The recent decision in Peacock v MGN Ltd [2010] EWHC 90174 (Costs) has highlighted the strength of a staged success fee in a CFA.
Background
Historically, all forms of contingency fees in litigation (whereby payment of the solicitor depended on the results) were considered to be unlawful. It was felt that they could lead to a conflict of interest between the solicitor and his client. In 1990 CFAs (Conditional Fee Agreements) were introduced which allow for the amount of any fees to be increased, in specified circumstances, above the amount which would be payable if it were not a conditional fee agreement. All other forms of contingency fee agreements are unlawful.
CFAs are often referred to as "no win, no fee" agreements. Essentially the solicitor agrees to forego payment of his fees until the court decides the matter. In the event you win he is entitled to his fees at his normal rates together with a success fee being a percentage of his normal rates, subject to a maximum 100%. Significantly, not only the normal rates but also the success fee are recoverable from the other side in the event you win in the proceedings. In the event you lose the solicitor will not recover any fees from you. You will only be liable to pay disbursements, which will include Counsel's fees (although rarely some Counsel will also proceed on CFAs).
A success fee must be expressed as a percentage uplift on the amount which would be payable if there was no CFA. The percentage uplift of the success fee must be reasonable. The reasonable success fee should in general be calculated so that it does not exceed the amount of the fees at risk ie. the conditional fees. On a detailed assessment of costs the Court will consider the reasonableness of the success fee. If the Court finds the level of the success fee to be unreasonable it will reduce it accordingly.
The legal representatives acting for the client with whom the CFA is to be concluded will calculate the level of the success fee. There are two elements which go into the calculation of a success fee:
- The risk of losing the litigation (the risk element).
- The cost of funding the litigation (the postponement element).
The legal representative will need to calculate separate percentages for these elements which, together, must not exceed 100% of the amount which would normally be payable if there was no CFA.
Discounted CFAs are becoming increasingly common. This is where the solicitor will be paid a discounted rate for his fees during the progress of the matter. In the event you win the claim the solicitor will be able to recover his fees at his normal rates together with the success fee, applied to his normal rates. If you lose the solicitor simply retains the discounted fees he has been paid during the conduct of the litigation. The court will usually take into account the fact that a reduced level of fees would have been recoverable even if the case had been lost when considering the reasonableness of the success fee.
A success fee is seen as the just reward for the solicitor taking the risk of either not being paid at all; or being paid significantly less than their usual going rates (depending on the terms of the CFA) if the client should lose the case.
The Peacock decision
The recent decision in Peacock v MGN Ltd [2010] EWHC 90174 (Costs) on a detailed assessment of costs reconsidered the issue of staged success fees.
In Callery v Gray (2001) EWCA CIV 1117 Woolf CJ explained the logic behind a staged success fee:
"The logic behind a two-stage success fee is that, in calculating the success fee, it can properly be assumed that if, notwithstanding the compliance with the protocol, the other party is not prepared to settle, or is not prepared to settle upon reasonable terms, there is a serious defence [emphasis added]. By the end of the protocol period, both parties should have decided upon their positions ..."
In Peacock the success fee was staged so that it was:
- 100% it the claim proceeded to 28 days after service of the defence and beyond.
- 50% if the case settled after proceedings were issued, but before 28 days after the defence is served.
- 25% if the case settled before proceedings were issued.
Proceedings were issued on 2 September 2008, the defence was served on 24 October 2008 and a settlement was reached and embodied in an order dated 30 November 2009. The order included a provision that the defendant would pay the claimant's costs on the standard basis, to be assessed, if not agreed.
MGN disputed the reasonableness of the 100% success fee. In advancing an offer of 43% success fee, the thrust of MGN's argument was that where the success fee is staged, it is unreasonable for this to be fixed at 100% at an early stage in the proceedings, such as 28 days after service of the defence. MGN further advanced the proposition that the risk assessment undertaken by Carter Ruck (solicitors acting for Peacock) is not "bespoke" but is akin to block-rating, because if the firm decides to accept a case funded by a CFA, a "one-size-fits-all" success fee of 100% is invariably agreed at the final stage.
MGN did not contend that the "discount" from 25% to 100% "ran out too soon". This was wise given that the case of KU v Liverpool City Council (2005) EWCA Civ 475 plainly contemplated the second stage of a two stage success fee taking effect on service of the Defence.
Master Campbell held that the decision to enter into the staged success fees was reasonable. Once the claim had got to the stage where it was apparent that the defendant believed it had a "serious defence" then it was reasonable for the level of success fee to rise in accordance with the other side's view of the merits and the defendant's apparent belief that the claim would fail.
He derived the following propositions in relation to the arguments in the case:
- A party who contends for a high success fee in a matter that has gone a long distance towards trial (the situation here) stands a better prospect of having that fee approved if a lower success fee would have been payable had the claim settled earlier (precisely what could have but did not happen here). A party who enters into a CFA with an unstaged success fee which is payable at that level irrespective of whether the case settles quickly or slowly, will find it more difficult to justify the fee. For that reason, the "high" success fee, having been staged so that it would have been less if the case had settled "quickly", is justified;
- It is open to the Claimant to choose the date of staging. Since in Ku the Court of Appeal contemplated a low success fee, "perhaps until the service of the defence" and to have the benefit of a high success fee in the cases that did not settle early, Master Campbell considered there was nothing unreasonable in the Claimant choosing 28 days following service of the Defence as the date on which the 100% success fee would come into effect; this gave MGN an extra four weeks above and beyond the period mentioned by Brooke LJ in Ku before it would assume any potential liability for a 100% success fee.
- If a defendant denies liability and serves a Defence the Court can infer that the defendant must believe that it has a realistic chance of the defence succeeding at trial. Having not settled the matter in the protocol period and having thereafter served a Defence giving the particulars of justification in the manner that it did, it is reasonable to suppose that MGN believed it had a "serious defence" in the nature contemplated by Lord Woolf in Callery v Gray.
- A court should be cautious about a suggestion that a claimant firm has not undertaken bespoke risk assessments when fixing success fees but rather, has used a "one size fits all" staged success fee. Such arguments will be put to strict proof and require cogent evidence.
Upon entering into a CFA notice must be given to the other parties to the dispute as soon as possible and in any event within 7 days of entering into it or, where a claimant enters into a CFA before sending a letter before claim, in the letter before claim. The only information that must be provided to the court and the other parties is the date of the CFA and the claims to which it relates. The party with the benefit of the CFA does not need to reveal the terms of it or the applicable success fee.
Lord Justice Jackson's review of civil litigation costs published in January 2010 included the proposal that success fees should cease to be recoverable. For further information on Lord Justice Jackson's report see Karen Jacobs blog on 14 January Lord Justice Jackson's report on costs in civil litigation. However, for the time being at least the current CFA regime remains.
Comment
Beth Lovell, solicitor at Matthew Arnold & Baldwin, comments "the Peacock case is a further example of the Court's willingness to penalise in costs a losing party who has passed up the opportunity to settle the claim at an early stage in the proceedings. Entering into a CFA early on and giving notice to the other side, as required by the rules, can be a real tactical weapon in settling claims early in the proceedings. A foolish defendant that carries on regardless runs the risk of paying significant sums in costs with hefty success fees on top".
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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