The pros and cons of conditional fees and other ways of funding legal fees

The usual way to pay for legal fee in business and property cases is to pay using you own income and/or savings as civil Legal Aid is not available for most business and property disputes. In most (not all) such cases, the loser is ordered to pay the legal costs (or most of the legal costs) of the winner so you might get back what you have spent in the end but, on the other hand, if you lose and have to pay the other side's legal costs as well, that would be a double blow. Sometimes you have to take risks to enforce your rights but it is important, before commencing legal proceedings, to get the opinion of a barrister on the strength of you case and how much of a risk you would be taking. 

Most people find that in most business and property disputes there is no realistic alternative to paying with their own money and taking a risk, but, before you decide to do that, you might want to investigate whether some other funding option, such as Legal Aid, might be available. If you do qualify for Legal Aid, or for some other scheme, don't assume that it will be good value but be prepared to ask (preferably in writing) how the scheme works. Legal Aid is a scheme subsidised by general taxation and it might therefore be assumed that it is good value but things are not always so straightforward. Someone who loses their case may be relieved to find that because they are Legally Aided they do not have to pay the other side's costs. Someone who wins their case completely may find that the other side is ordered to pay almost all of their costs so that the Legal Aid fund is paid back in full and that most of the contributions the winner has been paying to the Legal Aid fund are refunded. However someone who wins party, and does less well that an offer made by the other side, may find that not only do they not get their contributions back but that the Legal Aid fund is entitled to a large portion (or even all) of the damages awarded. In this last example, it might be thought that the litigant is, at least, no worse off for having used Legal Aid, but they could be. If you use Legal Aid then you have to use a solicitor as well as a barrister so the total legal costs may be more that if you had paid yourself and gone direct to a barrister. As long as someone else pays in the end that may not matter but if the fees end up being deducted from your damages you might be worse off having used Legal Aid. Every case is different but the important thing is to get facts and figures and ask searching questions before you decide how to fund a legal case. This article does not go into every aspect of what are often complicated schemes with pros and cons but is just designed to get you thinking about some of the questions you might want to ask of the provider of any scheme for funding legal fees.

Legal Aid

Legal Aid is a Ministry of Justice funded scheme which pays for a solicitor and barrister to represent you in a case. If you are accused of a serious crime you will qualify for criminal legal aid and criminal legal aid is also available if you are accused of a civil contempt of court (e.g. if it is alleged that you have disobeyed a civil injunction) because you are at risk of being sent to prison.

In other civil cases you might be able to obtain civil legal aid but the availability of civil legal aid has been progressively reduced since it was first introduced in 1949 and relatively few people now qualify. You can use this link www.gov.uk/check-legal-aid as an initial check to see if you might qualify. An advantage of using Legal Aid, if you do qualify, is that it normally protects you from having to pay the other side's costs if you lose the case. However with Legal Aid you do have to make a contribution to your own legal costs. The amount of the contribution you have to make depends on your income and savings, so if you have a low income and few savings your monthly contribution may not be very large but it should also be appreciated that if you win the case and it results in you obtaining or keeping property (e.g. if someone is claiming half your property and you successfully resist that claim) the Legal Aid fund has first claim on the property acquired or preserved to pay off the difference between what you have contributed (and any costs the other side is ordered to pay) and the fees of your barrister and solicitor (which the Legal Aid fund has paid for you). If the property preserved is a house you live in then the Legal Aid fund will normally take a "charge" on the property so that although you don't have to sell it immediately, when you do decide to sell it the Legal Aid fund will be repaid what it is owed out of the proceeds.

So although an advantage of Legal Aid is that you do not have to pay fees up front which you cannot afford you might, in some circumstances, still end up paying the full amount in the end. If you use Legal Aid you have to have a solicitor as well as a barrister because the solicitor is responsible to the Legal Aid fund for administering the scheme (working out and taking contributions for example). In some types of case you need a solicitor anyway (whether you use Legal Aid or not) but if yours is the type of civil case for which a solicitor is not required (e.g. if you yourself can do the administrative work which a solicitor would otherwise do) then to have to engage a solicitor just because you are using Legal Aid increases the costs which you might eventually have to pay. Some people who qualify for Legal Aid actually decide not to use it but to pay a barrister "privately" (i.e. not through the Legal Aid scheme) instead because they calculate that it will be less expensive in the long run, but before deciding not to use Legal Aid, if you qualify, it is important to research the relative costs and think carefully about the pros and cons.


