CONDITIONAL FEES: THE FACTS-- 36,200 Accident Line Protect policies have been taken out to date.-- The number of cases which have been completed on a conditional fees basis now exceeds 8,000.LEGAL REFORMS: THE GOVERNMENT'S MAIN PROPOSALS-- In the first stage of the government's plan, legal aid will be withdrawn from most personal injury cases this summer and from other cases, where conditional fee agreements h ave been shown to work, during the next three years.

Some 60% of cases could be excluded under present legislation.-- In the second stage, a white paper in the summer followed by a Modernisation of Justice Bill in the autumn will be introduced to allow the withdrawal of legal aid from all other cases.-- Medical negligence cases will stay within legal aid at the moment, but legal aid is likely to be withdrawn in the medium term once conditional fees have been shown to work.-- Representation in medical negligence cases to be limited to practitioners who have demonstrated their competence.-- A traditional legal aid fund will be available in exceptional cases where legal aid has been withdrawn.

Merits test to be tightened but not specifically to a 75% chance of success as first mooted by Lord Irvine.-- The losing party might be required to pay the successful party's success fee and insurance premium.-- Long term aim to focus legal aid on welfare and public interest cases.-- Conditional legal aid fund rejected.-- No guarantee the legal aid budget will not be cut after 1999.NEIL ROSE TESTS THE PROFESSION'S REACTION TO LORD IRVINE'S RECENT HOUSE OF LORDS STATEMENT ON CONDITIONAL FEESThey are coming, but not as quickly as the legal profession had feared.

When the decision to replace legal aid with conditional fee agreements (CFAs) in all money or damages claims was first announced by the Lord Chancellor, Lord Irvine, last October, the aim was to implement the plan by 1 April 1998.

Earlier this month Lord Irvine admitted it would not happen by that date.But in a House of Lords statement, Lord Irvine left lawyers in no doubt that CFAs would be introduced for all money or damages claims eventually.

He said: 'The extension of the availability of conditional fee agreements will provide an alternative means for people to bring most money or damages claims without public funding.

Our aim is to create the conditions in which anyone can use conditional fees to bring cases, regardless of their financial status, across the whole range of litigation in which money or damages are the main remedy sought.'However, we recognise that solicitors' firms may not presently be financially structured to do this, and that the insurance and finance industry needs time to develop products to assist in the expansion of the use of conditional fee agreements.

The government, therefore, proposes a measured approach to encouraging this change to take place.'The government has responded to the legal profession's vigorous lobbying campaign that followed the October announcement by modifying its proposals.

However, this does not help personal injury (PI) lawyers, who face the withdrawal of legal aid for most of their cases this summer.

This will be the first stage of the government's new policy of removing legal aid once CFAs have proved themselves successful in a particular field.The government, but not the legal profession, is already convinced that CFAs have proved themselves in PI.

Speaking to the Gazette earlier this month, Geoff Hoon, parliamentary secretary at the Lord Chancellor's Department, said: 'There have been more than 30,000 PI cases conducted by conditional fees and I have not had a single complaint about any one of them.

Whereas I receive regular complaints about legal aid.'However, the government was sufficiently persuaded of the particular circumstances of medical negligence cases to keep them within the scope of legal aid, at least in the short-term.The government says current legislation allows it to remove legal aid from around 60% of money or damages claims once CFAs have proved themselves.

The consultation paper that accompanied Lord Irvine's announcement - called Access to Justice with conditional fees - listed seven other areas in addition to PI which were on the agenda:-- Disputes about inheritance under a will or an intestacy;-- Matters affecting the administration of a trust or the position of a trustee;-- Matters relating to the position of directors of companies, restoring a company to the Register [of companies] or dealing with the position of minority shareholders;-- Matters affecting partnerships;-- Matters before the Land Tribunal;-- Cases between landowners over a disputed boundary of adjacent property; and-- Cases pursued in the course of a business.In his House of Lords speech, Lord Irvine explained the thinking behind targeting these areas: 'There are certain categories of proceedings which the government believes no longer have sufficient priority to command continued public funding.

