Contingency Fees & Damaged-Based Agreements (DBAs)

The current regime

1. Contingency fee agreements have always been allowed in non-contentious work. Pre-issue work is classed as non-contentious and therefore can be carried out under a contingency fee agreement.
2. However once the case is issued then that pre-issue work retrospectively becomes contentious and thus the contingency fee agreed is of no effect. The solution is to enter in to a conditional fee agreement and a contingency fee agreement from Day One and to serve Form N251 on the other side.
3. The agreement with the client will be that the contingency fee agreement operates until proceedings are issued at which point it drops away and the conditional fee agreement is deemed to have been in place from the beginning. This is achieved by a bridging agreement.
4. Absent contractual agreement with the other side there is no right to costs pre-issue and therefore it does not matter that the conditional fee agreement is not in place. Costs are only payable by agreement; if they are agreed then there is no problem and if they are not agreed then proceedings will need to be issued at which point the conditional fee agreement comes in to force with effect from the beginning of the case.
5. The potential problem is that fees on an hourly basis, even with a success fee, may be significantly less than the contingency fee would have been. That will depend upon a combination of the settlement figure and the contingency fee percentage on the one hand and the time spent and the hourly rate on the other hand.
6. Thus where there is a contingency fee agreement you should have a high hourly rate in the conditional fee agreement.
7. Solicitor and own client rates can and should be very much higher than the rates that you are likely to recover on a between the parties basis.
8. This is for two reasons:

(i) to maximize the alternative “take” to the contingency fee; and

(ii) to maximize the indemnity costs received if, as a claimant, you match or beat your own Part 36

offer.

The Jackson Proposals

1. It is now proposed to allow contingency fee agreements in all types of civil litigation, including in relation to all post-issue work including advocacy.
2. Paragraph 13 of the Government’s Consultation Paper Reforming Civil Litigation Funding and Costs inEnglandandWales– Implementation of Lord Justice Jackson’s Recommendations reads:

Damages-based agreements (DBAs/contingency fees) will be allowed to be used in civil litigation. DBAs are another type of ‘no win no fee’ agreement, but the lawyer’s fee is related to the damages awarded, rather than the work done by the lawyer. The Government will lift the restriction on their use in civil litigation.

DBAs will provide a useful additional form of funding for claimants, for example in commercial claims. Successful claimants will recover their base costs (the lawyer’s hourly rate fee and disbursements) from defendants as for claims, whether funded under a CFA or otherwise, but in the case of a DBA, the costs recovered from the losing side would be set off against the DBA fee, reducing the amount payable by the claimant to any shortfall between the costs recovered and the DBA fee.

DBAs will be subject to similar requirements for parties to the agreement as for CFAs. For example, the amount of the payment that lawyers can take from the damages in personal injury cases will be capped (at 25% of damages excluding for further care and loss). However, the Government is not persuaded that there should be a requirement for a claimant to obtain independent legal advice in respect of a DBA.

1. This has become Clause 42 of the Legal Aid, Sentencing and Punishment of Offenders Bill which I set out below and this amends Section 58AA of the Courts and Legal Services Act 1990, which was itself an amendment to formalize and regulate contingency fee agreements in employment tribunals.
2. Again the devil will be in the detail.
3. Note:

– contingency fee agreements are to be allowed in ALL civil litigation;

– all costs received from the other party must be deducted from the amount charged to the client

by way of a contingency fee;

– nothing is achieved that could not be achieved by an appropriate solicitor and own client rate;

except if the case is settled very early;

– in personal injury cases the contingency fee will be limited to a sum equal to 25% of damages,

with the same definition of damages as in conditional fee success fees charged to the client.