Conditional Fee Agreements

A conditional fee agreement (CFA) is an agreement between a lawyer and their client that the client will only have to pay the lawyer's fee if the client wins their case. Conditional fee agreements used to be illegal because it was considered that they might cause an improper conflict between the lawyer and client. However the law was changed in the 1990s to allow conditional fees subject to certain rules. 

The Pros of Conditional Fee Agreements

The most obvious advantage for the client is that in the event that the case is lost, they will not have to pay their lawyer the conditional fee (though, depending on the agreement, there may be other fees such as expert witness fees which they still have to pay). If the case is won then although the client has to pay the conditional fee the court normally orders their opponent to reimburse them for part of the conditional fee. Sometimes the conditional fee agreement provides that if the conditional fee is not recovered in full from the opponent then the client does not have to pay the difference.


The Cons of Conditional Fee Agreements

Under-recovery of costs

A lawyer will only offer a conditional fee agreement if the agreed fee rate, together with their estimate of the chances of success, makes it worthwhile. This normally means that the fee has to be such that in the event of a win only part of the fee will be recovered from the other side and the balance of the fee effectively comes out of the damages (compensation) which the client receives. The court will only order the other side to pay normal and reasonable fees but the lawyer will probably have charged a higher-than-normal fee to reflect the risk of not being paid at all if the case is lost: the difference between the fee charged and the fee recovered comes out of damages.

Barristers instructed direct do not normally do CFAs

Conditional fee agreements are not normally available if the client engages a barrister direct. The reason for this is that when a barrister is engaged direct, the barrister carries out a series of individual pieces of work as the case proceeds and much administrative work is done by the client themselves with the client only asking the barrister for advice about this administrative work as and when necessary. Much depends on how efficient the client is - e.g. in ensuring deadlines are met - so it is difficult for a barrister to agree to accept the risk of not being paid when it is not only the strength of the case itself but also the efficiency of the client, which will affect the outcome. So if there is to be a conditional fee agreement this means that in practice a solicitor will need to be engaged to manage the litigation and ensure all deadlines are met. Engaging a solicitor, however, increases costs and therefore increases the unrecoverable element of costs which effectively comes out of the damages (compensation) recovered.

How CFAs can lead to conflict

It might be thought that what is good for the client will always be good for the solicitor: the solicitor is only paid if the client wins. But things are not always so simple. For example, sometimes, part way through a case, it becomes apparent that the chances of success are not as high as first thought. The question then is whether further investigations should be carried out to see whether anything further can be uncovered to strengthen the case, or whether to proceed without any further investigations and hope for the best at trial. The client will always want there to be further investigations. The solicitor may view matters differently. Further investigations will take more of the solicitor's time. Even if the result is to strengthen the case a little it may still be lost in the end and that will mean even more work has been done for no reward. So the solicitor may be inclined to "cut their losses". They  may be obliged by the terms of the conditional fee agreement to continue the case until trial but they may not wish to devote time to doing more than the minimum. In doing CFA cases the solicitor may base their profit projections on one case in five being lost, and they view an individual case which encounters problems philosophically, but to the client their case is everything. If this were not a CFA case the solicitor would advise the client on the pros and cons of further investigations and if the client wished to pay for these further investigations that would be the client's choice. But if there is a CFA there may be a conflict between the interest and wishes of the client and the interests and wishes of the solicitor.

Many cases do not go all the way to a trial but are settled by agreement between the parties. For example if the client is claiming £100,000 the other side might offer £90,000. The offer will invariably include an offer to pay the client's costs. If someone wins in court the court will normally order the loser to pay the winner's costs but the court will "assess" those costs and only order reimbursement of a reasonable and proportionate amount. If an offer is made of, say £90,000 plus costs, the parties could settle on the basis that the court will determine the amount of costs to be paid but usually it makes sense for the parties to actually agree the amount of costs to be paid at the same time as the amount of damages are agreed so that their settlement agreement covers everything. If the CFA contains a clause limiting the amount of fees which the client has to pay to their solicitor to the amount recovered from the other side, it will undoubtedly also contain a clause  giving the solicitor a veto on any settlement under which the costs paid are not acceptable to the solicitor. Say a party offers to settle for £90,000 plus £30,000 costs. If the amount of costs claimed is actually £32,000 then the solicitor may think this a reasonable settlement, and the client may think that an offer of £90,000 against the £100,000 claimed is reasonable. But suppose costs claimed are £50,000. In this case the client may well want to accept the offer but the solicitor may well not if the CFA agreement is of a type where the solicitor bears the risk of unrecovered costs. Or suppose the offer is £60,000 damages (as against £100,000 claimed) plus £45,000 costs (as against £50,000 claimed). In this case the solicitor may want to accept but the client may not. 

