Would a contingency fee system based on the regulated Canadian model work in the UK? some lawyers predict this would complicate an already workable structure, reports Jon Robins

‘The idea that Americans are highly litigious is so much baloney,’ reckons Jim Rooks, senior rules counsel with the American Trial Lawyers Association. He is eager to dispel a few enduring misconceptions that exist on both sides of the Atlantic about the US’s so-called compensation culture.


He says ‘myth one’ is that his compatriots are by nature compulsive litigators, and ‘myth two’ is that the US’s unregulated brand of ‘no win, no fee’ fuels claims in the US. ‘The only way that the average person can get representation and redress for an injury is through the contingency fee programme,’ Mr Rooks argues. ‘There is no way that the middle classes of America could afford to hire a lawyer on an hourly fee.’


Of course, the US does not have a legal aid system comparable to that over here, but nonetheless, earlier this month, the Civil Justice Council (CJC) made a series of recommendations that included calling on the government to consider the introduction of contingency fees as a ‘funding method of last resort’ where no other options are available, especially in group actions and other complex cases (see [2005] Gazette, 6 October, 1).

The legal profession has historically frowned on the notion of its practitioners taking a slice of the damages, although outside the traditional court context – such as in employment tribunals – it is common practice for lawyers to take a percentage cut of their clients’ awards. In fact, the CJC has rejected the US model, not because of any squeamishness about US-style litigation, but because that would spell the end of the costs-shifting rule – and with it much of the incentive to settle. Instead, the council has proposed a system of regulated contingency fees allowed in the Canadian state of Ontario, where recoverability continues.


Lawyers on both sides of the claimant-defendant divide are bemused at the timing of the CJC’s endorsement of contingency fees, coming as it does a couple of weeks before a simplified version of conditional fee agreements (CFAs) is unleashed on the profession. ‘We will be looking in detail at this somewhat unexpected report, and will respond to the CJC in due course,’ comments Denise Kitchener, chief executive of the Association of Personal Injury Lawyers (APIL).


It appears that the historic resistance to contingency arrangements is still intact. ‘APIL has always been against the introduction of contingency fees for personal injury cases, as we feel the claimant’s damages should be sacrosanct. APIL and other organisations – and indeed the government – have put in a lot of work and have taken steps to make sure the conditional fee system works,’ Ms Kitchener says. ‘We are now at a stage where we have a workable system – introducing contingency fees now would render the last five years’ work pointless.’


Kerry Underwood, a costs expert and senior partner at Hemel Hempstead firm Underwoods, also does not see much ‘joined-up thinking’ in evidence. He points to the Compensation Bill, scheduled to be published at the start of next month, which will mark the first time that the government has tackled the unregulated claims industry. It is expected that the proposals will have nothing to do with CFAs, which suggests they are hardly in ministers’ sights. ‘I don’t see how it could work as a funding of “last resort”,’ he argues. ‘If it’s the client’s call, you can’t envisage a client ever wanting to enter into a relationship to pay – win or lose – when they can get a contingency fee.’


But if it were the solicitor’s decision, then they would opt for the risk-free route, Mr Underwood says. ‘We do contingency fees for [employment] clients who otherwise couldn’t afford it. However in an ideal world where everyone had the money, I would prefer to be paid, win or lose.’


In Ontario, it has been three years since ‘no win, no fee’ was put on a formal footing through the amendment of the Solicitors Act. Whereas the model in the US has been for the legal profession to remain free of controls on costs, the Canadian model is tightly regulated. All contingency fee agreements must be in writing; lawyers are precluded from collecting both the pre-determined contingency fee and legal costs unless approved by a judge; and the client may collect full payment for an award of costs even if it exceeds the amount payable under a contingency fee agreement, if the award is used to pay the client’s solicitor. The government is able to prescribe a maximum percentage that can be charged, but local courts may review agreements to endorse a fee above that.


How does this work in practice? ‘You are allowed to take a fee based on a percentage which, generally, can’t exceed one-third of what you ultimately recover,’ explains James Morton, vice-president of the Ontario Bar Association. ‘That fee has to be justified to some extent in the traditional way. In other words, it has to reflect the work done.’ City litigators will be disappointed to learn that, as Mr Morton explains it, the Ontario model means that they cannot just make a telephone call, strike a C$10 million (£5 million) settlement and pocket a quick C$3.3 million.


Although the regime is new, the change in legislation reflects professional practice in Ontario. ‘We have effectively had contingency fees for many years but they have been carefully disguised. They were hourly rates that happened to approximate a certain recovery and, because we have had them before, it hasn’t made a big difference in relation to access to justice. What it has done is put the regime on a proper basis, whereas it was a grey area before.’


A crucial difference between the US, when compared with the UK and Canada, is that costs do not follow the event. The CJC quoted Lord Bingham when he was Master of the Rolls in 2002 as describing the principle of costs following the event as being ‘of fundamental importance in deterring claimants from bringing, and defendants from defending, actions which they are likely to lose’. Lord Woolf is also quoted (from his interim Access to Justice report) saying that any propensity to litigate encouraged by the rule ‘tends to be associated with more meritorious companies and greater expectations of success than does the US rule’.


Mr Rooks is not convinced. He says that not having costs following the event ‘makes litigation possible’. He adds: ‘If there is a threat of having to pay the other side’s legal fees if the court rules against you, you would scotch even more litigation. I don’t think that anyone has ever demonstrated that that the so-called US rule, where each party pays their own fees unless there has been egregious behaviour, has shaken the foundation of US society.’


There is little scope for a costs war with contingency fees under the Ontario model. Mr Morton explains: ‘The contingency fee doesn’t intervene in any assessment of costs. When you have finished the trial you put in a bill of costs based on hourly rates and that’s assessed or approved by the courts. So the defendant has nothing to do with the contingency fee; that’s between the party and their solicitor.’


What if the client is not happy with the fee? The lawyer explains that there is a relatively straightforward process of filing a form with ‘a modest fee of about C$50 to C$100’ which covers a review by a court assessor.


Back in the UK, the profession is gearing up for next month’s overhaul, which will see the conditional fee regulations revoked and replaced by new rules. They will shift all client-care requirements from statutory regulation to the solicitors’ practice rules.


Several commentators question whether there is a substantive difference between a regulated contingency fee and a simplified CFA. ‘Why advocate limited Canadian-style contingency fees when we haven’t yet adopted CFA-lite procedures here?’ asks Graham Huntley, president of the London Solicitors Litigation Association. ‘If the purpose of that was to simplify the complicated conditional fee structure we have in this country, why go and complicate it by bringing in a first cousin?’


‘If we are talking about contingency fees that are recoverable against defendants, then we already have them in the form of CFAs, surely?’ reasons Rob Carter, head of the Forum of Insurance Lawyers’ costs special interest group. He is troubled by the scope of fresh debate that could be opened by contingency fees – in particular about the information provided to clients about the most appropriate funding, when contingency fees could be very lucrative. He predicts: ‘I can see defendants feeling very uneasy about that.’


Jon Robins is a freelance journalist