1. Consequently it is hard to see any benefit for the solicitor of a contingency fee agreement over a conditional fee agreement in any case, where costs are recoverable from the other side in the event of a win.
2. For the client a contingency fee agreement is likely to be more attractive than a conditional fee agreement.
3. In personal injury cases contingency fees are almost entirely pointless from a solicitor’s point of view as they are subject to all of the restrictions that apply in relation to conditional fee agreements AND the solicitor has to allow a pound for pound reduction in relation to any costs received from the losing party, something that does NOT apply in relation to the conditional fee success fee.
4. Furthermore the technical requirements in relation to this statutory form of contingency fee agreement rate are greater than for conditional fee agreements, which defeats the purpose of pure contingency fee agreements whose beauty is their simplicity and certainty.
5. The significance of this measure is that it is a statutory recognition of contingency fees and that ends all arguments about their lawfulness, due to the doctrine of the Sovereignty of Parliament.
6. With the small claims track limit rising to £10,000.00 or £15,000.00, or possibly even £25,000.00, contingency fees will have an increasing role to play as obviously they are of greater value and importance where costs are not recoverable from the other side, which obviously applies in small claims track cases.
7. Contingency fees have been widely used in fields where costs are not recoverable from the other side, especially in CICA claims and in employment tribunals.
8. The whole Motor Insurers’ Bureau Untraced Drivers Scheme is based on contingency fees.
9. This half-hearted measure is pointless in relation to costs-bearing cases and I can envisage few cases where a Damages-Based Agreement would be appropriate, for the solicitor.
10. In cases where costs do not follow the event it is a different matter.
11. Pre-action contingency fee agreements have always been allowed as pre-action work is non-contentious but retrospectively becomes contentious upon issue. That will change in that contingency fees will now be allowed in respect of contentious work.
12. It is not yet clear, and may not become clear, whether old-fashioned pure contingency fee agreements will continue to be allowed.
13. If they are, then the answer is to have a pre-action contingency fee agreement, a bridging agreement and a conditional fee agreement that only comes in to play if proceedings are issued.
14. Thus if the success fee and the contingency percentage are the same, and in personal injury work the maximum is 25% of damages excluding future loss, then:

– it is always in the solicitor’s interest to have a conditional fee agreement as that is costs recovered PLUS 25% of damages as a success fee;

– it is ALWAYS in the client’s interest to have a contingency fee agreement as that is 25%

LESS costs recovered from the other side.

1. The 25% cap in relation to the success fee and the contingency fee “take” applies only in personal injury cases.
2. All success fees remain subject to the rule that they must not exceed 100% of base costs.
3. Base costs are solicitor and own client costs NOT the sum recovered from the other side on a between the parties’ basis.
4. In non-personal injury cases it will be possible to construct a contingency fee agreement along the lines of “whatever fees which once the as yet unknown recovered costs are taken in to account and set off against that fee, will leave the solicitor with 25%, or 30% or whatever of damages” or to put it another way a promise that the client will get 75% or 70% or whatever of damages with the solicitor keeping the rest.
5. In Employment Tribunal claims the maximum contingency fee is 35%, including VAT, which, with VAT at 20%, is a contingency fee of 29.17% plus VAT; in other words the profit costs are 29.17% of the sum recovered.
6. It is presumed that the 25% maximum in personal injury cases will include VAT and that gives a profit costs figure of 20.83%.
7. Any deal can be done with counsel, such as

– splitting the contingency fee 50-50;

– splitting the contingency fee in some other way;

– paying counsel win or lose and keeping all of the contingency fee in the event of a win

but paying counsel personally in the event of defeat;

– instructing counsel on a conditional fee basis.

