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

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 the conditional fee, or at least the major 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

1. 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 changed a higher-than-normal fee to reflect the risk of not being paid at all if the case is lost: the different between the fee charged and the fee recovered comes out of damages.

2. 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.

3. 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.

4. 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. 

5. 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 special rules apply in personal injury claims - i.e. 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 if you lose. 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.  

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.


Other ways of funding legal fees

Legal Expenses Insurance

Many people have legal expenses insurance which is often included in a house insurance policy, for example. For a modest premium, perhaps £10, 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.

The great benefit for solicitors firms who are accepted onto an insurance company's panel is that the 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 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. 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 unduly influence 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 is 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.       

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.   
   
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 possible to take out insurance after a legal dispute has arisen (After the Event or ATE insurance) but the premium for ATE insurance is often quite large and the cost cannot be recovered from the other side if you win.

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 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 may 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 may 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.     


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 and of questions you might want to ask.   

This page was lasted updated in March 2017          Disclaimer