“Skin in the game”
05/12/2023
Conditional Fee (“no win no fee”) Agreements (CFAs) have been around for some time now. But do they really work for both claimant clients and their solicitors?
A CFA inevitably changes the dynamics of the client/solicitor relationship because the client is obliged to assist the solicitor just as much as the solicitor is obliged to assist the client. The client is still the client, of course, and ultimately gives the instructions, but it is the solicitor who is taking the commercial risk.
In a typical CFA model the client will also have adequate After The Event (“ATE”) cover from an insurer against losing the claim outright, as well as loan finance (if required) for disbursements such as court fees, counsel’s and experts’ fees, etc.
To reflect the involvement of third parties such as insurers and litigation funders, there is usually a Priorities Agreement. The PA is the contractual means of recording the order of preference for payments out of the damages and costs recovered from the defendant to the various stakeholders involved. Typically the insurer and funder are first, followed by the solicitor, and then the client.
With the arrival of the Legal Aid, Sentencing and Punishment of Offenders Act over a decade ago however, the ATE premium, interest on the funder’s loan, and the solicitor’s CFA success fee (the additional percentage on base fees to reflect the solicitor’s risk) are no longer recoverable from the defendant, so these must be deducted from any recovery from the defendant. This can inevitably increase pressure on a claimant’s solicitor to deliver a higher recovery to mitigate against this.
As would be expected a CFA solicitor therefore has important reporting obligations to these third-party stakeholders just as much as they do to the client. Critically, the solicitor must therefore also be alive at every stage of the claim to it making good commercial sense for all parties involved.
The costs of litigation usually increase exponentially the closer a case gets to trial, so by the time a claim has reached its latter stages any improved settlement offer from a defendant may be worse in real terms, once the claimant’s additional costs incurred by that stage have also been taken into account.
In those situations things can unravel quickly. A case risks becoming “uneconomic” when it has reached a point where the legal costs, insurance and funding have eroded or (worse) exceeded the recoverable damages plus costs. At that point the solicitor may be tempted to continue with the claim in the hope that the overall commercial position will improve. Claims against such solicitors show that it rarely does.
Careful thought and advice must therefore be provided to clients and all stakeholders, at all stages of a case, to ensure that any decision to settle it is made at the right point. While that may not be at the outset of a claim, it is also unlikely to be towards the end of it.
Before any claim is even launched on a CFA, very thorough due diligence and risk assessment is required bearing in mind not only that any settlement will usually only be for a proportion of the headline claim, but also (and just as important) that the overall costs might look very different after two years than they did in the first 6 months.
Temple Bright’s professional negligence claims (no win no fee) model has been running for almost a decade now. Most recently it saw a successful outcome against a City law firm at mediation. Richard Fisher, TB’s professional negligence claims partner and a CMC registered mediator, remarks:
“It is not a business model for everyone as obviously the firm takes on substantial risk on behalf of our clients. However, before we take any case on a CFA we not only carry out very thorough due diligence on its merits and its true value, but we also produce a full estimate of overheads up to trial – so we are always prepared for the long haul if necessary. Often our initial analysis can take several months, and we routinely reject many more cases than we take. This has worked well for us, as our 100% success rate shows. Some of our successes also include claims against law firms who have previously misjudged CFAs by allowing them to become uneconomic.”
This article is not legal advice, which should be obtained before taking any decisions or actions in the areas covered. Please contact me if you would like an initial discussion of your situation.
