M & A Rainmaker

Background
Success fees, after-the-event insurance and contingency fees
Report
Consultation

Background

Lord Justice Jackson published the “Review of Civil Litigation Costs: Final Report” in January 2010. The report made various proposals for the reform of the costs regime in UK litigation. One of his key proposals was to end the recoverability of success fees and after-the-event insurance premiums under conditional fee agreements (for further details please see “Civil litigation costs review: key recommendations“). In July 2010 the government announced that it would consult on how to implement this proposal. The consultation will also gather opinion on the report’s other recommendations on funding arrangements, particularly the recommendation that lawyers be permitted to enter into contingency fee agreements.

Success fees, after-the-event insurance and contingency fees

In a conditional fee agreement a success fee is an amount paid to lawyers when a certain event arises – usually, the client winning the case. This amount is additional to the amount that would normally be payable if there were no conditional fee agreement, often referred to as the ‘base cost’ of the law firm.(1) A success fee is expressed as a percentage uplift on the base cost, the maximum uplift being 100%. Both the base cost and the success fee are recoverable from the other side if the client wins the proceedings. A success fee is calculated by taking into account (i) the risk element (ie, the risk of losing the litigation), and (ii) the postponement element (ie, the cost of not being paid the fee until the outcome of the litigation is known).

Often, a party relying on a success fee also enters into after-the-event insurance in order to cover the opponent’s legal costs should the case be lost.

A contingency fee arrangement provides that a client does not pay its own lawyer’s fees if the case is lost. However, where the client wins or settles favourably, the client’s lawyer receives the fee from the damages that the claimant recovers (in contrast to a success fee, where a client’s legal fees are recoverable directly from the opponent).

Report

The report noted that the rationale for introducing conditional fee agreements was to make legal action more attractive to those unable to qualify for legal aid after the threshold for entitlement had been lowered. Under a conditional fee agreement the burden of funding litigation was shifted from the taxpayer (as in the case of legal aid) to the opposing party. However, it was noted that where the opposing party is a public body – for example, the National Health Service (NHS) – the cost of funding the litigation is still effectively met by the taxpayer, and that millions of pounds are spent each year defending claims against tax-funded entities.

The report also attacks conditional fee agreements on the grounds that they often result in the creation of ‘super-claimants’ who enjoy a package of a conditional fee agreement, after-the-event cover and third-party funding, and thus assume minimal risk. The burden of costs is transferred to the opponent and claimants with conditional fee agreements often have little interest in controlling the costs being incurred on their behalf. The report also states that conditional fee agreements allow claimant solicitors to cherry-pick cases which they see as being likely to win in order to maximise their fees.

The report’s main recommendation was that success fees and after-the-event premiums cease to be recoverable from unsuccessful opponents where the client wins the case. Conditional fee agreements would remain available, but success fees would be capped at 25% of damages and would be borne by the claimant. In practice, this would mean that a success fee would be paid out of any award of damages. However, in order to ensure that successful claimants are properly compensated, the report recommends increasing the level of general damages for personal injuries, nuisance and other civil wrongs by 10%. It was also recommended that the reward for a successful Part 36 offer made by the claimant be enhanced, as this would help claimants to meet the success fee in the limited cases that proceed to trial. A further proposal would allow contingency fees or damages-based agreements, which would enable lawyers to take a share of their client’s damages. Such arrangements are not permitted under UK law.

Consultation

The consultation is likely to be thorough and wide ranging. Earlier in 2010 the Conditional Fee Agreement (Amendment) Order 2010, which proposed a cap for the maximum success fee in defamation cases at 10%, had a difficult passage through Parliament due to concerns that there had not been adequate consultation – the consultation period had been four weeks, rather than the usual 12. However, the fact that this order was expedited shows a willingness to implement legislative change in this area.

Reforms arising from the consultation with regard to the recoverability of success fees and after-the-event premiums are likely to require primary legislation. Perhaps a more decisive factor in implementation and legislative change will be the cost to local and central government. If the proposed changes fit the government’s cost-cutting agenda – and the cost of litigation to the NHS suggests that there are savings to be made – then new legislation may be more likely.

The short-term effect is likely to be increased awareness within the legal profession and the judiciary of the importance of controlling costs. The current consultation may be focused on recoverability, but the overarching theme of Jackson’s recommendations is to identify and tackle the causes of excessive costs. In this respect the consultation is relevant to all litigators, not just those instructed under conditional fee agreements.

For further information on this topic please contact Helen Fairhead at Reynolds Porter Chamberlain LLP by telephone (+44 20 3060 6000), fax (+44 20 3060 7000) or email (helen.fairhead@rpc.co.uk).

Endnotes

(1) The definition of a success fee can be found in Section 58(b) of the Courts and Legal Services Act 1990, as amended by Section 27 of the Access to Justice Act 1999

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