Mediation, CFAs and conflicts of interest

Transcription

1 Mediation, CFAs and conflicts of interest A paper published by the Civil Mediation Council 1 1 Origins and purpose of this paper 1.1 This paper originates from questions raised by a number of mediators as to whether special considerations arise in mediations when a party s representation is funded under a Conditional Fee Agreement (CFA). In particular, questions have been raised as to how the actual or apparent conflict of interest between client and lawyer should be dealt with. Such a conflict may arise when the client wants to settle at a discount from their full claim but the lawyer wants to have his costs paid in full. 1.2 This paper is not a policy or guidance note, but discusses the main issues and indicates where, in the view of those who have contributed to its thinking and drafting, mediators need to be aware of potential tensions in such cases and suggests some ways in which these can be managed. 2 A brief account of CFAs 2.1 We cannot improve on this summary from the MOJ Consultation Paper Proposals for Reform of Civil Litigation Funding and Costs in England and Wales: Implementation of Lord Justice Jackson s Recommendations dated November 2010: 42. Conditional fee agreements (CFAs) are the most common type of no win no fee agreements in England and Wales. Under these arrangements lawyers do not receive a fee from their client if they lose a case, but can charge an uplift on top of their base costs otherwise known as a success fee if they win. The success fees can be up to 100% of the base costs in all categories of case. After the Event (ATE) insurance can be taken out by parties in a CFA funded case to insure against the risk of having to pay their opponent s costs and their own disbursements if they lose.. 47.The combination between 1998 and 2000 of (i) removing legal aid for personal injury cases, (ii) extending CFAs to all civil cases (except family) and (iii) introducing recoverability of success fees and ATE insurance premiums 1 This paper is the majority report of a CMC working party, written by Philip Bartle QC (chair), Sir Vivian Ramsey, Tony Allen and Ian Gatt QC. Stephen Walker, the fifth member of the working party, favoured the publication of brief guidance. The CMC decided to publish both this report and a shorter guidance note which has also been posted on the website. 1

2 caused a cultural shift in the role of CFAs as a core method of funding litigation. 2.2 A party taking out a CFA with ATE cover must notify every other party of its existence (but not the success fee uplift or the amount of the ATE premium, so as to keep the risk assessment confidential) as soon as taken out, even before proceedings are issued. 3. Flaws in the CFA Regime 3.1 In his Review of Civil Litigation Costs: Final Report, Sir Rupert Jackson observed that the undoubted benefits of CFA s have been achieved at massive cost, especially in cases which are fully contested. That cost is borne by taxpayers, council tax payers, insurance premium payers and by those defendants who have the misfortune to be neither insured nor a large and well resourced organisation (Chapter 10: 1.10). 3.2 Also, he identified two flaws in the existing system. First, that the recoverability regime is unfocused. There is no eligibility test for entering into a CFA, provided that a willing solicitor can be found (Chapter 10: 4.12). Second, the party with a CFA generally has no interest in the level of costs being incurred in his or her name. Whether the case is won or lost, the client will usually pay nothing. If the case is lost, the solicitors waive their costs and pay the disbursements, in so far as not covered by ATE insurance. If the case is won, the lawyers will recover whatever they can from the other side either (a) by detailed or summary assessment or (b) by negotiation based upon the likely outcome of such an assessment (Chapter 10: 4.13). However, as noted at 10 below, there is a risk that when, before trial, a case is settled without full recovery from the defendant of base costs, success fees, disbursements and ATE premium, a lawyer might seek to recover any shortfall from his client. 4 Reform 4.1 Sir Rupert recommended that the recoverability of success fees and ATE insurance premiums should be abolished across all areas of civil litigation. The MOJ Consultation paper referred to in section 2 supports this proposal. If abolition occurs, the issues raised in this paper will fall away. 5 A typical mediation scenario 5.1 C s claim against D is funded by a CFA with ATE cover. C values the claim at 100,000. By the time of the mediation, C s CFA agreement with his solicitor provides for a 100% success fee. D argues at the mediation that C faces considerable risks in succeeding on liability and also on one major head of damage, even if liability is established. D offers 45,000 plus costs to be agreed. 2

