One of the most groundbreaking recommendations in Jackson LJ's final report on litigation costs is the introduction of contingency fees. When implemented, as now appears likely, this could provide start-to-finish funding for a claimant that doesn't want to spend, or risk, money funding a claim through the court or arbitration process. Proposals to abolish the recoverability of after-the-event insurance premiums and success fees are also to be implemented. The contingency model could therefore replace conditional fee agreements as the preferred funding model.

In this, the third part of our series, we look at contingency fees, when you can currently enter into them and what the future holds.

What are contingency fees?

Contingency fees (also known as damages based agreements) are relatively simple. If a claimant wins, the lawyer's fees are paid out of the settlement sum or damages awarded, usually as a percentage of that amount.

Aren't contingency fees outlawed here?

Most people think we cannot have contingency fees at the moment, but we can. It is already possible before commencement of proceedings and for non-litigation matters such as the sale of a property. Claims in certain tribunals (such as employment tribunals) are also currently classed as non-litigation work. Third party funding is also essentially contingency funding. For more on third party funding see part 2 of our series.

What does Jackson LJ say?

In his final report on civil litigation costs, Jackson LJ recommended that the current prohibition on contingency fee agreements for contentious business (essentially proceedings before a court or an arbitrator) should be removed. On 29 March 2011, the Government - in its response to his recommendations - confirmed that it would lift the restriction on their use in civil litigation.

What will contingency fee agreements look like when implemented?

In proposing to remove the restriction on contingency fee agreements, the Government envisages that:

  • Parties to a contingency fee agreement will be subject to similar requirements as for conditional fee agreements. For example, the payment that lawyers can take from the damages in personal injury cases will be capped at 25% of damages (excluding for future care and loss).
  • Successful claimants will recover their base costs (the lawyer's hourly rate fee and disbursements) from defendants as is currently the case. The costs recovered from the losing side would be set off against the contingency fee. This would reduce the amount payable by the claimant to any shortfall between the costs recovered and the contingency fee.
  • There will be no requirement for a claimant to obtain independent legal advice about the terms of a contingency fee agreement. This is contrary to Jackson LJ's recommendation that such advice should be obtained for a contingency fee agreement to be valid.

Jackson LJ also recommended that regulations relating to contingency fee agreements should be brought in to:

  • Introduce a requirement that clear and transparent advice and information is provided to consumers on costs, other expenses and other methods of funding available.
  • Control the use of unfair terms and conditions.

It is unclear whether such additional regulations will be brought in. The Ministry of Justice, however, is not convinced that separate detailed regulation of contingency fee agreements is necessary.

I understand contingency fees if you win, but what if you lose?

The lawyer does not receive any payment if the case is lost. For adverse costs orders made against the party entering into the contingency fee agreement, Jackson LJ recommended that agreement on how such costs will be met must be reached at the outset. If the solicitors agree to bear any adverse costs order, then this additional risk can be reflected in the percentage recovery allowed in the event of success.

What about counsel's fees and disbursements?

Jackson LJ suggests that counsel's fees could be dealt with in one of two ways. Those fees could be a disbursement to be paid by the solicitors in any event. Alternatively counsel could be instructed on a contingency fee as well and entitled to a specified percentage of any sums recovered.

Similarly, in relation to other disbursements, they might be paid by the client or funded by the solicitors as part of the contingency arrangement. If this course is taken, then the risk accepted by the solicitors should be reflected in the percentage recovery to which they are entitled in the event of success.

The future

As yet, there is no indication when the restriction on contingency fee agreements will be lifted as further consultation and legislation may be required.

Points to consider

  • Contingency fee agreements are simpler than conditional fee agreements. They are easier to understand and would avoid some of the technical problems and challenges CFAs have generated.
  • They allow the lawyer to share the risk and align their interests with the client. They are "no win, no fee". They give the lawyer a direct incentive to win and maximise recovery.
  • As the contingent fee is not recoverable from the other side (as is the case in all jurisdictions where contingent fees are currently permitted) then clients will lose part of any damages successfully recovered.
  • If the award sought is non-monetary, such as equitable relief, then contingency fees are unsuitable.
  • Agreement regarding how disbursements and any adverse order for costs will be met, should be reached at the outset.