Civil litigation funding agreements: Part 1: contingency fee agreements

Many general civil litigators are unaware of the range of funding options open to clients and lawyers in such proceedings, and tend to stick limpet-like to an hourly rate, win or lose, which is deeply unattractive to most clients, and is not necessarily the most profitable method for the solicitors either.

I know only too well that civil litigation can take all sorts of unexpected twists and turns, but generally payment by the hour rewards the inefficient and punishes lawyers who get a good result early on, often because of their reputation and knowledge of the law.

In the following two blogs, I look at two species of contingency fee, that is a payment of a percentage of damages, with no costs if the case is lost, and in a follow-up discussion, I will look at conditional fee agreements (CFAs), where it is not all or nothing as solicitors and clients can have no win, lower fee agreements.

Contingency fee agreements

Contingency fee agreements have been allowed in non-contentious work since at least 1728: see the Attorneys and Solicitors Act 1728. The current governing legislation is section 57 of the Solicitors Act 1974.

The pre-issue contingency fee agreement

Pre-issue work in all matters is classed as non-contentious business within the meaning of section 57 of the Solicitors Act 1974, and therefore can be carried out under a contingency fee agreement. However, once the case is issued, then that pre-issue work retrospectively becomes contentious and thus the contingency fee agreement is of no effect. The solution is to enter into a CFA and a contingency fee agreement from day one.

The agreement with the client will be that the contingency fee agreement operates until proceedings are issued, at which point it drops away and the CFA is deemed to have been in place from the beginning. This is achieved by a bridging agreement.

Absent contractual agreement with the other side, there is no right to costs pre-issue; therefore, it does not matter that the CFA is not in place. Costs are only payable by agreement; if they are agreed, then there is no problem, and if they are not agreed, then proceedings will need to be issued, at which point the CFA comes in to force with effect from the beginning of the case.

The potential problem is that fees on an hourly basis, even with a success fee, may be significantly less than the contingency fee would have been. That will depend upon a combination of the settlement figure and the contingency fee percentage on the one hand, and the time spent and the hourly rate on the other hand. Thus, where there is a contingency fee agreement, you should have a high hourly rate in the CFA.

Solicitor and own client rates can and should be very much higher than the rates that you are likely to recover on a between the parties basis, on the standard basis. This is for two reasons:

  • To maximise the alternative “take” to the contingency fee.
  • To maximise the indemnity costs received if, as a claimant, you match or beat your own Part 36 offer.

Such agreements cannot be used in employment tribunal work, where you must use a damages-based agreement (discussed further in Part 2) if working on a contingent basis, even in relation to pre-issue work. Apart from employment cases, such agreements are specifically excluded from the provisions of the Damages-Based Agreements Regulations 2013 by regulation 1(4) of those same regulations:

“(4) Subject to paragraph (6), these Regulations shall not apply to any damages-based agreement to which section 57 of the Solicitors Act 1974 (non-contentious business agreements between solicitor and client) applies.”

The paragraph 1(6) exception reads:

“(6) Where these Regulations relate to an employment matter, they apply to all damages-based agreements signed on or after the date of which these Regulations come into force.”

As the explanatory note to the Damages-Based Agreements Regulations states:

“… section 58AA(9) of the [Courts and Legal Services] Act provides that, where section 57 of the Solicitors Act 1974 (c.47) applies to a DBA (other than one relating to an employment matter) it is not unenforceable only because it does not satisfy the conditions in section 58AA (4), under which these Regulations are made. Accordingly, article 1(4) [sic – should read Regulation 1(4) – articles apply to orders, not regulations] excludes those DBAs to which sections 57 of the Solicitors Act 1974 applies from the scope of these Regulations.”