3 C is risk-averse and is advised by his lawyer that there are risks as outlined by D. C is minded to accept D s offer. C s base costs to date are 55,000 and thus will be 110,000 with 100% mark-up plus an ATE premium of 10,000. D refuses to agree costs at that level and makes a global offer of damages, costs and ATE premium of 105,000. C s lawyer wants the full mark-up and payment of the ATE premium. 5.2 It is C s legal costs that are suddenly obstructing progress to settlement. Does this create a conflict of interest between C and his lawyer, such that the lawyer should propose that C should obtain separate advice? Or is this no more than an acceptable clash of interests normally accommodated within the retainer between them? What, if any, ethical questions arise for a mediator in handling such a case? 6 Does this particular problem arise only in mediations? 6.1 The answer is No. The same pressures arise during settlement discussions in correspondence or at a without prejudice meeting where the receiving party is funded by a CFA. 6.2 Where settlement is reached through a Part 36 offer, standard basis costs are payable automatically, so the dispute is just about the quantum of costs, to be decided by detailed assessment if not agreed: the principle of paying a success fee and ATE premium is conceded unless the defendant finds a material breach of the statutory CFA requirements. 6.3 The problem perhaps appears more acute at a mediation because the client decision-maker is present in one place with their lawyers who advised on funding and are now advising on settlement or not. Everyone on both sides is thus able to discuss and argue the issues in close sequence and even face to face within a small time-span. 7 Is this exclusively a CFA problem? 7.1 Again the answer must be No, but the scale of the problem in relation to CFAs is greater than in other areas of cost recovery. Mediators are inured to debates about legal costs at the end of mediations. CFAs are merely one rather expensive-looking way (at least to defendants) to fund litigation. It seems to be the sheer enormity and apparent disproportionality of the costs figures generated by the success fee mark-up that colours attitudes to CFA cost recovery disputes. 8 CFAs and settlement: can a true conflict of interest arise? Solicitors 3

4 8.1 A dispute between client and solicitor over costs can look and feel like a conflict of interest, but is it any more so than the normal costs situation where a client wants to recover as much as possible and a lawyer wants to be paid? We think not. The client has signed up to this kind of lawyer-client adjustment. Whether it was adequately explained to him when surrounded by No win no fee blurb remains an issue which the client may feel needs to be explored later with separate advice, but it is not really needed during a mediation. It is certainly not for the mediator to initiate such a move, for instance by taking the claimant aside and tipping him off. There are proper questions to be asked by a mediator, as we suggest below, but the answers are for discussion between client and lawyer. Barristers 8.2 Counsel may have entered into a CFA through their instructing solicitor and be entitled to a success fee if the case is won and nothing if lost. Alternatively, his fees may be a disbursement under the CFA. 8.3 The Bar s Code of Conduct emphasises counsel s duty to promote and protect fearlessly and by all proper and lawful means the lay client s best interests, and to do so without regard to his own interests or to any consequences to himself or to any other person (including any professional client or intermediary or another barrister). 8.4 Counsel will often be asked to advise on a settlement emerging from the mediation and as to whether the ATE or BTE insurer should continue to fund the case. So he must take full responsibility for advising both client and solicitor over the wisdom of settling at what is offered, and not be concerned whether this might impede future instructions from that solicitor. In doing so, we have seen counsel offering to waive or reduce their own success fee (and even the fee agreed for their attendance at the mediation) and also advise their solicitor to diminish their costs expectations in order to secure what counsel sees as a proper settlement for the lay client. Conclusion 8.5 Where acting in negotiation or mediation, solicitors and counsel will always have an indirect involvement in the settlement because one of the heads of claim will be their costs and the settlement may fail because of the size of their costs. 8.6 Solicitors and counsel are entitled to their costs in accordance with the terms agreed. The fact that a settlement may not be agreed because of the level of fees or the unwillingness of solicitors, experts or counsel to reduce fees does not mean that there is a conflict of interest. 8.7 CFAs and ATE Insurance add an additional dimension, but this but does not change the principles any more than the fact that solicitors or counsel have a financial interest in the outcome changes the position on conflict of interest in litigation. 4

5 9 Different CFAs and ATE policies: elephants not in the room and authority to settle 9.1 Just as CFAs are likely to vary considerably in the way they are drafted from firm to firm, so will ATE policies. Each case will have different provisions, making generalisation difficult. Some CFAs may give clients extra protections from liability for their own legal costs or set limits, though it would be unwise for these ever to infringe the indemnity rule while it still exists (Lord Justice Jackson has recommended its abolition). 9.2 Similarly, ATE policies confer varying levels of control on insurers over those they insure. The relationship between solicitor and ATE insurer will also vary. Some solicitors may be linked to one insurer - effectively as a panel provider/introducer: others may trawl for the best terms for each client over the range of ATE insurers. The solicitor who is tied to an ATE insurer, maybe with a degree of delegated authority, may have interests arising out of that relationship which affect decision-making. 9.3 Levels of control over decision-making may, therefore, vary. Lawyers will usually be obliged to report settlement terms to their ATE insurer when they emerge, and the insurer may decline continued cover unless an offer is accepted. Whether insurers would ever prevent an insured from settling is doubtful, though they will undoubtedly decline to waive any ATE premium for which their insured has become liable. 9.4 But there are circumstances when the ATE insurer, who is rarely at a mediation, can have an effect on settlement. Mediators need to be alive to this and try to ascertain before the mediation the extent of such control, so that they can manage the issues that might emerge from its being exercised from afar. 9.5 We have received reports of mediations where settlement has been broadly reached but the receiving party s solicitor (or occasionally under-instructed or under-authorised counsel or junior solicitor sent in the conducting solicitor s stead) have asserted that they had no authority to compromise on costs, in particular to reduce the percentage of the success fee. To attend a mediation without authority even to discuss, let alone make concessions on, a major component of a claim is a breach of the mediation agreement, not that any attempt has yet been made to sue on such a breach so far as we know. To attend without authority is likely to be a serious affront to an opponent. Of course it can be argued that nothing is lost by agreement on standard basis costs with detailed assessment if not agreed, and the defendant has to make a choice if confronted with that attitude. The danger for a mediator is that annoyance about this might jeopardise perceived neutrality. 5

