Conditional Fee Agreements and capital

A key problem in obtaining effective justice in litigation is the inequality of arms which will often exist between a well funded defendant and an impecunious claimant. Or to put it another way, the imbalance of capital between two parties which enables the richer party to buy better lawyers, better experts and generally turn its financial advantage into strategic or tactical advantage within the litigation.

From this perspective the key to enhancing access to justice is to facilitate access to capital for the purposes of the litigation by the economically weaker party. This should enable them to pay for lawyers, pay for experts, pay court fees, and make provision for funding any adverse costs consequences which might follow from an unsuccessful court case. There can then be a reasonable prospect that the provision of capital will remove the inequality of arms and the production of a more “just” result.

Now capital used in a broad sense could be provided in a number of ways. In the closing years of the twentieth century and still more so, in the first two decades of the twenty first century the state has lost interest in providing capital through a state funded Legal Aid scheme.

This has not caused the need for capital to diminish: far from it, but rather has required the provision of capital from the private sector. Litigation funding provided by third parties, external to the litigation is one such source of capital: and I believe that developments to date have only scratched the surface of what such external capital can do.

Enabling lawyers to fund (part) of the litigation through making their own fees deferred and conditional on success, is another crucial source of capital for litigation funding, where the lawyers effectively provide capital to an impecunious claimant.

In such circumstances their own client can expect to pay an economic “rent” by way of a success fee for the provision of the capital. From 2000 to 2013 this “rent” could be externalised through the scheme of additional liabilities which existed under the Access to Justice Act 1999.

Accordingly I believe it is entirely possible to view the Costs Wars of this period as a struggle by defendants whether insurance companies, public authorities or private litigants to exclude the introduction of capital into litigation by their opponents, using tools such as champerty, maintenance and consumer protection provisions coupled with the indemnity principle to achieve this end.

Even the mundane struggle to decrease levels of costs through for example the introduction of fixed costs, the Ministry of Justice Portal and more restrictive rules on the recovery of costs generally can be viewed as exercises both in capital conservation and capital restriction.

Although the above analysis is unashamedly economically determinative (positively Marxist in fact) it does shed a light on why 700 years of prohibition on contingency fee arrangements was discarded within the span of a single generation of lawyers: the urgent and pressing need to introduce a source of capital into the system which was readily to hand.

I consider how this came about as an inevitable result of the state being unwilling to provide the capital  to litigants that they required to access a sophisticated and complex system of laws through appropriately skilled lawyers.

Since the Statute of Westminster of 1275, the common law of England and Wales set its face firmly against the introduction of contingency fees (based on payment by results) holding at various times that they “inherently immoral”, “deeply corrupting” or “definitely sinister”. In effect conditional fee agreements were held to be contrary to public policy and would not be permitted. In this context, Conditional Fee Agreements, were not only unenforceable between the parties to them, they could properly be regarded as illegal contracts too.

However, a Green Paper published in 1989, the then Lord Chancellor, Lord Mackay put forward a Green Paper, on contingency fees, inviting consideration of funding litigation by contingency agreements.

The paper reflected two elements which have underpinned the development of the law on conditional fee agreements: namely public funding constraints which have led to the effective abolition of Legal Aid for personal injury claims and a perception that an increasingly broad spectrum of society, was precluded from obtaining access to justice, by not qualifying for Legal Aid by reason of financial ineligibility, yet still lacking the resources to fund lawyers to act in litigation.

In this context, public policy, began to shift. The Green Paper, ultimately led to the introduction of the Courts and Legal Services Act 1990, which contained the first incarnation of section 58[3], permitting Conditional Fee Agreements. It should be noted that that section imposed certain requirements which had to be met, for the Conditional Fee Agreement to be enforceable and in particular created the notion of the “specified percentage” or success fee, which a lawyer would be permitted to charge their client subject to a cap on the amount created by secondary legislation. Further section 58(8) specifically prohibited the success fee from being recovered from the losing side to litigation, under a costs Order. It would remain a solicitor-own client charge.

In parallel with the change of public policy expressed in clear and unambiguous terms by the enactment of the Courts and Legal Services Act 1990, the attitude of the judiciary to Conditional Fee Agreements, began to change, and was expressed most famously in the case of Thai Trading.v.Taylor where it was sought to develop the common law to permit the making of Conditional Fee Agreements. As Millett LJ (as he then was) noted:-

Current attitudes to these questions are exemplified by the passage into law of the Courts and Legal Services Act 1990. This shows that the fear that lawyers may be tempted by having a financial incentive in the outcome of litigation to act improperly is exaggerated, and that there is a countervailing public policy in making justice readily accessible to persons of modest means. Legislation was needed to authorize the increase in the lawyers reward over and above his ordinary profit costs. It by no means follows that it was needed to legitimize the long-standing practice of solicitors to act for meritorious clients without means, and it is in the public interest that they should continue to do so…

