Conditional Fees – who wins?

 MARKET VIEW – LITIGATION 

Ian Gray, Litigation head at Eversheds, looks back on the firm’s experience of alternative fee arrangements in commercial disputes, explains the lessons learned, and looks ahead to the future of dispute funding

One-off conditional fees

I remember being told around 1998, just prior to the introduction of conditional fees, that the general counsel of one large client was fed up that litigation lawyers did not have any ‘skin in the game’ and that, as a result, they ran cases too far, without a care for the costs. In the years that followed, we did a series of small and large conditional-fee cases. In truth, we had some tough experiences along the way, at times losing more than just some skin.

Many lawyers feared that they would choose to run a case on a conditional fee agreement (CFA) believing it to be a winner, but that it would turn out to be a loser. Those cases have been relatively rare in our experience. Lawyers are pretty good at judging the merits of a case early on – it is what they are trained to do. And where new evidence comes to light that fundamentally changes the merits of the claim, they have to remain sanguine and treat it as a learning experience.

Where we acted for large corporate clients, who we knew well, things tended to go smoothly, because there was an established relationship of trust and understanding about how things would work. One case sticks in the mind, where we were acting for one FTSE 100 company against another. It concerned legacy claims about which neither client was particularly excited. Having begun the case on an hourly rate, we moved it over to a CFA to suit the client’s internal budgeting needs. We were clear where it was heading and it duly settled four months later. The client got its damages while managing internal cash flow. We got a substantial uplift on our base costs and a happy client.

Less happy have been the occasions where we did not really know our client. We had several similar situations where a case became a bit of a ‘runaway train’. With no established relationship of trust between solicitor and client, and a client paying nothing, sticking to a project plan for the case became more and more difficult. The client became increasingly demanding in relation to the case, which itself became more complex, so the costs and exposure grew significantly. Resolution was rarely straightforward. These cases missed the discipline of the monthly bill for both solicitor and client, which tends to keep them to the original plan, and encourages an ongoing cost/benefit analysis.

‘Our experience from both portfolios and the one-offs tells us “know your client” and “know your lawyer”. It is a matter of trust, however it is being funded.’

The client relationship was perhaps most relevant at the time of settlement. When acting for the defendant, we would often offer a sum to cover everything – damages, costs and success fees – and leave the claimant and its lawyers to negotiate with each other as to who got what. The claimant’s solicitor had to change – from simply being his client’s agent to the businessperson looking for his cut. Tension was also prevalent where we advised a client to accept an offer (and trigger the success fee), but the client said no – let’s fight on for more (because it wasn’t costing them anything). Those sorts of conversations are much easier when you have a strong solicitor/client relationship. Where that is missing, things get tricky.

Portfolios of cases

The financial crash of 2008 changed the landscape for us. Our banking clients very quickly had substantial numbers of professional negligence cases that they wished to pursue against valuers and solicitors, relating to property lending.

The marketplace for these cases quickly embraced CFA and we embarked on a journey with many of the big banks to pursue these cases on their behalf. Only now can we look back on this phase and analyse whether it has been a financial success. It certainly was for the banks, as they recovered hundreds of millions of pounds in settlements from valuers and solicitors, and their insurers, for no initial outlay.

The early years of these portfolio cases for us were brutal. The claimant banks had many problem loans. With no upfront costs, they threw the shortfall cases at their solicitors to see whether there was a runable claim. The time involved in selecting the good cases from the bad cases was underestimated by many firms of solicitors, including ours. Although there were many cases with valid claims, the banks had suffered a loss in a high percentage of cases because of credit risk and the downturn in the property market, not because of poor advice from their lawyers or surveyors. The associated reporting arrangements with our banking clients and the changing circumstances as the banking crisis unfolded meant that we faced multimillion-pound write-downs in the first two years. The banks got frustrated too, because they were under extreme pressure and needed quick results.

The books began to balance, however, as we began to mature strong cases through to resolution. Interestingly, for the client bank with whom we have the best relationship and where the selection of cases was a joint effort, quickly and efficiently executed, our write-offs have been minimal. Crucially, that bank was the winner too, compared to all the other banks, because it got its damages quicker and with less investment of management/supervision time than the others.

So our main experience from both portfolios and the one-offs tells us ‘know your client’ and ‘know your lawyer’. Relationships count. It is a matter of trust, however it is being funded.

More recent issues, third-party funding and DBAs

Post-Jackson, the expected enthusiasm for damages-based agreements (DBAs) has not yet materialised. Indeed, there is a distinct lack of appetite among our commercial clients. We have recently been approached by new clients who have been put off conditional/contingent work altogether, mainly as a result of after-the-event (ATE) insurance policies, which are now much less popular. Combined with the CFA in the early days, some claimants convinced themselves that they had no costs risk. However, they discovered that ATE policies did still leave residual costs risk, such as where a claim was abandoned because the defendant was insolvent, or a change in risk appetite, and the ATE insurer still required the premium to be paid. The large premiums also got in the way of settlements.

‘I recall many saying that third-party funding would “change the face of litigation”. In our experience, it hasn’t.’

The more sophisticated claimants realise they can take on the adverse costs risk themselves if they have confidence in their solicitors and the strength of their claim. The structure of CFAs has also changed, as success fees have to be funded from the damages, not recovered as costs from the defendant, and they are generally lower, often only 20% upwards depending on risk.

As for third-party funding, where an outsider funds all or part of the costs of the claimant in return for a slug of the damages, I recall many saying that this would ‘change the face of litigation’. I was even headhunted to run a fund. In our experience, it hasn’t. We have only seen a handful of third-party funded cases. Undoubtedly there is a role for third-party funders in certain cases, typically high-value claims with good prospects of success, which the claimant would otherwise struggle to fund. Our commercial clients have been less keen than expected.

So is there a move back to old hourly rates? Not quite. Today’s specialist in-house litigation counsel take a step back with their business colleagues, to establish what they want to achieve, where once CFA would have been the answer. They see the expense of DBAs and third-party funding eating away at the damages their business units need to recover. They see that cost unpredictability can be addressed by fixed fees. They realise that the solicitor can be more incentivised by quicker payment or a greater share of the panel’s work.

For those that still like the idea of the success fee element, the most popular route now is ‘CFA lite’ – where the solicitor gets paid discounted rates until the outcome of the case, with nothing more if it is lost and a more modest uplift if it is won – but it is not conditional on what is received from the defendant in terms of costs. We are finding that it makes the best of the client/solicitor relationship while retaining skin in the game.