Will the conventional contingency fee agreement reduce litigation funding conflict?

In litigation, most funding methods create a tension between the interests of the lawyer and the interests of the client. Even the most traditional form of ordinary private retainer creates a conflict between the claimant who wishes to recover the largest amount of damages as quickly as possible, and as cheaply as possible in case the claim fails, and the lawyer who has no direct interest in the damages recovered but a clear interest in maximising the level of costs incurred, even at the expense of delaying settlement.

The conventional contingency fee agreement, widely used in other jurisdictions but previously unlawful for most litigation in this country, is generally viewed as removing such conflicts. Both the lawyer and the claimant benefit from increased damages being recovered. Both benefit from a speedy settlement. The lawyer benefits from increased profits by undertaking the least amount of work and that creates no conflict with the claimant, so long as the damages are nevertheless maximised. Both suffer if the claim is lost.

Now that contingency fee agreements are to be made available in the form of Damages Bases Agreements (DBAs) it might be thought that a similar aligning of interests between the client and the lawyer will arise.

However, the decision to use the “Ontario Model” to govern such agreements will create some strange outcomes. This requires solicitors to set off, pound for pound, all between-the-parties costs recovered. Costs between the parties are assessed on the conventional basis of the amount of time spent, with no reference to the DBA (other than the indemnity principle acting as a cap so the total costs recovered cannot exceed the amount allowed by the DBA).

This creates unusual tension between solicitor and client.

Solicitors’ firm Quick and Good settle a commercial claim early with a DBA set at 25 per cent of the damages recovered. The costs incurred, on the conventional basis, amount to £10,000. In this case, the solicitors benefit from speedy resolution.

?Damages £100,000

Solicitors’ fee under the DBA ?charged to the client £25,000

Costs recovered from the ?other side £10,000?Client’s net recovery £15,000

?Firm Slow and Good drag out the case but eventually manage to settle the claim for £100,000, again with a DBA set at 25 per cent of damages. The costs incurred, on the conventional basis, amount to £25,000.

?Damages £100,000

Solicitors’ fee under the DBA ?charged to the client £25,000

Costs recovered from the ?other side £25,000

Client’s net recovery £25,000

?In this case the client positively benefits from the inefficiency of his solicitors. On detailed assessment, parties who drag cases out are rarely penalised with a corresponding reduction in costs recovery. The client bizarrely benefits from the inefficiency of his solicitors.

A more obvious example of direct conflict is caused, not by the “Ontario Model” but by the fact that in personal injury litigation the percentage of damages chargeable under the DBA will be capped at 25 per cent of general damages and past loss. I am grateful to legal commentator Kerry Underwood for the following example.

Quick and Good settle early and their 25 per cent is based on general damages of £50,000 and one year’s specials to date of £50,000, total £100,000.

General damages £50,000

1 year’s specials at £50k £50,000

£100,000

Solicitor’s fee £25,000

?Firm Slow and Poor take five years to settle the claim and only get £40,000 generals and £40,000 a year specials.

?General damages £40,000

5 years’ specials at £40k £200,000

£240,000

Solicitor’s success fee £60,000

?Every month delayed in any case with heavy special damages is a significant extra fee for the solicitor. The client is left hoping that the extra delay has led to sufficiently increased recoverable costs on the conventional basis that much of the extra fee will be off-set by the costs recovered from the other side.

No system is perfect but the DBA model that is about to be introduced leaves much to be desired.