Contingency fee agreements arise where the solicitor agrees with the client to be paid a percentage share of any damages, rather than being paid on an hourly rate basis (whether conditional or not). They have long been lawful in non-contentious business, and have been permitted in contentious business since the introduction of the Damages Based Agreement Regulations 2013 as part of the Jackson reforms. However, it has been widely commented that those regulations have failed, intentionally or otherwise, to stimulate the wider use of contingency fee agreements.
Contingency fee agreements are commonly used in some very specific categories of work, such as employment tribunals and criminal injuries compensation scheme claims, but outside that they remain relatively little used. As a result, there is little guidance on how the courts will approach their use. Spencer J’s judgment in the case of Bolt Burdon v Tariq on 13 April 2016 is one of the few recent decisions which considers the use of contingency fee agreements. As such, it merits close consideration for anyone contemplating using such an agreement.
Background to Bolt Burdon v Tariq
The clients considered that they had been missold an interest rate swap by their bank. They had approached the bank, with the assistance of other professional advisors, but their claim for compensation had been rejected by the bank. They subsequently approached the firm of solicitors, BB. As Spencer J found, there was no guarantee at this stage that the clients would be able to recover any compensation from the bank at all. The bank’s review purported to be final and there was no readily identifiable avenue of appeal.
The clients proposed to BB that they should act on the basis of a contingency fee agreement, whereby the solicitors would receive 50% of any compensation recovered. A lengthy period of negotiation followed, but by the end of it an agreement was reached, which contained essentially the same core term: that the solicitors would be paid 50% of any compensation. The agreement was put into the form of a non-contentious business agreement under section 57 of the Solicitors Act 1974.
BB applied to the bank on behalf of its clients for a review of the claim. The application was successful and the clients were in due course offered compensation of £821,045. At this point, the clients’ relationship with their solicitors broke down. The solicitors sought payment of the apparently agreed 50% of the compensation offered. The clients disputed that all of the compensation offered had been achieved as a result of the solicitors’ efforts and refused to pay the sum sought.
Grounds for challenging the contingency fee agreement
By the time matters came before Spencer J, the argument had widened. The clients challenged the agreement on the basis:
- Of its construction (arguing, among other matters, that on its proper construction it provided that the 50% was only payable in respect of any part of the compensation offered which BB could show was offered as a result of its efforts).
- That the clients had been induced to enter into the agreement by misrepresentations by the solicitor as to the prospects of success.
- That the agreement was unfair or unreasonable and therefore could be set aside under section 57 and effectively replaced with a simple agreement to pay BB on an hourly rate basis for the work actually done.
The construction and misrepresentation arguments, whilst involving some analysis of legal principle, were largely fact-dependent. Spencer J rejected all of the clients’ arguments in this regard, finding that there had been no misrepresentation by the solicitors.
Of wider interest was the approach to the issue of unfairness and unreasonableness under section 57. Not only is this an issue likely to crop up in many contingency fee cases, where such agreements (if in relation to non-contentious business) are usually in the form of a non-contentious business agreement, but it also touches on the issue of reasonableness that can arise in any solicitor/client costs assessment. It may, therefore, be relevant, for example, to a court’s consideration of the reasonableness of the “amount” of payment under a DBA.
Spencer J found that fairness and reasonableness had to be considered separately. The agreement had to be both fair and reasonable.
Fairness related primarily to the manner in which the agreement came to be made. In that regard, he found that the clients, themselves businessmen, had known exactly what they were signing up to. The contingency fee agreement had been their proposal, intended to encourage the solicitors to become involved in their case at a time when all other avenues of redress seemed to be closed to them. The core term of the agreement itself was simple and, in any event, the agreement had been the subject of negotiation over several months and the clients had shown a clear understanding of it during that process.
Moreover, the solicitors had explored other options with the clients, but had made it clear that in light of the limited prospects of success they were not prepared to enter into a CFA. The contingency fee agreement was the only funding option realistically open to the parties.
In addition, the judge found that the clients expressly wanted an arrangement whereby they would not have to pay anything unless the claim succeeded and where, if it did, the amount to be paid would be a “cut” of the compensation awarded. The clients did not want to risk being left out of pocket. In those circumstances, a CFA, even if available, would not have satisfied the clients’ need. Under such an agreement, if any compensation at all was offered, the client would be liable for all of the solicitor’s (reasonable) fees, plus a success fee, regardless of the amount of compensation. With the contingency fee agreement, the clients knew for certain that they would not have to pay anything unless they won and that anything they did have to pay could only amount to 50% of the compensation offered, ensuring that if they succeeded they would be left with some benefit from the case.
Accordingly, there was no unfairness in the way the agreement had come about.
Reasonableness, in contract, related to the terms of the agreement. In all the circumstances, were the terms (in particular, the agreement to pay 50% of the damages) reasonable? The clients’ core point here was that it was agreed and accepted that the solicitors had only done just over £50,000 of work on an hourly rate basis. How could it be reasonable that they should be paid over 8 times the fee for the amount of work that they had done?
However, Spencer J rejected this point. The clients‘ comparison sought to compare what the outcome would have been under an agreement that those clients expressly did not want and would never have signed up to with what they had proposed to the solicitor and had expressly agreed to.
Moreover, it sought to compare apples and pears. Fees on an hourly rate basis are paid regardless of success or failure. Even if on a CFA basis, when a success fee will be added, they are payable regardless of the degree of success. That was not what the clients wanted here. As Spencer J expressly found, this was a speculative venture. There was no guarantee of success and what the clients wanted was someone to share in that speculative venture and to take all of the costs risk. In return, the clients were prepared to offer a share of any compensation they obtained.
The venture could easily have failed, leaving the solicitors bearing all of the loss. It could have succeeded in a substantially lower amount, leaving the solicitors with little or no reward. As it happened, both solicitors and clients were “very fortunate”. The express bargain was that they should share equally in that good fortune and there was no unreasonableness in such a bargain.
Impact on the use of contingency fee agreements
The judgment will give heart to those contemplating using such arrangements. It is refreshing to see a court prepared to hold a client to its bargain, once it had satisfied itself that the clients knew and understood what they were agreeing to. The fact that a court is prepared to endorse an award of 50% of the compensation received, which is the maximum amount provided for under the DBA Regulations, may also give some heart to those considering using such agreements.
The judgment does, however, make instructive reading in illustrating the need to ensure that the client is properly and fully advised and that the agreement is well drafted. The agreement must set out clearly the circumstances in which the contingency fee will be payable, and the mechanism for calculation and payment of that fee (see, in particular, the argument as to whether the fee was to be calculated on the compensation figure net or gross of tax).
The final sting in the tail for the clients was that the outcome in the judgment meant they failed to beat a Part 36 offer by the solicitors. As a result, pursuant to CPR 36.17, the solicitors were not just entitled to their 50% fee, but to an extra 10% of that fee, which was effectively another 5% of the compensation.