CONDITIONAL FEE AGREEMENTS

Kerry Underwood sells the documents listed – please contact him at  Kerry.underwood@lawabroad.co.uk or 01442 430900 for details.

This piece, in slightly different form, first appeared on the Practical Law Dispute Resolution Blog.

The matters dealt with in this piece are examined in great detail in my three volume, 1,300 page book Personal Injury Small Claims, Portals and Fixed Costs – price £50 and available from Underwoods Solicitors here.

These principles, and the whole issue of Qualified One-Way Costs Shifting, is dealt with in my book – Qualified One-Way Costs Shifting, Section 57 and Set-Off – Available from me here for £15.

Kerry Underwood offers consultancy services in relation to this and other matters and details are here.

General Principles and No Win No Fee Agreements

In this first section I look at the general principles of Conditional Fee Agreements and specifically No Win No Fee Conditional Agreements, and below I look at No Win Lower Fee Conditional Fee Agreements, which are a useful and popular method of funding for commercial disputes.

Conditional Fee Agreements are allowed in all work except family work and criminal work and are a form of contingency fee, but much more heavily regulated than contingency fee agreements under Section 57 of the Solicitors Act 1974, which I looked at in last month’s post.

Conditional Fee Agreements have been allowed since 1995 and in certain areas of work, such as personal injury claims, this system of funding totally dominates the market.

There has been a very much lower take up in general civil litigation, but for law firms who know what they are doing, both in terms of the type of work and funding, Conditional Fee Agreements offer an opportunity to get much more work in, to have happy clients and to earn more money. It is a virtuous circle.

The basic concept of a Conditional Fee Agreement is that in return for the client paying nothing, or a lower fee, in the event of defeat, the solicitor charges the client an extra fee, known as a success fee, in the event of success.

Unlike the position with a Contingency Fee Agreement or a Damages-Based Agreement, the solicitor and client are not free simply to agree a charge of a percentage of damages on success, although this can be achieved by appropriate drafting.

Rather, the solicitor’s bill has to be calculated in the usual way, that is with an hourly rate and the numbers of hours worked and emails sent etc., and the success fee, which is  on top of these ordinary charges, is a percentage uplift on those charges.

The success fee can never exceed 100% of the basic charges calculated in the usual way, but the success fee is based on the total of solicitor and own client costs, not the shortfall between solicitor and own client costs and recovered costs.

In personal injury work alone, there is also a cap on the success fee by reference to damages, and that is that the success fee, including VAT, must not exceed 25% of damages, and even that damages pool is restricted so that future loss cannot form part of the damages fund for the purposes of that maximum 25% success fee.

Thus, the success fee in personal injury Conditional Fee Agreements is capped at the lower of 100% of base costs or 25% of the Allowed Damages Pool.

In all other areas of work there is no damages-based cap on the success fee.

A Conditional Fee Agreement where the client is paying no costs for work done in the event of defeat, can still properly be described as a No Win No Fee Agreement, even if the solicitor is charging for disbursements, and those disbursements can include counsel’s fees, provided that the proper wording is used in the Conditional Fee Agreement.

Success is whatever the solicitor and client decide upon. For example, if acting for a defendant, success may be defined as keeping any damages award or settlement below, say, £250,000, or whatever.

As in all agreements, the key is that the solicitor and client are clear in advance as to what has been agreed and the consequences of any particular result.

Although there is no damages-based cap outside the field of personal injury, the solicitor and client are able to agree a damages-based cap without offending the indemnity principle.

Let us look at an example.

In a commercial case, the solicitor and client have a no win no fee agreement whereby the solicitor charges no legal costs in the event of defeat, with a 100% success fee in the event of success, but with the total charges to the client limited to 50% of damages.

The matter settles for £500,000.

Costs are as follows:

Solicitor and own client costs:	£300,000
Less recovered from other side:	£200,000
Balance:	£100,000
Add success fee:	£300,000
Total:	£400,000
But capped at 50% of damages:	£250,000

Thus, in this example the solicitor will earn £450,000 as follows:

Recovered from other side:	£200,000
Paid by client as above:	£250,000
Total:	£450,000

Had the matter been on an ordinary basis, rather than a conditional fee basis, the solicitor would have earned £300,000 as follows:

Total costs:	£300,000
Less recovered:	£200,000
Balance payable by client:	£100,000

The success fee is not recoverable from the other side; it is always paid by the client.

What has happened in this example is that the client has ended up paying an additional £150,000 in return for paying nothing if the case is lost.

Thus, as far as her or his own legal costs are concerned, there is no risk.

If the matter is lost, nothing is paid and if it is won then there is a fund of money out of which the client can pay the solicitor.

There is a problem in general civil litigation, and that is, to adapt the old phrase, the defendant may be a person of straw. The parties are free to agree that success is defined as recovering money, rather than simply winning the case, and that is obviously attractive to clients.

That still leaves the client exposed to an adverse costs order if the case is lost, and that can be covered by After the Event Insurance.

