 |
Hong Kong Law Reform Commission |
Chapter 3
Legislative changes in England
concerning conditional fees
Introduction
3.1 In
stark contrast to the
Maintenance and champerty
3.2 Until
recently, any form of contingency fee arrangement was not enforceable at common
law in
3.3 The
law in this area developed as a response to perceived abuse of the judicial process
in medieval
3.4 Champerty
and maintenance were deemed unlawful for fear of encouraging “mischievous”
litigation. In 1895, Lord Esher, MR
observed that:
“The doctrine of maintenance … does not appear to me to be founded
so much on general principles of right and wrong or of natural justice as on
considerations of public policy. I
do not know that, apart from any specific law on the subject, there would
necessarily be anything wrong in assisting another man in his litigation. But it seems to have been thought that
litigation might be increased in a way that would be mischievous to the public
interest if it could be encouraged and assisted by persons who would not be
responsible for the consequences of it, when unsuccessful.”[8]
3.5 The
public policy considerations which shaped the doctrine of maintenance in
medieval times changed with changing social conditions and the courts
recognised that the class of persons and organisations deemed to have
justifiable interests in others’ proceedings had to be broadened. Lord Denning MR has commented that:
“Most of the actions in our courts are supported by some association
or other, or by the state itself.
Comparatively few litigants bring suits, or defend them, at their own
expense. Most claims by workmen
against their employers are paid for by a trade union. Most defences of motorists are paid for
by insurance companies. This is
perfectly justifiable and is accepted by everyone as lawful, provided always
that the one who supports the litigation, if it fails, pays the costs of the
other side.”[9]
Criminal Law Act 1967
3.6 In
modern times, maintenance and champerty as crimes and torts fell into disuse
and they were duly abolished in
“… the great bulk of litigation which engages our courts is maintained from sources of others, including the state, who have no direct interest in its outcome, but who are regarded by society as being fully justified in maintaining it.”[12]
The report instanced as maintainers of litigation, trade unions, trading associations, third party liability insurance and the state funded legal aid scheme. The report recommended that criminal and tortious liability for champerty and maintenance should be abolished and this was duly implemented by the Criminal Law Act 1967.
3.7 The
Criminal Law Act 1967, however, included a provision that the abolition of
criminal and tortious liability for champerty and maintenance “shall not affect any rule of law as to the
cases in which a contract is to be treated as contrary to public policy or
otherwise illegal.”[13] This section was in response to the Law
Commission’s recommendation that “champertous
agreements (including contingency fee arrangements between solicitor and
client) should for the present, continue to remain unlawful as contrary to
public policy.”[14]
3.8 Hence, after the Criminal Law Act 1967, contingency fee arrangements were still regarded as contrary to public policy and unlawful.[15] Lord Denning’s dictum in Wallersteiner v Moir (No 2)[16] reflected the attitude of the courts at that time:[17]
“English law has never sanctioned an agreement by which a lawyer is remunerated on the basis of a ‘contingency fee’, that is that he gets paid the fee if he wins, but not if he loses. Such an agreement was illegal on the ground that it was the offence of champerty.”[18]
Solicitors Act 1974
3.9 Agreements
to act on a contingency basis are also restricted by section 59 of the
Solicitors Act 1974. Subject to the
recent changes in the law described below, they are proscribed in respect of
proceedings in
“A solicitor who is retained or employed to prosecute any action, suit or other contentious proceeding shall not enter into any arrangement to receive a contingency fee in respect of that proceeding.”[19]
A contingency fee is defined in the Solicitors Practice Rules as:
“… any sum (whether fixed or calculated either as a percentage of the proceeds or otherwise howsoever) payable only in the event of success in the prosecution of any action, suit or other contentious proceeding.”[20]
The rules have effectively prohibited any fee arrangements dependent on the outcome of any contentious proceeding.[21]
The Royal Commission on Legal Services 1979[22]
3.10 The concept of contingency fees was considered by the Royal Commission on Legal Services in 1979 which rejected the idea on the ground that it would foster malpractices:
“The fact that the lawyer has a direct personal interest in the outcome of the case may lead to undesirable practices including the construction of evidence, the improper coaching of witnesses, the use of professionally partisan expert witnesses, especially medical witnesses, improper examination and cross-examination, groundless legal arguments, designed to lead the courts into error and competitive touting.”[23]
