Contingency fees - or, to adopt the statutory terminology, damages-based agreements (‘DBAs’) - were defined in the Jackson Report as: ‘fees which a) are payable if the client wins and b) are calculated as a percentage of the sum recovered’ (Review, chapter 12, 4.1).

Lord Justice Jackson recommended that the contingency model operating in Ontario, Canada, be adopted in England and Wales, where ‘…costs shifting is effected on a conventional basis and in so far as the contingency fee exceeds what would be chargeable under a normal fee agreement, that is borne by the successful litigant.’ (ibid).

Legal Aid, Sentencing and Punishment of Offenders Act 2012

Inspired by the Jackson Report, section 45 of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (‘LASPO’) introduced amendments to s. 58AA of the Courts and Legal Services Act 1990 (‘CLSA’). Section 58AA previously governed DBAs in contentious employment matters. As a result of the LASPO amendments, DBAs will in future be a lawful means of ‘funding’ litigation in disputes before the courts of England and Wales; it appears that the new regime will come into force in April 2013.

Section 58AA(3)(a) of CLSA defines a DBA. Sub-section (4) prescribes certain requirements that will have to be complied with if a DBA is to be lawful, and ss. (5), (6) and (6A) enable regulations and rules of court to be made in that regard.

Civil Justice Council working party

The Civil Justice Council (‘CJC’) has established a working party to consider inter alia the practical and policy issues flowing from the new regime, with a view to reporting by the end of July 2012.  The working party’s terms of reference pose the question: ‘whether, and if so in what circumstances, a lawyer acting under a DBA should be liable for adverse costs?’

What might have inspired this line of enquiry?  In that part of his review dealing with DBAs, Sir Rupert Jackson stated:

‘Agreement must be reached at the outset as to how any adverse order for costs will be met. If it is agreed that the solicitors will meet any such order (as quite often happens in Canada), then this additional risk should be reflected in the percentage recovery to which the solicitors will be entitled in the event of success.’ (Review, Ch. 12, 4.7).

This seems to envisage the solicitor agreeing to pay adverse costs orders made against the client, rather than costs orders being made directly against the solicitor. The more pertinent question (reflected it appears in the working party’s terms of reference) is whether solicitors may be at risk of an adverse costs order (‘ACO’) being made against them directly where they have a contingent interest in the outcome of the litigation under a DBA. An answer may lie in comparing the position of third party funders.

ACOs and third party funding

Third party funding is investing in claims by paying a party’s legal costs and disbursements in return for a share of the proceeds recovered.

Funders are prima facie liable to pay the opposing side’s costs where a funded claim fails: see e.g. s. 51 Senior Courts Act 1981 (‘SCA’); Arkin v Borchard Lines Ltd [2005] 1 WLR 3055 (CA); and Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2004] 1 WLR 2807 (PC). In Dymocks Lord Brown said ([25]):

‘(3) Where, however, the non-party not merely funds the proceedings but substantially also controls or at any rate is to benefit from them, justice would ordinarily require that, if the proceedings fail, he will pay the successful party’s costs. The non-party in these cases is not so much facilitating access to justice by the party funded as himself gaining access to justice for his own purposes. He himself is ‘the real party’ to the litigation….’

In Arkin a costs order was made against a funder, but the extent of the adverse costs liability was capped by reference to the amount of its funding.

It is easy to see how a funder falls within Lord Brown’s categorisation, but what of a lawyer under a DBA?

ACOs and DBAs

By definition a DBA satisfies the second limb of Lord Brown’s formulation; but does the DBA lawyer thereby ‘fund’ the proceedings (Lord Brown’s first limb)?

Under the current conditional fee (‘CFA’) regime, lawyers discount (completely or partially) their standard charge-out rates in return for an upside on success. The commercial reality is that they are thereby ‘funding’ the action by way of their own working capital, either completely or partially. Solicitors may also pay for disbursements during the course of the litigation; that is clearly funding in the third party funder sense.

In the future DBA regime much the same commercial reality will pertain and, given Lord Brown’s dicta, lawyers must be viable candidates for ACOs in the event a claim so funded should fail.

ACOs and CFAs

Is there any guidance to be gleaned from the current CFA regime?

In Myatt v National Coal Board [2007] 1 WLR 1559 (CA), solicitors representing four claimants in test-case personal injury claims were acting on CFAs with ACO insurance policies (‘ATE’). The solicitors were also retained on CFAs in around 60 similar claims that were ‘piggy backing’ on the lead-claims. The lead-claims were successful and under the CFAs the lawyers were looking at profit costs plus uplift totalling around £200,000.

The CFAs in the lead-claims were found to be unenforceable, which had the effect of nullifying the ATE policies. The claimants’ appeal failed and the defendants applied, under s. 51(3) of the SCA, for an order for costs of the appeal against the claimants’ solicitors.

The CA (Dyson, Lloyd L.JJ.; Sir Henry Brooke) held that the court did have jurisdiction to order costs against a lawyer in circumstances where ‘litigation is pursued by the client for the benefit or to a substantial degree for the benefit of the solicitor’. The Court relied on Rose L.J. in Tolstoy-Miloslavsky v Aldington [1996] 1 WLR 736 and the decision in Dymocks in holding that the lawyer in Myatt was a ‘real party…in very important and critical respects’ who ‘not merely funds the proceedings but substantially also controls or at any rate is to benefit from them’ [8].

Taking into consideration the solicitors’ primary interest in the outcome of the appeal, the claimants’ continued financial interest (given pre-appeal disbursements) and the absence of notice of the application, the Court ordered the solicitors to pay 50% of the defendant’s costs.

Some pertinent factors in the Myatt case:-

  • It was assumed (without challenge) that the solicitors had funded the appeal, at least by paying Counsel and providing their services free [25].
  • The Court considered that it was most unlikely the appeal would have been brought at the behest of the claimants solely to seek reimbursement of their disbursements [13].
  • The solicitors stood to benefit substantially from a successful appeal.
  • The apparent immunity of CFA lawyers to ACOs embodied in Symphony Group plc v Hodgson [1994] QB 179 (CA) per Lord Woolf M.R., was not seen as a bar to the decision.

ACOs and Counsel

If solicitors under DBAs are liable for adverse costs then there appears little reason in logic why that principle ought not to apply to Counsel undertaking contentious proceedings under a DBA. The differing business structure and working capital of the barrister ought not to impact on the jurisdiction, though of course it may influence a court in deciding the extent of such liability.

The future

The DBA regime offers opportunities for the legal profession to develop innovative solutions for clients to the age-old problem of funding litigation. The financial benefits could be significant, but the risk of ACOs is real. Where previously lawyers might have insured against that downside, the impending end to the recoverability of ATE premiums from defendants brings added uncertainty to that market. Perhaps the solution for lawyers (solicitors and barristers) will be to ‘joint venture’ with funders? The lawyer would fund ‘own costs’ through a DBA and the funder would i) pay the cash disbursements incurred and ii) assume the risk of ACOs, by agreeing to indemnify both the lawyer (and client), should they be ordered.

Timothy Mayer, Investment Officer, Woodsford Litigation Funding Ltd