Many such policies are so-called silver bullet schemes, whereby if the case is lost, the insurance premium is not payable, and so the losing client is at no risk.

However, if the case is won, the client must pay the After the Event Insurance Premium out of damages, as well as the success fee to the solicitor.

That means the litigation is genuinely risk-free for the client, but they will end up paying a significant sum out of damages in the event of success. For commercial clients this is often attractive as it means they can plan and budget accordingly.

In Part 2 I will look at No Win Lower Fee Agreements, and as the name suggests that means that the solicitor gets a fee in any event, win or lose, but that the fee is lower in the event of defeat.

In general civil litigation, this is in many ways a much more attractive option for the solicitor, and whilst not eliminating risk for the client, it does limit that risk.

A word of warning if you have never dealt with Conditional Fee Agreements. There are considerable regulatory hurdles to overcome, but these can all be dealt with by having proper procedures in place and properly worded agreements.

In Part 3 of this series I will list all the types of general civil litigation Conditional Fee Agreements that I have written and in Part 4 I set out a list of all types of potential funding for civil litigation.

No Win Lower Fee Agreements

The general principles in relation to Conditional Fee Agreements are set out above; there I considered no Win No Fee Agreements in detail; the same principles apply to No Win Lower Fee Agreements.

It is important to note that in a No Win Lower Fee Agreement, as in a No Win Fee Agreement, you must have a full hourly rate as the main, standard rate in the Conditional Fee Agreement, just as you would if you were acting on an old-fashioned hourly rate basis, win or lose.

It is that full rate which is then discounted, in the event of defeat, to nothing in the case of a No Win No Fee Agreement, and to a lower fee in relation to a No Win Lower Fee Agreement.

So if, for example, the main full rate is £400 an hour, with a 100% success fee, but discounted to £200 an hour in the event of defeat, then that is fine.

Very obviously you are getting four times the fee for winning as compared with losing – £800 an hour and not £200 an hour – but because the success fee is based on the standard full rate of £400 an hour, you are not falling foul of the rule that the success fee cannot exceed 100% of ordinary solicitor and own client costs.

However, if the agreement was expressed as £200 an hour, but increased to £400 an hour in the event of a win, then that is the 100% already used up and there could be no further success fee.

There is no problem at all, provided that the Conditional Fee Agreement is drafted properly, and in Part 3 of this series I list the different types of Conditional Fee Agreements I have prepared for general civil/commercial litigation.

The full standard rate is the rate that the client will never pay; in the event of defeat they pay the discounted hourly rate, and in the event of success there is a success fee added to that full hourly rate.

The benefit to the solicitor of a discounted Conditional Fee Agreement is that the solicitor is guaranteed a fee win or lose. In the event of defeat the fee will be lower than normal, but in the event of victory it will be higher than normal, and therefore it is not all or nothing.

Above I have set out a scenario where the discounted fee is simply a lower hourly rate, but solicitor and client are free to agree anything by way of discounted rate, as long as the winning rate is the full hourly rate, so as to justify recovery from the other side under the indemnity principle.

An option that can be attractive to solicitor and client is to have the discounted fee being a fixed fee, for example ‘’£400 an hour discounted to a fixed sum of £50,000 in the event of there being no success.’’

The parties are free to define what success is, but for claimants a common definition is that there is a settlement or court award for damages or costs in favour of the claimant.

The benefit of a fixed sum as the discounted fee is that the client has certainty which is not achieved by a lower hourly rate, as the fee will still depend upon the number of hours worked and how long the case goes on.

From the solicitor’s point of view, as it is a fixed fee payable in any event, the full discounted sum can be charged immediately and thus there are cashflow benefits.

If charging by the hour, the discounted fee can be charged each month in the usual way, as that fee will be payable in any event. Care should be taken not to deliver a statute bill for the work done to date, as that potentially prevents a further charge to the client for that work if the case is won; there are conflicting authorities on this point, and it is not worth taking the risk.

Let us look at the example in Part 1, but on the basis that if the case is lost, the client pays 50% of the normal charges, rather than nothing.

In return, the solicitor charges a success fee of 50%, rather than 100%.

It then looks like this:

Solicitor and own client costs:	£300,000
Less recovered from other side:	£200,000
Balance:	£100,000
Add success fee of 50%:	£150,000
Total:	£250,000

Thus, in this example, the solicitor will earn £450,000 as follows:

Recovered from other side:	£200,000
Paid by client as above:	£250,000
Total:	£450,000

It will be seen that in fact the solicitor is earning exactly the same on this No Win Lower Fee agreement, as on the No Win No Fee Agreement, due to us choosing to cap the charge to the client on the No Win No Fee Agreement  at 50% of damages.

I have made the example work like this, but it will in fact often be the case in practice and, in the market, it is attractive to cap the total charge to the client at a percentage of damages; otherwise the client can end up with nothing even in the event of a win.

