In this first blog I look at the general principles of conditional fee agreements (CFAs), and, in particular, “no win no fee” conditional agreements. In a second blog, I look at “no win lower fee” CFAs, which are a useful and popular method of funding for commercial disputes.
CFAs
CFAs are allowed in all work except family work and criminal work and are a form of contingency fee, but much more heavily regulated than contingency fee agreements under section 57 of the Solicitors Act 1974, which I looked at in last month’s blog.
CFAs have been allowed since 1995 and, in certain areas of work, such as personal injury claims, this system of funding totally dominates the market.
There has been a very much lower take up in general civil litigation, but for law firms who know what they are doing, both in terms of the type of work and funding, CFAs offer an opportunity to get much more work in, to have happy clients and to earn more money. It is a virtuous circle.
The basic concept of a CFA is that, in return for the client paying nothing (or a lower fee) in the event of defeat, the solicitor charges the client an extra fee, known as a success fee, in the event of success.
Unlike the position with a contingency fee agreement or a damages-based agreement, the solicitor and client are not free simply to agree a charge of a percentage of damages on success, although this can be achieved by appropriate drafting. Rather, the solicitor’s bill has to be calculated in the usual way: that is, with an hourly rate and the numbers of hours worked and emails sent and so on, and the success fee, which is on top of these ordinary charges, and is a percentage uplift on those charges.
The success fee can never exceed 100% of the basic charges calculated in the usual way, but the success fee is based on the total of solicitor and own client costs, not the shortfall between solicitor and own client costs and recovered costs.
In personal injury work alone, there is also a cap on the success fee by reference to damages, and that is that the success fee, including VAT, must not exceed 25% of damages, and even that damages pool is restricted so that future loss cannot form part of the damages fund for the purposes of that maximum 25% success fee.
Thus, the success fee in personal injury CFAs is capped at the lower of 100% of base costs or 25% of the allowed damages pool.
In all other areas of work there is no damages-based cap on the success fee.
A CFA where the client pays no costs for work done in the event of defeat, can still properly be described as a no win no fee agreement, even if the solicitor is charging for disbursements, and those disbursements can include counsel’s fees, provided that the proper wording is used in the CFA.
“Success” is whatever the solicitor and client decide upon. For example, if acting for a defendant, success may be defined as keeping any damages award or settlement below, say, £250,000, or whatever. As in all agreements, the key is that the solicitor and client are clear in advance as to what has been agreed and the consequences of any particular result.
Although there is no damages-based cap outside the field of personal injury, the solicitor and client are able to agree a damages-based cap without offending the indemnity principle.
An example
In a commercial case, the solicitor and client have a no win no fee agreement, in which the solicitor charges no legal costs in the event of defeat, with a 100% success fee in the event of success, but with the total charges to the client limited to 50% of damages.
The matter settles for £500,000.
Costs are as follows:
Thus, in this example, the solicitor will earn £450,000 as follows:
Had the matter been on an ordinary basis, rather than a conditional fee basis, the solicitor would have earned £300,000 as follows:
The success fee is not recoverable from the other side; it is always paid by the client.
What has happened in this example is that the client has ended up paying an additional £150,000, in return for paying nothing if the case is lost. Thus, as far as her or his own legal costs are concerned, there is no risk. If the matter is lost, nothing is paid, and if it is won then there is a fund of money out of which the client can pay the solicitor.
There is a problem in general civil litigation, and that is (to adapt the old phrase) that the defendant may be a person of straw. The parties are free to agree that success is defined as recovering money, rather than simply winning the case, and that is obviously attractive to clients.
That still leaves the client exposed to an adverse costs order if the case is lost, and that can be covered by after the event (ATE) insurance. Many such policies are so-called silver bullet schemes, whereby if the case is lost, the insurance premium is not payable, and so the losing client is at no risk. However, if the case is won, the client must pay the ATE insurance premium out of damages, as well as the success fee to the solicitor.
That means that the litigation is genuinely risk-free for the client, but that they will end up paying a significant sum out of damages in the event of success. For commercial clients, this is often attractive as it means they can plan and budget accordingly.
In Part 2, I look at “no win lower fee agreements” and, as the name suggests, that means that the solicitor gets a fee in any event, win or lose, but that the fee is lower in the event of defeat. In general civil litigation, this is in many ways a much more attractive option for the solicitor, and whilst not eliminating risk for the client, it does limit that risk.
A word of warning if you have never dealt with CFAs. There are considerable regulatory hurdles to overcome, but these can all be dealt with by having proper procedures in place and properly worded agreements.
List of “no win no fee” CFAs suitable for general civil or commercial litigation
Below is a list all the types of “no win no fee” civil litigation CFAs that I have written. (In Part 2, I will set out a list of “no win lower fee” CFAs, followed by a schedule of all types of potential funding for civil litigation):
