Working party recommends no cap on contingency fees for commercial cases

The working party set up to consider fundamental issues relating to the planned introduction of contingency fees, or “damages based agreements” (DBAs), published its report and recommendations on Friday (3 August). The key recommendations affecting commercial clients are:

• There should not be a cap on the level of contingency fee that can be charged in commercial cases. Opinion was split as to whether there should be a cap for consumer / small business claims – if there is to be such a cap, it was agreed that the cap should be 50%.
• Lawyers should not be liable for adverse costs where they act under a DBA, unless they agree to indemnify the client for adverse costs liability. This is consistent with the position where lawyers act under a conditional fee agreement (CFA).
• Partial DBAs should be permitted, where the lawyer receives for example a reduced hourly rate as the case proceeds plus a contingency fee in the event of success.
• There should be no obligation to notify opposing parties where a lawyer acts under a DBA. The working group envisages that the current notification requirements for CFAs and after-the-event (ATE) insurance will be removed once the additional costs for such arrangements are no longer recoverable from an opponent (another change being introduced to implement the Jackson reforms).

Background

One of Lord Justice Jackson’s key recommendations, which is due to come into effect next April, is to remove the restrictions on DBAs for civil litigation. DBAs allow lawyers to conduct a case in return for a share of any damages.

At our seminar on 19 January (Litigation: asset or liability? How contingency fees could change commercial litigation) Lord Justice Jackson outlined some of the detailed issues that were still to be worked out in relation to contingency fees and suggested that a working party might usefully be set up to consider those issues. The working party was established by the Civil Justice Council (CJC) in April, and its report provides advice to the Ministry of Justice to be used in drawing up regulations and determining the detail for the implementation of DBAs.

Disagreement over how DBAs should work

Lord Justice Jackson's final report recommended the introduction of contingency fees on what he called the "Ontario model", as it was based on the regime which operates in Ontario, Canada. He explained the Ontario model as follows: "In other words, costs shifting is effected on a conventional basis and in so far as the contingency fee exceeds what would be chargeable under a normal fee agreement, that is borne by the successful litigant".

Surprisingly, there was significant disagreement among the working party as to how contingency fees are intended to work, and in particular whether the lawyer will receive the contingency fee in addition to recoverable inter-partes costs, or whether the inter-partes costs are deducted from the contingency fee with the client paying any shortfall out of damages. Ultimately the working party concluded in favour of the latter, which certainly appears to be what Lord Justice Jackson envisaged based on the wording of his report.

Group / collective actions

The working party also considered the "special factors" that apply to group or collective actions and concluded that "special controls are necessary in this area of complex litigation where large numbers of claimants are involved and funding options very limited."

It recommended that where there is an application to court for a Group Litigation Order (GLO) the lawyers should at the same time seek the court's approval of the level of any contingency fee; if there is no application for a GLO, the level of the contingency fee will be open to challenge by the clients at the end of the case.

The working group also took the opportunity to comment on the government's current proposals to introduce an "opt-out" collective action for competition claims (see post), and in particular the proposed ban on the use of contingency fees in such actions (which was included in the proposals as a safeguard against vexatious or unmeritorious claims, and the perceived “excesses” of the US class action model). The working party expressed the view that this policy is "misguided because the collective action is precisely the type of civil claim that will benefit from the introduction of DBAs to ensure access to justice."

Interplay with third party funding

As noted above, the working party has recommended that lawyers who act under a DBA should not normally be liable for adverse costs, as the position should be consistent with CFAs. The working party has also recommended that third party funders should continue to be liable for adverse costs where they provide finance in a DBA case.

In our January seminar (referred to above), one of the issues discussed was that if third party funders are liable for adverse costs but solicitors acting under DBAs are not, this might encourage funders to buy or set up law firms to conduct cases under such arrangements (perhaps under a newly permitted "Alternative Business Structure", or ABS, which allows non-lawyer investment in law firms) rather than putting in funding as a third party. The working party refers to "some speculation" about the effect of ABSs on a third party funder's liability for adverse costs where the funder has an ownership share in the ABS. However, the report states that the working party "does not feel that this is a matter that could at this stage be the subject of rules or regulation and is best left to the Courts to resolve if and when a question arises in a particular case".

Employment and personal injury cases 

DBAs are currently permitted for some tribunal cases, but not for civil litigation. For employment tribunal cases, the contingency fee is currently subject to a cap of 35% (including VAT). The working group said it could see no reason to interfere with the existing cap.

For personal injury cases, Lord Justice Jackson recommended that the amount of damages that could be taken as a contingency fee should be capped at 25% of the damages (excluding damages for future care and loss). The working party's approach differs from this:

• It envisages that the cap will apply to the total level of the contingency fee, not just the proportion that has to be deducted from the claimant's damages (i.e. the excess over recoverable costs). Lord Justice Jackson appears to have envisaged the latter, particularly as he based the recommendation in part on his view that the cap on deductions from damages should be the same for CFAs and for contingency fees.
•  The working group has recommended that this 25% cap should be calculated based on ALL damages, not excluding damages for future care/loss as Lord Justice Jackson recommended.

Working party members

The working party comprised:

• Michael Napier CBE QC - Chair
• Nicholas Bacon QC - Barrister 4 New Square
• Duncan Campbell - CBI
• Don Clarke - Forum of Insurance Lawyers
• Richard Collins - Solicitors Regulation Authority
• Peter Douglas - Bar Standards Board
• David Greene - Law Society
• Professor Rachel Mulheron - Civil Justice Council
• Hardeep Nahal - Commercial Litigation Forum
• John Spencer - Association of Personal Injury Lawyers
• Peter Smith - Civil Justice Council
• Colin Stutt - Formerly of the Legal Services Commission