Beginning in April 2013, lawyers in England will be permitted to recover fees from the damages awarded to their clients. This type of contingency fee agreement was formerly prohibited in the UK, but a comprehensive review of civil litigation costs in 2009 prompted the recent passage of the Legal Aid, Sentencing and Punishment of Offenders Act 2012, which will permit damages-based fee agreements when the first part of the Act comes into force, which is expected in April 2013. Many details concerning these agreements will be contained in regulations that are still being developed. Nonetheless, it is clear that the introduction of damage-based fee agreements will shake up the way litigation is conducted in the UK.

Although contingency fees were long barred in the UK, one sort of contingency fee arrangement, success fees, has been a feature of the UK litigation environment for the past two decades. Success fees entitle lawyers to an increase in fees, capped at 100%, in the event of a successful outcome. Success fees are said to encourage the prosecution of meritorious claims which lack funding and provide lawyers with incentives to win cases without emphasising the size of the resulting award.

In 2000, successful claimants were allowed for the first time to recover from defendants, not just their usual fees, but also success fees as well as any premiums for after-the-event insurance, which protects litigants against costs that may be imposed upon them in unsuccessful litigation. Although in England successful parties traditionally have been able to recover legal fees from the losing party in most cases, the recovery of success fees and insurance premiums significantly increased the costs burden for unsuccessful parties. Moreover, this burden was asymmetric because unsuccessful claimants could often insulate themselves from large costs bills by taking out after-the-event insurance and entering into success fee arrangements based on an initial reduced fee.

Commentators criticized the disparate cost burdens created by shifting the costs of contingency fees and after-the-event insurance. These concerns, along with the growing interest in enabling greater access to justice, led to a significant review of civil litigation costs in England. As a result, the Master of the Rolls, the second most senior judge on the Court of Appeal of England and Wales, mandated his colleague, Lord Justice Jackson, with reviewing civil litigation costs. Lord Justice Jackson issued a report in December 2009. In the forward to that report, Lord Justice Jackson commented, “In some areas of civil litigation costs are disproportionate and impede access to justice. I therefore propose a coherent package of interlocking reforms, designed to control costs and promote access to justice.” Accordingly, Lord Justice Jackson recommended permitting barristers and solicitors in England to enter into damages-based contingency fee agreements, but prohibiting shifting the costs of after-the-event insurance premiums and success fees. These reforms were adopted in the Legal Aid, Sentencing and Punishment of Offenders Act 2012 and will progressively come into effect, with contingency fees expected to be effective in April 2013.

If the United States’ experience with contingency fees is any guide, these reforms will bring significant benefits. It is more likely that impecunious claimants with meritorious, high-value claims will be able to find representation. It is also expected that barristers and solicitors will become more creative with their costs structures and will depart more and more from simple time-sheet billing. In addition, clients may begin to expect creativity from their legal counsel in structuring fee deals to deliver commensurate value.

On the other hand, the retention of the English practice of awarding legal fees to the prevailing party is likely to prevent many of the speculative claims experienced in the U.S. The “no win, no fee” concept utilized in the United States won’t apply in England because, regardless of whether a matter is conducted under a contingency fee arrangement, in England the unsuccessful party normally bears the reasonable costs of the successful party’s legal fees and disbursements. Moreover, because of the reforms contained in the recent legislation, defendants will not be induced to settle by the threat of contingency fees because insofar as the contingency fee payable to a solicitor exceeds what would be chargeable under a normal fee arrangement, the successful party must bear that cost.

Numerous questions concerning the new damages-based contingency fee arrangements remain open. Many are being addressed by the regulations on which the Civil Justice Council (“CJC”) is advising. For example, the CJC has recommended that there should be no maximum cap set for contingency fee agreements in general commercial litigation. (There would be caps, however, in litigation concerning certain areas such as employment law and personal injury.)

The CJC is also considering whether lawyers should themselves be made subject to adverse costs awards as third party funders may be in some circumstances. In third party funding arrangements, an investor finances all or part of a client’s legal costs and expenses in exchange for an agreed share of any recovery. Under current law, third party funders may be held directly liable for adverse cost awards, but lawyers are immune from such awards. The CJC has recommended retaining both practices. However, some commentators have suggested that, if lawyers are not liable for adverse cost awards in circumstances when third party funders are, litigation funders may buy into or set up law firms in order to avoid adverse costs liability.

Even after the regulations are issued, questions will remain concerning contingency fee arrangements. One issue will be the impact of the common law doctrines of maintenance and champerty. Maintenance is the act of supporting litigation in which a party has no legitimate interest, while champerty is maintaining a party on the basis that the funder will be rewarded upon a successful outcome. The Criminal Law Act 1967 abolished both the crimes and torts of maintenance and champerty. Nevertheless, the common law rules against maintenance and champerty remain, and therefore a contingency fee agreement that violates those rules may be held contrary to public policy and unenforceable. Case law suggests that a funding arrangement amounts to maintenance or champerty if it permits an unjustifiable intrusion into the running of the case or disproportionate control or profit, or creates a clear tendency to corrupt justice.

While the coming regulations and existing common law doctrines such as champerty and maintenance will place some restrictions on the new damages-based contingency fees, there undoubtedly will be much room for creative new fee arrangements, which lawyers and clients alike should explore.