Conditional Fee Agreements

David Marshall, Partner
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Many people believe that their lawyer should share the risk of their court cases with them rather than be paid win, lose or draw. However, public policy in England and Wales has long frowned on the ("American") idea that lawyers should be paid by their results in court cases. Backing a case in exchange for a "share of the spoils" if it was won was actually a criminal offence until 1967 and it remained "unlawful" until 1995.

In 1995, lawyers were allowed for the first time to take personal injury cases (extended in 1998 to all "civil litigation") under a conditional fee agreement ("CFA"). A CFA is a species of "contingency fee". It provides that the lawyer is paid nothing (or, occasionally, a reduced fee) if the case is lost. However, it differs from an "American-style" contingency fee in that if the case is won the lawyer is not entitled to a cut of the damages, but instead gets a percentage increase on his normal hourly rate for the number of hours he has spent on the case (the "success fee"). The success fee cannot exceed 100% (i.e. up to double his normal fee). The success fee can include a "risk" element (the lawyer is running the risk of not being paid if the case loses) and a "subsidy" element (the lawyer is not receiving payments on account of costs during the case which he would normally receive from a private client or under legal aid). Solicitors can enter into a similar arrangement with specialist barristers on a client’s behalf in appropriate cases.

Even though he has to pay his own lawyer nothing, because the loser is under English law generally obliged to pay the winner his costs, a client instructing a lawyer under a CFA will also need to take out an "after the event" legal expenses insurance policy ("ATE") to cover against this risk. (The ATE policy taken in conjunction with a CFA does not, of course, pay the client’s own lawyer anything towards his lost fees if the case is lost).

On 1 April 2000 the government made a significant change to the law relating to CFAs. Until that time a client instructing a solicitor under a CFA would have to pay the success fee and the ATE premium himself, effectively out of any compensation he received when he won the case. However, because the government removed personal injury cases from legal aid on the same date, they substantially improved the position of clients using CFAs. For CFAs taken out after 1 April 2000, the ("risk element") of the success fee and the ATE insurance premium forms part of the costs of the claim payable by the loser on top of any compensation. Unless the Court specifically orders it, the lawyer is not allowed to charge to his client any part of the risk element that is not ordered to be paid by the loser. However, the subsidy element of the success fee (if any) is still down to the client.

CFAs and their accompanying ATE insurance should be distinguished from "both sides costs" ("BSC") insurance policies offered by certain insurance and "claims management" companies. Both arrangements tend to be described as "no win, no fee", but clients should be careful to ensure they know which they have signed up to. Although both schemes should lead to no cost (except sometimes payment of the ATE premium) if you lose, there can be significant differences if you win.

Unfortunately, a substantial log-jam of CFA cases arose in the courts. The insurance companies representing Defendants who had lost cases and who were asked to pay the risk elements of success fees and the ATE premiums raised a number of technical legal arguments about the scope of the government reforms. These had to be decided by the Court of Appeal in a case called Callery v Gray. Judgment was given in July 2001. The Defendant insurance companies’ technical arguments were rejected and the Court ordered that they had to pay the risk element of reasonable success fees (20% was allowed for moderate and straightforward road traffic accidents). The Court also said that the loser also had to pay reasonable ATE premiums, but the Court was less clear about how much is reasonable. There will have to be more court cases over subsequent months and years to decide this. This is particularly important because (unlike the risk element in success fees) clients are usually obliged to pay the ATE or BSC premium in full if they win, even if they can only recover part of it from their opponent. Some companies also ask clients to enter into loan agreements to cover the cost of the ATE or BSC premiums at significant interest rates – always think carefully before entering into any such loan and ask about the APR.

So with a CFA linked to a reasonable ATE policy, the lawyer’s costs and success fee and the ATE premium should be recoverable from the loser, leaving the client with his compensation largely intact.

Solicitors are usually entitled to charge a small extra sum to their client over and above the sum recovered from the loser. They are also entitled to charge the subsidy element of the success fee. The solicitor is required to specify in the CFA his hourly rates, the success fee (split between risk and subsidy elements) and the reasons for the success fee. Ask whether the solicitor’s hourly rate is the same as he expects to recover from the other side so that you will not be landed with a bill for a shortfall in rates. If a subsidy element is charged ask how this is calculated. If this relates partly to disbursements to be paid on your behalf by the solicitor, and you have sufficient funds to meet them yourself considering doing so to reduce the cost. Also check the price of the ATE premium and ask whether the solicitor expects to recover its cost in full from the loser if you win. 

