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FAQs: litigation and arbitration: costs and funding options

Litigation is unpredictable – particularly when it comes to the cost of running a court case so it’s not easy to put a figure on the average cost of a civil court case in the UK. This is despite widespread reforms in recent years aimed at encouraging litigants to justify their actions and to conduct their cases proportionately when it comes to incurring costs. In short, litigation is still perceived as an extremely expensive way to resolve a business dispute.

In addition to court fees, litigants are responsible for outgoings such as solicitor and barrister fees and payments to other experts. Whether or not you can recover your costs at the end of the case will be at the discretion of the court (although you can agree who pays with your opponent) – so there is always a degree of risk inherent in any form of litigation.

For many small and medium-sized businesses the potential costs of litigation often act as a barrier to pursuing any type of court case. This is why at Harper James we will often encourage you to negotiate settlements or use other forms of dispute resolution such as commercial mediation and early neutral evaluation.

Sometimes litigation or arbitration becomes unavoidable. Here our dispute resolution solicitors answer some common questions about the main funding options available for court cases and arbitration.

What are damages based agreements?

In 2013 contingency fee agreements (where a client only pays the solicitor if a certain outcome occurs) were first permitted in civil litigation cases in England and Wales. A damages based agreement (DBA) is one type of contingency fee agreement available to plaintiffs and – more recently – to defendants. Under a DBA the client only needs to pay its legal representative if it obtains damages from the opposing side. Normally the client will pay a fixed percentage of compensation received to his or her lawyer. Significantly there are statutory limits on the percentage payable to a legal representative under a DBA. If the client loses the case the legal advisor will not receive payment. In addition there may be a liability in terms of paying costs to the winning side and it’s important for the client and lawyer to agree at the time of entering the DBA who is responsible for these costs.

Can I enter a conditional fee agreement?

Conditional fee agreements (CFA) are available to anyone. They are commonly used in litigation before the courts and to a lesser extent in arbitration proceedings. Under a CFA an unsuccessful client will not pay any fees or expenses covered by the CFA but a successful client will meet all fees and expenses. These include the conditional fee agreed and a ‘success fee’ if one is specified in the CFA. This success fee cannot usually be recovered from the losing party.

How do I obtain legal expenses insurance?

Many individuals have legal expenses insurance as part of their home insurance and businesses will often take out insurance against unforeseen legal liabilities.

It is also possible to purchase ‘after the event’ insurance when you have already become involved in a legal dispute. To qualify you will normally need to convince the insurer that you have a strong case (possibly by obtaining a barrister’s formal opinion) and you will also need to be represented in proceedings by a solicitor. While premiums for legal expenses insurance are high, a policy like this does remove the possibility that you end up paying your opponent’s costs if you lose. If you disclose that you are insured to your opponent it will alert them to the strength of your case because they will understand that the insurer has carried out a separate examination of the case and agreed to insure you.

What is third party litigation funding?

Third party funding is a way to finance litigation (or arbitration) by using a commercial funder who has no direct interest in your case. It is used most frequently in high value money claims. You will agree to pay the third party a share of your compensation if you win your case. If you are unsuccessful you do not have to pay anything. Where a costs order is made against you it will usually be up to the funder to pay the costs of your opponent. In practice there will usually be after the event legal expenses insurance in place to cover this eventuality (see above).

Can crowd funding be used for litigation and arbitration?

The crowd funding model of raising money for a particular cause is one that most of us are now familiar with. Litigation crowd funding is still uncommon in the UK, limited to sites like Crowdjustice. It tends to facilitate cases that are in the public interest in the fields of human rights, discrimination and immigration. 

While the market in litigation crowd funding is small at present it may well expand in the coming years. Care is needed when drafting any crowd funding agreement to ensure that it is enforceable. Some form of further regulation will also be essential to clarify issues such as responsibility for costs in situations where the crowd funded litigant is unsuccessful.

