Funding options for legal services - Conditional fee agreements (CFAs)

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Overview

Conditional Fee Agreements (CFAs), often known as "no win, no fee" deals, are a major funding tool in legal services, reshaping access to justice. For those preparing for the SQE1 FLK1 exam, a thorough grasp of CFAs—covering their legal basis, structure, and effects on professional practice—is vital. This article thoroughly examines CFAs, discussing their legal framework, potential risks, and influence on solicitor-client relationships, while highlighting crucial recent developments.

Legal Framework and Statutory Provisions

Legislation governing CFAs includes:

  1. Courts and Legal Services Act 1990: Introduced CFAs, allowing success fees with restrictions.

  2. Access to Justice Act 1999: Broadened CFA scope and introduced recoverability of success fees from losing opponents.

  3. Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO): Changed rules by stopping recoverability of success fees for agreements after 1 April 2013.

Key statutory elements are:

  • Section 58(4) of the Courts and Legal Services Act 1990 requires CFAs to be written and comply with specified rules.
  • The Conditional Fee Agreements Order 2013 outlines specific CFA requirements, including success fee caps.

Structure and Components of CFAs

A compliant CFA must include key parts:

  1. Base Costs: Standard legal fees charged by the solicitor.

  2. Success Fee: Extra part of base costs, payable only on winning. Capped at 100% for most cases, limited to 25% in personal injury cases (excluding future care and loss).

  3. Definition of Success: Clear criteria for a successful outcome.

  4. Risk Assessment: Explanation of success fee based on case risk.

  5. Client's Potential Liabilities: Detailed account of client's cost responsibilities.

Professional Conduct Considerations

Using CFAs intersects with several professional conduct areas as outlined in the SRA Code of Conduct:

  1. Conflict of Interest: Solicitors must manage potential conflicts between financial and client interests.

  2. Clear Communication: Enhanced duty to clearly explain CFA terms.

  3. Proportionality: Success fees must match the risk, as in Motto v Trafigura Ltd [2011] EWCA Civ 1150.

  4. Informed Consent: Solicitors must ensure clients fully understand the CFA terms.

Risks and Challenges

Understanding the risks associated with CFAs is vital:

  1. Client Risks:

    • Possible disbursement liability if unsuccessful.
    • Success fees affecting damages recovered.
    • Necessity and cost of After-the-Event (ATE) insurance.

  2. Solicitor Risks:

    • Financial exposure if unsuccessful.
    • Cash flow challenges from deferred payments.
    • Reputation risks from perceived over-charging.

  3. Wider Risks:

    • Potential for frivolous cases.
    • Impact on case settlements and litigation behavior.

Case Law Analysis

Key cases shaping CFA interpretation include:

  1. Callery v Gray [2001] EWCA Civ 1117: Set success fee guidelines, emphasizing a two-stage risk assessment.

  2. Hollins v Russell [2003] EWCA Civ 718: Guided CFA enforceability, highlighting compliance importance.

  3. Sarwar v Alam [2001] EWCA Civ 1401: Tackled recoverability of ATE insurance premiums.

  4. Coventry v Lawrence [2015] UKSC 50: Examined pre-LASPO CFA regime compatibility with human rights laws.

Practical Application and Recent Developments

Recent shifts have significantly affected CFA use:

  1. LASPO Effects: Success fee non-recoverability led to structural changes, especially in personal injury cases.

  2. Fixed Costs Regimes: Introduction of fixed recoverable costs in some cases has changed CFA viability.

  3. Damages-Based Agreements (DBAs): Introduced as an alternative, adding complexity to funding methods.

Examples and Applications

Example 1: Personal Injury Claim

A client seeks help for a road traffic accident claim. The solicitor offers a CFA with a 25% success fee cap on damages. If successful, the client pays standard fees plus the capped success fee. If not, only disbursements are owed.

Key considerations:

  • Assessing claim strength and chance of success
  • Explaining associated CFA risks
  • Being transparent about potential costs

Example 2: Commercial Litigation

A small business is pursuing a breach of contract claim. The solicitor suggests a CFA with a 100% success fee. If successful, the client pays double the fee; if not, no fees are owed.

Key considerations:

  • Evaluating case strength and settlement options
  • Clearly explaining success fee and risks
  • Client's financial capacity in case of success

Example 3: Commercial Dispute with £500,000 Damages Claim

The solicitor assesses a 60% success chance and agrees to a CFA with these terms:

  • Base costs: £50,000
  • Success fee: 50% (based on risk)
  • Success definition: Damages exceed £300,000

If successful, the client pays:

  • Base costs: £50,000
  • Success fee: £25,000 (50% of £50,000)
  • Total: £75,000

This showcases potential cost savings if unsuccessful, balanced against higher fees if successful.

Conclusion

Conditional Fee Agreements remain a detailed and evolving area in legal practice, important for SQE1 FLK1 preparation. Key points to grasp include:

  1. Statutory framework, noting recent legislative changes.
  2. Structure and vital components of a valid CFA.
  3. Conduct considerations, especially conflicts of interest and client communication.
  4. Risks for both clients and solicitors.
  5. Impact of recent developments like LASPO on CFA usage.
  6. Case law's role in shaping CFA practices.

Mastering these equips future solicitors to manage legal funding complexities while upholding professional standards. Understanding CFAs is vital for ensuring justice access, managing client expectations, and maintaining ethics in practice.