On Monday I wrote about the government’s plans for reforming legal aid and the funding of civil litigation. One of the issues which confuses me is what will happen to no win no fee agreements now that contingency fee arrangements (or, Damages Based Agreements as they are to be known) are to be allowed in the courts. They have, of course, been allowed in Employment Tribunals for quite some time but were regulated by the Damages Based Agreements Regulations 2010 last year.
Jonathan Djanogly was on the Today programme on Tuesday morning discussing the Bill with Evan Davis: “access to justice means justice for defendants as well”, if I recall the Minister’s comments correctly. The new reforms will put Claimants at risk on costs because the “mark-up” will come out of their own compensation, not the Defendant’s.
The media-related blog Inforrm carried a post predicting the end of the CFA at least in as far as non-PI/CN cases are concerned, (e.g in defamation cases because of the non-recoverability of the success fee and ATE] From the practitioner’s point of view, what sort of no win no fee agreement should you offer a client? There will be two options in future;
- A Conditional Fee Agreement – as now, save that the success fee will not be recoverable from the Defendant and will be payable by the client. Similarly the insurance premium will be payable by the client and only the client. CFAs work on the basis that the success fee is a percentage uplift on the solicitor’s base costs. The maximum amount that can be deducted by way of a success fee will be 25% of general damages, which excludes future losses.
- A Damages Based Agreement, aka a contingency fee. It is envisaged what will happen to no win no fee agreements now that contingency fee arrangements (or, Damages Based Agreements as they are to be known) are to be allowed in the courts.by the government that they will be particularly useful in commercial disputes, although I think that underestimates their potential appeal. The lawyer will charge a “DBA fee” (aka a success fee) when taking the case on and if successful will take their fees from the client’s compensation. However, if successful and a recovery of costs is made from the other party then those costs will be offset against the DBA fee. As above, the maximum success fee will be capped at 25% of general damages. In cases before the High Court or the County Court, in non-personal injury/clinical negligence (CN) cases, there will still need to be an ATE policy to protect against having to pay the winning side’s costs. Only in PI/CN will there be QOCS, meaning no need for Claimant’s to insure against losing.
Both will be available, it seems, in all areas of civil litigation. As a solicitor advising a client (let’s assume a Claimant) on the funding options available, which one of these would you advise? If it’s an ET matter then it has to be a DBA, for obvious reasons.
However, if it’s a non-PI/CN case in the High Court, let’s say, then both are available. There’s a risk of incurring costs to the other side if you lose so ATE is needed, but the premium won’t be recovered. The success fee you can charge is limited in both cases to 25% of the client’s damages, so there is no difference there. Again, the client pays the success fee, save that with a DBA the success fee chargeable to the client can be offset (or extinguished) by the sums recovered from the other side. With a CFA that can’t happen because the uplift is calculated on the base costs of the solicitor.
This is how I think it will work (but am happy to be corrected),
A. sues B. in the High Court in a non-PI/CN case and is awarded £100,000 compensation. Costs follow the event. A’s solicitors base costs are £25,000 (inc. disbursements, VAT etc and these have been agreed or subjected to detailed assessment)
The insurance premium is £30,000 (in my experience insurers seem to quote a premium of around 25-35% in commercial cases).
The success fee is 25%.
If A’s solicitor is on a CFA then the success fee is £6,250 – payable by A. so he/she recovers £93,750.
A’s solicitor gets £25,000 – paid by B and £6,250 paid by the client. Total = £31,250.
If instead costs are assessed/agreed at £20,000 then the success fee is £5,000, paid out of A’s damages. A gets £95,000.
A’s solicitor gets £20,000 plus £5,000 = Total £25,000
A. pays the insurance premium out of damages, and is thus left with £65,000.
Assuming that A. signed up to a DBA then the result must be this;
A’s solicitor gets a fee of 25% of £100,000, being £25,000. (A. would get £75,000 if no costs come from B.)
B pays costs of £25,000, which is offset against the DBA fee, meaning A suffers no deduction from damages and A’s solicitor gets paid £25,000. A. pays the insurance premium and so comes away with £70,000.
However, if A’s legal costs were £25,000 but B only agreed or was ordered to pay £20,000, there would be a deduction from A’s damages of £5,000.
A’s solicitor will be paid out of A’s damages and from B.
Even with a DBA, A. will need insurance so will pay £30,000 from his damages, leaving him with £65,000.
A. takes a hit in these examples but isn’t it better to get £65,000 than nothing at all?
It is only in indemnity cost cases where B has to pay all (or virtually all) of A’s costs that the DBA offset will wipe out the solicitor-client element of the costs. In most cases the solicitor-client element will be fairly significant and I can see a situation where solicitors will come under pressure not to charge that element to the client. In reality, that probably happens quite often anyway – for instance in cases where the claimant is supported by a legal expense insurer who won’t allow recovery of the “extra” bit.
On these sort of figures, a DBA looks like marginally better value for the client if the insurance premium is taken out of the equation and provided some costs recovery is made from the losing party. If none made then it looks very expensive for the client. But, in lower value cases where the costs will equal or even outweigh the damages awarded clients are going to either not be able to afford to litigate or will have to accept a lower offer than they otherwise would because they could not afford to go to trial.
Aside from this I cannot see there is much to choose between a DBA or a CFA in this type of situation, save that a DBA is a simpler concept to explain to a lay client.
In PI/CN cases where QOCS apply there will be no need for an insurance premium so the figures will look more appealing to the Claimant. The government is said to want to curb the so-called compensation culture yet it is in PI/CN cases where the worst of the alleged excesses have occurred, promoted by the insurance companies themselves as Jack Straw publicized yesterday (it’s referred to in the audio clip above). These reforms then, will do nothing on the government’s own case to curb allegedly unmeritorious PI/CN claims.
These reforms ought to promote the insurance industry to either introduce cheaper premiums or to seriously raise the profile of Before the Event insurance (BTE), as the government would like. Lower value claims will be squeezed. Predictable costs already exists for RTA claims where £10,000 or less is recovered and the RTA Portal is likely to be extended, taking lower value claims out of the “traditional” process. However, unless insurance becomes cheaper and lawyers can work more efficiently (so that the success fee is lowered) the future looks grim for lower value litigation – the sort of bread and butter work for many practices.
I would welcome all comments on the above, especially if it is to tell me I’m completely wrong.
From my understanding, I cannot see a difference from the claimant’s point of view between CFAs or DBA in PI Claims. With the introduction of QOWCS the claimant will not (unless in exceptional circumstances) be liable for the defendant’s costs. Therefore there will be little need for an ATE premium.
If that is the case, then if the claimant were successful, in both cases his solicitor’s base costs would be recovered from the defendant and an uplift (of no more than 25% of damages awarded in both cases) paid by the claimant out of his damages.
If the claimant were to be unsuccessful, he would not be liable for the defendant’s costs and, depending on the terms of his retainer, not be liable for his own solicitor’s costs.
Unless I am misunderstanding the recommendations, I can see no difference between entering into a CFA or a DBA other than when the 25% uplift within the CFA amounts to less than 25% of the damages awarded.
If this is right, then claimant solicitors may compete by offering lower or no success fees to attract clients.
Am I right or have I missed a fundamental point?!