No-win-no-fee: Enforceable retainers after 1st April 2013

The Legal Aid, Sentencing and Punishment of Offenders Act 2012 which amends theCourts and Legal Services Act 1990, and the Conditional Fee Agreements Order2013 and the Damages Based Agreements Regulations 2013 have established a fresh set of statutory criteria for “no win-no fee” funding arrangements, which must be satisfied by after 1st April 2013. The purpose of this post is to consider what those criteria are, and how they might be met.

Choosing the funding arrangement

Considerations as to how a firm structures its funding arrangements with clients, will flow from the fundamental considerations of the business. A firm must consider what its overheads are, and what an acceptable level of profit is. It must make these considerations, not in a vacuum, but informed by what its competitors in the marketplace are doing.

It must consider how many cases, it is likely to take on, how much these will cost and what the delay will be, between inception of the retainer and the end of the case. Then and only then, can it sensibly approach the issue of structuring its retainers: because the starting point must be, to choose a structure which fits its cases, rather than seeking to shoehorn its cases into an agreement.

Solicitor/own client charging v the CFA Lite model

This in turn will lead to the single most important decision, that the firm has to make, which is whether to maintain a rigid distinction between compensation and costs, permitting it to market itself as a firm which secures “100%” of damages for its clients, or whether in addition to those costs which might be secured from a paying party, it will seek to make a solicitor/own client charge, usually from the pot marked “clients damages”.

If a firm decides that it will limit itself to those costs that can be recovered from the paying party, then it will be drawn inexorably to the “CFA Lite” model of Conditional Fee Agreement: which will usually contain a clause, waiving the right of the solicitor to recover fees (and possibly disbursements) in excess of those recovered from the other side.

If a firm decides, that it cannot afford or simply does not wish to, limit its fees in this way, then a retainer can be structured which permits the solicitor to make a solicitor/own client charge. In the context of a Conditional Fee Agreement, this can either be by way of enhanced hourly rates, agreed with the client, but which are unlikely to be recoverable from the paying party, or by way of a success fee, a specified uplift on the solicitors basic fees, which will, absent certain narrow categories of case, certainly not be recoverable from the other side. It is important to note, that a client may well have an interest in disputing the solicitors bill, and it can be of the utmost importance to consider what might then be capable of being challenged on a solicitor/own client basis. Agreed hourly rates are not capable of dispute: the time spent on the case certainly is. The percentage level of the success fee, is not capable of dispute, given the repeal many years ago, of the Conditional Fee Agreements Regulations 2000: the quantum of the basic charges used to calculate the success fee certainly will be capable of dispute.

The alternative funding agreement contemplated by the Courts and Legal Services Act 1990, is the Damages Based Agreement. This is not as is commonly, and wrongly thought, a contingency fee agreement in the purest sense of that phrase. Rather it provides that a client agrees to pay a solicitor (or a barrister, or a claims management company) a specified percentage of the damages recovered in the claim. But a client who also recovers costs from a paying party, is entitled to offset and deduct those costs, from the payment. This can mean in certain circumstances, the client retains all his damages, and in others that he loses up to 25% of them.

The statutory requirements

The statutory scheme, for purposes of consumer protection and the administration of justice, imposes certain formalities on the making of such agreements. The most onerous formality requirements relate to agreements which impose success fees on clients: where Parliament seeks to control or limit such fees by a system of “caps”.

It is also important to note that the scheme contemplates these formalities applying on agreement-by-agreement basis. It is entirely possible, that a client might first make a damages based agreement with a claims management company, a conditional fee agreement with a firm of solicitors, sack that firm, and then make a further conditional fee agreement with a second firm of solicitors. Each such agreement, logically, would carry its own cap, though some commentators are of the view that this was not what Parliament intended.

Turning to consider he first and fundamental point to note is that all such agreements must be made in writing, though they need not be signed.

If a conditional fee agreement provides for a success fee, and note that a success fee, in this context means a specified percentage uplift of the basic charges, then the agreement must satisfy a number of additional requirements, set out by the Conditional Fee Agreements Order 2013.

The first is that the percentage uplift on the basic charges cannot be more than 100%. The second is that agreements which relate to proceedings at first instance, must further contain an express cap, or maximum limit, on the success fee, by reference to the damages recovered. That cap is further specified to include for the purposes of calculation, general damages for pain suffering and loss of amenity and pecuniary loss, other than future pecuniary loss, net of sums paid to the Compensation Recovery Unit and cannot exceed 25% of such sums.

Thirdly, if the agreement is apt to include not just first instance proceedings, but an appeal, then although it is permissible to increase the limit of the capped success fee to 100% of the relevant damages, there must still be a cap on the success fee. In no circumstances, is it permissible to exhaust the damages with the success fee, and then seek any residual liability from the client’s own resources.

A similar scheme is adopted in relation to Damages Based Agreements, but with one important further requirements to specify within the agreement, the claim to which the agreement relates, the circumstances in which the payment obligations are triggered and the reasons for electing on the percentage payment.

This must be no more than 25% of the general damages for pain suffering and loss of amenity, pecuniary loss other than future pecuniary loss net of sums paid to the Compensation Recovery Unit. The Damages Based Agreement cannot impose on the client an obligation to pay more than this sum, together with expenses paid by the representative, less any costs recovered. This can lead to the consequence, that if the client terminates the agreement prematurely, the only sum which will be payable at that point, will be the expenses.

Common mistakes

So what mistakes might arise? Few solicitors will fail to put something in writing. But does the agreement accurately reflect the deal struck with the client or will the client have scope to complain that what he signed, was not what he was told?

Does the agreement specify a success fee? If so, how is this calculated? Is it limited to no more than 100% of the basic charges? Does the agreement cover first instance proceedings and proceedings at appeal? If so, does it contain the requisite caps? All of these are points which careful drafting should address, in order to ensure that if no-win-no-fee litigation, is embarked upon, retainer problems do not arise, months or years after the case began.

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