Conditional fee agreements (CFAs)

Introduction

Conditional Fee Agreements (CFAs) are legally binding contracts between clients and solicitors, where the payment of legal fees depends on the success of a case. Originating from the Courts and Legal Services Act 1990, CFAs have transformed access to justice by allowing individuals to pursue legal claims without immediate financial burden. The core principles involve an agreement to pay an additional fee in addition to standard fees if the case is successful, and possibly not to pay fees if the case fails. Key requirements include a written agreement outlining the conditions, a clear definition of success, and meeting statutory regulations and professional conduct rules. CFAs are significant in civil litigation funding, making their understanding essential within the SQE1 FLK1 examination framework.

Legal Framework and Statutory Provisions

Understanding the legal background of CFAs is important. The Courts and Legal Services Act 1990 permitted CFAs in specified proceedings, effectively allowing solicitors to charge fees contingent on case outcomes. Subsequent legislation, such as the Access to Justice Act 1999 and the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO), further shaped these agreements.

Key statutory provisions include:

• Section 58 of the Courts and Legal Services Act 1990: Specifies that CFAs must be in writing and comply with prescribed requirements.

• Access to Justice Act 1999: Expanded the use of CFAs and allowed for the recovery of certain fees and insurance premiums from losing parties.

• LASPO 2012: Introduced significant changes, notably abolishing the recoverability of certain fees and After-the-Event (ATE) insurance premiums from the losing party for CFAs entered into after April 2013.

These statutes collectively establish the parameters within which CFAs operate, outlining the rights and obligations of both clients and solicitors.

Structure and Components of CFAs

You might wonder, what exactly makes up a CFA? Let's break it down. A valid CFA comprises specific elements that define the obligations of the parties involved:

1. Base Legal Fees: These are the standard fees a solicitor charges for their services. Consider this as the starting point.

2. Additional Fee: An extra fee payable only if the case is successful, typically calculated as a percentage of the base fees. This fee reflects the risk the solicitor takes in working on a conditional basis.

3. Definition of Success: Clearly defined criteria outlining what constitutes a successful outcome. Without this, both parties might have different expectations.

4. Risk Assessment: An evaluation of the case's strengths and weaknesses, justifying the agreed additional fee based on the level of risk involved.

5. Client's Liabilities: Detailed information about potential costs the client may incur, such as disbursements or fees if the case is unsuccessful.

Crafting a CFA is akin to setting the terms of an agreement. Both the client and solicitor need to understand and concur on the path forward, ensuring transparency and trust.

Professional Conduct Considerations

Solicitors must follow strict professional conduct rules when entering into CFAs. The Solicitors Regulation Authority (SRA) Code of Conduct outlines several key considerations:

1. Conflict of Interest: Solicitors must avoid situations where their own financial interests conflict with those of the client. Charging an additional fee could potentially influence a solicitor's advice, so caution is needed.

2. Clear Communication: It's important to explain the terms of the CFA comprehensively. Clients should fully understand how fees are calculated, the circumstances in which they must pay, and any alternative funding options.

3. Best Interests of the Client: The solicitor's primary duty is to act in the best interests of the client. This means providing unbiased advice, even if it may not align with the solicitor's financial incentives.

4. Proportionality: Additional fees should reflect the level of risk involved. Overstating risk to justify higher fees breaches professional standards.

Professional conduct in the context of CFAs isn't just about following rules; it's about upholding the integrity of the legal profession. By maintaining transparency and prioritizing the client's needs, solicitors safeguard trust in the solicitor-client relationship.

Risks and Challenges

While CFAs can provide substantial benefits, they also come with risks and challenges for both clients and solicitors.

Risks for Clients

• Financial Liability: Even under a CFA, clients might be responsible for certain costs, such as court fees, expert witness fees, or the opposing party's costs if the case is lost.

• Reduction in Damages: Additional fees are often deducted from the client's damages. This means that even if the case is won, the client may receive less than expected.

• Insurance Costs: Clients may need to obtain After-the-Event (ATE) insurance to cover potential liabilities, adding an extra layer of expense.

Risks for Solicitors

• Unpaid Work: If the case is unsuccessful, solicitors might not recover their fees, which can affect their financial stability.

• Cash Flow Issues: CFAs can lead to irregular income streams, making financial planning more challenging for law firms.

• Professional Liability: Advising on CFAs requires careful compliance with professional standards. Missteps can lead to complaints or disciplinary action.

Broader Challenges

• Access to Justice Concern: While CFAs aim to improve access to legal services, they may inadvertently encourage weak claims, impacting the efficiency of the legal system.

• Market Uncertainty: Legislative changes, such as those introduced by LASPO, have altered the financial viability of CFAs, creating uncertainty for practitioners.