Often the Defendant will offer a single figure -  e.g. £130,000 inclusive of costs. This can cause great difficulty in a CFA case if the agreement is one where the client is only be liable for the conditional fee to the extent that the client is reimbursed by the other side. Of the £130,000, how much is reimbursement of costs and how much is damages? It boils down to a question of how the client and solicitor agree to split the money offered and the potential for dispute between client and solicitor in such a situation is obvious.

Payment of the other side's costs if you lose 

If you lose you will normally be ordered to pay the other side's costs. However a special rule (called "one-way costs shifting") applies in personal injury claims. A personal injury claim is where you are claiming for bodily (or mental) injury. In personal injury claims you normally do not have to pay the other side's costs even if you lose - there are some exceptional circumstances in which you might be ordered to pay the other side's costs but most solicitors will offer ATE insurance to cover that risk. This means that in personal injury cases a CFA can effectively be an almost risk-free was to litigate - I say almost because, depending on the agreement, you might still have to pay court fees and experts fees if you lose.  

CFAs in business and property disputes

There is nothing to stop solicitors offering CFAs in business and property disputes but most solicitors do not consider it profitable to do so. Many personal injuries occur in circumstances where it is relatively easy to estimate the chances of success (e.g. a car accident where the other party has not heeded a Give Way sign, or a work accident where the employer has breached a specific statutory safety regulation) and so a solicitor does not mind spending 30 minutes considering each enquiry even if only one in three cases has, on consideration, a good prospect of success. But in business and property cases it might take several hours to evaluate prospects of success and few solicitors will be prepared to do this for free.

Summary

Many people, particularly in personal injury cases, are enabled to pursue a case by a CFA when they would not otherwise have been able to fund it so there can be advantages of CFAs but the possible pitfalls should be borne in mind also.

In the publication A Handbook for Litigants in Person the authors, His Honour Judge Edward Bailey and other experienced civil judges, say

Now that Conditional Fee Agreements (CFAs) are legal there are many solicitors willing to bring claims, and sometimes defend claims, on a ‘no win no fee’ basis. This is a sensitive area. It is a difficult subject for the authors of this handbook to comment upon. There are many excellent solicitors who will provide a good service under a CFA. There are also, unfortunately, accounts of solicitors who fall short of a high standard, and who seek to impose too high a success mark-up or who compromise a claim too readily in order to secure a fee.


Legal Expenses Insurance

Many people have legal expenses insurance (not to be confused with indemnity insurance) which is often included in a house insurance policy, for example. For a modest premium, perhaps £15, cover up to £50,000 may be provided. This sounds very good value but what is not always realised is that if you claim on your policy what can happen is that the insurance company instead of paying a solicitor to represent you will simply arrange for a firm of solicitors on the insurance company's panel to do the case on a CFA basis. This raises many of the problems referred to above but, in addition, there can be further problems as explained below.

In recent decades insurance companies have sought to get involved in the provision of services where there is a claim. In times past if a car needed to be repaired after an accident the policyholder took it to a local garage of their choice and the insurance company just paid the bill. But more recently insurance companies have established networks of preferred repairers with whom they have struck up advantageous deals. One of the factors giving insurance companies leverage is the closure of many small garages and the presence of new larger entrants in the market. A small local garage generally does not need to advertise and has a constant supply of work from the local area. A large new entrant needs to generate new business quickly. It can do that at a cost by branding, extensive advertising, and using more expensive premises in the retail parts of towns, but if it comes to an agreement with an insurance company it is immediately assured of a constant flow of work without having to invest heavily in such means of generating business. Consequently the insurance company can strike a bargain which takes into account the value to the repairer of its ability to provide a steady stream of work, thus reducing the cost to the insurer of the insurance claim.

Not dissimilar factors are at work in the market for legal services. Over the last two decades there has been a trend away from solicitor's firms which had remained at a fairly stable size and saw themselves primarily as practising law, to firms who see themselves as expanding businesses in the legal service market. The Legal Services Act 2007, introduced in Parliament by the Blair government and passed in the first few months of the Brown administration, was symbolic of this change because it introduced, for the first time, the possibility of non-lawyers owning law firms, but the change in outlook was already underway and the distinction is a matter of degree. Partners in many a large city firm often felt more like managers of a business than practising lawyers and the distinction between practising law and doing very well out of it, and seeing law as a business venture is not clear cut. Nevertheless there has been a rise in firms which seek to rely for work mainly on deals made with insurance companies.                     

