David Marshall, Managing Partner
Journal of Housing Law - July 2011
email David
The development of the current conditional fee regime
Until 1995 charging fees for civil litigation which were contingent upon the result was unlawful. This prohibition often caused problems for impecunious clients who for one reason or another fell outside the scope of the legal aid scheme. In the early 1990s solicitors began to recognise the bars to access to justice that were raised by a legal requirement for such clients to fund litigation costs up-front. Indeed it was in housing related matters, claims under the environmental Protection Act 1990, that innovative solicitors first sought to agree a retainer whereby the client paid normal fees only if the case was won whilst the solicitor was limited to Green Form only costs if the case were lost¹.
The Courts and Legal Services Act 1990 introduced the concept of a legal conditional fee agreement (“CFA”) but this was not brought into force until 1995. CFAs applied to all civil litigation, but in practice were at first almost exclusively utilised for personal injury litigation. Why was this? Firstly, most housing claims suitable for CFAs (i.e. where damages are awarded and/or where “between the parties” costs orders are routinely made) involve disrepair of tenanted property. Most housing claimants in 1995 were still likely to be financially eligible for legal aid. And between 1995 and April 1, 2000 the success fee under the CFA was payable by the client out of the damages (although the Law Society recommended that solicitors imposed a cap of 25 per cent). It was, therefore, clearly in the claimant’s interest to apply instead for legal aid if they were financially eligible for it as there was likely to be very little deduction from damages by way of the legal aid statutory charge; certainly very rarely as much as 25 per cent. Similarly, many personal injury victims continued with legal aid. It was personal injury claimants who were not financially eligible for legal aid (because of earnings or capital) who brought the cases funded by CFAs—this applied much less frequently to housing disrepair claimants, almost by definition.
The Labour government brought in the Access to Justice Act 1999 which made fundamental changes to the conditional fee regime. In particular, the new Act introduced the concept of “recoverability”. In other words “additional liabilities” (namely success fees and after the event insurance premiums) were recoverable as items of costs from the losing party. This meant that in most cases the successful claimant would lose none of their compensation as all of the costs, including the success fees, would be payable by the losing defendant. At the same time, personal injury litigation was removed from the scope of legal aid. Housing litigation, however, remained in scope.
For a CFA to be lawful it was essential that the solicitor complied with the strict terms of the 2000 Regulations². And, as the Court of Appeal in Hollins v Russell³ made clear, unless the deviation from the 2000 Regulations was minimal, a breach of the 2000 Regulations rendered the entire retainer unlawful and no costs at all could be recovered. In the memorable words of Dyson L.J. this was “pour encourager les autres”.
The full effect of this decision was mitigated in later appeals, but the so-called “costs wars” caused considerable uncertainty for solicitors and clients and brought the system of costs assessment into disrepute. The government was, however, determined to see its reforms work and in 2005 they introduced new Regulations which revoked the 2000 Regulations4, leaving all client protections to the Solicitors’ Code of Conduct.
As housing work had remained within the scope of legal aid, most housing lawyers had continued to use public funding for their disrepair and other housing damages claims rather than CFAs notwithstanding the changes to recoverability. However, some claims management companies saw the potential for mass disrepair actions against some local authorities and sought to generate work by leafleting. It is unlawful to pay a referral fee in respect of a publicly funded case. The solicitors to whom the cases were referred therefore wished to enter into CFAs, but sought to justify the reasons they did so with clients who would otherwise be eligible both financially and on merits grounds for public funding. The costs judges gave short shrift to their arguments holding that the arguments deployed in favour of a CFA and against legal aid were disingenuous or specious, finding that advice had not been properly given in respect of legal aid which was required under the 2000 Regulations5. All costs were therefore disallowed.
The “costs wars” and the failed involvement of claims management companies clearly acted as disincentives to the use of CFAs by solicitors in housing cases. However, financial eligibility for legal aid was falling fast throughout the period and many tenants with disrepair claims were ceasing to be eligible, or were only eligible with significant monthly contributions. In addition, the various attempts by government to reform legal aid franchising led to firms either losing legal aid contracts or deciding not to bother to continue with legal aid because of the changes to the contracts imposed by the Legal Services Commission. In the new environment, the courts became more willing to uphold CFAs even where legal aid might have been available6. And the 2005 Regulations have meant that the effect of non-compliance was usually far less draconian.
However, the uptake of CFAs in housing cases is still low. There remain particular difficulties. First, even after 2005, unlike virtually all routine personal litigation, there were no fixed success fees for housing litigation and therefore there was the potential for an argument as to the level of success fee in every concluded successful case. Secondly, disrepair cases often arise in the context of a counterclaim or a claim for rent arrears and/or possession. Some thought is therefore needed as to how likely there would be “success” and how this should be defined in the CFA. Thirdly, and perhaps most importantly, after the event insurers did not find this market particularly attractive. As outlined in the evidence in Sibthorpe v Southwark7, after the event insurance was almost impossible to find or only available at a very high premium. This meant that even if the solicitor was prepared to accept the risks under a CFA, the client would still be liable to pay adverse costs if the case were lost. In Sibthorpe, the solicitors agree to indemnify the client against the possibility of an adverse costs order in the proceedings. The local authority challenged this saying that the arrangement was either champerty or unlawful insurance. The Court of Appeal held that it was lawful to offer an indemnity against adverse costs in the circumstances of such housing disrepair claims8.
