Spreading the risk of CFA gamble

Mark Parkhouse says litigators taking on conditional fee work should cover their backs by asking clients to see another solicitor to thrash out the details of the CFA. Mark Parkhouse is a litigation partner at Rakisons in London.

It was Lord Justice Millett who said in court only this year: “A contingency fee which entitles the solicitor to a reward over and above his ordinary profit costs… should be condemned as tending to corrupt the administration of justice.”

But the Courts and Legal Service Act and the Conditional Fee Arrangements Order 1998 turn this common law definition on its head.

The legislation ignores the corrupting influence of the contingency fee that so concerned Lord Justice Millett.

Instead, it heralds a situation where conditional fee arrangements (CFAs) can be used to finance claims in almost any dispute.

This is a fundamental change. The wider availability of CFAs creates important practical considerations for solicitors.

Litigators are now obliged to advise their clients that they can fund their claim using a CFA. Failure to do so could be viewed as negligent.

At the same time, the solicitor needs to examine the merits of the claim to see if it makes business sense to carry out the work on a conditional fee basis.

It makes no sense to commit resources to a claim where the solicitor is acting on the basis of no win-no fee, when that claim has little prospect of success.

This due diligence forecasting is also necessary to assess the likely costs of insurance, should costs be awarded in favour of the other side.

It is essential to ensure the client properly understands the CFA. This could involve the client taking legal advice that is independent of the litigator in order to get an impartial assessment of the degree of risk involved. This is because the greater the risk, the higher the success fee the solicitor is likely to charge.

He or she can charge a success fee of up to 100 per cent of their ordinary profit costs if the claim leads to a successful outcome and the client wins damages or an acceptable settlement. On the whole, the ordinary profit costs are calculated according to the amount of time the solicitor has spent on the job. This is the fee that the solicitor would charge if the work was not being done under a CFA.

In drafting a CFA, the solicitor naturally gives careful thought to protecting his own interests – perhaps more than those of his client. Defining exactly what success means in each individual case is vital if the solicitor wants to ensure they get paid.

If it is decided that a huge damages award equals success, the solicitor's chances of being paid an uplift fee are much lower than if a successful outcome means the plaintiffs settling.

Other clauses deal with what will happen if the client wants to change solicitors, or to discontinue the claim.

These provisions highlight a conflict of interest between the solicitor and the client and have a substantial effect on the client's rights to the fruits of the litigation.

A client may feel aggrieved to see his winnings disappear into the solicitor's success fee.

If, for example, a client is awarded #65,000 and only ends up with #19,175 having paid #32,000 to their solicitor, several thousands of pounds in counsel's costs, expert witness fees and other disbursements, the client may decide they would have been better of paying his solicitor on an hourly basis – in this case, #16,000 for 80 hours at #200 per hour.

A grievance of this kind over the use of the CFA could lead to litigation against the solicitor if the CFA was not fully explained.

The relationship of trust and confidence between solicitors and their clients means that where the client is materially disadvantaged by arrangements between them, it will be presumed that undue influence has been exercised by the solicitor (see BCCI v Aboody [1992]).

In a dispute over fees incurred under a CFA, the court could presume that the client entered into the CFA as a result of undue influence by the solicitor.

The CFA would then be set aside, leaving the solicitor with no means of being paid for their time spent on the claim, except perhaps through an argument of quantum meruit.

But the court will not presume undue influence against the solicitor if the client has taken independent legal advice before entering into the CFA.

CFAs are complex documents. This could mean clients going to a solicitor for advice about their claim, only to be sent to see another solicitor to negotiate the terms of the CFA with the first.

This is bound to increase the cost and complexity of the litigation process for clients.