In the U.S., the general rule is that each party in a legal proceeding pays its own costs and fees. There are some exceptions under which federal courts, and occasionally federal agencies, may order the losing party to pay the attorneys’ fees of the prevailing party. However, the most common exception is where the parties have contracted that in the instance of a legal dispute the losing party will cover fees and costs related to the dispute.
A recent case from the Delaware Supreme Court raises a question for both litigators and the contract attorneys to consider – should contractual provisions cover the shifting of the financing costs apply to the use of third-party funding used to finance a dispute? Such costs could include the return of the funder’s investment and the contingent return on that investment as agreed by the funded party.
The concept of litigation funding being a recoverable cost is not a new one — in international arbitration, for example, cost-shifting tends to be standard. In multiple decisions interpreting English arbitration law  that provides for the prevailing party to recover “other costs,” the English High Court has declined to set aside arbitration awards holding that the prevailing party was entitled not only to the amounts paid in law firm fees and disbursement costs for experts and court fees but was also entitled to the costs of litigation funding (usually charged as a multiple of funds invested, a % of recovery or on a hybrid ‘great of’ success fee model). Incidentally, TheJudge’s James Blick, gave evidence in one such lead authority, Essar Oilfields Services v. Norscot Rig Management
In the U.S., the reasoning applied to costs shifting of an attorney’s contingency fee in a recent ruling in the Delaware Supreme Court could also apply to parties seeking to recover the costs of litigation funding.
In Shareholder Representative Services LLC (“SRS”) v. Shire US Holdings, Inc. (“Shire”), the Supreme Court of Delaware affirmed in a summary decision the ruling of the Court of Chancery, which awarded the full amount of the contingent law firm fees to be shifted to the losing party based on a contractual fee-shifting provision between the parties. The contingent fees in the matter were substantial, amounting to a third of the damages awarded in the matter, totalling nearly $20 million. Like law firm contingency fee arrangements, funding agreements are nearly always structured to include a return of investment and an ‘uplift’ or ‘success fee’ if the matter is concluded successfully.
In the Shire case, the plaintiff represented the shareholders of FerroKin BioSciences, Inc., after it was acquired by Shire. The shareholders contended the merger agreement entitled them to a $45 million milestone payment related to an experimental drug. The merger agreement also contained a fee-shifting provision: “‘[I]n the event that any action, suit or other proceeding is instituted concerning or arising out of this Agreement, the prevailing party shall recover all of such party’s costs and reasonable attorneys’ fees incurred in connection with each and every such action, suit or other proceedings, including any and all appeals and petitions therefrom.’”
Through SRS, the shareholders took legal action to recover the milestone payment, interest, and legal fees due under the contractual fee-shifting provision. At trial, the Chancery Court found in favour of SRS and issued a ruling for Shire to pay the milestone payment plus interest.
While Shire did not dispute the milestone payment amount, the interest, or the roughly $2.5 million in out-of-pocket disbursement costs and Delaware counsel’s fees, however, Shire objected to the attorneys’ fees, insisting that the nearly $20 million in attorneys’ fees were “unreasonable.”
The nature of an alternative fee arrangement between SRS and their law firm creates a strong parallel with litigation financing. As the Chancery Court explained, the lion’s share of the law firm’s sizable bill was not their hourly rate, but the result of a contingent-fee agreement. While SRS first paid the firm on an hourly basis, later when SRS was struggling to fund the litigation, the firm took on significant risk by agreeing to represent SRS on a contingent basis entitling the firm to up to a third of any proceeds recovered by SRS in the matter. Claimholders often seek litigation funding as a means of access to justice in circumstances where they cannot afford to finance a long-running matter with good prospects of succeeding.
The Chancery Court applied an eight-factor test found in Rule 1.5(a) of the Delaware Rules of Professional Conduct to evaluate whether the requested fees were customary and reasonable. Shire contended that the amount was unreasonable because it was the product of a contingent-fee arrangement, however, the Chancery Court did not agree with Shire’s argument. It held:
“[T]here is nothing inherently unreasonable in enforcing a contractual fee-shifting arrangement to cover a contingent fee award. Risk-taking of this nature is a normal part of litigation, which Delaware public policy seeks to reward when it benefits stockholders,” the letter order said.
The Court also correctly noted that a one-third contingency fee is “quite typical and commercially reasonable,” and noted that in this case, it allowed SRS to retain skilled lawyers (ultimately capable of bringing the matter to a successful conclusion for the shareholders) despite their lack of resources. Similar findings on the “reasonableness” of a litigant seeking funding appear in the UK cases awarding litigation finance costs.
As the litigation funding market matures and becomes a customary practice for U.S. litigants, the logic applied in the Shire matter and similar cases could extend to the recovery of litigation finance costs under the “costs” prong of a fee-shifting contract provision. Whether the contingent cost is paid to a law firm or a professional third-party funder should not make a difference. Litigation funding allows risk transfer away from litigants and the risk transfer benefits claim holders who may otherwise be unable to achieve access to justice without such financing. It also allows litigants to choose a law firm with the particular expertise to represent them in their claims, increasing the chance that a valid claim will be successful.
Funders and claim holders should consider the possibility of recovering litigation funding costs in all circumstances where a contractual, equitable or statutory fee-shifting provision is present. In addition, contract drafters should consider whether to explicitly clarify fee-shifting provisions to include or exclude such recovery.
TheJudge is a specialist provider of various forms of litigation insurance covers including adverse costs insurance (insurance to cover the risk of a fee-shifting award), own side’s legal costs insurance (insuring self-financing claimants), law firm contingency fee insurance as well as judgment preservation insurance.
The Judge works closely with Erso Capital, a global litigation funder that finances both commercial litigations and arbitrations. Erso enjoys substantial capital support from its institutional investors.
 Essar Oilfields Services v. Norscot Rig Management,  EWHC 2361 (Comm); Tenke Fungurume Mining S.A. v. Katanga Contracting Services S.A.S.,  EWHC 3301 (Comm).
 In Tenke Fungurume Mining S.A. v. Katanga Contracting Services S.A.S, the English Commercial Court upheld an award of third-party funding costs rendered by a London-seated ICC arbitral tribunal. The judgment confirmed that an arbitral tribunal seated in London can, in principle, award reasonable funding costs to a successful party. The success fee payable to Katanga’s funder was a fixed fee payable in the event of a successful outcome of 100% of the amount of the funding, which in that matter was USD$1,300,000.