It is important that scarce public funds are directed to where help is most needed .

.

.

The issues [in the list above] will generally be too narrow or too specific to deserve the use of public money, when such support means less for other matters of greater public importance.' The intention was to focus the civil legal aid budget on social welfare cases, such as employment, housing, debt, state benefits, and actions against officialdom and bureaucracy, Lord Irvine said.The government has instructed the Legal Aid Board to set up a transitional fund to assist with high cost (£100,000 plus) cases and public interest cases in areas where legal aid is removed but which might have difficulty in attracting CFAs.

The fund should be in place by the end of 1998.Meanwhile, the power to withdraw legal aid from the remaining 40% of money or damages claims will be contained in the Modernisation of Justice Bill later this year, which will not make it to the statute book until 2000 at the earliest.Plaintiff and defendant PI lawyers have come together to condemn the decision to press ahead with removing legal aid from PI, saying it is too early to be sure that CFAs are working.

Caroline Harmer, president of the Association of Personal Injury Lawyers (APIL), describes the move as a 'mean and miserly hammer blow'.

APIL has long been convinced that CFAs would reduce access to justice, because injured people would not be able to afford to bring their case and solicitors would not be able to afford to pay for expenses such as expert witnesses and court fees.

'APIL has more experience of conditional fees than any other organisation - indeed the association supported their introduction.

But they were never meant to replace legal aid, and it is far too soon to draw any conclusions about how well they are working,' she said.Martin Brufell, president of the Forum of Insurance Lawyers (FOIL) agreed it was still too early to assess the success of CFAs, calling the removal of legal aid 'appalling'.

Mr Brufell adds: 'I think that getting rid of legal aid will stop a lot of PI claims getting to court.' Law Society President Phillip Sycamore, himself a medical negligence specialist, insisted there were still problems with 'availability, affordability and the funding of up-front disbursements'.Ms Harmer also points to a report by the Policy Studies Institute - which was based on a survey of 120 law firms and an analysis of 197 CFA cases - published by the government in September 1997.The researchers concluded it was too early to assess the significance o f conditional fees in relation to access to justice.

In fact, they identified problems with the ability of solicitors to assess risk and with the different uplifts they charged on similar cases, both of which indicated solicitors needed more time to come to grips with conditional fees.One area of possible contention is the suggestion in the consultation paper that any success fee claimed by the successful plaintiff's solicitor should be recoverable from the losing defendant.

If this happened, the consultation paper asks at what point a party should disclose the success fee agreed with the solicitor and what rights the liable party should have to challenge it.

The government says it is 'on the whole, minded' to make the success fee recoverable, and to allow the insurance premium to be recovered as a disbursement.Mr Brufell describes these proposals as 'inequitable', arguing that defendants would lose whether they won or lost a case.

He said success fees had the effect of making a successful client subsidise a solicitor's unsuccessful cases.

In addition, if a defendant lost one case and had to pay the plaintiff solicitor's success fee, he or she was effectively funding the solicitor to bring further cases.Also, Mr Brufell sees no reason why, if successful plaintiffs are allowed to recover the costs of their insurance premiums from defendants, successful defendants should not be able to recover their costs of insurance from plaintiffs.Ms Harmer says the suggestion that success fees be recoverable from defendants had initially been 'very attractive' because of the protection offered to worse off plaintiffs who were less able to part with 25% or more of their damages.

However, she conceded that, on reflection, she had some 'sympathy' with a fear expressed in the consultation paper that allowing the losing party to challenge the level of the success fee could generate 'satellite litigation'.

This would be counter-productive to the whole push to reduce litigation.

In addition, revealing the level of the success fee would indicate to the other party how confident the solicitor was about winning the case.

However, Ms Harmer says defendants should not have a problem with the insurance premium being treated as a disbursement.After all, through insurance, defendants would be able to recover costs they often were unable to recover under the current system, she points out.There is a 30 April deadline for comments on the consultation paper.

But Ms Harmer says the government has made its mind up regarding removing legal aid from PI cases.

'I think [the government] has perceived PI victims as easy scapegoats,' she says.