1. However generally if a contingency fee is being used it is better for the solicitors’ firm to do the advocacy itself.

Interplay with Third Party Funding

1. Lord Justice Jackson appears not to understand the way funding, as opposed to costs, works.
2. At present a client’s success fee is paid by the other side but the third party funder’s fee is paid by the client.
3. If the client is to be the payer in any event then an informed decision needs to be made in each case between these two methods of funding.
4. For example in what looks like a safe case the client may feel better off with a Third Party Funder taking 20% of any damages and agreeing to pay the solicitor in the event of defeat. The potential loser here is the solicitor who will receive no success fee but face no risk.
5. These will be difficult calls and the tension between non-recoverable success fees and third party funding has not been fully considered.
6. In the pre-2000, pre-recovery, days there was no third party funding and so the issue has not arisen.
7. Suppose a third party funder was to advertise that it would back any viable road traffic accident case in return for 10% of damages.
8. What would the solicitor’s duty then be? To limit their own success fee to 10%? To take no success fee at all?
9. Lord Justice Jackson says in favour of Third Party Funding that it provides an additional means of funding litigation, “and for some parties the only means” and, unlike conditional fee agreements does so without “any additional financial burden upon opposing parties,” and that it tends “to filter out unmeritorious cases”.
10. Reflecting his view that recoverability of success fees should be banned Lord Justice Jackson states that it is better for a claimant “to recover a substantial part of damages than nothing at all,” and notes, correctly, that Third Party Funding would “become even more important as a means of financing litigation if success fees under conditional fee agreements become irrecoverable.”
11. Jacksonalso appears to accept that in the absence of the recoverability of after-the-event insurance Third Party Funding may fill the gap.
12. In referring to Stone and Rolls (in Liquidation) v Moore Stephens (a Firm) [2009] UKHL 39 where the third party funded claimant lost and had not taken out after-the-event insurance to cover its adverse costs risk Lord Justice Jackson said:
13. “These facts illustrate that third party funders can operate satisfactorily in the absence of ATE insurance and they can accept liability for any adverse costs orders”, adding that the risk undertaken by the funder was reflected in the percentage of damages which the funder was entitled to receive in the event of success.
14. What was not addressed is the percentage of damages to be left to the successful third party funded claimant.
15. Thus a clinical negligence action is third party-funded in a post-Jackson world where there is no recoverability of the success fee or after-the-event insurance premium. The third-party funder agrees to cover any adverse costs order, in other words to be the after-the-event insurer as well as the funder. In those circumstances a percentage take towards the top of the range for the third party funder would not be unreasonable – say 40% of damages. It agrees to pay a discounted fee to the solicitor in any event, that is the solicitor works under a discounted conditional fee agreement.
16. The solicitor’s conditional fee agreement success fee is capped at 25% of damages.
17. The claimant wins and thus gets 35% of damages awarded.
18. It could in fact be rather less – there may be interest on the third party funding and some irrecoverable solicitor and own client costs.
19. That is why Third Party Funding in an age of non-recoverability of success fees and after-the-event insurance premia risks a re-run of Claims Direct and the Accident Group.

Clause 42 of The Legal Aid, Sentencing and Punishment of Offenders Bill

1. “42. Damages-based agreements

(1) Section 58AA of the Courts and Legal Services Act 1990 (damages-based agreements) is amended as follows.

(2) In subsection (1) omit “relates to an employment matter and”.

(3) In subsection (2)—

(a) after “But” insert “(subject to subsection (9))”, and

(b) omit “relates to an employment matter and”.

(c) Omit subsection (3)(b).

(4) After subsection (4)(a) insert—

(i) “(aa) must not relate to proceedings which by virtue of section 58A(1) and (2) cannot be the subject of an enforceable conditional fee agreement or to proceedings of a description prescribed by the Lord Chancellor;”.

(5) In subsection (4)(b), at the beginning insert “if regulations so provide,”.

(6) In subsection (4)(d) for “has provided prescribed information” substitute “has complied with such requirements (if any) as may be prescribed as to the provision of information”.

(7) After subsection (6) insert—

(i) “(6A) Rules of court may make provision with respect to the assessment of costs in proceedings where a party in whose favour a costs order is made has entered into a damages-based agreement in connection with the proceedings.”

(8) After subsection (7) insert—

(i) “(7A) In this section (and in the definitions of “advocacy services” and “litigation services” as they apply for the purposes of this section) “proceedings” includes any sort of proceedings for resolving disputes (and not just proceedings in a court), whether commenced or contemplated.”

(9) After subsection (8) insert—

(i) “(9) Where section 57 of the Solicitors Act 1974 (non-contentious business agreements between solicitor and client) applies to a damages-based agreement other than one relating to an employment matter, subsections (1) and (2) of this section do not make it unenforceable.

(10) For the purposes of subsection (9) a damages-based agreement relates to an employment matter if the matter in relation to which the services are provided is a matter that is, or could become, the subject of proceedings before an employment tribunal.”

(11) In the heading of that section omit “relating to employment matters”.

(12) The amendments made by this section do not apply in relation to an agreement entered into before this section comes into force.

A spokesman for the MoJ said: ‘We are committed to reforming the “no win, no fee” system so that legal costs for reasonable compensation claims will be more proportionate, and avoidable claims will be deterred from going to court.

‘This will require changes to legal rules and regulations and we want to give sufficient time to get the complex details right. We are also conscious that legal businesses will need sufficient time to plan for the changes, alongside other forthcoming regulatory and funding changes to the industry.’

Posted on January 6, 2012 by kaweb

This entry was posted in Costs and tagged ACL, Civil, Commercial, Contingency Fee Agreements, Costs, DBA, Law Costs. Bookmark the permalink.