UK contingency fees: a user’s guide for the in-house lawyer

January 2015 | EXPERT BRIEFING | LITIGATION & DISPUTE RESOLUTION

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The most eye-catching ‘Jackson’ reform was the arrival in April 2013 of contingency fees for English civil litigation. Eighteen months later, how has the world of commercial litigation changed, if at all?

The theme of this article is to explore the limited experiences of damages based agreements (DBAs) in mainstream commercial dispute work. We will seek to identify lessons learned, and point out structural, financial and ethical difficulties which have inhibited their wider use.

DBAs: the core components

It is worthwhile revisiting the core components of an English DBA. The central concept is straightforward. Instead of a time based fee, the lawyer is entitled to a percentage of the amount recovered, with a cap of 50 percent. Below that cap, we have no guidance concerning what would be the ‘right’ level for any particular type of case, regardless of its relative simplicity or difficulty.

Clients who regularly commission commercial litigation will appreciate that time charges, while central to the costing exercise, are by no means the only component. Other elements may be more expensive. The regulations make no provision, nor could they, for the fees of experts, forensic accountants and others. Barristers are now allowed to provide their services on a DBA basis, but that element of expense is not without its problems, a theme to which we will return later in this article.

Is a DBA right for my case?

So, with a commercial litigation scenario to be pursued, how has the landscape changed for the client considering their options? There is no doubt that budgetary considerations play a dominant role. There are, of course, real cash constraints; the claimant has valuable rights but is distressed, and simply does not have adequate resources to pursue the claim.

This can particularly be the case in relation to smaller businesses, which have valuable rights, for example, based on antitrust abuses. The remedies available could restore their business to health, but the budgets required to take on larger opponents are beyond their reach. For them, the DBA can be a lifeline.

Sometimes, cash constraints are budgetary rather than absolute; the client is not able to access a budget allocation to pursue an otherwise strong case. This could be where there is no willingness within the organisation to increase allocations for legal spend or, sometimes, can reflect differences within an organisation concerning the merits and cost/benefit analysis relevant to the case under consideration. In such scenarios, the willingness of the clients’ firm to act on a DBA basis may unlock potentially valuable rights to be pursued.

Other factors may also bear on the appropriateness of a DBA for any particular case. These can include simplified case monitoring that may be feasible in a DBA scenario. It is no longer of direct concern to the DBA client just how many hours any particular task has taken at the firm. The quality of work is of course of paramount importance, as ever, but the firm now takes the ‘risk’ that any task will take, say, 10 hours when it might have taken five.

However, the impact a DBA relationship may have on the client/solicitor relationship may present an important challenge. Our DBA regulations provide no guidance concerning how case strategy decisions are to be taken. Where there are a range of options with varying time and expense implications, how are those choices to be managed when the cost falls on the law firm, not the client? Where a fairly low settlement offer is made, but the client might be interested, how is the difficult decision to be made that the strong case for a high value should be ‘sold out’ for a small proportion? When, the defendant makes a generous proposal to rid itself of a threatening case, but for ‘policy reasons’ the claimant wishes to press on, how is that to be managed? Answers to these questions rest with the need for the relationship between client and law firm to be one of transparency and trust, since there are inherent ‘conflicts’ in all of these scenarios which are inescapable in a DBA case.

If I am on the defensive, what does it mean for me?

What are the implications for the client defending a commercial case, if their claimant has a DBA? There is no doubt that this has resulted in scenarios where defence teams have to grasp that their antagonist, having escaped the shackles of budgetary constraints, is able to bring a case previously beyond their reach.

It is difficult for the defendant to assess whether their antagonists are now highly motivated to maximise recoveries, or perhaps that the legal team are highly motivated to achieve an early settlement and ‘cash out’. Clearly these are significant factors affecting the way cases are resolved, and add to the complexities of managing the defence.

Beating a DBA funded claim still enables the successful defendant to be paid costs. The rules governing how these costs will be assessed have not changed. To that extent, there is comfort for the defence team. However, negotiating a settlement, which includes issues concerning the DBA claimants’ costs, may be more difficult than it used to be.