The problem with Thai Trading, is equally well known. In the case of Hughes.v.Kingston upon Hull City Council the view taken by the Divisional Court was that the decision of the Court of Appeal and in particular the views of Millet LJ could not stand by reason of the earlier decision of the House of Lords in Swain.v.The Law Society. The matter was put beyond doubt, in the case of Awwad.v.Geraghty & Co (a firm) where Schiemann LJ stated:

I share Lord Scarman’s reluctance to develop the common law at a time when Parliament was in the process of addressing those very problems. It is clear from the careful formulation of the statutes and regulations that Parliament did not wish to abandon regulation altogether and wished to move forward gradually. I see no reason to suppose that Parliament foresaw significant parallel judicial developments of the law. I add that, on the judge’s findings in the present case, it appears that this understanding was shared by the solicitor who successfully endeavoured to prevent the conditional normal fee agreement from being evidenced in writing.

I would therefore hold that acting for a client in pursuance of a conditional normal fee agreement, in circumstances not sanctioned by the statute, is against public policy. IN those circumstances, I would also reject the submission that the Rules were ultra vires, a submission which was premised on the assumption that the Rules sought to forbid what was permitted under the common law.

The effect of the judgment in Awaad was to preclude the common law from having any role to play in the development of Conditional Fee Agreements. Henceforth, they were to be solely creatures of statute.

The statutory power contained in section 58 of the Courts and Legal Services Act 1990, was not implemented until the Conditional Fee Agreements Order 1995 which permitted that three particular types of proceedings would be permitted, namely personal injury claims, insolvency matters and applications under the European Convention on Human Rights to be conducted under Conditional Fee Agreements. The maximum permitted increase on fees would be 100%. A further statutory instrument contained the detailed provisions for implementation of section 58.

Government policy continued to evolve and with the publication of a consultation paper, by Lord Irvine, the then Lord Chancellor in March 1998 it was intended to (a) extend the scope of Conditional Fee Agreements to all types of civil proceedings (excluding family cases) to remove Legal Aid from all personal injury claims (excluding medical negligence) and to introduce recoverability: the proposal that success fees and after-the-event insurance premiums would be recoverable from the losing side to litigation, repealing the prohibition contained in section 58(8).

The proposals, including the notion that success fees should be recoverable from the losing side won the day. These proposals were made manifest in the Access to Justice Act 1999, which heavily amended the Courts and Legal Services Act 1990. The current provisions are to be fund in a revised section 58, a new section 58A. Further detail was contained in the Conditional Fee Agreements Order 2000, the Conditional Fee Agreements Regulations 2000, the Access to Justice (Membership Organisations) Regulations 2000 and the Collective Conditional Fee Agreements Regulations 2000.

The switch to recoverability, prompted an explosion of satellite litigation called the “Costs Wars”, whereby losing parties, funded by the insurance industry, challenged the quantum of recoverable uplifts, and fought detailed technical challenges to the form and content of conditional fee agreements, alleging breach of the formality requirements embodied in the secondary legislation, which in turn mean the agreements were unenforceable, and hence applying the indemnity principle, no costs were payable as the liability of the lay client to their instructed lawyer, under an unenforceable Conditional Fee Agreement was “nil”.

This in turn led to an attempt to simplify the formality requirements with the Conditional Fee Agreement (Miscellaneous Amendments) Regulations 2003 and then the outright abolition of the formality requirements by the Conditional Fee Agreements Revocation Regulations 2005 with effect from the 1st November 2005.

From 2005 to 2013, the formality requirements for an enforceable Conditional Fee Agreement were only that it had to be made in writing and contain a success fee not greater than 100%.

Although that position has changed since LASPO 2012 and the perceived need to regulate Conditional Fee Agreements, each of the legislative developments from 1990 to 2012 can be characterised as a liberation or constriction on the free flow of capital.

Conditional Fee Agreements are here to stay as an essential source of capital. Litigation funding from third party funders will undoubtedly increase, moving from funding individual cases into funding or buying, “books” of cases, with an increasingly porous dividing line between third party funders and legal expense insurers.

But perhaps the most far reaching development of all, will be the  market liberalisation of legal services which will facilitate the introduction of capital into litigation funding on an unprecedented scale. Thus the Legal Services Act 2007 and the changes it has introduced will prove extremely far reaching, perhaps far more so than the removal of the prohibition on contingency agreements.

With law firms bloated by private equity or stock market funding inequalities of arms may well disappear, though new problems of consumer choice and consumer protection can be readily expected to develop between over mighty law firms and their individual clients.

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