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Solicitors need to wise up to contingency fees
Thursday 08 March 2012 by Rachel Rothwell
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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