All or nothing

Conditional fees for personal injury cases are one thing, but when it comes to major commercial litigation, Jon Robins finds out that the big City firms have yet to take CFAs to their hearts

Most City lawyer might be forgiven for thinking that conditional fees were the exclusive preserve of their colleagues on the high street and their rear-end shunt clients. That is probably the view of Allen & Overy (A&O), after the firm and counsel Michael Tugendhat QC were left £200,000 poorer when their conditional fee arrangement (CFA) was declared invalid, as reported in The Lawyer (8 July).
The sorry tale provides a cautionary lesson about the dangers of 'no win, no fee' in the commercial world, where few firms are rarely anything other than cautious. But business clients' distrust of CFAs is far more ingrained and goes back to the “inbuilt conflict of interest” of no win, no fee.
“Certainly, that's at the back of their minds and it's always in my mind,” observes Mark Humphries, head of advocacy and a partner in the litigation department at Linklaters. “The trouble with CFAs is there's always a conflict and you can't get around that; and that's why we look to have a law firm to advise a client on an agreement.”
There was a time when it seemed that Linklaters would break ranks and become the City firm advocate for CFAs, but Humphries has subsequently corrected that notion. The firm's perceived enthusiasm “might have been slightly misunderstood at the time”, he says. According to Humphries, the firm was never “trying to convert Linklaters' litigation department into some form of the plaintiffs' bar, run exclusively by taking risk”, but was merely exploring the tactical advantages of CFAs.
“I just don't think that there are many clients that actually want them,” Humphries continues. “And that's fine as far as I'm concerned. In fact, it's fantastic, because if they don't want it we'll do it on the standard basis. If they do, we're more than willing to talk to them about it.” In fact, his firm has just entered into a CFA – “a substantial contractual dispute for a major commercial client” – but it is only the fourth major piece of work to be done on a no win, no fee basis.
Lovells partner Neil Mirchandani sees the recent A&O saga as “an illustration of the difficulties of using CFAs in this context and another disincentive”. But, as he points out, the deficiencies in running the agreement had no impact on the merits of the case. “They simply failed to comply with the regulations,” he explains. “Some commercial clients aren't comfortable with the lawyers having such an incentive for their fees.”
It is easy to see how problems arise in a situation, for example, where lawyers enter into a mediation over a claim of £10m, the other side offers £3m and the lawyers are entitled to a 100 per cent success fee on an offer of £5m. “I'm not sure that a lawyer's independence is lost by having a CFA, but clients are nervous,” adds Mirchandani.
By contrast, Wragge & Co is taking a more enthusiastic approach to CFAs. “My view is that they're here to stay and they're not a passing fad,” says Paul Howard, head of dispute resolution at the firm. “People will be increasingly aware of them, wish to use them and will put their solicitors on the spot for advice.” His firm has three “chunky” commercial matters presently being conducted on CFAs.
And why shouldn't savvy commercial clients want no win, no fee? “If a client can secure insurance cover against an adverse costs order, in certain situations it's difficult to argue that it's anything other than a sound thing to do,” says Howard.
According to Humphries, there are two types of client wanting CFAs. First, there are those without any money – and clearly, they are of little interest to Linklaters. “That would strike us as a rather dangerous approach and one would approach that with a great deal of caution,” Humphries says. But the second category is a more interesting proposition. “Where the clients are simply attuned to the idea that a straightforward hourly rate is not the best way to incentivise their lawyers and they'd prefer to pay them handsomely in the event that they did a good job; and the reverse also,” Humphries explains. But he concedes that it is not a very large category.
A&O is not using conditional fees for any mainstream work. According to Catriona Smith, head of A&O's intellectual property litigation group, the firm has yet to create any such arrangements for “a major company with any kind of sizeable assets”, but admits that “there are no particular clients we would or wouldn't do it for”. The firm has run CFAs in the past for pro bono work and for clients “who struggle to pay our fees where we think there's good reason to act for them”. The firm's recent failed attempt at a CFA – in a case concerning defamatory remarks made by scientologists against its client in Bonnie Louise Woods v Sheila Chaleff – was conducted pro bono until two months before the trial.