Addressing these risks requires careful consideration and strategic planning. Both clients and solicitors must weigh the potential benefits against the possible downsides.

Case Law Analysis

Several landmark cases have shaped the understanding and application of CFAs.

Callery v Gray [2001]

In this case, the Court of Appeal provided guidance on the reasonableness of additional fees and the necessity for ATE insurance. It emphasized that solicitors must conduct a proper risk assessment to justify the level of the additional fee.

Sarwar v Alam [2001]

This case addressed the availability and relevance of ATE insurance. The court held that it was reasonable for a claimant to take out ATE insurance to protect against adverse costs, even if they had legal expense insurance under an existing policy.

Coventry v Lawrence [2015]

The Supreme Court considered whether the recoverability of additional fees and ATE premiums infringed upon the defendant's right to a fair trial under the European Convention on Human Rights. The case highlighted tensions between access to justice and the rights of opposing parties.

These cases illustrate the changing nature of CFAs and the importance of staying informed about legal precedents that affect their use.

Practical Applications and Recent Developments

The field of CFAs has undergone substantial changes in recent years, affecting both legal practitioners and clients.

The Impact of LASPO 2012

The Legal Aid, Sentencing and Punishment of Offenders Act 2012 introduced substantial reforms:

• Non-Recoverability of Additional Fees: Additional fees are no longer recoverable from the losing party. This means clients must pay the additional fee out of their damages.

• Cap on Additional Fees: In personal injury cases, the additional fee is capped at 25% of the damages, excluding damages for future care and loss.

• Qualified One-Way Costs Shifting (QOCS): Provides that a losing claimant may not have to pay the defendant's costs, except in certain circumstances.

These changes have altered the strategic considerations for both clients and solicitors when entering into CFAs.

Emergence of Damages-Based Agreements (DBAs)

As an alternative to CFAs, Damages-Based Agreements allow solicitors to receive a percentage of the damages awarded. While similar in concept, DBAs have their own regulatory framework and considerations.

The evolving nature of funding arrangements requires practitioners to remain responsive. Keeping abreast of recent developments ensures that clients receive informed advice tailored to the current legal environment.

Examples and Applications

To illustrate how CFAs operate in practice, let's consider some scenarios.

Example 1: Personal Injury Claim

Consider a person injured in a car accident seeking compensation. They approach a solicitor who believes the case has strong merits but the client cannot afford legal fees upfront. Under a CFA, the solicitor agrees to represent the client with an additional fee capped at 25% of the damages awarded.

If the claim succeeds, the client pays the solicitor's base costs plus the additional fee, deducted from their compensation. If the claim fails, the client may not owe the solicitor's fees but could still be liable for disbursements unless protected by ATE insurance.

Example 2: Commercial Litigation

Consider a small business facing a breach of contract dispute. The potential recovery is significant, but legal costs are a concern. A solicitor offers a CFA with a higher additional fee, reflecting the complex nature of the case and the risks involved.

By entering into a CFA, the business can pursue the claim without initial outlay, aligning the solicitor's remuneration with the outcome. However, if successful, a portion of the recovery will go towards the additional fee.

Example 3: Employment Dispute

An employee believes they were unfairly dismissed but lacks the funds to pursue legal action. A solicitor assesses the case and agrees to a CFA with a moderate additional fee. The client feels reassured knowing they won't face hefty legal bills if the case doesn't succeed.

These examples demonstrate how CFAs can enable access to justice across various legal contexts. They also highlight the importance of clear communication and understanding of the terms.

Conclusion

CFAs represent a complex interplay of legal principles, statutory regulations, and professional obligations. The detailed statutory framework, encompassing statutes like the Courts and Legal Services Act 1990 and LASPO 2012, sets the groundwork for their operation. Understanding the precise requirements—such as the necessity for a written agreement, clear definition of success, and compliance with Section 58 of the Courts and Legal Services Act—is essential.

Professional conduct considerations, as stipulated by the SRA Code of Conduct, intersect with these statutory provisions, emphasizing duties like avoiding conflicts of interest and ensuring clear communication. The interaction between these principles is evident in cases like Callery v Gray, which illustrate how risk assessments justify additional fees within the bounds of professional ethics.

Technical examples, such as the impact of LASPO on the recoverability of additional fees and the introduction of QOCS, demonstrate how legislative changes affect the practical application of CFAs. Solicitors must manage these developments while meeting both legal and ethical requirements.

In sum, CFAs require meticulous attention to legal statutes, professional standards, and evolving case law. Proficiency in these elements is critical for anyone engaged in civil litigation funding, ensuring that CFAs are employed effectively and responsibly within the legal system.