One of the basic principles of third party litigation funding in the UK market is that the funder cannot take an assignment of the claim. Therefore, the traditional model of third party funding sees the funder invest in the claimant, but without being able to take over and control the litigation. However, the insolvency exemption provides an interesting alternative, where the funder instead buys the claim outright and conducts the litigation as assignee of the cause of action.

This approach clearly offers certain benefits – a funder buying a claim will often be willing to make an immediate cash payment, as well as agreeing to hand over a percentage of any recovery made. This enables the IP to secure an immediate recovery for creditors irrespective of the outcome of the case, as well as a further windfall if a recovery is made, all without having to commit time and resource to pursuing litigation.

When considering litigation, third party funding (or selling the claim) is only one of the potential methods of funding that IPs will wish to consider. It is equally vital to consider whether the law firm may be willing to share risk by way of a conditional fee agreement (CFA) and whether After-the-Event (ATE) insurance should be obtained, either to cover the risk of having to pay the defendant’s costs, or to indemnify some element of the own side’s costs.

A crucial benefit of these arrangements is that IPs can potentially recover the cost of the insurance premium and/or CFA success fee from the defendant as part of costs. If the defendant is good for the money, this may enable these funding options to be used effectively at no cost to creditors, as well as providing significant tactical benefits.

However, things may be changing. There is now less than 12 months left of the two- year exemption from the rule changes on recoverability of ATE premiums and CFA success fee and there is still no clear guidance on what 1st April 2015 will bring. We must assume and prepare for the worst – that from 1st April 2015, IPs will potentially no longer be able to recover these costs from the defendant as part of costs.

It is important, therefore, for IPs to observe and be aware of what is happening in the wider market, as this will give an indication of things to come, if a further temporary or permanent exemption is not secured.

The first thing to say is that the lack of recoverability has not significantly damaged the ATE insurance market, nor has it stopped the use of CFAs. On the contrary, 12 months post implementation of the LASPO Act 2012, the commercial litigation market has started to normalise and we have seen a steady rise in the volume of insurance applications, such that we are at around the volumes we saw in 2012.

However, the key challenge is making the economics work. There were undoubtedly cases funded under the old regime, where the funding arrangement (CFA and ATE) was only viable because of the ability to recover the success fee / premium, but where under the new regime, the damages simply are not large enough to make this work.

IPs will be familiar with this scenario. The ultimate recovery in many cases will be determined by the defendant’s available assets, whether or not costs are technically recoverable. Therefore, whilst the margins in some cases will be squeezed, the analysis about the cost of a funding arrangement versus the likely level of recovery will often be very similar.

The combination of the ability to sell claims to potential funders, or retain the claim but benefit from recoverable CFAs and ATE premium, means that IPs in the UK market currently have the widest and most flexible range of funding options available.