Solicitors need to wise up to contingency fees
One of the big uncertainties of the Jackson reforms is how big damages-based agreements (‘DBAs’, or contingency fees as they are more commonly known) are going to be.
For the first time outside of employment cases, from April 2013 lawyers will be able to take their fees from their client’s damages. In personal injury cases, they will be able to take only a maximum of 25% of damages, but for commercial cases it has not yet been decided whether there will be any cap.
Jackson has suggested that a working party should be set up to work out this kind of detail, but when I asked him at a recent seminar (hosted by City firm Herbert Smith) what his own view was in relation to a cap on contingency fees, he said that while he had an open mind on the issue, he could see the logic in there being no cap in commercial cases, which were between ‘two adult parties’.
If commercial DBAs are not capped, we could see them taking off in the commercial arena in a much bigger way than many solicitors realise. Unlike conditional fee arrangements, where the success fee is linked to damages, in DBAs the rewards could potentially be sky-high. We’re likely to see complex arrangements developing to reflect the amount of work a lawyer does on a case (it would be rather unfair if a lawyer were able to claim, say, 30% of a client’s settlement, if all they had actually done was write one stern letter to their opponents, for example).
If DBAs take off, this will also be a big opportunity for third-party funders, as law firms look to share their risk and need finance during the course of litigation.
But what will be the appetite among clients? Views are mixed on this one. For the client with a decent claim but lack of funds, they may find it easier to persuade a lawyer to take the case on under a DBA than they had under a CFA; and the client may well be prepared to hand over a decent chunk of their damages in return for the certainty that they will pay nothing if they lose.
But one lawyer who acts for very large commercial clients has suggested that, at this end of the spectrum, clients prefer to pay the traditional way and get what they believe to be truly independent advice from their law firm, rather than giving their lawyer a direct interest in the outcome.
In terms of the type of law firm that will be attracted to DBAs, the expectation is that the magic circle will not really be interested. In the US, where contingency fees are already well established, the biggest law firms do not tend to use them.
Discussing this issue recently with a funder, he predicted that, from a magic circle firm’s point of view, offering DBAs could put partners in a tricky position. He painted a scene in which one of the firm’s biggest corporate clients might want to pursue litigation under a DBA rather than the usual hourly or discounted rates. The litigation partner could find themselves under pressure from their corporate colleague to agree, to keep an important client sweet. But even if the case were ultimately successful, it would still mean tying up members of the litigation practice for a lengthy period without seeing the benefit until the case concludes or settles. For a litigation partner under pressure to maintain the current year’s fee-income, that may not be an attractive prospect.
That said, it is far from safe to assume that DBAs will be an irrelevance for the magic circle. Ultimately it will depend on clients; if they begin to demand it, then in the current environment, firms will have to start offering it - whether they like it or not. For the smaller and mid-range firms that already offer CFAs, and are expected to embrace the new DBAs with some gusto, there is another key issue to be dealt with; namely the risk of over-exposure. Voices from the funding and insurance sectors are beginning to raise the prospect of minimum capital adequacy requirements for firms that want to take on DBAs. Otherwise, if a law firm does come unstuck, could the solicitors’ compensation fund (paid for, of course, by a levy on every solicitor) be left to pick up the bill?
DBAs raise plenty of questions, and much will hang on the way they are implemented. The legal profession needs to start thinking about this now, so that it can influence the rules governing DBAs while they are still in the process of being drawn up. April 2013 may seem like a long way off, but the discussions are already beginning.
Rachel Rothwell is editor of Litigation Funding magazine. The current issue features a discussion of the impact of DBAs by a group of leading experts
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Comments
"We’re likely to see complex
"We’re likely to see complex arrangements developing to reflect the amount of work a lawyer does on a case (it would be rather unfair if a lawyer were able to claim, say, 30% of a client’s settlement, if all they had actually done was write one stern letter to their opponents, for example)"
But you miss the whole point of Contingency Fees - it matters not to a client whether the lawyer does loads of work or 1 letter - it's the result to the client that matters, not the process to get there!
You have to make enough from the 'quick'n'easy' settlements to make up for those cases you take to trial after 3 years and lose and get paid nowt...and how do you know before you write the letter before action whether it will take 3 years or settle after 1 week?
Why would it be unfair?
Why would it be unfair? client wants maximum recovery in shortest time - both things which a contingency fee rewards (unlike hourly rates which reward pointlessness, inefficiency and delay).
It reminds me of the announcements on PPI claims, and how those (which include my firm) who assist people with PPI claims on a contingency fee are - according to the financial ombudsman - "ripping off" their clients. why? because we offer a serivce people want and just might make a profit?
Independent advice
Stand by for the satellite litigation when a client, having won his case, alleges that his solicitors took too high a proportion of the damages and did not take adequate steps to ensure that he obtained independent advice on the terms of the DBA. The solicitors' professional indemnity insurers will then refuse to cover that claim, because the client is seeking to recover sums which the solicitors should never have received in the first place.
Can't see too much of that to
Can't see too much of that to be honest as surely the regulations are set down and they are either followed or not. So long as they are followed, I would expect that the percentage taken is not challengable in court other than by Part III Solicitors Act 1974 assessment, which takes into account all relevant factors.
What is much more likely to happen (in fact inevitable) is our friend the Legal Ombudsman unilaterally deciding (in that so-called "accessible" way which just seems to me patronising and dumbed down) something like the following:-
"Poor old Mr & Mrs F popped into their local solicitors after having had an accident, that wasn't their fault. They only wanted a spot of compo, and the firm was just the one to do it. But they stole 20% of their damages, even though the case didn't even go to a hearing! And it settled early because of documents that Mr & Mrs F prepared themselves! We agreed that such fraud was shocking and ordered the firm to reimburse all the money they had been paid, plus another £750 to cover the shock, upset and distress that they had."
The chances of them not saying (as the original article above says) that it is not "fair" if a case settles early and the solicitor still gets paid the same is virtually certain.