Green Paper on
Contingency Fees 1989[24]
3.11 The 1989 Green Paper on Contingency Fees (the 1989 Green Paper) was devoted wholly to the subject of contingency fee arrangements. Perhaps because of the controversial nature of the topic, the 1989 Green Paper did not put forward firm recommendations. It merely said that:
“Examination of the arguments and issues arising in the debate on the introduction of contingency fees suggests that it is time to consider at least some relaxation of existing restrictions.”[25]
Risk of conflict of interest
3.12 The 1989 Green Paper examined the various arguments for and against the introduction of contingency fees, and found that there was no real basis to fears that the lawyer acting on a contingency basis would engage in malpractices such as encouraging the client to accept an unnecessarily low settlement, engaging in unmeritorious cases with a high nuisance value realising that the opponent would settle, coaching witnesses, or withholding inconvenient evidence.[26]
3.13 The 1989 Green Paper stated that any malpractices ought to be capable of control through stringent codes of practice to which both branches of the profession were subject. The Green Paper pointed out that judges also have the power to penalise solicitors personally in costs for any improper act or omission in the conduct of litigation.[27]
The United States
3.14 The 1989 Green Paper also dealt with the argument that the existence of contingency fees in the United States encouraged juries in civil cases to award excessively high damages to successful plaintiffs, so that even after the lawyer has taken his percentage (which may be as high as 50%), the balance would still be sufficient to compensate the plaintiff for his losses. Critics of contingency fees further argued that contingency fees would encourage the pursuit of low merit cases for nuisance value against large companies and Government bodies. Insurance premiums would be driven up and the increased business costs would have to be borne ultimately by the consumer.[28]
3.15 In
this regard, the 1989 Green Paper said that any form of contingency fee, if
introduced into
3.16 The
1989 Green Paper also pointed out that the costs indemnity rule in
Access to justice
3.17 The 1989 Green Paper stated that the main advantage of contingency fees was that “small” plaintiffs would have the opportunity of bringing their claims to court. “Small” in this context meant those individuals and organisations who did not qualify for legal aid but nevertheless had insufficient means to support the full cost of expensive litigation. Further, legal aid was not available in respect of certain types of proceeding. Contingency fees might be useful to sections of the population whose means took them above the legal aid eligibility limits.[31]
Allowing the consumer to choose
3.18 The Green Paper pointed out that consumers would have the choice between contingency or conventional fee arrangements. Solicitors would then have the incentive to operate more efficiently and to expedite the proceedings.[32]
Options set out in the 1989 Green Paper
3.19 Having examined the arguments for and against contingency fees, the 1989 Green Paper considered several possible options:
(i) Adopt
the speculative basis, as was already possible in
(ii) The second option modified the speculative basis by adding a percentage to the taxed costs in the event of success. The extra percentage (“the uplift”), could be fixed by reference to the amount of taxed costs, rather than by reference to the amount of damages or property recovered. In this way, the lawyer would not have a direct financial interest in the level of damages recovered.[34] Fees on this basis would eventually be called conditional fees.
(iii) The third option, termed a restricted contingency basis, was to allow contingency fees in the American sense but to restrict the percentage of the damages that could be taken by the lawyers, depending on the stage the proceedings had reached.[35]
(iv) The fourth option, an unrestricted contingency basis, would be to allow contingency fees as a percentage of the damages without any upper limit. The Green Paper considered that this option would not be in the public interest due to the unequal bargaining power of the lawyer and his client.
Responses to the 1989 Green Paper
3.20 The Bar was strongly opposed to any change, primarily on ethical grounds.[36] The Law Society was also opposed to contingency fees on ethical grounds. However, it supported the second option of the speculative fee plus a percentage uplift of costs by way of a success fee.[37]
3.21 Six months after the publication of the 1989 Green Paper, the White Paper on Legal Services: A Framework For The Future[38] was issued, which subsequently resulted in the 1990 Act.
