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Dobson: considering funding should be standard step

Dobson: considering funding should be standard step

Posted by Stephen Dobson, legal reviewer at Litigation Futures sponsor Augusta Ventures

Failure in appropriate cases to advise on the suitability and availability of after-the-event (ATE) insurance and third-party funding will amount to professional misconduct and may amount to professional negligence, as this case study explains.


Mr and Mrs Smith invested their life savings in building their dream house. The project went disastrously wrong. The Smiths consulted Mr Brown, a solicitor with expertise in construction disputes. They explained that they had sunk nearly all of their capital into the project, and they estimated their losses at £1.5m.

Mr Brown advised that their case had a decent chance of success, and proposed that his firm should take it on under a partial conditional fee agreement. His firm’s client-care letter advised the Smiths of the adverse costs risk and provided a cost estimate and details of billing procedures, but he made no reference to ATE insurance or third-party funding.

The Smiths resolved to go ahead with the case on the terms proposed by Mr Brown, and to fund the litigation from their pension funds.

The case was a nightmare. Costs soared, mediation failed, it went to trial and the Smiths lost. They had spent £450,000 on (discounted) fees and disbursements, and were liable for the other side’s costs to the tune of £500,000. The total would wipe out their pension funds.

A sorry story, but not an implausible one; anyone with significant litigation experience will have been seen something along these lines. Litigation is risky.

The question is, how much of the risk should the client have to bear? In my view the Smiths were left to carry far too much. I explain below my reasons.

The regulatory position

The SRA’s Code of Conduct is expressly based on 10 principles. Principles 4, 5 and 6 are relevant. They are mandatory, and state that “you” (i.e. every solicitor) must:

  1. act in the best interests of each client
  2. provide a proper standard of service to your client
  3. behave in a way that maintains the trust the public places in you and in the provision of legal services.

The Code of Conduct itself prescribes the following relevant mandatory outcomes:

  • O (1.1) You treat your client fairly.
  • O (1.6) You only enter into fee agreements with your client that are legal and… which you consider are suitable for the client’s needs and take account of the client’s best interests.
  • O (1.12) Clients are in a position to make informed decisions about the services they need, how their matter will be handled and the options available to them.
  • O (1.13) Clients receive the best possible information, both at the time of engagement and when appropriate as their matter progresses, about the likely overall cost of the matter.

Those outcomes are evidenced by the following indicative behaviours (insofar as relevant):

  • IB (1.13) Discussing whether the potential outcomes of the client’s matter are likely to justify the expense or risk involved, including any risk of having to pay someone else’s legal fees.
  • IB (1.16) Discussing how the client will pay, including whether public funding may be available, whether the client has insurance that might cover the fees, and whether the fees may be paid by someone else such as a trade union (my emphasis).
  • IB (1.17) Where you are acting for a client under a fee arrangement governed by statute, such as a conditional fee agreement, giving the client all relevant information relating to that arrangement.
  • IB (1.19) Providing the information in a clear and accessible form which is appropriate to the needs and circumstances of the client.

What of Mr Brown’s approach, in the light of this regulatory framework? He was sedulous in providing regularly updated cost estimates; he helped the Smiths by agreeing to represent them under a CFA; he spelt out his firm’s terms regarding costs, disbursements and billing arrangements.

What he failed to do was explain to the Smiths how they could avoid the risk of an adverse costs award, and got most of the cost of fighting the case paid for without risking their pension funds, by arranging ATE insurance and third-party funding, both of which would have been available at a palatable cost.

With them in place, the Smiths would have suffered no loss from an adverse costs award and (depending on the funding model) would have only paid a proportion of their own costs and disbursements to run the litigation. If the claim had succeeded, they would have foregone a percentage of the damages recovered plus interest on the amount of finance provided.

In my view, in failing to advise on the possible availability of ATE cover and external funding, Mr Brown plainly breached SRA principles 4, 5 and 6, and outcomes 1.1, 1.6, 1.12 and 1.13; and failed to comply with indicative behaviours 1.13, 1.16, 1.17 and 1.19; and accordingly was guilty of serious professional misconduct.

Legal liability?

What of Mr Brown’s legal position? I am not aware of any directly applicable authorities, although in Adris v Royal Bank of Scotland [2010] EWHC 941 (QB), Judge Wakeham QC found that it was a “gross breach of duty on the part of [the solicitor] to [his] clients” to fail to tell them that they had no ATE insurance when they would have been expecting to have it.

Plainly it would be wrong automatically to equate a breach of the Code of Conduct, however serious, with professional negligence (see e.g. Sarwar v Alam [2001] EWCA Civ 1401 and Mastercigars Direct v Withers [2007] EWHC 2733 (Ch)).

But my feeling is that given particularly what the Smiths had made known to him about their financial position, a court could well conclude that Mr Brown’s failure to explain to them the possible availability of ATE cover and external funding amounted to breach of the common law contractual and tortious duties of care he owed to the Smiths, for which he should be found liable in damages.


I do not say that solicitors should advise clients about the possible availability and suitability of ATE cover and third-party funding in every case. There will be many situations in which it would be inappropriate to do so.

But in my view, the well-run law firm should include consideration of the possible relevance of ATE cover and third-party funding as a standard step in its engagement procedure in contentious matters, to ensure that it does not fall foul of the SRA, the Legal Ombudsman and the court.

    Readers Comments

  • George Robertson says:

    A good article but is fails to explain what would have happened to Mr and Mrs Smith if they had won the case at first instance but the defendant had them ‘won’ permission to appeal on the basis of having ‘a real prospect of success’.

    I suspect that the insurer would then be entitled to jump ship (and probably would do so) or (unlikely) demand yet more premium from Mr and Mrs Smith for maintaining the cover.

    So in effect ATE insurance is not the be all and end all of the matter. Yes it night be ok at the first hurdle, but not if the case goes to appeal.

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