Claiming it could not back down for political reasons, Ms Harmer challenges the government to say how much money it would actually save by withdrawing legal aid from PI cases.

She says PI cost £34 million, less than 2.5% of the entire legal aid budget.Solicitors and their representative groups are now gearing up to launch another major lobbying effort at the government.

The Law Society is holding a conference on legal aid on 29 April.

Lord Irvine has proven himself willing to change his plans once, giving rise to some hope that he can be persuaded to do so again.

If only one thing is certain, it is that there will be no shortage of voices encouraging Lord Irvine to do just that.

MIKE YUILLE FINDS INSURERS SCEPTICAL ABOUT THE ABILITY OF SOLICITORS TO ASSESS RISK IN NO WIN, NO FEE CASESInsurers say solicitors must change the way they work if they are to flourish under the new regime of conditional fee arrangements (C FAs) proposed by the Lord Chancellor.The removal of legal aid from most personal injury cases could hit some high street firms hard this summer, but the plan to strip state funding from most litigation later on will mean solicitors who fail to adapt to the changes could find themselves struggling to survive.

Where once the state picked up the tab, insurers will now call a more commercial tune.

Insurers say they will not - indeed cannot - carry those solicitors who fail to keep in step with their more business-like approach.Insurers offering personal injury-related CFA policies, most of which have been consulted by the Lord Chancellor, Lord Irvine, say solicitors will have to take a more commercial approach when taking on, assessing and processing cases.

Risk assessment is the most important area to address.'The ability of solicitors to assess risks is pretty appalling,' says Derri-Ann Clark, an underwriter at insurer Litigation Protection.

'They will have to pull their socks up and look at cases with a commercial view,' she says.Litigation Protection, which provides CFA-related cover, rejects about 10% of cases presented by solicitors, usually because they are unwinnable.

'Presentation of the case is a major weakness generally, with evidence supplied which is inconclusive,' says Ms Clark.

Files sent in may even have expert opinions which conclude there is no case to fight.

'Insurers will take risks, but not fliers,' she warns.Abbey Legal Protection, which runs the Law Society's Accident Line Protect scheme, has agreed to rely fully on solicitors' assessment of cases.

However, James Innes, Abbey's chairman, says: 'It becomes imperative that solicitors have the ability to assess risk and judge prospects for success.

Under the legal aid system, they don't have to worry.

They will get their fees paid by the Legal Aid Board regardless of win or lose.

But under CFAs, not only will they not get paid if they lose, they stand to lose their insurance cover if they lose too often.'Through Accident Line, underwritten by US insurer AIG, the Law Society has ensured that solicitors measure up to certain quality assurance standards before they can participate in the scheme.

One such requirement is that any firm involved has at least one partner who is a member of the Society's 2,000 -strong personal injury panel.

But this is no absolute guarantee of success, as the occasional removal from Accident Line's authorised list of some firms that are losing too many cases attests.'There is some incentive to make sure they achieve a level of expertise.

It does require solicitors to weigh up the chances of winning and losing, because in the end, it could hit them where it hurts,' says Mr Innes.Insurance companies have no choice but to rationalise their business in such a way.

'Our job is to protect the interests of the underwriters, who are carrying the risk and will have to pay the bills if the solicitor loses the case.'Abbey and other companies are preparing for the extension of CFAs into new areas of litigation.

Already, Abbey has launched a medical negligence policy backed by 15 syndicates in the Lloyd's insurance market.'The [CFA] market for insurers is potentially gigantic, but if they are going to get involved in funding litigation in a major way, they are going to have to insist that they only deal with solicitors who they believe are expert in their field,' says Mr Innes.Abbey and others therefore monitor the success rates of lawyers to weed out those who continue to 'get it horrendously wrong'.

However, occasional losses shoul d not be a problem.Insurers back the view that while the bulk of cases can be turned over to the private insurance market, high-risk test cases should be funded under a continuing legal aid system, as proposed by the Lord Chancellor.Bob Gordon, technical director at insurer Greystoke Legal Services, warns that small- to medium-sized firms could face serious cashflow problems under CFAs, as they will have to wait until a case is finished before being paid.