City firms have been quick to see the obvious benefits of CFAs for pro bono work. But others are uncomfortable about it. “Lawyers do need to be distinct as to what is the basis upon which they're taking on work,” observes Humphries. “You just can't have pro bono with the possibility of doubling your costs.” One lawyer reckons that the probable reason why A&O botched the CFA was, with the case being pro bono, the firm did not bother too much with the paperwork.
Clearly, the mechanics of formulating a CFA for a multimillion, multi-party commercial breakdown are not the same as for a bog-standard road traffic accident (RTA). For example, the definition of what constitutes success is not so clear-cut and may change during the course of a case.
Also, the mayhem in the courts over costs – and most recently the landmark House of Lords judgment in Callery v Gray – leaves the new costs landscape far from certain. In Callery, the Law Lords upheld the ruling that a success fee of 20 per cent was reasonable in a straightforward RTA. According to Mirchandani, lawyers are not going to work on complex issues for a number of years for a modest one-fifth uplift. Indeed, he points out that mathematics are not that great for complex cases even with a full success fee. If lawyers are doing commercial cases that are 50-50, “you have to win at least half and be able to justify a success fee of 100 per cent simply to stand still”. By contrast, around 80 per cent of personal injury cases result in payment to the victim or injured party.
While such mark-ups are not enough to reward lawyers for the risks that they undertake, at the same time they could be too much for the courts to stomach.
Kerry Underwood, senior partner at St Albans firm Underwoods and a leading commentator on all things CFA, observes that 100 per cent uplifts in high-value cases are likely to produce the kind of sums that will make the costs judges' “eyes water”. “They see solicitors potentially making a windfall of, say, £1m – but it isn't like that, because the lawyers are taking huge risks; and by definition the judges don't see the ones they lose,” he says. Underwood advises firms on their CFAs for big deals (“but not A&O”, he adds). He reckons that commercial CFAs are beginning to get off the ground; he recently advised on a £1.2m claim, but admits that the take-up has been “patchy”.
That is also the experience of the after-the-event insurers. “A lot of firms appear to be doing a great deal of soul-searching about whether it's something that they want to get into, but that hasn't been followed by any great activity,” comments Emmanuel Gilbert, managing director of online consultancy
If commercial CFAs do take off, Underwood believes that it is likely to be a client-led movement and reckons that clients have yet to understand the costs argument of CFAs. He cites the case where the base cost on two cases is £1m, which would ordinarily mean a solicitor recovering £1m on the case they win and charging the client the same on the case they lose. Whereas on a CFA with 100 per cent uplift, the effect for the solicitor is cost-neutral, as they would get their £1m costs on the win plus the same again for their success fee.
“The difference is, instead of the client paying £1m on the loser and £1m on the winner, he pays nothing on the loser and the other client pays £2m on the winner,” says Underwood. “I just don't think that point is being picked up – the firm that does it properly can shift the burden from their own client.”
It was the use of no win, no fee as “a tactical litigation assessment” that prompted Linklaters' Humphries to talk to his clients about CFAs. “Where a client is represented on a conditional fee, there's not only the potential for the costs to be recovered against the defendant if the case is successful, but there's also the potential for the success fee to be recovered, which it can be anything up to a 200 per cent costs exposure,” he explains. “What the defendant can do in that situation, facing a double costs exposure that could be tactically disadvantageous, is enter into a CFA so that he can pin a double costs exposure on the other party if he loses.”
It is clear that when firms do enter into a rare commercial CFA, it involves considerable soul-searching and thought. For example, Linklaters requires the approval of two independent litigation partners (“so the whole outfit buys into the idea”, says Humphries) and advises the client to instruct another law firm for the purpose of entering into the agreement.
At Wragges, the managing partner is consulted on every CFA and there could be circumstances where counsel's opinion would be taken.
“Entering into these agreements can have quite a profound effect on the financial side of the business,” explains Howard. “There is the risk; but also there's quite a serious cashflow implication, because if one enters into a CFA, the cash ceases to flow.”
As he points out, there are 30 litigation partners at Wragges; and if they were all running CFAs in the region of £250,000, that could tie up around £8m. “And that would have pretty huge implications, even for a Wragge & Co-size business,” he adds.