Key areas for reform

The uptake of DBAs in relation to commercial litigation has been very limited. There are several reasons for this. To date, most attention has been paid to the lack of a ‘hybrid’ option – on a ‘pay as you go’ basis the law firm would be remunerated at discounted hourly rates for the work undertaken, supplemented at the end of a successful case by a percentage of the amounts recovered.

Current regulations do not permit a hybrid approach. Commentators had expected that a reform could clarify that hybrid structures are permissible, but this was ruled out in a Ministry of Justice statement in November 2014.

Earlier in this article, we identified the possibility that barristers might now be available on a DBA basis. But, in practice, there may be limited willingness among barristers to embrace the DBA approach. To an extent, this unwillingness can be attributed to concerns that the appropriate contractual structure is as yet unclear, and conflict issues integral to a contingency approach have been left unresolved.

This makes it challenging to find the right barrister team for a complex case, on a DBA basis. In the meantime, since the rules forbid the firm from charging more than the contingent fee, and wrap the involvement of the barrister team into that, the alternative scenario is for the firm to incur the expense of the barrister team on its own account. For substantial commercial cases, this may be a risk which many law firms are simply unwilling to incur.

This leads us into the problematic area of cost recovery. It is remarkable how challenging this topic has become. Balking at the notion that an unsuccessful DBA defendant should have to indemnify the claimant in relation to the contingency fee, legislators have adopted an approach based on fiction. An unsuccessful defendant in a DBA case will be ordered to pay a hypothetical amount equivalent to the costs that might have been payable, had the claimants’ lawyers been working on a conventional time basis.

As a matter of public policy, this may be a tolerable compromise, requiring the defendant to pay something while not punishing them for being unsuccessful at the hands of a DBA claimant. It does, however, mean that the paraphernalia of conventional costs-related activity remains in place in a DBA case, which some might see as an unfortunate inefficiency in the regime.

The difficulty does not stop there. To ensure that the successful firm will not ‘over recover’ from their client’s winnings, our rules require two things: that the ‘fictional’ fee award should only be recovered from the unsuccessful defendant and no one else, and that the successful claimants’ lawyers should be rewarded as regards that amount, only if and to the extent that they are successful in enforcing that costs award.

The bizarre implications of this construct have dampened the enthusiasm of firms to enter into these arrangements in the first place. For a mid-value commercial dispute, the risk exists that a successful claimant legal team could nevertheless go completely unpaid. To the extent that they are not able to recover the costs award from the unsuccessful defendant, and if the costs on that basis broadly equate to the amount of the contingency fee, there may be no remaining basis on which the claimant is obliged to remunerate its successful lawyers.

This in turn leads into difficult issues concerning the allocation of partial payments. To illustrate this, suppose that the DBA claimant has won a judgment for £5m and that the costs incurred would have totalled, on a conventional basis, £1m. The firm agreed a 30 percent DBA with its client. Assuming the judgment is satisfied, you would think the firm would be happily expecting to receive a fee of £1.5m, which is a premium over costs on the conventional basis. However, how does this play out if the defendant hands over a lump sum of £3m to the claimant, but is not able to pay a penny more? Thanks to the rules, the successful firm must recover £1m of costs from that defendant. In calculating what they are entitled to recover from their client, they are deemed to have done so. If that £3m payment is all appropriated to the principal amount of the award and not paid in relation to costs, the most a successful firm will be able to earn is £500,000, making a significant loss on its work.

What does the firm do? Does it try to argue with its client that part of the lump sum payment should be appropriated to costs, so that it can go towards paying the law firm’s fee? Nothing in the rules helps us with this conundrum.

Faced with the issues identified in this article, the reader may be despairing of DBAs ever being a useful tool for financing a potential claimant action. In the meantime, those on the defensive may be thinking that they have nothing to fear since, in the complex commercial dispute world, it is unlikely they will have to confront such a case. For the DBA to take its place as a useful tool, which can be used responsibly in appropriate cases, it is clear that much needs to be done, to turn this innovation from a stumbling prototype into a production model.

Peter Sharp is a partner at Morgan Lewis. Mr Sharp can be contacted on +44 (0)203 201 5580 or by email at psharp@morganlewis.com.

Peter Sharp

Morgan Lewis