Section 57 of the Solicitors Act 1974 has itself been amended by section 98 of the Courts and Legal Services Act 1990 and sections 117 and 221 of, and schedule 16 to, the Legal Services Act 2007, and now reads:

“57. Non–contentious business agreements

(1) Whether or not any order is in force under section 56, a solicitor and his client may, before or after or in the course of the transaction of any non–contentious business by the solicitor, make an agreement as to his remuneration in respect of that business.

(2) The agreement may provide for the remuneration of the solicitor by a gross sum or by reference to an hourly rate, or by a commission or percentage, or by a salary, or otherwise, and it may be made on the terms that the amount of the remuneration stipulated for shall or shall not include all or any disbursements made by the solicitor in respect of searches, plans, travelling, taxes, fees or other matters.

(3) The agreement shall be in writing and signed by the person to be bound by it or his agent in that behalf.

(4) Subject to subsections (5) and (7), the agreement may be sued and recovered on or set aside in the like manner and on the like grounds as an agreement not relating to the remuneration of a solicitor.

(5) If on any assessment of costs the agreement is relied on by the solicitor and objected to by the client as unfair or unreasonable, the costs officer may enquire into the facts and certify them to the court, and if from that certificate it appears just to the court that the agreement should be set aside, or the amount payable under it reduced, the court may so order and may give such consequential directions as it thinks fit.

(6) Subsection (7) applies where the agreement provides for the remuneration of the solicitor to be by reference to an hourly rate.

(7) If, on the assessment of any costs, the agreement is relied on by the solicitor and the client objects to the amount of the costs (but is not alleging that the agreement is unfair or unreasonable), the costs officer may enquire into—

(a) the number of hours worked by the solicitor; and

(b) whether the number of hours worked by him was excessive.”

It will be seen that section 57(2) specifically sanctions remuneration by way of a percentage. There is no statutory cap on the percentage that may be charged to a client under a pre-issue contingency fee agreement, but solicitors have a duty not to exploit clients and a duty to conduct themselves in a way that does not bring the profession into disrepute. Charging an unfairly high percentage risks putting a solicitor in breach of these duties.

The agreement must be in writing and must be signed by the client (section 57(3), Solicitors Act 1974). We insert a default hourly rate of £480 including VAT, as that is now our standard rate for most types of work, including work in preparation for multi-track cases. Solicitors can put in the figure that they think fit, but this must be discussed and agreed with the client. You can have different rates for different levels of lawyer and work, but one of the benefits of contingency fee agreements is their simplicity.

The protection and value to the client is that they pay nothing in the event of failure to obtain damages. The client is guaranteed a fixed percentage of anything recovered.

A contingency fee agreement gives greater protection to clients than a CFA, as recognised in a an interesting, accurate and telling part, at paragraph 156, of the High Court’s judgment in Bolt Burdon Solicitors v Tariq and others:

“Mr Mallalieu submitted strongly that the questions of fairness and reasonableness were not to be tested by the outcome, but by reference to the reasonable perception at the time the agreement was entered into. He submits that any analogy or comparison with a conditional fee agreement is wholly inappropriate. By way of illustration, assume a conditional fee agreement with an uplift of 100%. Solicitors incur costs of £200,000, which with the mark up of 100%, entitles them to £400,000. If the sum recovered in the proceedings is £1 million, this may be a satisfactory outcome for the client. But if instead, after the same amount of work, the recovery in the proceedings is only £50,000, there would still be the same liability to pay costs of £400,000. This is because in a conditional fee agreement costs are always tied to the work done, whereas in a contingency fee agreement costs are always proportionate to recovery. Mr Mallalieu submits that to grant the relief sought in this case would be to destroy the commerciality of contingency fee agreements of this kind.”

For example, if the contingency fee is 40%, then the fixed percentage of damages to the client is 60%; if it is a 30% contingency fee, then it is 70% and so on.

Detailed guidance is given by the Court of Appeal in Rees v Gately Wareing. Note that once proceedings are issued, you must not use a contingency fee agreement, even if you are not on the record, or are merely assisting another solicitor.

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