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A conditional fee arrangement (CFA) is one in which a claimant pays his legal representatives' fees only in the event of a successful outcome. The lawyer may seek to cover the expenses of lost cases in a number of ways. This article describes the historical background to CFA, the metas of CFA that are currently lawful, and some hazards associated with such arrangments for the client and the lawyer.
It has been assumed for centuries that Contingency fee arrangements are unlawful for Champerty, which encourages the view that litigation is a money-making procedure for the plaintiff, rather that a way of seeking restitution for wrongs. It was argued that solicitors would seek to recover larger amounts of compensation than were merited by the case, in order to enhance their renumeration. In spite of this, many jurisdictions -- notably the USA -- accept that contingency fees are a valid way to finance litigation.
In the UK, contingency fees are mostly limited to conditional fee -- 'no win, no fee' -- arrangements. These were made lawful by the Courts and Legal Ser v ices Act (1990), which gave the Lord Chancellor the authority to define which metas of litigation could be the subject of such an arrangement, and how it should be administered. It was not until 1995, however, with the enactment of the Contingency Fees Agreement Regulations (1995), that the Lord Chancellor made it practicable to use conditional fees in practice, by allowing them in personal injury, insolvency, and human rights cases. These regulations also allowed for -- indeed mandated -- the levying of a 'success fee' by the lawyer. This was a fee in excess of the lawyer's basic charge, aimed at offsetting some of the costs of losing unfunded cases.
The problem with the success fee was that the client would have to pay it, even if the case were successful, so in practice he did not recover the full measure of damages. The Contingency Fees Agreement Regulations (2000) changed all this by permitting the successful party to recover the success fee from the losing party, provided that certain formalities were adhered to. Incidentally, at about the same time Legal aid was withdrawn for personal injury, defamation and corporate matters. It was also enacted that legal aid should be refused where conditional fee agreements were a more appopriate form of funding.
In the meantime, the courts had begun to formulate a limited common law doctrine of conditional fees; in particular, Thai Trading v Taylor (1998) decided that a 'no win, no fee' arrangement in the 'spirit' of the 1990 Act would be enforceable, even when technically outside the remit of the 1995 Regulations (by not stipulating a success fee). This meta of arrangement was made statutory by the 2000 Regulations.
Current legal position
CFAs are currently allowed for all civil cases except family cases. They may include a success fee, or not.
Where a success fee is included, it will be a percentage of the lawyers' costs (the 'Uplift'). Under the 2000 Regulations, the success fee is recoverable from the paying party, as is an insurance premium paid by the claimant to cover the risk of losing the case, provided that certain formalities are complied with.
Where no success fee is levied, this is still a valid CFA provided that it complies with the statutory formalities.
Hazards for the claimant Under a CFA the claimant is not liable to pay his lawyer's costs if he loses the case, but other liabilities may be incurred in the course of litigation; these may well not be recoverable. Such liabilities include disbursements, barristers' fees (if the CFA is with a solicitor only) and, of course, the costs of the other side. Claimants may take out insurance to cover this risk, and the premium should be recoverable if the claimant wins the case. In some cases an existing insurance policy may cover this eventuality (e.g., motor insurance), but in most cases the claimant will need to take out After the event insurance]]'. This insurance is usually only recoverable from the losing party if preceedings have been issued, so it may be 'better to defer the purchase of a policy until this time.
Hazards for the lawyer
Courts in the UK have been quick to penalise solicitors that they feel to be in champertous relationships -- however unobjectionable -- with their clients; such penalties have included the setting aside of contracts between solicitors and clients, leaving solicitors unable to recover any part of their fees. Probably the most notorious recent case is Aratra Potato v Taylor Joynson Garrett (1995), in which the High Court held to be unenforceable a contract between client and solicitors, that allowed for a modest reduction in fees in the event of losing the case. As a result the solicitors ended up out of pocket by about a quarter of a million pounds, as they could not recover their expenses from their clients. Although it could be argued that this case occured before the statutory acceptance of CFAs, no such claim could be made in Awwad v Geraghty (2000). Here the Court of Appeal set aside an agreement in which the solicitor agreed to accept a much-reduced fee if the case were lost, and the normal fee in the event of a win. Had the solicitor offered to waive the fee completely, this would presumably be acceptable under the 2000 Regulations. This indicates that the courts will reject contingency fee agreements that don't fit into the narrow range allowed by the Regulations.
s.28 of the access to justice act 1999, states that a conditional fee arrangement that complies with all the statutory provisions cannot be deemed to be unenforceable simply by it's being a conditional fee arrangement. However, it goes on to say that all other arrangements that purport to be conditional fee arrangements shall be unenforceable. Presumably this second provision is to prevent the development of a common-law doctrine of conditional fees along side the statutory one (as was begun by Thai Trading). This has the unfortunate side effect that a CFA could be deemed unenforceable simply by failing to comply with a trivial formality. If it is unenforceable, then defendants that lose cases against a CFA-funded claimant have sought to avoid paying costs on the basis that the claimant's solicitor cannot claim against his client, so the client does not need to pay. Solicitors are therefore advised to be very careful that the formalities are followed, and these include ensuring that the written agreement includes a statement to the effect that the client has been given full advice about the funding opportunities available.