Conditional fees: the new regime

District Judge Chris Lethem guides solicitors through the fees maze in the first of his two-part article

It has been said of certain dictators that they had the great advantage of making the trains run on time.

Would that the same could be said for the arrival of the conditional fee arrangements, which have been more delayed than the 7.30 to Paddington.

Since the introduction of the Community Legal Service practitioners have inhabited a limbo world where state funding has diminished or ceased and yet the replacement conditional fee arrangements have lacked the necessary alterations to the Civil Procedure Rules 1998 and the attendant practice directions.

Announced for arrival at the start of May, the new regime finally came into force on 3 July 2000 with the Civil Procedure (Amendment No.3) Rules 2000 (SI.2000/1317 (L11) and a far-reaching amendment to the costs practice direction (PD).

The terms definedBoth solicitor and client will have to grapple with new and alien terminology.

The new rules commence with a series of definitions that will provide the framework for the new funding arrangements.

Regulation 11 introduces a new rule 43.2 which contains the definitions.The two core definitions are those of a 'funding arrangement' and 'additional liability'.

A 'funding arrangement' is either a Conditional Fee Agreement (CFA), an insurance policy where the premiums may be recovered as costs or an agreement with a membership organisation to meet the litigant's costs.

The terms 'insurance premium, 'percentage increase' and 'membership organisation' are also defined.

The 'additional liability' is the percentage increase, the insurance premium and the additional amount in respect of provision by the membership organisation.

This is contrasted with the base costs, which are costs other than the amount of any additional liability.

In essence, solicitors will have to consider these two elements as separate items.

The base costs are readily recognisable as the old costs recoverable in any litigation either on the standard or indemnity basis.

The new element is the additional recovery that the solicitor can make.

The amendments focus in large part on the extent to which the legal representative will be able to pass these additional costs on to the unsuccessful litigant and what happens as between the client and his lawyer where the liability cannot be so transferred.

To this extent the rules build on the existing regulations that regulate the relationship as between the legal representative and his client.

Arrangements with clientsIt will be remembered that the Conditional Fee Agreement Regulations 2000 SI 2000/692 (CFAR) and the Access to Justice (Membership Organisations) Regulations 2000 SI 2000/693 lay down additional requirements between the legal representative and the client.This will be the starting point for the new relationship with the client.

It is critical that solicitors abide by the rules, as failure to do so may render the whole funding arrangement unenforceable.

Many solicitors will start with a CFA.

Such an agreement must be in writing and signed by the client and the legal representative (CFAR regulation 5).

It must contain certain information, notably:l The proceedings to which it relates.

This is not as straight forward as might be thought.

One must be clear as to whether it includes any appeals, any part 20 claims and enforcement.

Precision is the key to the agreement.

The solicitor will have to consider all the permutations that are likely in the case (for example, what happens if two actions are consolidated but the subject of different funding arrangements?).l The circumstances in which the legal representative's fees are payable.

Do they become payable in part? What arrangements are made for funding disbursements?l What payment is due if matters do not conclude as anticipated.

What happens if the solicitor advises settlement and the client elects to continue, or the contract is terminated for some other reason? All eventualities must be spelt out in the agreement.l How the amounts payable are calculated in all the circumstances and whether there is any limit on the costs with reference to the damages.

One of the most difficult areas of the agreement will be any success fee.

As we shall see, the paying party will be entitled to know, on any detailed assessment, the amount of the success fee and the rationale for setting it.

Similarly, CFAR regulation 3 requires that this information must be included in any CFA.

It is clear that, to be successful, the solicitor will have to conduct a detailed risk assessment (for methods, see Goldrein I, de Haas, M: 'Winning on a Conditional Fee', NLJ Vol 149 no.

6916, 10 December 1999, 1,866).

This is critical in ensuring that the firm is not exposed to potentially ruinous litigation, in ensuring that the client knows exactly why they are agreeing to a success fee and in persuading a costs assessment officer that the fee is recoverable after the successful litigation.

Some care will have to go into this clause in the agreement and solicitors must realise that they are talking not only to their client, but also to their opponent and the court when this part of the agreement sees the light of day.

An important component of the success fee is the additional cost to the firm of having to defer receipt of its fees and expenses until the conclusion of the litigation.

This calculation must be specifically stated in the CFA.

Unless the uplift clause is carefully thought through, it may be that costs assessment officers will be more ready to grant the success fee that compensates the solicitor for the cost of funding the litigation than the uplift attributable to additional risk.

The difficulty with the latter element of the success fee is that the costs officer will be invited to consider it with the benefit of hindsight, even though this is contrary to the rules.The opponent who ridiculed your case, and asked if you were a qualified solicitor, will now confess that he or she knew all along that you would win and that the case was open and shut, before asking that there should be no uplift to reflect risk!

Solicitors may be uncomfortable about committing their fears regarding the case to paper at the outset.

If so, they will have difficulty in persuading the court that the success fee is justified.

Finally, the CFAR must give the legal representative the right to disclose information from the agreement to the court and must give prescribed information about what happens to the success fee if the court finds that it is unreasonable.

(See CFA Regulation 3 for the full details of the information required to be contained in any CFA).

Having ensured that the agreement meets the requirements of the regulations, the lawyer must then ensure that their client understands the agreement.

This is not only a requirement of good practice but a stipulation of the regulations that require that the client is informed orally and in writing as to the effect of the agreement and also whether the lawyer considers that there might be alternative ways of funding the litigation (for example by way of insurance).

(see CFAR regulation 4).

This latter regulation is detailed and considered to be one of the important safeguards for the client.

It follows that solicitors will have to be very careful about the way that the advice is given and that the explanation is appropriate to the understanding of the client.

Those who practice in an area with vulnerable clients (for example clinical negligence work) may experience some difficulty in simply sending off precedent letters to the client.

Indeed as some of the information need only be given orally it might be prudent to tape record the giving of the advice so that the nature of the explanation and the language used is preserved for posterity.

Where the funding arrangement includes an insurance premium, then similar provisions are found in s30 of the Access to Justice Act 1999 and the amount that can be passed on to the client for the insurance is limited to the amount of the premium (Access to Justice Regulations, regulation 4).

District Judge Lethem sits at Tunbridge Wells County Court