Putting a bet on CFAs

Last week, Linklaters' head of advocacy, Mark Humphries, bought a racehorse and called it “No Win, No Fee”.

His purchase coincides with his firm's announcement that it will be the first magic circle law firm to advise clients to enter into conditional fee agreements (CFAs) as policy in certain cases.

Linklaters is hedging its bets by introducing the payment method on pensions appeals cases to the High Court (The Lawyer, 23 August). Pension appeals lend themselves to CFAs. The cases are short and their outcomes predictable.

If the method of payment proves a success with both clients and the firm, Linklaters will extend it to other areas of commercial litigation. However, other lawyers are concerned about legislative changes and new insurance policies that encourage no win, no fee agreements in litigation.

Until 1995, CFAs were illegal in the UK. The idea of giving lawyers a vested interest in winning a case was seen as a potentially corrupting influence, despite the popularity of no win, no fee arrangements among clients in the US.

Then the law changed. Fees in personal injury, insolvency and human rights cases could now be funded on a no win, no fee basis. It has proved popular with clients, so the Government has extended CFAs to other areas of law.

Last year they were extended to embrace all civil litigation cases. Lawyers have been allowed to charge higher fees to cover their risk when advising on this basis.

And this year clients have been given the right to recover the costs of insurance from an opponent, making CFAs even more attractive, and insurers are taking advantage of a predicted rise in demand.

Many insurers have offered deals since 1995, but Royal & SunAlliance has launched a policy which, it claims, offers a unique amount of coverage. It underwrites most of the risks of a case for a claimant, defendant and lawyer. If the client loses, the insurers pay the client's costs and most of the law firm's and counsel's, with no premium charged. If the client wins, the insurers charge a premium based on the risks attached to the case and the lawyers charge their normal fees. And it only costs about £200 to take up insurance on litigations.

Humphries is confident about the new insurance policies. He says that under this system “everyone is happy if they lose, apart from the insurers”.

Humphries says that the changes will lead to a boost in client demand for CFAs: “There could be a flood of clients looking for no win, no fee. If a firm is not willing to do this, clients may go somewhere else. We must have our armoury well-stocked before the floodgates open. We are talking about billions of pounds.”

He claims many firms in the City are deliberately ignoring CFAs, because they fear the implications of not being able to charge clients if they lose cases.

He says: “Firms are desperately trying not to take notice of CFAs. It is a cosy world where you don't have to take risks. Firms must embrace the risk to be successful.”

Paul Bowden, litigation partner at Freshfields, disagrees with Humphries.

He says that CFAs only work for small-scale litigation, because clients and firms do not want to risk losing on a grand scale.

“The whole no win, no fee issue is mainstream for 95 per cent of the civil litigation teams in the country. This is outside the City. As far as the City is concerned there is not the driver there.

“CFAs are like putting an occasional £10 on a race. Major litigations are not £10 but millions. The risks are too great to start offering it on a large scale,” he says.

But he does think the loosened CFA restrictions will encourage litigators to be more innovative when arranging payment methods from clients.

“I don't mean no win, no fee, but we should be more flexible in our fee structures. We can run clients on capped fees and fixed fees in respect of particular aspects of a litigation,” he says.

He says that he applauds Linklaters' CFA policy for being innovative, but says that it is early days for the City.

David Reston, litigation partner at Herbert Smith, agrees with Bowden when he says: “Our position is that we can see difficulties in CFAs.” But he refuses to say why.

Martyn Day, senior partner at Leigh Day & Co, however, is willing to express his concerns about CFAs.

He advised 60 lung cancer victims against Imperial Tobacco and Gallahers on a no win, no fee basis between 1996 and 1999 and lost.

He says: “The defendants decided not to go against them for the costs, but we still lost £2.5m.

“The lesson is that there is a danger attached to this.”

But Humphries insists that the law and insurance policies have moved on to such an extent that there is only a slight risk for firms now.

He says: “From the firm's perspective, there is a certain amount of time and expense that goes into investigating the merits of the case from the outset, but I see no problem with that at all. US firms can do it.”

Apart from minimal costs investigating whether a case has a chance of success, he sees the brunt of the risk lying with the insurer if Royal & SunAlliance's policy is taken out.

Nigel Barnett, head of insolvency litigation at Wilde Sapte, disagrees. He says that at first that the insurance Humphries recommends “sounds too good to be true”. But after seeing the policy, he says: “It looked very good. But it will have wrinkles.

“Insurance companies tend to be very selective when deciding the merits of a case. They can turn a case down if it is unlikely to win.”

And Barnett thinks the insurance premium is likely to be high and this will deter companies from proceeding on a no win, no fee basis.

He says: “Most clients may just as well fund their cases in the normal way so they don't face an uplift in insurance costs.

“Most of these clients are going to be big companies. All they want is something that makes litigation cheaper.”

He adds that another unattractive aspect of covering CFAs with insurance is that lawyers will not get paid until the end of cases.

“If you are carrying out a litigation for a long time, you are not going to want to wait for five years to get paid.”

But regardless of how lawyers feel, they are going to have to accommodate client demand for CFAs.

As Andrew Clark, litigation partner at Allen & Overy, says: “Clients are aware of the changes that are taking place. Conditional fees are something they are more and more likely to ask for.”

Alan Hodgart, European director of legal consultancy firm Hildebrandt, warns that some clients may think of CFAs as a panacea, but firms should not.

He says: “Insurance companies are not silly.

“They will screw law firms down by paying the lowest rate possible. And the client relationship will change. They will now shop around for no win, no fee. Firms will progressively have to provide no win, no fee because clients will demand it.”

While other firms may not have reached the starting line Humphries' firm is confident that it is backing the right horse, even though there may be several furlongs to go before “No Win, No Fee” reaches the finishing post.