Example:

Many solicitors, as a matter of course, charge nothing for the subsidy element of the success fee (accepting this cost themselves as a business expense) and will voluntarily waive any basic costs not recovered from the loser. So far as waiving costs not recovered is concerned, solicitors may be reluctant to agree formally to this in advance because of an obscure technical rule called the "indemnity principle". In brief, this means that if a solicitors agrees in advance to accept only what he can recover in costs from the other side, he may be entitled to receive no costs at all. This rule is also one of the main reasons why the documents for CFAs are so ludicrously complex. This rule is currently subject to review. As soon as it is abolished, all CFAs can become simpler and more transparent. In the meantime, if a reputable solicitors’ firm says that it will charge nothing for the "subsidy element" of the success fee and that it is their usual practice to waive irrecoverable basic costs, you can probably believe them. This provides a good deal to the consumer as it is "no win, no cost" and "win, no cost". 

Example:

Compare this was the possible scenario of a "BSC" or ATE policy where the Court refuses to allow the full premium. (At the time of writing no such case is known to have been so decided by a Court, but an indication of this possibility was given by the Court of Appeal in Callery v Gray. Before agreeing to any such arrangement, the question about possible irrecoverability of the premium should be put to the solicitor and/or any claims manager). 

Example:

The three examples show how three different arrangements, probably all marketed as "no win, no fee", would indeed all leave the client with no liability for costs if the case were lost, but with very different net recoveries for the client if the case were won.

Another issue to raise with the lawyer is the degree of control any ATE insurer may have over the conduct of the case, especially if a settlement offer is made. It is also worth asking what happens if there is a Part 36 payment into court in attempted settlement. Arguably, giving the lawyer or ATEor BSC insurer a financial interest in the outcome might create possible conflicts of interest (e.g. when advising whether or not to accept a settlement offer, acceptance of which would trigger payment of the lawyer’s fees under a CFA or relieve the ATE or BSC insurer of any further risk of liability) . These conflicts are worse under some CFA arrangements than others. Some ATE or BSC insurers exercise more influence than others. Identifying whether there might be a problem is easier at the outset than at the time it happens.

Market forces and consumer awareness do not yet properly operate in this relatively new market. The technicalities are complex and are relatively untested in the courts. Extreme care should be taken to choose a legal representative who can represent you competently, to win the case, get proper compensation at little or no cost to you. Even in the most straightforward cases, the differences in net recovery for the client, could be substantial.

The Law Society maintains a list of members of their Personal Injury Panel. The Association of Personal Injury Lawyers (APIL) can put you in touch with specialist firms who have a Fellow of the College of Personal Injury Law. Best of all is probably a reliable personal recommendation. Some of the companies marketing for this work are consortia of specialist solicitors’ firms. Others are claims managers or insurance providers. Be sure you know who you are dealing with and that you are happy with your choice.

Obviously, the use of CFAs means that lawyers are only going to take on a case if they are reasonably sure that they are going to win. If they think that you are unlikely to prove that the accident was someone else’s fault or that your injuries were caused by the accident or that the compensation is below the Small Claims Limit (currently £1,000 for injury cases) they won’t take on your case. However, if you do have a reasonably good case, it should not be difficult to find a good lawyer willing to help you. You do, of course, have responsibilities under the CFA to pursue the claim and to help the lawyer do so by co-operating, attending medical appointments and so on. You must also check whether you have "before the event" legal expenses insurance which would cover you. If you do, and provided that it is appropriate cover, you will probably find it difficult to justify signing a CFA, taking out an ATE policy and claiming the cost back from the loser.

The reforms introduced by the Access to Justice Act should mean that if you have got a reasonably good case then not only should you be able to get a "no win, no fee" deal, but also, if you shop around, you should be able to secure a "win, no cost" arrangement too.

David Marshall is a partner with London firm, Anthony Gold, Solicitors. He is a Fellow of the College of Personal Injury Law, a Fellow of the Society for Advanced Legal Studies and a Member of the Law Society’s Personal Injury Panel. He has written and lectured extensively on the subject of CFAs and other personal injury matters. For further information email David Marshall or call 020 7940 4000.