6 9.5 One mediator reports that a solicitor asserted that he could not compromise costs because of conditions placed upon him by the ATE insurer. It is hard to see how this could be the case, but maybe some policies do cede control of a kind to a background insurer. Mediators might want to highlight this in preparation for the mediation and ensure that the insured party s solicitor brings the insurer or at the least has a line of communication open at the end of the day. Such problems can occur with any Before the Event (BTE) legal expenses policy too. 10 A claimant s potential liability for legal costs when a claim is won 10.1 There is a risk that when a case is settled at a mediation without full recovery from the defendant of base costs, success fees, disbursements and ATE premium, a lawyer might seek to recover any shortfall from his client. Such matters are rarely if ever discussed in the presence of a mediator at the mediation. Mediators will inevitably feel a reluctance even to investigate whether there might be different interests at play within the same private room internal to the claimant team. But there is considerable scope for tension between lawyer and client on this issue, and this will have a direct impact on the most important question, namely what will the claimant actually get in his hand from what the defendant offers If the contractual position on the face of the CFA agreement is that a lawyer may make up any shortfall in contractually entitled remuneration from the claimant, this inevitably leads to doubt (and not necessarily just in the claimant s mind) as to how much the claimant will receive net of all deductions. Mediators do have a sense of responsibility for the workability and practical result of outcomes negotiated at a mediation, partly to prevent any discredit to the process itself, but mainly to ensure that everyone understands the outcome and, if possible, to avoid further issues in the future. 11 Working out the problems 11.1 From those mediators that we canvassed, it seems that, while a few lawyers have effectively scuppered a possible settlement by holding out for their full success fee, very frequently others do not do so when confronted with this scenario. They are willing to share the pain with their client who (on their advice, after all) has accepted the wisdom of a discounted settlement figure. Some mediators appear to have reality-tested quite robustly on this point. Whilst in exceptional cases it might be necessary to suggest to the parties that there may be a professional conflict of interest between lawyer and client requiring separate advice, in the vast majority of cases the situation arises from an inevitable but contractually permitted clash of interests and needs to be understood and managed as part of the mediation process. 6

7 11.2 Good client relations will frequently persuade a solicitor to take a hit on their fees, especially the bonus element in them. While the CFA retainer means that the lawyer is entitled to recover from his client his costs, disbursements, full success fee and ATE premium from the client in the event of a win, as defined above, to the extent that it is not recoverable from the defendant, there is little available evidence that lawyers operating on CFAs have sought to do so. Theoretically the lawyer could agree a reduced success fee or even reduced base costs in a mediated settlement and then seek the balance from the claimant s damages. This would not require any new agreement between lawyer and client. But such a claim, if not enunciated by the lawyer to the client clearly when advising him at the mediation about the implications of accepting such a deal would inevitably provoke wrath Even in relation to base costs, there is generally known to be a significant difference between standard basis costs and what the solicitor can charge the client on the indemnity basis. We know of no evidence that solicitors are taking that difference out of damages after settlement or trial under the CFA retainer. They probably do not do so if they receive the bonus of a success fee. But again, a potential tension can arise between solicitor and client which impacts in what the client will receive. If that goes wrong after a mediation, it is possible that the client might blame the mediation process as much as their solicitor In all these circumstances, the Solicitors Code of Conduct para 2.03(2) (a) and (b) require a solicitor to explain when appropriate, as the matter progresses (so certainly during a settlement discussions at a mediation) whether their client under a CFA may be liable for some of the solicitor s costs, and if so, inform the client of the right to have them assessed by the court. Mediators might well raise the issue of what, if any, deductions from damages are contemplated, and issue a gentle reminder to the solicitor about their obligations under the Code of Conduct, possibly in the presence of the client, if this becomes a major issue which might obstruct a settlement that the client broadly wants. 12 The mediator s own ethical responsibilities 12.1 What are the mediator s own ethical responsibilities in such a situation? Mediators operate under published (if currently voluntary) Codes of Conduct, and are self-regulated or to an extent regulated if working through a provider organisation. However, conflict of interest as discussed in such codes is potentially as between the mediator and the parties and not as between parties and their lawyers. The leading published Codes of Conduct are coy on this topic. The EU Code provides: The mediator must take all appropriate measures to ensure that any agreement is reached by all parties through knowing and informed consent, and that all parties understand the terms of the agreement. 7

