Conditional Fee Arrangements, After the Event Insurance and beyond! CFAs, ATEs, DBAs Let s de-mystify the acronyms! 1. Conditional Fee Arrangements 1.1. What is a Conditional Fee Arrangement A conditional fee arrangement ( CFA ) is an agreement between a client and a legal representative under which the client agrees to pay the legal representative s fees at less than standard rates (or even for nothing) if the case is not successful and at standard rates plus, potentially, a "success fee" (expressed as a percentage uplift on standard rates) if the case is successful. The success fee compensates the legal representative for the risk of not getting paid the ordinary fees. 1.2. Types of CFA There are a number of different types of CFAs, including: 1.2.1.CFAs with no success fee. Pursuant to this form of "no-win, no-fee agreement", the legal representative agrees to forego all of its fees if the client loses and will charge its ordinary fees if the client wins. 1.2.2. CFAs with a success fee. Pursuant to this form of no-win, no-fee agreement, the legal representative agrees to forego all of its fees if the client loses and will charge its ordinary fees and a success fee calculated as a percentage uplift on the ordinary fees if the client wins. 1.2.3. CFAs with a discounted hourly rate. 1.3. The success fee Pursuant to this type of CFA, the legal representative will be paid at a discounted hourly rate whatever the outcome of the claim, but will forego the balance of its ordinary fees if the client loses (i.e. will only charge the discounted rate), and will charge all of its ordinary fees (with or without a success fee) if the client wins 1.3.1. Notification A party that intends to recover an additional liability must notify the court and other parties. In theory, a failure to notify properly means that the additional liability is not recoverable from the other side (see below). The definition of additional liability includes a success fee payable under a CFA. If the CFA has already been entered into by the time a claim is commenced, the party that has entered into the CFA must file a Form N251 at Court. This form, which simply notifies the other parties of the date of the CFA and the claims to which it relates, must be served with the claim form. If a
defendant is funded by a CFA, it must file the Form N251 at Court when it files its first document at Court (eg the acknowledgment of service) and notify the other parties at the same time too. If the CFA is entered into after the claim has commenced, then the Form N251 must be filed and served as soon as possible and, in any event, within 7 days of the CFA being entered into. Although a party is obliged to provide information about a CFA once a claim has been issued, the rules are not as rigid prior to the issue of a claim; they simply state that a party that has entered into a CFA prior to the issue of a claim should as soon as possible, notify the other parties to the dispute that it has done so. 1.3.2. How is it calculated? The success fee represents the risk to the legal representative of the client losing the claim and therefore the possibility of not ever receiving full payment and suffering a delay in payment of a full fee. It is up to the legal representative to set the success fee depending upon his/her assessment of the risk. However, the success fee must not exceed 100% of the legal representative s ordinary fees. 1.3.3. Disclosure of the success fee A party is not obliged to disclose the level of success fee in its CFA until after a final costs order. It is not obliged to do so as, due to the way the fee is calculated (see above), it can give away what a party and its legal representatives consider to be its prospects of success and therefore put it at a tactical disadvantage. Before making an offer of settlement which incorporates an offer to pay the other side s costs, a party to a dispute (the offeror) may want to know what the receiving party s costs will (or at least are likely to) be. However, the party with the CFA is under no obligation to provide details of the success fee. Instead, it can just inform the offeror what its ordinary costs are and remind them that there will be a success fee in addition. Alternatively, the party with the CFA could provide the offeror with a global figure including the success fee. If they do not provide a global figure, the party making the offer will want to err on the side of caution and proceed on the worst case scenario, namely that the maximum success fee of 100% will be applicable. 1.3.4. When is the success fee payable? The event(s) upon which the success fee will become due will be defined in the CFA. The definition of success can include results achieved by settlement, regardless of how low the settlement sum may be. This is, therefore, a critical term of the agreement. 1.3.5. Who pays the success fee? If a party with a CFA wins the claim, the other party is likely to be ordered to pay the winnings party s costs. In theory, these costs can include all fees payable under a CFA including any success fee, although in practice the costs will be subject to the usual tests of reasonableness and proportionality.