What is pure funding?

A pure funder finances a legal action and will only recover the amount he or she contributes to the case. Unlike other litigation funders a pure funder will not receive any uplift or success fee above his or her expenditure.

Pure funders are usually individual well wishers or supporters of a claimant who wish to facilitate access to justice that may not otherwise be possible. Some pure funders are commercial entities, funding a related company that has been exposed to litigation costs. Whether a pure funder – who is not after all a party to proceedings – will be made liable for costs will depend on the facts of the case.

However most case law in this area appears to confirm that a court will only reluctantly make a costs order against a pure funder. The thinking being that a pure funder is a non-party who never stood to profit from the litigation and who had no control over management of the case.

What are the different types of costs orders a court can make?

Generally speaking a successful litigant will be granted an order that his or her reasonable costs will be paid by the losing side (‘costs follow the event’). But costs must be assessed and the actual costs an unsuccessful litigant must pay can be limited in a number of ways so that not all costs are recoverable. When deciding on costs orders the court will consider the conduct of all the parties and whether a party that’s been unsuccessful overall has won particular elements of the case.

It’s important to remember that most cases will involve several applications to court before a final hearing and it’s possible to apply for costs orders at each application. A party that loses at trial may obtain favourable costs orders throughout the course of the action. This means a party that loses at trial does not always pay the legal fees of his or her opponent.

Some of the most common costs orders are:

  • Costs in any event – A party that obtains this type of order will receive the costs of the application to which it relates no matter how the case unfolds and what other costs orders are made.
  • Costs in the case/costs in the application – Whoever gets a costs order at the end of the case in their favour will receive the costs of the part of the proceedings to which this order relates.
  • Costs reserved – A decision on costs is deferred.
  • Claimant's/defendant's costs in the case/application – If the party with this type of order is granted costs at trial then they are entitled to the costs of the portion of the case to which this order relates. If another party is awarded costs at trial the party with a costs in the case/application order in their favour is not liable to that other party for the part of the proceedings to which the costs in the case/application order relates.
  • No order as to costs/Each party to pay his own costs – Each party is responsible for their own costs of the part of the proceedings to which the order relates irrespective of what the court determines regarding costs at the end of the case.

Sometimes there will be no order for costs, and each party bears the costs of the application themselves. Normally the costs of the particular application will not be recoverable at the end of proceedings.

Who pays the cost of arbitration?

One reason why clients opt for arbitration is that it can be substantially cheaper than going to court – but costs can still be considerable. The Arbitration Act 1996 states that unless the parties otherwise agree, the tribunal shall award costs on the general principle that costs should follow the event (meaning that the successful party is entitled to an order to recover costs from the unsuccessful side). However the arbitration process is governed by consent. Arbitrators have a wide discretion when it comes to the issue of costs and parties are free to decide among themselves how to divide costs.

How can I recover costs awarded to me by a UK court?

Interest on costs is payable from the date of the order but unfortunately it’s not uncommon for successful litigants to encounter difficulties in receiving reimbursement of their costs from the losing side. While orders for costs can be enforced like any money judgment they must be for a specific amount. So if you are unable to agree the level of costs with your opponent it’s necessary to have your costs formally assessed before you take legal action to recover them.

Like any enforcement action you should satisfy yourself that your opponent has sufficient assets to make enforcement cost-effective. If you wish to proceed to enforce the order there are several enforcement methods available, including obtaining a charging order, insolvency proceedings, attachment of earnings proceedings and appointment of a receiver.

If you suspect that there may be an attempt by your opponent to move assets so that they are put of reach you should act quickly. In some cases a freezing injunction or other pre-emptive action may be required.

What next?

If you need advice our business disputes solicitors are ready to help.

Please leave us your details and we’ll contact you to discuss your situation and legal requirements. There’s no charge for your initial consultation, and no obligation to instruct us. We aim to respond to all messages received within 24 hours.

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