'Monitoring and control of cases will be very important.

One 40-partner firm I know has designated one partner to act as arbiter, deciding whether to accept CFAs for cases or not.'Mr Gordon says firms will have to extend their cashflow management systems, which could be an expensive exercise for some.

However, banks may develop suitable products to help with this shortfall, he says.Michael Napier, senior partner of Irwin Mitchell and a founder of the Association of Personal Injury Lawyers, is keenly aware of the need for solicitors to improve their case management.

'The risk management issue is crucial.

The process of screening cases is fundamental to getting them right,' he says.In his book Conditional fees: a survival guide, published by Law Society Publications, Mr Napier lists the major issues, including knowing how much risk a firm is able to bear, understanding the complexity of the case, and the need constantly to monitor the progress of cases.The Law Society believes insurers will want to lay down quality criteria for lawyers in a way similar to the approach taken under Accident Line.

The Society is talking to insurers about the types of case that need to be covered, but there is uncertainty about who is going to offer what.

'It is not going to be easy successfully to develop insurance products for all types of litigation,' says David Hartley, head of solicitors' remuneration at the Society.The number of companies offering CFA-orientated policies is still small.

And despite the interest shown by other insurance companies through the Association of British Insurers' working party on the subject, there is still no sign of the sector's giants piling in to expand the market.Leading insurance companies already offering before-the-event legal insurance - DAS, Hambro Assistance, Cornhills LawClub, and FirstAssist, part of Royal SunAlliance - are poised to launch CFA policies, but they are waiting to assess developments before doing so.Charles Wright, assistant general manager at DAS, says CFAs look like a 'natural commercial opportunity'.

However, he adds: 'Lawyers need to think about where they need to be.

Most lawyers are not adept at risk assessment.

For commercial litigation, it won't be enough to send some wishy-washy opinion to the insurers.

They will have to improve their own ability to assess risk.'ROBERT VERKAIK TALKS TO SOLICITORS WITH SIGNIFICANT EXPERIENCE OF RUNNING CASES ON A NO WIN, NO FEE BASISSince the first conditional fee agreement (CFA) was signed on 4 July 1995, such agreements have become synonymous with personal injury work.

But the introduction of no win, no fee was also intended to increase the effectiveness of insolvency litigation and ease the route for UK citizens seeking to take their cases to the European Court of Human Rights (ECHR).While most personal injury (PI) lawyers have had some experience of CFAs, the same can not be said of insolvency and human rights specialists.Although the Lord Chancellor's Department does not keep figures for the number of existing CFA agreements, it is thought that perhaps only one or two cases h ave come before the European Court of Human Rights on a conditional fee basis.Louise Christian, a partner at civil rights and personal injury specialist firm, Christian Fisher, says she does not know of one such case.

'People', says Ms Christian, 'don't bother with conditional fees on human rights cases because there is no risk of costs against.' She says this defeats the purpose of registering a CFA in order to insure against the other side's costs.

She further contends that damages are too small in the ECHR to make the agreements work.There has been a trickle of CFAs between insolvency solicitors and liquidators but not enough to justify any attempts to trumpet them as being a success story.Christopher Garwood, chairman of the government's DTI working party on insolvency regulations and a partner at Hull-based insolvency specialist Carrick Read Insolvency, says the importance of CFAs in insolvency litigation is in the threat of their use.

The knowledge that a lawyer is prepared to act for a client on a conditional fee basis is a powerful weapon in insolvency litigation.

Mr Garwood says it is akin to knowing that the other side has been granted legal aid while you have not and represents a persuasive incentive to negotiate.

Many insolvency lawyers are already coming to terms with the inevitability of conditional fees.

In a recent claim against a bank, Mr Garwood's opposite number told him that he had advised the bank to settle the case because there was every likelihood that the extension of CFAs would become a reality in the next few months and Mr Garwood's client, currently on limited legal aid, would be able to take the case farther on a conditional fee basis.