The great benefit for solicitors firms who make agreements with insurance companies and are accepted onto an insurance company's "panel" is that they are assured of a steady flow of cases without them having to spend money on advertising or other forms of marketing (such as having expensive offices on the high street). In return for being on the panel the panel solicitors have to agree to take - on a CFA basis - every case which has chances of success of at least 50%. This is because the insurance policy will state that cover is provided in defined areas of law if there is at least a 50% chance of success. Ideally solicitors firms would rather not take on CFA cases unless they have  a much higher chance of winning and there may be a temptation to asses cases where the likelihood of success is less than 80% unduly pessimistically at, say, 45% so that the firm has a reason for not taking them on. 

There is a further factor which may influence panel solicitors. The insurance policy is supposed to provide protection to the policyholder if the policyholder loses and is ordered to pay the other side's costs. However the policy limit - typically £50,000 - is an overall limit for both the costs of the panel solicitors and and costs ordered to be paid to the other side. The result of this can be illustrated by some examples:

1. Panel solicitors provide £49,500 worth of legal services and case is won - likely result: court orders other side to pay costs so the panel solicitors receive £49,500. Insurance company pays out nil.

2. Panel solicitors provide £49,500 worth of legal services and case is lost - likely result: court orders policyholder to pay other side's costs (let's assume they are £55,000) so the panel solicitors receive nil, insurance company pays out £500, and policyholder must pay £54,500.

3. Panel solicitors provide £20,000 worth of legal service and the case is won - likely result: court orders other side to pay costs so the panel solicitors receive £20,000. Insurance company pays out nil.

4. Panel solicitors provide £20,000 worth of legal services and case is lost - likely result: court orders policyholder to pay other side's costs (let's assume they are £25,000) so the panel solicitors receive nil, insurance company pays out £25,000, and policyholder does not have to pay anything.

Panel solicitors are keen to keep insurers happy so that they remain on the panel. This means that there can be an incentive for the solicitors to only take cases with high chances of success and to try to ensure that they provide legal services worth just under £50,000 so as to minimise the risk of the insurance company having to pay anything significant if the case is lost.

Providing services "worth" just under £50,000 is a slightly artificial concept. Neither the insurance company nor the policyholder will ever pay the £50,000 because there is a CFA so there is nobody to say, as the costs mount up, that the quality of work does not match the price. The only person who will ever pay the £50,000 is the other side who are forced to pay by court order (if they lose). The other side can query the bill - and the court will sometimes reduce it - but if it seems reasonable for the type of case the other side will have little information about how good or bad the quality of service was for the client and whether it was value for money. Of course if the service is obviously bad the policyholder will complain but the policyholder is unlikely to know, or complain about, work taking more man-hours than it should as the policyholder is not paying (until the limit of insurance is reached).              

It can be seen from the above that the perverse incentives arise partly from the fact that, in the main, the insurance company is not actually paying out real money to the panel solicitors but simply has an arrangement whereby panel solicitors will provide services at little or no cost to the insurance company in return for which panel solicitors are guaranteed a steady flow of work with limited scrutiny of the quality or efficiency of the service provided to the policyholder.  
   
To try to combat these problems there are regulations which mean that you should be able to choose your own solicitor, and not be restricted to a panel solicitor, so that your solicitor is actually paid real money by the insurance company and there is no CFA, but insurance companies will try to discourage you from doing this. 


"After the Event Legal" Expenses Insurance

Ordinary legal expenses insurance (as described above) is also known as Before the Event (BTE) insurance because it is taken out before any specific legal dispute is on the horizon. It is also sometimes possible to take out insurance after a legal dispute has arisen (After the Event or ATE insurance) but (unlike BTE insurance) this would generally only cover the risk of being ordered to pay the other side's costs (i.e. it would not normally protect you against under-recovery of you own costs). The premium for ATE insurance is often quite large (unless, perhaps, it is a personal injury claim and the ATE insurance is purely to cover those exceptional circumstances where one-way costs shifting does not apply) and the cost cannot be recovered from the other side if you win.



The above explanation is only an overview and in order to be reasonably concise I have had to leave some details out - details which are likely to affect what the law would say about your own situation. So please do not rely on the above: it is just an indication of possible sources of legal funding, possible pros and cons, and questions you might want to ask of any potential funding provider.   

This page was lasted updated in August 2018.    Disclaimer