The Legal Aid Sentencing and Punishment of Offenders Act (“the Act”) received Royal Assent on 1 May 2012 and the majority of the Act is due to come into force April 2013.
The Act will bring in a new dimensions of funding by developing third party funding and introducing contingency fees, also known as damage based agreements (“DBAs”). Prior to this Act, contingency fees were only allowed in employment tribunal cases and noncontentious work.
The Act reverses the growth of conditional fee agreements (“CFAs”) and after the event (“ATE”) insurance (putting us back in the position of pre-April 2000, when success fees and ATE premiums were not recoverable from the losing party). The changes are likely to cause confusion to companies and individuals as complex documents will need to be drawn up to reflect the agreement entered into. It is therefore paramount that you are fully up to speed with the latest developments and that you are able to advise your client of their options.
Lord Justice Jackson (“LLJ”) believed that excessive costs i.e. uplift and ATE premiums placed undue pressure on the paying party to settle claims at an early stage. Due to the changes in the legislation, success fee and ATE premiums will not be recoverable from your opponent . However, solicitors will still be able to recover the ATE premiums and success fees from their client.
Contingency Fees/ DBAs
Section 45 of the Act introduces a new dynamic to funding. It enables litigants to enter “no win, no fee” agreements with their solicitor. The solicitor will be able to recover a percentage of the damages awarded as their fee , if their client is successful. The percentage will be agreed from the outset. However, it is unlikely to be higher than 45-50% as this could be perceived that the solicitor will be taking control of the litigation from a professional and personal point of view.
It may be possible to obtain an insurance policy between an insurer and the law firm to cover the solicitor’s fees if the client is unsuccessful.
It is LJJ’s view that DBAs will provide access to the courts for those that would normally be unable to afford litigation. However, in reality, it is likely to reduce the number of cases that are issued as solicitors will decide not to enter into DBAs if they are high risk. There have been reports that in the United States (“US”), firms have over-leveraged on DBAs which has resulted in them collapsing. It is therefore important that risk assessments are undertaken before entering into a DBA.
1There is a common law duty to advise your client of their funding options and the SRA has set out several Principles and Rules on this subject, in particular: Principle 4 “you must act in the best interests of each client”; (1.6) “you only enter into fee agreements with your clients that are legal, and which you consider are suitable for the client's needs and take account of the client's best interests;” O(1.12) “clients are in a position to make informed decisions about the services they need, how their matter will be handled and the options available to them” IB (1.16)) “discussing how the client will pay, including whether public funding may be available, whether the client has insurance that might cover the fees, and whether the fees may be paid by someone else such as a trade union”.
2Section 44 of the Act
The US have used contingency fee agreements for many years, particularly in relation to personal injury cases and many law firms have developed their business model around them. Commercial clients have pushed for alternative structures in the US which has resulted in “partial contingency agreements” or “mixed contingency agreements” as we may know it.
It is still unclear how DBAs will fit into our legal system and therefore, a working party has been set up to prepare a report and establish some of the fundamental issues, these are:
- Will law firms be liable if their client accepts liability for adverse costs but cannot or will not pay them?
- Should there be a model form of DBA?
- How would you terminate a DBA?
- How are DBAs going to be regulated?
- Should there be a cap on the percentage of damages payable to solicitors and counsel under a DBA.
The report is expected at the end of July which should provide some clarity of how DBAs will be implemented into our legal system.
Third Party Funding
Third party funding is a developing market which is regulated by the SRA Code of Conduct. It is an arrangement whereby a commercial funder or investor (with no connection to the legal proceedings) finance all or part of their legal costs in return for a share of a monetary award, in the event of success. If the case fails, the funder loses its investment and could be liable for an adverse cost order, leaving a third party funder open to a costs order that could exceed their own funding!
Third party funders may fund both your client’s legal fees and disbursements, they will also bear the risk of your opponent's costs by offering an indemnity or paying for an insurance policy. The burden placed on a third party funder is more onerous than that of a solicitor; they are required to maintain adequate financial resources to cover their funding liabilities for a minimum period of three years and they could find themselves on the wrong side of a costs order.
There may be a decline in individuals/companies entering into CFA’s and ATE policies which may lead to an increase of ATE premiums. Success fees and ATE premiums will be unrecoverable from the losing party, leaving the solicitor to recover them from its client which may be an unattractive position.
Insurance companies will need to be alive to the changes and may consider offering indemnity to law firms if they enter into DBAs.
Food for thought
An innovative approach should be taken when considering your client’s position on funding – you may want to consider entering into a “mixed DBA”, where some steps of the litigation are paid by a fixed fee agreement, and some by way of a percentage of the damages, as a result, the solicitor will take a lower percentage of the damages if their client is successful.