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CFAS – Is risk assessment necessary?

October 10, 2016

Nowhere in the Conditional Fee Agreements Order 2013 is there any reference to risk assessment as a basis of calculating the success fee.

The Government had said all along that there would be. In its October 2012 update the Ministry of Justice said that solicitors would be required to provide clear information to the client on how the success fee had been calculated including showing the breakdown between solicitor and counsel, if appropriate, adding

“This will be a new requirement for both CFAs and damages-based agreements (DBAs), and is designed to help transparency and consumer protection, and make it easier for clients to compare success fees”.

None of this has made it in to the Conditional Fee Agreements Order, although there is a faint echo of it in Regulation 3 of The Damages-Based Agreements Regulations 2013 in relation to DBAs:

“3. The requirements prescribed for the purposes of section 58AA(4)(c) of the Act are that the terms and conditions of a damages-based agreement must specify –

(a) the claim or proceedings or parts of them to which the agreement relates;

(b) the circumstances in which the representative’s payment, expenses and costs, or part of them, are payable; and

(c) the reason for setting the amount of the payment at the level agreed, which, in an employment matter, shall have regard to, where appropriate, whether the claim or proceedings is one of several similar claims or proceedings.”

Nothing similar to 3(c) has made it in to the Conditional Fee Agreements Order 2013.

Further evidence that, without telling anyone, the Government has changed its mind is contained in the 27 February 2013 Ministry of Justice Consultation response: Extension of the Road Traffic Accident Personal Injury Scheme: proposals on fixed recoverable costs.

In its response to the suggestion that lower recoverable fees will lead to a reduction in the quality of legal advice the Government says, at paragraph 45:

“It should be remembered that when the provisions in Part 2 of the LASPO Act 2012 are enacted, success fees in personal injury cases will no longer be limited to 12.5%. Solicitors will be free to negotiate with their client for success fees up to 25% of damages for pain, suffering and loss of amenity and historic pecuniary loss.”

Leaving aside the Ministry of Justice’s confusion between costs-based success fees (12.5%) and the damages-based success fee of 25% and leaving aside the fact that it was only in road traffic accident matters, not personal injury cases generally, that the costs-based success fee was limited to 12.5%, it does indicate that risk-based success fees have been scrapped.

Thus the only costs-based limit on success fee is 100% (Article 3 of The Conditional Fee Agreements Order 2013).

Thus it seems that at long last the Underwoods Method is officially the law of the land. Unofficially it always was.

That method, established in pre-recoverability days, involved always having a 100% costs-based success fee, but always capping the damages taken from the client at 25%.

I set out below Chapter 3 of my 1998 book “No Win No Fee No Worries”

Chapter 3 – No Win No Fee No Worries

The Success Fee And The Cap

Myth And Reality

Conditional fees differ from U.S. style contingency fees only in that it is not permissible to simply agree a “percentage take”. The Conditional Fee Agreements Order 1995 stipulates a maximum increase of 100% per cent (the “success fee”) but does not impose a percentage cap (“the cap”). However as far as the public is concerned the key consideration is the cap — i.e. will the solicitor guarantee to limit the percentage of damages taken in costs?

Discussions about the percentage success fee (as opposed to the cap), the assessment of risk and which fees form the base sum to be increased by a maximum of 100%, are lost on most solicitors, let alone the public. Amongst those who have considered the success fee in detail there is a widespread but erroneous view that it is the risk of losing which is the main factor in calculating the success fee. It is not!

Understanding this is the key to working successfully on a conditional fee basis.

The Statutory Background

Conditional fees were made lawful by Section 58 of the Courts and Legal Services Act 1990 and that section, without using the term, created the concept of the success fee. By contrast the cap, which actually protects the client, is neither mentioned nor alluded to in the Act or the Conditional Fee Agreements Order 1995.However the Conditional Fee Agreements Regulations 1995 make it mandatory, in a Conditional Fee Agreement, to state whether or not there is a cap but impose no requirement to actually have one.