The future for conditional fee agreements and housing disrepair cases
In their recent consultation papers, the government has made it perfectly clear that they believe that CFAs can take the place of legal aid in a wide variety of civil litigation. In particular the Legal Aid Green Paper suggested that legal aid would be withdrawn for all but the most “serious” cases of disrepair9. Under the Jackson Green paper, published at the same time, the government also proposed significant changes to CFAs10. In particular, the government has said that it will end recoverability of additional liabilities. This would mean that any success fee would be payable by the client out of damages. Unlike personal injury litigation, the government does not propose to legislate a cap on the maximum proportion of damages that can be used to pay success fees. However, the government proposes a 10 per cent increase in general damages. In housing cases, it is doubtful that this will be sufficient to recompense the claimant for the expense of having to pay a success fee out of those damages.
There remains the problem of after the event insurance. It remains difficult and expensive to obtain for housing litigation. Once the government proposals have been implemented, the premium will no longer be recoverable from the losing opponent and therefore will have to be paid by the client out of damages. This is likely to be completely uneconomic. The government had originally proposed that “qualified one way cost shifting” would apply to housing cases as well as to personal injury. This would have meant that unless the claimant was fraudulent or “conspicuously wealthy” they would not have to pay any adverse costs if the case were lost. They would therefore have had no need for after the event insurance. However, in the response to the consultation on the Jackson proposals, the government has decided not to extend qualified one way cost shifting beyond personal injury in the first instance. Unless these proposals are modified during the passage of The Legal Aid, Sentencing and Punishment Offenders Bill 2011, the government would therefore be proposing to remove large numbers of housing disrepair cases from legal aid, but to leave the claimants open to adverse costs orders or, if they can find after the event insurance, paying after the event insurance premiums out of damages, or looking for solicitors who are prepared to personally give a costs indemnity against adverse costs.
It seems likely that the government will have to either extend qualified one way shifting or come up with some other solution if access to justice is not to be denied to those people who suffer less than “serious” disrepair. If they do so, housing lawyers will have to consider using CFAs far more widely if they wish to represent such clients in the future.
Using CFAs in Practice
The key skill required for CFAs is excellent risk assessment. It is absolutely crucial to keeping a practice solvent that only cases with a reasonable prospect of success are taken on, and that cases which initially look good but then get more risky are jettisoned quickly once the prospects of success fall below 50 per cent. In theory, these risk assessment skills were also needed for legal aid, but in practice they have to become much sharper for CFA work. At the very least, all firms should insist that at least one person other than the conducting fee earner agrees to the firm accepting the risks of a CFA case. It will also be necessary for each firm to work out a sensible basis for setting success fees. As these are not subject to any of the fixed success fee regimes that have implemented for personal injury, it will be necessary for firms to look at their success rates so as to be able to justify success fees if challenged by the client. In particular, the experience with personal injury success fees has shown that many cases are abandoned early on and the lost costs in abandoned cases have to be factored in to the level of success fees in the winning cases if the solicitors are to run a revenue neutral CFA business. Analysis of success rates and fees earned under old case-loads (even if conducted under legal aid) is critical to future success and indeed survival.
The new regime proposed by the government offers some prospect of mitigating the loss of legal aid for housing disrepair cases. It seems inevitable that clients will be worse off than at present. However, they will be even worse off if they are not able to litigate at all because solicitors do not take the cases under CFAs.
1British Waterways Board v Norman (1994) 26 H.L.R. 232 and Hughes v Kingston Upon Hull City Council [1999] Q.B. 1193; [1999] 2 W.L.R. 1229; (1999) 31 H.L.R. 779.
2Conditional Fee Agreements Regulations 2000 (SI 200/692).
3Hollins v Russell [2003] EWCA Civ 718; [2003] 1 W.L.R. 2487; [2003] 4 All E.R. 590.
4Conditional Fee Agreements (Revocation) Regulations 2005 (SI 2005/2305).
5Hughes & Ors v London Borough of Newham [2005] EWHC 90019 (Costs); Bowen v Bridgend County Borough Council [2004] EWHC 9010 (Costs).
6Birmingham City Council v Crook [2007] EWHC 1415 (QB); Birmingham City Council v Forde [2009] EWHC 12 (QB); [2009] 1 W.L.R. 2732.
7Sibthorpe v Southwark LBC [2011] EWCA Civ 25; [2011] 2 All E.R. 240.
8See further D. Smith and R. Gibson, “Champerty and maintenance — old doctrines in a modern funding world” at p.86 of this issue.
9Proposals for the Reform of Legal Aid, Consultation Paper CP10/12, Ministry of Justice, November 2010, para.4.78.
10Proposals for Reform of Civil Litigation Funding and Costs in England and Wales — Implementation of Lord Justice Jackson’s Recommendations, Ministry of Justice, November 2010. See also Reforming Civil Litigation Funding and Costs in England and Wales — Implementation of Lord Justice Jackson’s Recommendations. The Government Response, Ministry of Justice, March 2011.
David Marshall is a personal injury specialist and managing partner of Anthony Gold Solicitors. For further information email David or call 020 7940 4000.