8 The CEDR Code of Conduct merely provides that The mediator will ensure that the Parties and their representatives all have adequate opportunities to be involved in the Process. Therefore, the Codes of Conduct remind mediators that they have responsibilities to the parties, for them both to be involved and also to understand what they agree to in the settlement In practice, mediators sometimes develop concerns about the calibre of representation or advice given to a party by their lawyer. But we are not adjudicators or decision-makers, and eschew giving advice on the fairness or justness of outcomes. Mediators will not know everything that a lawyer should about their client s position. The same principle must apply over the exercise of a lawyer s professional and ethical responsibilities during a mediation. The mediator should know the extent and limits of both a mediator s and a lawyer s professional and ethical obligations and feel able to raise questions or reminders about these if concerns emerge. But ultimately it is not for the mediator to intervene to sort out disputes between lawyer and client, unless invited to do so. Lawyers must take responsibility for their ethical responsibilities to their clients, just as they do in terms of professional competence, and a mediator must be very cautious about second-guessing what they are. 13 Other reported CFA problems 13.1 Mediators have also reported a different kind of problem relating to CFAs, namely using the threat of one to bring extra pressure to bear on the defendant. Some have reported a CFA signed just before a mediation, and some have reported threats to enter a CFA tomorrow. There are also warnings given that the ATE premium will be increased very substantially to a new higher level tomorrow, if a generous settlement does not emerge today. CFAs cannot be retrospective in effect, so a threatened success fee percentage uplift in a CFA to be signed tomorrow will not apply to past costs, only to costs after signature and notification of the new funding arrangement has been served on the defendant. As to signing a future CFA, and increases in ATE premium, we cannot see anything inappropriate about that provided that is what will happen. CFAs are currently legal so they remain available for parties in defamation and commercial cases as much as in personal injury and clinical negligence claims. Such pressures are a normal part of trying to gain leverage in a negotiation, and while such steps are authorised by law, they cannot be criticised. 14 Conclusion Any problems created by CFAs and ATE insurance in a mediation need to be dealt with as part of that process and, whilst the parties and mediators need to 8

9 be aware of these problems and address them appropriately, there is unlikely to be a conflict of interest any more than in all cases where costs are an issue to be dealt with as part of the settlement. 15. A summary of possible interventions by the mediator Before the mediation Ascertain the funding arrangements for each party (especially the claimant) for solicitor and counsel: particularly is it funded by o a CFA o BTE legal expenses insurance; o ATE insurance; and (when) was notice of funding given to the other party? If so, does the insurer have any say in settlement or costs negotiations (this would in our experience be rare) but if so, will a representative be there or available at the end of the day? Will the solicitor and counsel attending the mediation have the authority to negotiate if necessary about such matters as the quantum of base costs, the percentage of success fee and the amount of the ATE premium? Will the solicitor have authority to discuss reducing his firm's own costs or will he need to revert to other solicitors within his firm for instructions on this issue? If the party is privately funded, ascertain if there is any intention to change to a CFA with or without ATE and, if so, when and on what terms? At the mediation If success fee recovery or the ATE premium becomes an issue at the concluding stage of a mediation in a CFA-funded case, then: Assuming a global offer, the mediator needs to see if that offer is acceptable as providing enough to pay what the claimant and his legal team are willing to accept; If not, to see what is proposed to be done about any shortfall what will the claimant get in his hand as things stand; If it looks as if the lawyer might seek recovery from the client on a CFA of unrecovered costs and premium, invite the lawyer to disclose the contents of the CFA on which such recovery is sought. If any hesitation emerges over what will happen about the shortfall, gently remind the lawyer (perhaps in the presence of the claimant) of the duty imposed by the Solicitors Code of Conduct to give the client requisite information about costs, and that the client has a right to have any costs sought made the subject of a detailed assessment; If responsibility for the blockage is placed either on absent lawyers or ATE insurers, press for communication to be set up and offer to speak yourself to the missing person; 9

10 Reality-test whether it would be better to accept the present offer (which gives both claimant and lawyer something now) rather than risk carrying on and (in the event of a total loss) everyone getting nothing at all. 1 December