Why Parliament chose to use the concept of a “success fee” rather than the cap is a mystery but when Parliament extends the operation of conditional fees probably this autumn, 1998, it is to be hoped that the existing regulations will be replaced by a section reading:

It shall be unlawful for a solicitor to charge a client in a conditional fee case more than 25%, including Value Added Tax, of the damages actually recovered for that client.

However in the meantime we must deal with the law as it is, and the relevant parts of Section 58 read:

(2) Where a conditional fee agreement provides for the amount of any fees to which it applies to be increased, in specified circumstances, above the amount which would be payable if it were not a conditional fee agreement, it shall specify the percentage by which that amount is to be increased.

(4) In this section “specified proceedings” means proceedings of a description specified by order made by the Lord Chancellor for the purposes of subsection (3).

(5) Any such order shall prescribe the maximum permitted percentage for each description of specified proceedings.

(6) An agreement which falls within subsection (2) shall be unenforceable if, at the time when it is entered into, the percentage specified in the agreement exceeds the prescribed maximum percentage for each description of proceedings to which it relates.

(9) Rules of court may make provision with respect to the taxing of any costs which includes fees payable under a conditional fee agreement.

Thus the scheme of the Act is to limit the amount by which the solicitor’s costs can be raised, not to limit the percentage of damages that can be taken.

This, as we will see, in Mr Jones’ example below has bizarre consequences.

The Consequences for Mr Jones

Five years later Parliament approved The Conditional Fee Agreements Order 1995. Article 3 reads:

For the purpose of Section 58.(5) of the Courts and Legal Services Act 1990 the maximum permitted percentage by which fees may be increased in respect of each description of proceedings specified in article 2 is 100%.

Article 2 includes personal injury proceedings.

Thus under the scheme laid down by Parliament solicitors may double their fees, bur no more, and may ignore the consequences to the client.

The following is a letter not to send even though it complies with these regulations.

Dear Mr Jones,

I am pleased that the Judge found in your favour and indeed I have already received the damages cheque for £5,000.

My Firm’s costs total £6,000 of which I have recovered £4,000 from the other side.

You will recall that under the terms of the conditional fee agreement we agreed that I could increase my costs by 100% if you won. We agreed that figure because this was a risky case as shown by the fact that it went to trial.

The effect of increasing my costs by I 00% is that they now total £12,000 and, as mentioned above, I have received £4,000 costs from the other side leaving a shortfall of £8,000, but I have applied the £5,000 damages and so the balance due to me from you is £3,000. To make this easy to follow I have prepared a little table.

£
My firm’s basic costs 6,000
Success fee 6,000
Total 12,000
Less costs from other side 4,000
Balance 8,000
Less damages applied to costs 5,000
Balance due to me from you 3,000

Please let me have your cheque in due course.

You will recall that for £85 we insured against you having to pay the other side’s costs and our owndisbursements if we lost. This means that if you had lost it would have cost you nothing but as you have won it has cost you £3,000.

Never mind. It’s a funny old world.

I recall that you wanted the conditional fee scheme because you could not afford lawyer’s fees. A wise decision!

I will be pleased to act for you again in the future — after your forthcoming bankruptcy has finished.

Alternatively next time you are a passenger in a bus and you get injured you might find it cheaper just to admit liability. Yours sincerely

Some scheme. Some protection.

The Need for a Cap

Of course, as many of those involved in looking at conditional fees realised, the “success fee” concept is hopelessly flawed. One only has to look at why it is not used in those jurisdictions which have contingency fees. Those jurisdictions recognise that the cap is the client’s protection.

Thus in The Conditional Fee Agreements Regulations 1995 Parliament made its first faltering steps towards the cap. Thus Regulation 3:

An agreement shall state:?

(a) the particular proceedings or parts of them to which it relates (including whether it relates to any counterclaim, appeal or proceedings to enforce a judgment or order);

(b) the circumstances in which the legal representative’s fees and expenses or part of them are payable;

(c) what, if any, payment is due :-

(i) upon partial failure of the specified circumstances to occur

(ii) irrespective of the specified circumstances occurring; and

(iii) upon termination of the agreement for any reason;

(d) the amount payable in accordance with sub-paragraphs (b) or (c) above or the method to be used to calculate the amount payable; and in particular whether or not the amount payable is linked by reference to the amount of any damages which may be recovered on behalf of the client. (my italics)

Thus the Conditional Fee Agreement does not have to contain a cap but it must state whether or not there is a cap.