Thus, in both examples the solicitor paid £450,000 for winning, with the big difference that with the No Win Lower Fee Agreement the solicitor would receive £150,000 in the event of failure.

Thought through, and discussed in detail with the client, discounted Conditional Fee Agreements can be a very attractive option for both the solicitor and the client.

There is now no need to inform the other side that you are acting under a Conditional Free Agreement, as no element of the success fee is recoverable, except in the very limited case of  mesothelioma claims.

Tactically, it is a good idea to notify the other side as it shows that the solicitor is sharing the risk, and  believes in the strength of the case.

There is no need to inform the other side that it is a No Win Lower Fee Agreement, as opposed to a No Win No Fee Agreement, and as many people in civil litigation and commercial work have little knowledge of Conditional Fee Agreements, it is often assumed that the solicitor is acting on a no win no fee basis.

Indeed, in a claim where a solicitor feels the prospects of success are not great, you can enter into a Conditional Fee Agreement for say £400 per hour in the event of a win and £350 an hour in the event of a defeat.

The solicitor is risking just 12.5% of the fees, but tactically it puts pressure on the other side.

There are almost endless alternatives to the old-fashioned hourly rate win or lose and in Part 4, I provide a checklist of alternative funding methods.

Part 3: List of Conditional Fee Agreements Suitable For General Civil/Commercial Litigation

1. No Win No Fee – Without Success Fee

2. No Win No Fee – Without Success Fee; no charge to client beyond recovered costs

3. No Win No Fee – Without Success Fee; charge to client capped at [   ]% of damages including After The Event Insurance Premium

4. No Win No Fee – Without Success Fee; Charge To Client Capped At [   ]% Of Damages Excluding After The Event Insurance Premium

5. No Win No Fee – With Success Fee

6. No Win No Fee – With Success Fee; All Charges To Client Capped At [   ]% Of Damages Including After The Event Insurance Premium

7. No Win No Fee – With Success Fee; All Charges To Client Capped At [   ]% Of Damages Excluding After The Event Insurance Premium

8. No Win Lower Fee – Without Success Fee – No Charge to Winning Client Beyond Recovered Costs

9. No Win Lower Fee – Without Success Fee – Charge To Winning Client Capped At [   ]% Of Damages Including After The Event Insurance Premium

10. No Win Lower Fee – Without Success Fee – Charge To Winning Client Capped At [   ]% Of Damages Excluding After The Event Insurance Premium

11. No Win Lower Fee – With Success Fee

12. No Win Lower Fee – With Success Fee; All Charges to Winning Client Capped At [   ]% Of Damages Including After the Event Insurance Premium

13. No Win Lower Fee – With Success Fee; All Charges to Winning Client Capped At [   ]% Of Damages Excluding After the Event Insurance premium

Part 4: Charging Options in Civil Litigation

1. Hourly Rate – Uncapped

2. Hourly Rate – Total Capped at Fixed Sum

3. Hourly Rate – Total Capped by Reference to Damages

4. Conditional Fee Agreement – No Win No Fee – With Success Fee Not Capped by Reference to Damages (cannot be used in personal injury work)

5. Conditional Fee Agreement – No Win No Fee – Success Fee Capped by Reference to Damages

6. Conditional Fee Agreement – No Win No Fee – Success Fee Capped at Fixed Sum

7. Conditional Fee Agreement – No Win No Fee – No Success Fee – costs not capped

8. Conditional Fee Agreement – No Win No Fee – No Success Fee – costs capped at fixed sum

9. Conditional Fee Agreement – No Win No Fee – No Success Fee – costs capped by reference to damages

10. Conditional Fee Agreement – No Win No Fee – Recovered Costs Plus Percentage of Damages

11. CFA Lite: Costs Limited to Those Recovered from The Other Side

12. Fixed Fee

13. Fixed Initial Fee – then Hourly Rate with All Above Combinations

14. Fixed Initial Fee – then Conditional Fee Agreement with All Above Combinations

15. Conditional Fee Agreement – No Win Lower Fee – with all above combinations

16. Conditional Fee Agreement – No Win Lower Fee – Lower Fee Capped at Fixed Sum

17. Credit – Or Not – For Fixed Initial Fee in The Event of Success

18. Contingency Fee Agreement Under Section 57 Solicitors Act 1974 (pre-issue work only)

19. Damages-Based Agreement (not recommended)

20. Underwoods Method: Contingency Fee Agreement/Bridging Agreement/Conditional Fee Agreement

Other Factors

21. Who Is Paying Disbursements?

22. After the Event Insurance

23. Are Counsel’s Fees Including in Deal, Or Payable on Top?

24. Who Gets Interest?

25. Higher Hourly Rate to Reflect Solicitor Funding Case

26. Part 36: Who Is Taking the Risk?

27. The Retainer

28. Right to Interim Bill

29. Solicitors Act 1974 Explanation

30. Getting the Solicitors Act 1974 Bill Right