A conditional fee agreement allows the lawyer and client to share the costs and risk of litigation. Subject to the type of CFA entered into, the lawyer's fee is partially or wholly dependant on achieving a defined success criteria.
To compensate for the risk of being paid reduced or no fees a success fee may be payable in addition to the normal fees. This success fee of up to 100% of normal fees may in whole or in part be recoverable from the losing party in the litigation.
After the event legal expenses insurance (ATE) covers the liability to pay an opponent's costs if the policyholder loses its case. In addition, ATE may also cover an element of the client's own costs. The level of premium payable depends on the type and level of cover sought and assessment of the risk. If the client is successful, all or part of this premium may be recoverable from the losing party in the litigation.
For more information about conditional fee agreements and litigation costs insurance, please see our separate OUT-LAW Guides.
What does this mean for you?
You may want to consider entering into a CFA with your lawyer or to consider purchasing ATE as a means of sharing the risk of litigation and to apply costs pressure on an opponent.
If your opponent has the benefit of a CFA and/or ATE this could increase your costs exposure significantly and therefore affect the case strategy employed by you and your lawyer. If you are unsuccessful and ordered to pay your opponent's costs, you could be ordered to pay their normal costs together with the 'additional liability' of a success fee of up to 100% of the solicitors' fees and a substantial ATE premium.
If you are successful and your opponent is unable to pay costs, then there is the possibility that while you may obtain an order for costs you will not be able to enforce payment.
When will a party know about a potential 'additional liability'?
A party should notify other parties to a dispute about a CFA or ATE as soon as a funding arrangement has been put in place.
If your opponent fails to notify you of the existence of one of these forms of alternative funding, the opponent may not be able to recover a success fee for the period during which they had failed to notify you. Your opponent may also not be able to recover all or an element of any ATE premium.
What should be disclosed?
- the date of the CFA and details of the particular proceedings or part of the proceedings to which the CFA relates;
- whether the CFA includes a success fee;
- notification of a CFA does not include disclosure of the CFA or the level of success fee – this may only need to be disclosed at the end of the case;
- notification of an ATE policy should include the name and address of the insurer, date of the policy, details of the particular proceedings to which the ATE relates and whether the insurance premium is staged. If the premium is staged then notification should include the points at which an increased premium is payable;
- again, the policy, the premium rate and the amount payable is not disclosed until the conclusion of the case (and disclosure is subject to the terms of the policy).
Can the exposure to a success fee or ATE premium be reduced?
Tactics may need to be adopted both during the proceedings and on the assessment of costs with a view to reducing your exposure to having to pay all or part of these additional amounts.
Before the amount of costs payable between parties is assessed by the court, an opponent will disclose the level of the CFA success fee and ATE premium. The risk assessment prepared in support of these may also be disclosed, and challenges can be made to the effect that the risk assessment does not support the level of success fee or premium sought. Both the success fee and ATE premium may be reduced by the court on assessment if they are held to be 'unreasonable or disproportionate' between parties, given the facts and circumstances as they reasonably appeared to the receiving party's lawyer and insurer at the time the arrangements were entered into.
A CFA must comply with relevant statute, statutory instruments and practice rules. If it does not, then the CFA may be invalid and in turn negate the recovery of fees from an opponent.
Success fees and ATE increase the costs payable by a losing party.
Funding and the future
The Government is considering changes to the way litigation is funded, and to what costs will be recovered from a losing party. It has published a draft Bill that is likely to come into effect late in 2011 or in 2012 following a period of consultation in parliament. The Bill proposes that ATE premiums and CFA success fees will no longer be recoverable from opponents and widens the scope of damages based fee agreements (contingency fees).