature of the English legal system) and experts, as well as court fees and administrative/logistical costs. Barristers and experts may not always be open to the same risk-sharing arrangements as a law firm and may require their fees to be paid (or part paid) while proceedings are ongoing and other costs such as court fees will not be capable of deferral.
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Adverse cost exposure for losing party – Unlike in US securities class actions, where each side will usually bear its own legal costs, litigation in England and Wales generally follows a “loser pays” rule. This means that if the claim is unsuccessful, the claimant may be exposed not only to its own legal costs, but also to a significant portion of the defendant’s legal costs. For institutional investors, this is often one of the key differences between participating in US style class actions and bringing claims before the English courts.
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Possibility of security for costs – The English courts also permit defendants to seek an order requiring the claimant to provide a security for the defendant’s costs, especially when it is a smaller claimant. Security is typically provided in the form of cash or bank guarantees, which a law firm acting under a DBA may not be well placed to do so.
Introducing a third-party funder into the DBA structure can mitigate these risks. A funded DBA could be agreed at the outset of the case or introduced at later stages, depending on the law firm's needs. Usually, this would involve the funder paying the law firm a portion of its fees through the duration of the proceedings, as well as covering other disbursements, including the upfront premium for an ATE policy to cover adverse cost exposure. Upon the client’s successful recovery, the law firm’s DBA entitlement, for example 30% of the client’s recovery, is then shared between the law firm and the funder in accordance with their funding agreement.
The result is a structure that promotes alignment across all stakeholders, which could result in a more collaborative and economically-focused outcome, while de-risking certain exposures that remain present when using a DBA by itself. The involvement of a third-party funder means that the funder will have independently assessed the likelihood of the claim succeeding on the merits, as well as recoverability and enforcement prospects. This can offer institutional investors comfort (and send defendants a message) that the case is strong and that it has been scrutinised from more than one angle.
As the funding market evolves, DBA structures may become an increasingly useful option for institutional investors seeking to participate in UK securities actions without taking on open ended legal spend or unmanaged adverse cost exposure. However, these arrangements are not one size fits all. Investors will need to consider the economics of the structure, the allocation of control rights, the scope and reliability of adverse cost protection, including ATE insurance and the enforceability of the relevant funding and fee arrangements. A third-party funded DBA can offer a more balanced and commercially aligned route into complex UK securities litigation.
