UK: Contingency Fees - Are You Ready To Reap Your Rewards?

Last Updated: 25 April 2012
Article by Stuart Evans

Stuart Evans examines the impact of this US style fee arrangement coming to the UK, and how this provides further litigation funding options for clients.

So, hands up, who knows what a Contingency Fee is? Chances are that most people in the UK will have a rough idea about them, as they will have featured heavily in US Court room movie dramas, such as The Verdict, where Paul Newman bravely declined a settlement offer to take a matter to trial, where he only won a percentage of his client's damages if the case was successful. Of course, despite the best efforts of Defence Counsel, James Mason, he prevailed.

And that, in a nutshell, is what Contingency Fee Agreements are. Your lawyer agrees to take your case on for you, on the basis that his or her fee will be taken as a percentage of your winnings on the case. So if, say, you get a Judgment in your favour of £200,000, and your lawyer is on a 30% Contingency Fee, then your lawyer will get £60,000 and you will get the balance of £140,000. If you lose the case, your lawyer gets nothing.

This will be a major change. When I was first started out in the profession in the mid 1980s, Contingency Fees were completely outlawed. The concept of a lawyer taking any stake in their client's case was wholly untenable (mind you, the stock question at interviews for trainee solicitor contracts, or Articles of Clerkship as they were then known was "should solicitors be allowed to advertise?"). Indeed, a third party was not allowed to financially support a party's case in return for a share of the winnings either. Nowadays, litigation funding of this nature is part of the landscape of current litigation, and Lord Justice Jackson has now paved the way for Contingency Fees to become lawful from April 2013. So it's all change.

So what does this mean for businesses and individuals who have cases that they either cannot fund, or do not wish to fund out of their own pocket?

The Contingency Fee Arrangement will be an extra option on the litigation funding menu. If you have a claim that you wish to pursue, it is going to be open to you from April next year to discuss a Contingency Fee Arrangement with your lawyer. Looking at the example of the £200,000 claim above, if agreed that would mean that your lawyer would take 30% of your winnings. If the lawyer was able to achieve this in a two minute phone call with the other side, then they will earn £60,000 for the privilege. Equally, if it takes two years to bring the claim to trial and the solicitor's time costs would be well in excess of £60,000 by then, that is all that they will get.

Of course, nothing is straightforward, and the US model has worked well because they do not have a general "loser pays" rule. This means that if the litigant on a Contingency Fee Arrangement loses the case, then that is that. Over in England, if you lose the case then you must pay a proportion of the other side's costs, whether you are on a Contingency Fee Arrangement or otherwise. Further, we have a two tier system here, whereby unlike in the US, specialist Counsel have rights of audience in Court. Will Counsel agree to go on Contingency Fee Arrangements as well as your solicitor to ensure symmetry? And what about those adverse party costs? Will After the Event insurers still be needed to provide cover for these?

It looks as though we are likely to adopt a Contingency Fee model based upon the Canadian system, which is more a hybrid of the US and England. This would involve a party recovering most of their costs through a Contingency Fee Agreement with their lawyer, but a proportion of those costs being recoverable from the other side. The final details of this are awaited.

Prospects of success

Needless to say, it is unlikely that a lawyer is going to take a matter on a Contingency Fee basis unless there are some reasonable prospects of success. Whilst it is open to a lawyer to take even the most hopeless case on such an arrangement, the expectation would be that such cases would be considered on the basis of at least 50% prospects of success, bearing in mind that After the Event insurers are normally looking for percentages in the region of 60% - 65%.

Is this the end of Conditional Fee Arrangements?

Does the Contingency Fee Agreement (aka a Damages Based Agreement or DBA) mean the end for Conditional Fee Agreements (CFAs)? Not necessarily, but the judicial attitude to CFAs is now changing. Rather than charging a success fee under CFAs to the losing opponent, and in addition After the Event Insurance premiums, these are now going to be recovered out of the successful party's winnings.

A major change – what it could mean

So make no mistake, this is a major change. In terms of a case where a party wins £100,000, and their solicitor has incurred fees of £40,000 with a 100% success fee, and has incurred an ATE insurance premium of £20,000, then under the present system most of this will be recoverable from the losing party, leaving the successful party with most of the £100,000 in tact. Under the new regime, it will mean that at least the success fee and the ATE insurance premium will come out of the winnings, thereby leaving the successful litigant markedly worse off, to the tune of around £60,000 in this example. A Contingency Fee Agreement that took a lesser percentage of the winnings might therefore appeal to the client. But would the lawyer, knowing that there would likely be a minimum level of time commitment to bring the case to a successful conclusion, want to tie themselves to a percentage of a comparatively low sum?

Whilst we will have to see how things develop, the current thinking appears to be that Contingency Fee Agreements have greater appeal for lawyers where the quantum at stake is quite high, at least into six figures. For lower value claims, it may be that CFAs will still have their place. As for insurance to cover adverse costs, whether the ATE market contracts and the Before the Event insurance market expands remains to be seen, and can be the subject of debate at another time.

What is clear is this. Clients now have a further option to fund a case that they might not otherwise be prepared to pursue on the traditional basis of hourly rate charging by their lawyers. It marks a further step in the direction of lawyers taking more risks in acting for clients in litigation, and having more of a stake in the outcome. We believe that flexibility in litigation funding is an essential part of a litigation lawyer's approach to modern day disputes, and we shall both embrace and follow these new developments with considerable interest.

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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