Consult for success
27 January 1998
Neil Mirchandani says before extending conditional fee agreements to complex commercial actions serious consideration needs to be given to the likely impact. Martin Soames is a litigation partner at Biddle. Neil Mirchandani is a partner at Lovell White Durrant. Alison Lindley is a lawyer with the Consumers' Association.>
In the debate on extending the use of conditional fee agreements (CFAs) to almost all civil proceedings, less attention has been paid to their potential impact on the complex commercial actions in which City firms are normally involved.
Such cases are rarely clear cut. They often involve multiple parties and can also involve proceedings in other jurisdictions. Very often the costs involved are relatively insignificant when compared with the amounts at stake or the commercial issues driving the litigation.
For these reasons, the development and use of CFAs in large-scale commercial litigation is likely to be slow and perhaps will only occur on the back of the successful use of CFAs in smaller commercial cases.
It is essential that the consultation period for considering the Lord Chancellor's proposals be used as fully as possible. Numerous issues need to be discussed between all the parties affected by the conditional fee system, including clients, solicitors, barristers, expert witnesses and insurers (whose ability to assess and write suitable policies for litigation risks will be crucial to the success of the proposals).
Some of the issues that need further consideration include:
How to define 'success' in a case, particularly as CFAs are likely to be negotiated at the outset of a case without, for example, the benefit of the other side's documents. Will success depend on obtaining judgment or actually recovering money? If the latter, will solicitors be prepared, in effect, to underwrite the solvency of defendants?
How far will barristers be prepared to act on a conditional fee basis?
Is there any basis on which CFAs can be extended to expert witnesses, when their independence will be put in question by having a direct financial interest in the result?
Can better use be made of IT to estimate likely litigation costs? At Lovell White Durrant, software has been developed to help assess the likely litigation costs at different stages based on a variety of different assumptions as to how a case may develop. The ability to predict costs with greater accuracy is likely to be critical in enabling insurers to write policies at appropriate premium levels.
To what extent can CFAs be applied to specific aspects of a case, such as a major interlocutory hearing?
Will CFAs have an adverse impact on alternative dispute resolution by giving a greater financial incentive to proceed to judgment?
Should there be standard form agreements for solicitors, counsel, experts and insurers to minimise the risk of inconsistencies or gaps in coverage?
How far will insurers backing CFAs seek to exercise control over the litigation, particularly its settlement?
What alternatives are available, such as fixed fees with an uplift for success (and a reduction for defeat)?
Finally, how will work carried out under CFAs be treated for tax purposes? The Inland Revenue's recent proposals to change the basis for assessing firms' liability to tax may mean that certain elements of the cost of work carried out under CFAs would be subject to tax even though the related fee may not have been earned or received. The net effect of this would be to increase firms' tax liabilities. The impact of the Revenue's proposals needs to be carefully considered, otherwise CFAs will fail to get off the ground.
View from the frontline:The commercial litigator
Lord Irvine's reforms were designed to cut the legal aid bill but they have gone way beyond that aim. While the Law Society has begun to consider the impact of his proposals on legal aid firms, nothing has been published about their likely impact on commercial litigation practices. The question is not whether conditional fees will be extended to other forms of litigation but how far that extension will go.
The possibility of conflict of interest between client and solicitor (and solicitor and counsel) under the new proposals needs to be resolved, as does the issue of bearing disbursements including counsel's fees until the end of an action. It is one thing to carry such disbursements in a small personal injury case; it is quite another to have to bankroll them out of cash flow in a big commercial action lasting several years.
Would my firm take cases on a contingency or a conditional fee basis if the law allowed it? In litigation, we would respond to clients' needs, but we would not be prepared to enter into agreements which we did not believe to be in our clients' or our own best interests or which could risk dividing our interests from those of our clients.
There would be a need for greater risk assessment at an early stage which would mean more work for actuaries and insurers. It is hard to see how the chances of success in major litigation can be assessed accurately before discovery.
It is possible that the publishers for whom we act would face more speculative libel actions, which would mean more work for our clients' insurers. Ironically, the proposals are likely to mean more work for our insolvency department: many high street firms may be forced to close down because their cash flow has been drained.
It remains to be seen whether clients will take up the option of conditional or contingency fees. While Lord Irvine might be happy to hire a taxi on such a basis, he might be less enthusiastic about relying on treatment from a doctor who would be paid only if he cured him.
View from the frontline: the consumers' association
In principle, the Consumers' Association welcomes the extension of conditional fee agreements (CFAs) to cover most types of civil cases. But their extension should not be brought forward at the cost of removing all forms of state assistance.
The present legal aid scheme is in need of change. It no longer targets need properly, nor does it encourage efficiency or the development of legal services so as to provide consumers with the best possible choice of legal advice and assistance. The present scheme needs to be overhauled, but removing all forms of state assistance in civil cases and replacing it with CFAs is not the answer.
CFAs, together with 'after the event' insurance, should help many people bring court cases without the fear of bankruptcy if they lose. In certain cases such agreements may even be a more attractive proposition for litigants than legal aid, because of high contributions, the possible liability for some of the defendants' costs, the statutory charge and the bureaucracy involved.
But conditional fees are still at an embryonic stage and should not be seen nor promoted as a substitute for legal aid. A number of issues still need to be addressed:
There has been no research to find out whether existing CFAs are working for consumers and until such investigations are carried out it would seem ill-advised for CFAs to be consumers' main or only option for funding legal action.
CFAs work only if they are backed up by insurance agreements. However, it is unclear whether insurance companies are going to step into the market and provide policies to cover the other side's costs in areas of law not already covered by CFAs. Insurance companies may not be prepared to provide such policies. CFAs have been used mainly in personal injury cases where it is reasonably easy to predict the outcome of the case. In other areas of the law it is going to be far harder to assess the outcome with any certainty and the risks for insurers will therefore be higher.
Even if insurers do provide policies, the premiums are likely to be fairly substantial, as has proved to be the case in medical negligence cases. There will be many people who cannot afford the insurance premiums necessary to protect against the risk of paying the other side's costs should they lose litigation funded by a CFA.