Courts and Legal Services Act 1990
3.22 Section 58(3) of the Courts and Legal Services Act 1990 gave effect to the White Paper by legitimising conditional fee agreements, so that a conditional fee agreement “shall not be unenforceable by reason only of its being a conditional fee agreement”.[39] The Act empowered the Lord Chancellor, through subordinate legislation, after consultation with the designated judges and the profession, to prescribe the types of cases for which conditional fee agreements would be enforceable and to determine the permissible level of uplift fee on success.
Conditional Fee
Agreements Regulations 1995[40] and Conditional Fee
Agreements Order 1995[41]
3.23 Some
five years were needed to fine-tune the new conditional fee arrangements, and
the Conditional Fee Agreements Regulations and Conditional Fee Agreements Order
did not come into force until
· Conditional fee agreements were allowed only in three types of proceedings. These were insolvency and personal injury matters, as well as proceedings brought before the European Commission of Human Rights and the European Court of Human Rights.
· Solicitors and barristers working under conditional fee agreements were entitled only to such success fees as were agreed, and normal fees either as agreed or allowed on taxation.
· The maximum allowable success fee was set at 100% of the solicitor’s normal costs.
· Solicitors and barristers were not allowed to claim a percentage of the damages awarded.
· Solicitors were expected to fund all necessary disbursements themselves as a business overhead. Such disbursements could include:
(a) the cost of obtaining insurance for the client against the risk of his losing and having to pay costs to the other side,
(b) the court fees,
(c) the cost of obtaining expert reports,
(d) the payment of counsel’s fees,[42] unless counsel was also willing to act under a conditional fee agreement.
· Disbursements would not be eligible for any uplift.
· A losing party who was liable to pay costs would not have to pay any extra because his opponent had a conditional fee agreement, under which his solicitors and/or counsel's fees were subject to an uplift. In other words, the entire uplift or success fee would have to be funded by the client from any damages recovered.
· The Law Society recommended at that time that solicitors’ uplifts be capped when they reach 25% of the damages recovered and the Bar Council recommended that counsel’s uplifts be capped when they reach 10%.
3.24 The uplift by way of success fees that lawyers could charge was up to 100% of the fees.[43] This was the subject of fierce political debate. Zander has pointed out that the success fee is a percentage of the solicitor’s base costs, excluding disbursements; and whilst base costs cover overheads as well as profit, the success fee is all profit.[44] On the other hand, the extra profits might be needed to cover the cases that were lost. It was reported that two firms acting on conditional fee agreements against tobacco companies had abandoned the case, and the cost to one of the firms was some £2.5 million.[45]
3.25 The 1995 Regulations list out the elements that must be included in a conditional fee agreement if it is to be enforceable. Each agreement must describe:
(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) on partial failure of the specified circumstances to occur (i.e. if the case is lost); (ii) irrespective of the specified circumstances occurring (ie outlays/disbursements); and (iii) on determination of the agreement for any reason; and
(d) the amount or amounts payable in accordance with (b) or (c), above, or the method to be used in calculating the amount or amounts payable, and in particular whether the amount payable is limited by reference to the amount of any damages that may be recovered on behalf of the client (that is, a “cap”).
3.26 The 1995 Regulations also state that the contract must confirm that the solicitor has discussed specific points with the client immediately before signing. These are:
(a) whether the client might be entitled to legal aid in respect of the proceedings to which the agreement relates, the conditions on which legal aid is available and the application of those conditions to the client in respect of the contemplated proceedings;
(b) the circumstances in which the client may be liable to pay the fees and expenses of the legal representative in accordance with the agreement;
(c) the circumstances in which the client may be liable to pay the costs of any other party to the proceedings; and
(d) the circumstances in which the client may seek taxation of the fees and expenses of the legal representative and the procedure for so doing.
