PI Focus | Contingency fees: don't bother or downright brilliant agreements?

Contingency fees (or damages-based agreements to give them their proper name) are finally permitted for contentious business from 1 April. The broad concept is familiar; the client gives up a percentage of the proceeds of their claim in return for the lawyer running the case and not charging if the case is lost. Contingency fees have been used in employment cases for some time both before and after the 2010 regulations.

Although contingency fees of varying sorts have been permitted in other jurisdictions, perhaps most notably (or notoriously) in some US states, they have not historically been tolerated in England and Wales. No less an authority than Lord Denning condemned contingency fees in Trendtex Trading v Credit Suisse [1980] 1 QB 629, saying: “[Champerty] exists when the maintainer seeks to make a profit out of another man’s action – by taking the proceeds of it, or a part of them, for himself. Modern public policy condemns champerty in a lawyer whenever he seeks to recover – not only his proper costs – but also a portion of the damages for himself.” This followed Wallersteiner v Moir (No.2) [1975] 1 QB 373 where he had already said: “English law has never sanctioned an agreement by which a lawyer is remunerated on the basis of a ‘contingency fee’… such an agreement was illegal on the ground that it was the offence of champerty.”

Sir Rupert Jackson considered carefully the arguments for and against contingency fees in his preliminary and final report and there were strong arguments on both sides. He concluded, as part of his interlocking package of recommendations, that ?both solicitors and counsel should be permitted to enter into a particular type of damages-based agreement, the so-called Ontario Model.

The relationship between contingency fees and recovery of costs from the opponent throws up a number of options and issues. Jackson specifically recommended, and we will return to this point later, that costs should be recoverable against opposing parties in the usual way and not by reference to the contingency.

Finally, Jackson recommended that clients should receive independent legal advice before signing the contingency agreement.

Costs wars

?The Legal Aid Sentencing and Punishment of Offenders Act 2012 (LASPO) amended section 58AA of the Courts and Legal Services Act 1990 to permit damages-based agreements in all proceedings where conditional fee agreements would be permitted (so, excluding criminal or matrimonial). Proceedings are widely defined as including “any sort of proceedings for resolving disputes (and not just proceedings in a court), whether commenced or contemplated”. The Damages Based Agreements Regulations 2013 put the flesh on the bone.

It is important that the Act and the regulations are complied with. Damages-based agreements are creatures of statute and parts of the regulations are eerily reminiscent of the ill-fated Conditional Fee Agreements Regulations 2000 – enough to send shivers down the spine of any veteran of the costs wars. The agreement must follow a particular form. It must specify:

(a) The claim or proceedings or parts of them to which the agreement relates;

(b) the circumstances in which the representative’s payment, expenses and costs, or part of them, are payable; and

(c) the reasons for setting the amount of the payment at the level agreed.

There is no requirement for independent legal advice as recommended by Jackson. ?It is expected that model agreements ?will be provided.

Do check the regulations carefully if you are setting up the agreement.

The maximum contingency percentage which can be charged depends on the type of case. In personal injury cases the maximum is 25 per cent. In all other cases the maximum is, despite the recommendations of the Civil Justice Council, 50 per cent.

It is important to remember that the cap refers to the total costs including VAT, ?in other words VAT comes off the percentage cap.

So, which sum is the percentage applied to? This is a crucial question and the regulations are not drafted in a straight forward manner.

We start with the definition of “payment” which is said to mean “that part of the sum recovered in respect of the claim or damages awarded that the client agrees to pay the representative, and excludes expenses but includes, in respect of any claim or proceedings to which these regulations apply other than an employment matter, any disbursements incurred by the representative in respect of counsel’s fees”. “Expenses” means “disbursements incurred by the representative, including the expense of obtaining an expert’s report and, in an employment matter only, counsel’s fees”.

Regulation 4 then provides: “…a damages-based agreement must not require an amount to be paid by the client other than:

(a) the payment, net of:

(i) any costs (including fixed costs under Part 45 of the Civil Procedure Rules 1998); and

(ii) where relevant, any sum in respect of disbursements incurred by the representative in respect of counsel’s fees, that have been paid or are payable by another party to the proceedings by agreement or order; and

(b) any expenses incurred by the representative, net of any amount which has been paid or is payable by another party to the proceedings by agreement or order”.

In other words, the client gets credit for any sums recovered from the opponent in respect of costs or disbursements against the contingency fee they would otherwise have paid.

In personal injury claims (at first instance) the contingency percentage can only be applied against general damages and past pecuniary losses net of CRU. Future pecuniary losses (for example, future care or future loss of earnings) must be left out of the calculation. This throws up issues with global offers which the opponent will not break down. In this circumstance the lawyer will simply have to do their best to apportion the offer fairly having regard to their professional duties.

Hybrid agreements

?As if the detail of the regulations weren’t bad enough, the real killer is in the way costs recoverable from the other side will ?be treated.

 

First, the Civil Procedure Rules limit the costs recoverable at 44.18 provide that, “Where costs are to be assessed in favour of a party who has entered into a damages-based agreement… the party may not recover by way of costs more than the total amount payable by that party under the damages-based agreement for legal services provided under that agreement.” The reader will recall that this is expressly (and inexplicably) contrary to Jackson’s recommendation that costs should be recoverable against opposing parties in the usual way and not by reference to the contingency. Costs up to the level of the contingency fee are calculated in the ?normal way.

In lower value cases, especially personal injury cases where the contingency fee is capped at 25 per cent, the losing opponent will have to pay less to a client using a contingency fee agreement than he would if they were privately paying or using a CFA.

Second, and as we noted above, under regulation 4 the inter-partes costs are credited to the client (set off against the success fee due) in any event.

This is to be contrasted with the position under a conditional fee agreement where the full base costs can be claimed from the opponent and the success fee (capped by reference to the damages) is payable by the client in addition.

Before the regulations were published it was envisaged, especially for commercial clients, that hybrid agreements where the lawyer received a fee made up of a low hourly rate or fixed fee paid in any event coupled with a percentage contingency fee paid if successful would be popular. In other words, the lawyer was not risking everything on the win or loss. As drafted, unless you are prepared to take a bold view, the regulations appear to prevent such arrangements cutting off a whole panoply of constructive funding options which would have benefited both clients and lawyers in the right cases. There appears to be no good reason for this, especially in commercial cases.

For a government which has so rabidly sought to ban referral fees being paid to claims management companies (CMC) and others in LASPO, the DBA Regs 2013 contain a surprising provision. The regulations include CMCs within the definition of “representative”. Although the idea of regulating the agreements CMC’s make may be desirable, this provision has an unintended consequence of potentially nullifying the referral fee ban set out ?in LASPO.

Damages-based agreements could have been the most radical development to emerge from the Jackson reforms. The current consensus is that they have been killed at birth by unwieldy regulations and restrictions on costs which make ?them uneconomic.

In most cases conditional fee agreements will be a far better model to use. Apart from in small claims track cases (where they may be prevalent) or certain specialist high value pieces of litigation, they will not be ?widely used.

This is a missed opportunity and the draftsmen of the regulations need to look again. Until then, the Don’t Bother Agreement label seems to be apt.