The rest of Regulation 3 is very difficult to follow. It is primarily concerned with what payments are due when there is not necessarily a win, e.g. because one or other party terminates the agreement, or because the agreement stipulates that disbursements are payable in any event. These possibilities must be covered in advance in the agreement.

However the section italicised above refers to a limit of these costs by reference to the amount of damages recovered and yet by definition there will not necessarily be any damages and yet certain payments may be due. The italicised section should be a free?standing regulation applying unequivocally to all aspects of a solicitors charges to his client.

The Law Society, to its credit, saw the reality and in its model Conditional Fee Agreement imposed a 25% cap plus VAT on damages taken by way of a success fee, and thus the gap between solicitor and own client costs and inter-partes costs does not need to be brought into either the 25% cap figure, or the maximum 100% success fee.

I strongly recommend that practitioners include all charges to the client including any solicitor and own client costs and VAT in the 25% cap but not in the percentage success fee. (“the Underwoods Method”).

In Conditional fees speak the full solicitor and own client costs –which include any costs received from the other side – are known as “base costs”.

The Options for Mr Jones

To make this clear let us return to poor Mr Jones and look at the three options.

A 100% success fee but no cap.

B 100% success fee but a 25% cap on success fee

C 100% success fee but a 2.5% cap on all fees charged to client.

The damages recovered in each case are £5,000.

A No Cap

In the position set out in the letter to Mr Jones

£
Base costs 6,000
Less received from other side 4,000
Balance 2,000
Success fee (100% of basic costs) 6,000
Balance actually charged to client 8,000
Damages 5,000
Money to client Minus 3,000

 

B Cap on Success Fee only

Base costs 6,000
Less received from other side 4,000
Balance 2,000
Success fee (£6,000 but capped at 25% of £5,000) 1,250
Charged to client 3,250
Damages 5,000
Balance due to client 1,750

Actual success fee (£1,250 on £6,000) = 20.833%

Thus in B, applying the 100% success fee and limiting that success fee to 25% in accordance with the Law Society’s agreement the solicitor actually takes £3,250 from the client’s £5,000. I have excluded VAT for the sake of simplicity (!) but you are entitled to add that to the £3,250 and thus:

3,250.00
VAT at 17.5% 568.75
Total costs 3,818.75
Balance to client 1,181.25
TOTAL 5,000.00

You might like to undertake an exercise to compose a letter to Mr Jones explaining that his cheque for £1,181.25 out of £5,000.00 damages really does represent 75% of his damages and that the £3,818.75 taken by you out of his £5,000.0o really is a 25% cap on the success fee.

C – All Costs to Client Capped – The Underwoods Method

£

Base costs 6,000
Less received from other side 4,000
Balance 2,000
Success fee (£6,000 but capped at 25% of £5,000) 1,250
But total charged to client capped at 25% of damages Therefore charged to client Damages Balance to client 1,250 / 5,000, / 3,750

Actual success fee (£1,250 charged less base costs of £2,000 = minus £750)

Minus £750 on £6,000 = Minus 12.5%

Thus in example C in order to ensure that the client gets 75% of the damages we have actually foregone part of the Base Costs as well as taking no success fee and thus there is a negative success fee.

Only the Underwoods method fully protects the client, i.e. guarantees that the client will get 75% of his or her damages.

In return for always protecting the client in this way you should also aim to achieve 25% of the damages by way of an additional fee that is additional to the costs cheque received from the Defendant’s insurers. To maximise that chance I advise always having the success fee in the agreement as 100%, unless in a particular case you wish to make no charge to the client, e.g. because the client is a friend, relative, minor, client who gives you a lot of work or whatever. In these cases the correct percentage is 0%, i.e. you will take none of the damages.

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