3.27 The obvious danger area is in the calculation of the success fee and any cap on fees. In fact, the Regulations do not specifically require the lawyer to fix the percentage of success fee by reference to the risk of losing the case. Evans suggested that the recommended formula for calculating the success fee should be: (F ÷ S) × 100 = SF, where F = prospects for failure, S = prospects of success, and SF = the success fee. So, a case with a 75% prospect of success would attract a success fee of (25 ÷ 75) x 100 = 33.33%.[46] The computation is obviously subjective and clients would not be in a position to evaluate the solicitor’s assessment of the prospects of success.
After-the-event insurance
3.28 Given the costs indemnity rule, a conditional fee agreement alone would not protect the client against payment of the opponent’s legal costs in the event of unsuccessful proceedings. The introduction of conditional fee agreements had led to the development of “after-the-event insurance” (ATE insurance),[47] which typically covers the claimant against the opponent’s legal fees and disbursements and the claimant’s own disbursements.
3.29 In 1995, Lexington Insurance Co, for example, offered a service called Accident Line Protect to members of the Law Society. This was intended as a quality control provision and negated the need to screen every applicant on a routine basis.[48] A one-off premium of £85 would buy £100,000 of coverage in 1995 in respect of the other side’s costs and the client’s expert fees and certain disbursements. By August 2004, the premium for the same coverage for a road traffic accident case was £375. The premiums for occupational disease claims and other types of claims were £1,175 and £815 respectively.[49]
3.30 The following types of cases are automatically covered by Accident Line Protect:
·
Plaintiffs’ personal injury
cases arising anywhere in the European Union, so long as proceedings are
brought in
· Mixed cases in which a personal injury claim is being run in conjunction with another related claim. Examples would include the aftermath of a motor accident where someone is seeking compensation for both physical injuries and property damage to the vehicle, or a construction dust nuisance allegation where adverse health consequences are alleged to have followed the exposure. So long as there is a personal injury element to the action, all elements of the case will be covered by the insurance.
· Actions against other solicitors for the alleged negligent handling of a personal injury case.[50]
3.31 Some types of cases have to be referred to the insurer for prior approval:
· Multi-party actions involving ten or more claims;
· Claims for psychiatric injury “where there is no recognised cause of action in English law”. This means claims for categories of psychiatric illness that have not been recognised previously as compensatable by the courts and where the case will be breaking new ground;
· Where a personal injury claimant is seeking additional damages for further injuries allegedly caused by the negligent medical treatment of the claimant’s original injury;
· An appeal; and
· Where a new firm takes over the handling of a client’s case in which the original solicitor was acting under a conditional fee agreement.[51]
3.32 Certain types of cases are expressly excluded from coverage. They are:
· Medical negligence;
· Pharmaceutical, drug or tobacco-related claims;
· Accidents that occur outside the European Union;
·
Proceedings outside the
jurisdiction of the courts of
· Counterclaims, whether brought by defendants or defended by plaintiffs; and
· Small claims court cases.[52]
3.33 Various policies were available, but typically, policies will pay the other side’s costs, the client’s expert fees and other disbursements on any of the following events:
· Judgment in favour of the defendant;
· Failure to beat a payment into court under certain limited circumstances;
· Service of a notice of discontinuance, with the insurer’s prior consent, requiring payment of the defendant’s costs;
· The making of no order as to costs, leaving the client to pay his own disbursements; and
· A successful appeal by the defendant.[53]
3.34 Accident Line Protect does not, however, cover the plaintiff’s firm’s costs, agents’ fees, barrister’s fees, costs and disbursements incurred before policy inception; and any disbursements incurred in circumstances where the claim is abandoned before proceedings are issued.[54]
Counsel’s fees
3.35 In
a conditional fee situation, there are three possible arrangements with regard
to counsel’s fees. First, the
solicitor and counsel can each enter into separate conditional fee agreements
with the client; second, the solicitor can enter into a conditional fee
agreement with the client but counsel’s fees are incurred by the conventional
method; and third, the counsel can enter into a conditional fee agreement with
the client but the solicitor’s fees are incurred in the conventional way.
3.36 The
Law Society of