Note that whilst the fees payable under a CFA including any success fee should be recoverable from the losing party, this is only of comfort if the losing party can afford to pay them. If not, the winning party will end up paying higher costs than it would otherwise have done, given that costs under a CFA are usually significantly higher than costs when the legal representative is not acting under CFA. 1.3.6. Can the success fee be challenged? The success fee can be challenged. Grounds for challenge include: i ii Failure to provide the paying party with the requisite information (see notification requirements above). The level of the success fee. The judge assessing costs will consider the facts and circumstances as they were known to the legal representative when the CFA was entered into, in order to decide if it was set at a reasonable level. If he thinks not, he can reduce the success fee on assessment. Factors that will be considered include the risk that the circumstances in which the costs, fees or expenses would be payable might/might not occur and the legal representatives liability to any disbursements. Note that when it comes to the stage of assessing the success fee, the party with the CFA has to provide a statement of reasons explaining the percentage uplift applied (i.e. the success fee). There is a significant amount of case law and academic debate on whether or not a CFA itself is disclosable once a costs order/agreement has been made, which there is not time to go into here. 1.4. A CFA in practice Brief terms of an example CFA: The client is to pay 50% of the legal representative s normal hourly rate ( 250) during the course of the claim i.e. 125/hour during the claim, with the remaining 50% only becoming due if the client wins the claim along with a success fee (also known as the uplift ) of 100%. The legal representative does 200 hours of work. i ii If the client loses, then it will have paid 200 x 125 = 25,000 and nothing more will be due. If the client wins, then it will be obliged to pay the remaining 125/hour ( 25,000) plus a success fee of 250 x 200 hours ( 50,000). The client s costs will be 75,000. However, these costs may be recoverable if the party obtains a costs order in its favour. By comparison, if the client had not entered into the CFA its costs would have been 50,000 ( 250 x 200 hours). 1.5. Implications of the other side s legal representative acting under a CFA 1.5.1. Strength of case The existence of a CFA suggests that the party with the CFA and its legal representative believe they have a reasonably strong case, as the legal representative is unlikely to agree to enter into a CFA if its client's case is weak.
1.5.2. Costs pressure The risk of paying the other side s costs inclusive of success fee increases the financial risk of a claim and puts pressure on the receiving party. However, a claimant in a recent probate case was severly criticised for emphasising the level of her potential costs as a means of putting pressure on the defendant to her claim to settle. The way the existence of the claimant s CFA and ATE (see below) arrangements were deployed was one of the reasons the judge gave when awarding indemnity (i.e. the highest) rate of costs against the claimant. 1.5.3. Reaching a settlement The existence of a CFA can affect the likelihood of reaching a settlement. It is in the interests of a legal representative acting for a client with a CFA to succeed, however that is defined in the CFA (see above). This may affect settlement negotiations if a settlement, or a settlement below a given figure, would mean that the legal representative would have to forego his/her success fee. This gives rise to a potential conflict of interest between a legal representative and his client and potentially limits the clients control over his claim. Similarly, the fact that the other party s costs may be significant as a result of the CFA can impact upon the settlement negotiations; although the party with a CFA is not obliged to disclose success fee itself (see above). 1.5.4. Complications 1.6. A CFA in practice The existence of one or more CFAs in multi-party situations can make the proceedings particularly complicated. After the event insurance ( ATE ) is often arranged in conjunction with a CFA so that the party taking out the CFA is insured against the possibility of paying the legal representatives fees (including success fee) and/or disbursements. 2. After the event insurance 2.1. What is ATE insurance? ATE insurance is insurance taken out by a party when it is involved in a dispute in order to cover the possibility of having to pay some or all of the costs of losing the dispute. 2.2. Who can be insured? Any party to a dispute whether a company, corporation, charity, partnership or individual may apply for ATE insurance. However, it will only be available if the party seeking the insurance has received advice that it has a reasonable prospect of success at bringing or defending the claim. 2.3. What does ATE insurance cover? In its simplest form, ATE insurance covers a party s liability for its opponent s legal costs and disbursements, whether that liability arises from a defeat at trial,
discontinuance, or some other outcome, such as the failure to do better in the judgment than a settlement offer made before the judgment. Most parties also opt to insure their own disbursements (e.g. court fees), including Counsel s fees. Costs incurred before the policy is taken out can also be covered. However, it is important to note that ATE insurance will not cover the parties disbursements on an interim basis, but only at the conclusion of the claim in the event of an unsuccessful outcome. The policy may also insure the party against the costs of the ATE premium. Some insurers will offer a policy which covers both sides costs should the case be unsuccessful. The costs of the premium under such policies is much higher since the insurer is shouldering all the risk (as opposed, for example, to the party s legal representatives shouldering some of the risk via a CFA which does not require payment of the legal representative s fees upon losing the claim). The party taking out the ATE insurance policy will remain at risk of paying costs if, by the conclusion of the claim, the total costs payable exceed the insurance cover arranged. 