CFAs for beginners

Following in the wake of Lord Justice Jackson’s comments in Pankhurst v White [2010] EWCA Civ 1445 concerning “grotesque” funding arrangements, legal expenses insurer DAS has decided this represents a good opportunity to attack Jackson’s costs proposals.

Kathryn Mortimer, head of legal services at DAS, said in a widely reported Press Release:

“Deduction of legal costs from damages is at the centre of the reforms proposed by Lord Jackson. In fact, had his reforms already been in place, the solicitors in this case could have charged their client up to a quarter of his damages, at least 10 times the amount that was due under the funding arrangement that Lord Jackson has described as ‘grotesque’”

This misses the point entirely. The terms of the CFA entered into by the solicitors in Pankhurst did not put them at risk in relation to recovery of their base costs. In truth, this was not a CFA as recognised by common sense or, hopefully, the law. It was “grotesque” for the solicitors to enter into this type of agreement in these circumstances. It would be equally “grotesque” to enter into this type of agreement if the Jackson reforms happen.

Jackson LJ’s criticism of the funding arrangement was of solicitors seeking a success fee when there was “no risk”. The criticism would be the same whether the success fee is being paid by the defendant as costs or by the client out of damages.

Ms Mortimer said: “the catastrophically injured client was able to obtain access to justice under existing CFA arrangements, which will be fundamentally undermined by Jackson’s proposed reforms”.

Quite how this made it into a DAS press release is a mystery, although perhaps revealing. Despite CFAs being lawful since 1990 and between the parties recovery of success fees being allowed since 2000, it appears that a senior figure in the anti-Jackson campaign still does not understand what a CFA is for or how they operate.

Lesson One: CFAs for beginners

Where a client instructs his lawyer on an ordinary private retainer, the client carries the full risks of the litigation. Regardless of whether the client wins or loses his case, he is still liable to pay his lawyer’s fees in full.

A Conditional Fee Agreement (CFA) is designed to pass the litigation risk, in full or in part, to the lawyer. If the client is unsuccessful the lawyer either receives nothing (a no win no fee agreement) or receives a reduced fee compared to what the lawyer would otherwise have received (a discounted fee agreement).

In exchange for accepting some, or all, of the litigation risk, the lawyer can charge a success fee. The success fee will, in theory, allow the lawyer to recover in successful cases a sufficient “uplift” to compensate them for the lost or reduced fees in the cases that fail.

However, the fundamental point of a CFA is that there is a “condition” that has yet to be satisfied. Entering into a CFA when the only condition has already been satisfied, or is guaranteed to be satisfied, is absurd. It is the equivalent on betting on a horse to win, when the race has already been run and the horse come in first. In the Pankhurst case, the claimant had judgment on liability before the CFA was entered into. Unlike the terms of some CFAs, it appears the solicitors were not at risk in relation to Part 36 offers.

If the client lost on a Part 36 offer at a quantum trial, as indeed he did, the client would still be liable to pay his solicitors’ normal fees.

If the client won on a Part 36 offer at a quantum trial, the client would be liable to pay his solicitors’ normal fees plus a success fee.

In both situations, the solicitors would recover their normal fees (out of his damages if necessary). This is the same as how an ordinary private retainer works. There was no transfer of risk from the client to the lawyer. The client had all the risk.

Any success fee chargeable by the solicitors was pure windfall. There was “no risk” to compensate them for.

(The matter would have been quite different if the solicitors had been at risk in relation to Part 36 offers.)

How then, did the funding arrangement enable the catastrophically injured client to “obtain access to justice”? How will the Jackson proposals, if implemented, “fundamentally undermine” a client’s ability to obtain access to justice in this situation?

The client already had a “won” case at the time the CFA was entered into. The nature of the CFA meant he was going to have to pay his solicitors’ normal fees regardless of whether he beat any Part 36 offer at a quantum trial. At best, the agreement was one that allowed for postponement of payment of fees until he recovered his damages. This did not require a CFA. In fact, the CFA did contain a “postponement” charge that, on the facts of the case, amounted to £35,810.

The terms of this CFA were to the effect that the client was privately funding the claim from his future damages. The solicitors would be entitled to their full normal fees for simply acting for the client, regardless of the outcome, but receive a potential 100% increase on those fees to compensate them for… Well, nothing.

If the anti-Jackson camp can explain how this CFA benefited the client in terms of access to justice, please let us know. Otherwise, the charge of “grotesque” will have to stand.

Oh, and Happy New Year.