Contingency plan

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Reaction to the Legal Aid, Sentencing and Punishment of Offenders Bill (LASPO) has primarily focused on the reduction in availability of legal aid and the proposed ban on referral fees in personal injury cases. Surprisingly little attention has to date attached to clause 44 of LASPO, which will enable contingency fee arrangements (damages-based agreements or DBAs) - at present confined to non-contentious work, including Employment Tribunal cases - to be used in court proceedings.

This development must also be seen in the context of ABSs - because the removal of the current restriction on contingency fees, combined with the liberalisation of the legal services market allowing outside investment in law firms, means that there will be the opportunity for outside providers to invest not only in litigation (which is permitted via third-party litigation funding arrangements) but also in law firms which pursue litigation on a contingency fee basis.

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It is proposed that the approach adopted in Ontario should be followed here - if successful, the claimant’s solicitor would first recover costs from the losing party as now, and then be entitled to take the difference between the costs paid by the other side and the level of the agreed contingency fee from the claimant’s damages. Because third-party funders may well be liable for adverse costs, but solicitors acting under a contingency fee agreement have no such liability, this might well encourage funders to acquire or set up law firms to conduct cases under such agreements.

The SRA’s current regulatory regime applies to solicitors operating all conditional fee agreements and contingency fee agreements in non-contentious business. As and when contingency fees are permitted in court proceedings, the SRA will need to consider whether additional specific regulatory controls will be required.

The Ten Principles

Solicitors are now familiar with the SRA’s regulatory approach - principles-based, outcomes-focused and risk-based - contained in the new October 2011 handbook. The foundation of the SRA’s approach is the mandatory Ten Principles, and those of particular relevance here are Principle Two (you must act with integrity), Principle Three (you must not allow your independence to be compromised), Principle Four (you must act in the best interests of each client), Principle Six (you must behave in a way that maintains the trust the public places in you and in the provision of legal services), Principle Seven (compliance with legal and regulatory obligations) and Principle Eight (you must run your business in accordance with proper management principles).

The principles are amplified and supported by mandatory outcomes, describing what firms are expected to achieve in order to comply with the relevant principles. The outcomes are supported by non-mandatory indicative behaviours, setting out how firms may ensure that the outcomes are achieved; an element of flexibility is introduced. To take an obvious example - if a solicitor is dealing with a private client unsophisticated in these matters, the client will need greater protection than an experienced general counsel of a major corporation seeking to place a claim with outside lawyers on a contingency basis. The public interest does require that contingency fee agreements should be regulated. It is a matter for parliament whether it wishes to constrain their use through secondary legislation, and that currently happens in Employment Tribunal cases which impose a 35% limit on the proportion of damages which may be taken as a fee. If parliament decides not to control the use of contingency fees - for example, by placing no limit on the proportion of damages which can be taken - it is unlikely that the SRA could justify placing such restrictions itself.

The SRA will review this regulatory requirement when parliament’s intentions have been settled. At present it is not clear that anything other than minimum amendments will be required. In other words, the SRA may well take the view that the OFR principles are sufficient.

Independent advice

A fundamental question will be whether there is a necessity for the client to receive independent advice before entering into a contingency fee arrangement. Lord Justice Jackson recommended it; the government does not accept the need for it. The SRA’s position is likely to be that putting in place regulatory arrangements that require firms to insist that their clients seek independent advice is unnecessary given the existing requirements of, for example, the SRA principles referred to earlier.

Therefore, we are likely to conclude that there is no necessity for independent advice. However, through our supervision and enforcement activity we will undoubtedly pay close attention to the operation of these new arrangements to ensure that they are operating in the public interest and that clients are appropriately protected.

Supervision, in particular, will be key to successful regulation in this area. We will almost certainly conduct thematic supervisory reviews enabling us to identify specific problems. Poor business practice in firms could lead to overexposure and possible collapse, and would be counter to Principle Eight. A firm conducting most of its business on a contingency fee basis may well be following an unsound business model; that risk would increase out of all proportion if it also agreed to underwrite any adverse cost order.

So what will the position be for the profession in, say, five years’ time? A seminar was recently held at Herbert Smith at which Lord Justice Jackson, Michael Napier, litigation funders and insurers spoke. There is a full report at the Herbert Smith site. Michael Napier commented that history teaches us that costs reforms since 1995 have resulted in unintended consequences, and if history is followed the legislation to implement the Jackson reforms in this area will have the same result. In turn, that will mean continuing vigilance by the SRA to ensure that access to justice and the protection of clients develop hand in hand.

Charles Plant is chair of the board of the Solicitors Regulation Authority

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