2.4. Implications of the other side having ATE insurance The party with ATE insurance will (providing the cover is adequate) be able to pay the other party s costs in the event of the other party winning the claim, as the insurer should pay out. If a party without ATE insurance loses, it will (potentially) be liable to pay the winning party s ATE insurance premium as part of any costs order made against it for losing (see below). Therefore a party contemplating taking out such insurance should consider whether or not the other party will be able to afford to pay costs including an ATE insurance premium if it loses or whether, in practice, the premium will not be recovered due to the losing party s lack of resources. 2.5. The premium 2.5.1. Notification A party that intends to recover an additional liability must notify the court and other parties. In theory, a failure to notify properly means that the additional liability is not recoverable from the other side. The definition of additional liability includes a premium paid or payable for ATE insurance. If the ATE insurance policy has already been entered into by the time a claim is commenced, the party that has entered into the ATE insurance policy must file a Form N251 at Court. If a defendant is funded by an ATE insurance policy, it must file the Form 251 at Court when it files its first document at court (e.g. the acknowledgment of service) and notify the other parties at the same time too. If the ATE insurance policy is entered into after the claim has commenced, then the Form N251 must be filed and served as soon as possible and, in any event, within 7 days of entering in to the ATE insurance policy.
The information provided by way of the Form N251 is as follows: i ii iii iv the name and address of the insurer; the date policy was entered into; the claim(s) to which the insurance relates; the level of cover provided by the insurance; and v a statement as to whether the premiums are staged and, if so, when the increased premium becomes payable. Although a party is obliged to provide information about an ATE insurance policy once a claim has been issued, the rules are not as rigid prior to the issue of a claim; they simply state that a party that has entered into an ATE insurance policy prior to the issue of a claim should, as soon as possible, notify the other parties to the dispute that it has done so. 2.5.2.How is it calculated? The amount of the premium will depend on a number of factors including the stage the claim has reached, whether liability is in dispute, the complexity of the legal issues and the prospect of success. The premium payable can often exceed 35% of the costs covered by the insurance. This is hardly surprising as the insurers want to cover the risk of paying out their administrative costs and make a profit. To avoid the cash flow problems of financing such a large premium, a party is often able to pay the premium in instalments as the case proceeds to trial (pre-action, from issue of proceedings until just before trial and the trial). There is a tactical advantage to a such staged premium arrangement as it increases the pressure on the opponent to settle before the premium increases. Alternatively, a party can opt for a deferred premium under which the insurer may agree that payment is only due when the case is concluded. 2.5.3.Disclosure of the premium A party is not obliged to disclose the level of any ATE insurance premium paid by it until after a final costs order has been made. The level of the premium will only be disclosed when the costs payable by the party who took out the insurance come to be paid by another party. 2.5.4.Who pays the premium if the claim is won? The usual outcome is for the losing party to a claim to be ordered to bear the winning party s costs. These costs will include any ATE insurance premium the winning party has incurred. 2.5.5.Can the premium be challenged? The premium can be challenged by the other side if it is ordered to pay it. Grounds for challenge include:
i ii iii iv v vi Failure to provide the paying party with the requisite information (see notification requirements above). Proportionality. The judge assessing costs will consider whether the cost of the insurance cover was reasonable. To assist in this deliberation, the factors set out below will be considered. (Note that the risk assessment in support of the premium will be disclosed at this stage.) Where the insurance cover is not purchased in support of a conditional fee arrangement with a success fee, how the party s cost compares with the likely cost of funding the case with a conditional fee arrangement with a success fee and supporting insurance cover; The level and extent of the cover provided; The availability of any pre-existing insurance cover; Whether any part of the premium would be rebated in the event of early settlement; and vii The amount of commission payable to the receiving party or his legal representatives or other agents. 2.5.6.Who pays the premium if the claim is lost? 2.6. Note of caution The insured party will be responsible for the cost of the premium in the event that it is unsuccessful. However, as stated above, it is possible to take out a self-insurance policy whereby the premium itself is insured, so that if the party loses and claims on the policy, it can recover the cost of the premium too. Terms and conditions apply! A breach of the terms and conditions of the ATE insurance policy, whether in the small print or not, may enable the insurer to avoid paying out under the policy. Terms often include: i. An entitlement of the insurer to full information about the claim from the legal representatives. ii. A requirement on the client to provide instructions promptly and follow the advice received from the legal representatives. iii. A requirement to provide to the insurer and the legal representatives, all material information about the claim. iv. No right of the client to discontinue or settle the claim without the insurer s prior written consent (even if, for example, the party with the insurance wants to discontinue or settle it e.g. for PR reasons). v. No right to refuse an offer the insurer considers reasonable. 2.7. How to obtain ATE insurance It is usual for the legal representative for the party seeking the insurance to make the application as the underwriters will want the legal representative s views on certain aspects of the claim, such as the key arguments, the legal issues, the prospects of success and the likely costs involved.