Mr Garwood says: 'We have equalled up the bargaining position without even Lord Irvine's proposals coming into effect.'Insolvency has always been a results-orientated business and therefore lends itself to no win, no fee.

This was one of the reasons the Lord Chancellor's Department included it in the first tranche of CFAs.

Explains Mr Garwood: 'If you don't get the money in you don't get paid.' However, Mr Garwood predicts CFAs will not become the first choice for his colleagues.

He argues the liquidator client is going to be unwilling to enter into agreements which oblige him to pay more than he would need to at a standard rate.Mr Garwood has so far only run one case on a no win, no fee basis.

One of the reasons he decided to do so was to establish a template CFA and explore the possibilities open to lawyers using CFAs.Jenny Kennedy is head of the accident department of London-based Leigh Day & Co, the firm currently representing plaintiffs in the multi-party tobacco litigation.She says her department has taken many cases on a conditional fee basis.

'If a client is not eligible for legal aid we automatically think "would we offer a conditional fee policy in this case".' If the Leigh Day & Co accident department is unwilling to enter into a CFA then Ms Kennedy says her lawyers are unlikely to advise running the case on a private client basis either.Louise Christian, a member of the Law Society's personal injury panel, is acting in the Southall train crash and has represented the families of victims of the Marchioness disaster.She is opposed to no win, no fee on the grounds that lawyers should not be making money out of cases they would be prepared to advise on regardless of the availability of success fees.

She says: 'I find the idea of taking part of a client's damages as not very attractive.'The only CFAs Ms Christian has entered into are personal injur y cases where the agreement has been used to secure insurance against adverse costs.

The firm has stuck to its policy of not charging a success fee.

'A lot of the cases that are done on CFAs are ones which lawyers would have done anyway.Before conditional fee agreements came in, and you had a good case which was outside legal aid rates, you would still do it and you would not charge extra for it.'Ms Kennedy counters that lawyers are forced to charge success fees to cover the firm's funding of start-up and running costs incurred in unsuccessful cases.

In general, the higher the risk and the disbursements the greater the success fee charged by the law firm.However, Ms Kennedy says this off-setting of cost is an 'horrendous shortcoming' of CFAs.

'What you are asking clients to do is fund those clients whose cases are lost,' she concludes.Ms Christian maintains that CFAs have not led to the widely-anticipated rush of PI cases being taken on.CASE STUDYRobert Brown, an insolvency partner with Leeds law firm RC Moorhouse & Co, recently completed a CFA with a liquidator.The case, begun by a company acting through a liquidator before CFAs were permitted, had ground to a halt when the defendants won an order for security of costs.Mr Brown says: 'The company could not meet the order and there was no prospect of the litigation being pursued.

Once the (CFA) regulations were in force my firm entered into a CFA with the liquidator.'The CFA was linked to an adverse costs insurance policy and only on appeal did the court allow security to be given by way of the policy.The action went ahead, ending in a settlement for a six figure sum.

Mr Brown's mark up was a third.

He is about to enter into another CFA and is considering one other.Mr Brown acknowledges that CFAs work where there is sufficient money available to investigate the claim and prove there is a chance of success.

However, he wonders how often they will be used in complex insolvency cases where initial funding is not available.

London-based Leigh Day & Co recently acted for an artist who had hurt his hand in an accident while working as a part-time waiter.Initially the plaintiff was eligible for legal aid but had to wait so long for his medical prognosis that his circumstances changed and he became ineligible.

He continued the case as a private client but was concerned about the legal costs and although he had a strong case he asked to enter into a CFA to obtain insurance cover against adverse costs for his own peace of mind.Leigh Day & Co's Jenny Kennedy explains: 'He was unhappy even to accept a remote risk of losing his home.' She says the success fee of 10% reflected the low risk.

Ms Kennedy never arranged a 100% success fee in a CFA.But in another Leigh Day & Co conditional fee case the outcome was less satisfactory when the plaintiff's account of the personal injury claim was not supported by other evidence.'I got quite a way down the line before we actually got a reconstruction of the factory accident [which did not tie up with the client's recollection of events].

We had spent quite a lot money (less than £5,000) on the case.'