UK: Contingency Fees - On Your Marks, Get Set, Go!

Last Updated: 10 September 2012
Article by Stuart Evans

So the Olympics may be over, but back in the world of commercial litigation contingency fees are just around the corner, April 2013 to be exact. The Jackson Report gave the go-ahead for contingency fee arrangements, also known as damages-based agreements (DBAs), and the working groups are putting the finishing touches to the new regime. So what can we expect it to look like?

To recap, the current regime provides for conditional fee agreements (CFAs), also known as no win no fee agreements. These in their pure form allow lawyers for a successful party (usually a claimant) to charge a success fee on top of their base costs (calculated by reference to time charged), up to a maximum of 100%, and for this to be recoverable from a losing party (usually a defendant). To cover the risk of adverse costs (i.e. having to pay the other side's costs if the case is lost), a party can take out after the event (ATE) insurance, and again recover the premium from the other side. Whilst CFA's and ATE insurance cover are not being outlawed as such under the new regime, recovery of success fees and ATE insurance premiums from the losing side will no longer be permitted - the winning party will have to meet these out of the fruits of the successful litigation. DBAs follow a similar principle of a party being primarily responsible for its own lawyer's fees and expenses out of its winnings in the litigation. In its pure US-type form, all the fees come out of the winnings. But will it be the same here, given our traditional "loser pays" culture?

The answer is that it's likely to be a mix, a hybrid of the two, based on the "Ontario model" used in Canada. That means that base costs recovered from the other side will be deducted from the contingency fee first, with any shortfall being made up out of damages. So if you win £100,000, on a DBA agreed at 25%, and have base costs of £20,000, then you first seek to recover those costs from the other side. If you get £15,000 back after agreement or assessment, then the remaining £10,000 is taken out of damages. This leaves the successful client with a £90,000 net return. Under the pure model, you would get a net return of £75,000, the contingency fee coming straight out of damages, with nothing to come from the other side. It is unlikely that lawyers will be allowed both, namely base costs recovery and a full contingency fee - that would get us back towards success fees under CFA's, from which the law makers are trying to move away.

Will fees be capped? Possibly - it may depend on whether you are a sophisticated purchaser of legal services, a consumer or a "micro enterprise", with capping more likely in the latter two categories. We will have to wait and see. If a cap is introduced, it is likely to be at around 50%, higher than some have predicted (a 35% cap already existing for employment cases, for example).

Will lawyers be liable for adverse costs if they act on a DBA and lose? We sincerely hope not! The current view supports this. If DBAs are to become a common feature, then lawyers must be incentivised to enter into them. As for ATE insurance, this still has its place, but the burden of the cost of this now falls on the party with the DBA or CFA. In the above example, if the ATE premium was, say £20,000, then the net recovery would be £70,000, not £90,000, bringing in slightly less than a pure contingency fee arrangement (as in a US-type situation, for example, there is "no loser" pays regime, so on that basis ATE insurance would not be needed).

So what does this all mean? Assuming the law is passed along the lines set out above, CFA's may still be attractive for cases where the amounts at stake are fairly low. DBA's may be more popular for cases where there are higher amounts at stake, where the percentage fees recovered may exceed the time cost of the minimum level of service required to present a commercial case properly. We shall have to see how this develops.

One thing that should not be forgotten is the fact that DBAs and CFAs are normally only considered where there are high prospects of success, to justify the risk that the lawyer is taking of not getting paid. Many cases fall in that grey area, where there are too many ifs, buts and maybes for anyone - from junior assistant to senior QC - to give prospects that would reach the thresholds where a DBA or CFA would be of interest (bearing in mind that percentages must be high on liability, quantum and recovery - a wrongful termination of contract case may be a winner, but if there's little or no loss or the counter party has gone bust then there's little there to consider). In those cases, the more conventional model of fee paying agreement will remain, with costs continuing to be recovered under the loser pays rule in commercial cases.

Contingency fees are therefore coming soon, but they will be an extra string to the bow rather than a wholesale replacement of what we have.

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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