3. The future 3.1. Good news! It is believed (although somewhat incredibly the actual rules have not yet been published) that from 1 April 2013 (yes in 2 weeks time) there will be a fundamental change in the recoverability of CFA success fees and ATE premiums. You may have heard of Lord Justice Jackson s Report on litigation funding which has led to the forthcoming changes. In his Report he identified CFAs and ATEs as one of the major drivers of excessive costs. He recommended that success fees and insurance premiums should no longer be recoverable from opponents and this is what looks set to happen. From 1 April, unless the CFA was entered into before this date, a costs order may no longer require the paying party to pay all or part of the receiving party s success fee or insurance premium. As you can imagine, there has been a big push on entering into CFAs and ATE insurance policies over recent months! The obvious implication of this development for those of you who are on the receiving end of success fees and ATE insurance premiums is that the quantum of your costs risks going forward will be significantly reduced. You will not have to be warned that the financial risk of losing a case could be horrific as the other side could claim a 100% uplift on their ordinary fees, plus recover an expensive insurance premium. You should feel under less pressure to settle due to the risk of paying the other side s costs. The more deep rooted implication of this may be that there will be less claims as claimants will not want to take the risk of pursuing a claim if either (i) they have to pay their solicitor s success fee (as this could wipe out any gain made by winning or at least reduce it so significantly that it is not worth the risk) and; (ii) they cannot recover the cost of insuring themselves against paying out costs (as the hefty premium is not something you will want to incur if you cannot get it back). 3.2. Damages based agreements The interesting new development is the introduction from 1 April of what will be known as damages based agreements ( DBAs ) for all forms of dispute. (They are currently only available in relation to employment matters.) These are agreements under which the solicitor is paid as long as the client obtains a specified financial benefit and the solicitor s payment is based upon the amount of that benefit. In effect, the solicitor takes a cut of the winnings. There is a cap on the solicitor taking more than 35% of damages awarded in employment tribunal cases. It is anticipated that a personal injury solicitor s share will be capped at 25% and for all other claims the maximum cut a solicitor will be able to take is 50%. Whilst the solicitor will be paid by the share he takes of his client s award, this will not prevent the client recovering costs on the conventional basis (i.e. assessed by reference to a reasonable hourly rate and a reasonable amount of time) from the other side if the client also gets a costs order in his favour.
What the client will not be able to do is recover the full sum he has agreed to pay his solicitor by virtue of the DBA (if this is greater than the level of costs that would have been payable if charged under the conventional basis). That sum (the difference between standard costs and the share of damages due to the solicitor) rewards the solicitor for taking the risk that his client would not achieve the required award (and thus the solicitor would have not been paid at all) and is the price the client pays for not being subject to any risk of paying his own solicitor if his claim fails to result in the desired award. In the same way that a success fee under a CFA will not be recoverable from the other side, the element of the share of the damages received by the solicitor that rewards his risk taking will not be recoverable. DBAs will not, therefore, on the face of it have any impact on costs considerations for your charities (assuming here that your charities are on the receiving end of a claim being brought under one, as opposed to bringing a claim under one). It will be interesting to see if solicitors currently offering CFAs will start to offer DBAs instead in the hope of even higher returns. Potentially, however they will impact upon settlement negotiations even more than CFAs did as the solicitor will be thinking of his bottom line and will push for a settlement sum which means his cut at least reflects his reasonable costs and preferably more! There is never a dull moment when it comes to the issue of costs! Fiona Campbell-White Partner T 020 7998 0425 E fiona.campbell-white@wilsonslaw.com