Conditional fee agreements and damages based agreements

What is a conditional fee agreement?

A CFA is an agreement whereby a solicitor and a client can agree to share the risk of the litigation by coming to a financial arrangement whereby part, or sometimes all, of the solicitors’ fees will only be payable by the client in the event of success.

If any of the defined success criteria agreed when the CFA is entered into is achieved (i.e. the case is won), a success fee will be payable by the client in addition to the normal fees.

If none of the defined success criteria is achieved (i.e. the case is lost or an agreed level of damages is not awarded), a client will only pay reduced solicitor fees, or no solicitor fees, subject to the terms of the CFA.

With most CFAs for commercial disputes, all disbursements (including counsel fees and expert fees) and expenses are payable by the client in any event.

Can a CFA cover counsel (barrister) fees?

For some matters counsel may be willing to enter into a CFA for payment of part or all of their fees being subject to achieving defined success criteria. Individual counsel may be reluctant to enter into CFAs for commercial dispute resolution work, or may only be willing to put a relatively small percentage of their fees at risk.

What level of CFA success fee may be payable?

In commercial cases (not personal injury CFAs entered into from 1 April 2013), the success fee can be up to a maximum of 100% of normal fees.

The level of success fee is based upon the solicitors’ assessment of the risk of not achieving the predetermined defined success criteria. The solicitors will include considering all relevant factors, including the merits and value of the claim; the likelihood of settlement; the level of costs likely to be incurred; whether the case is heavily dependent upon factual or uncertain expert evidence, and the information and documentation available when the CFA is entered into.

A CFA success fee cannot be a percentage of the level of damages awarded or agreed by the client.

Who pays the CFA success fee?

The client is primarily liable for the payment of all CFA fees, including the success fee. If a CFA was entered into prior to 1 April 2013 the success fee may in whole or in part be recoverable from the losing party in litigation.

If the CFA is entered into from 1 April 2013, save for limited exceptions in respect of insolvency cases up to 5 April 2016, publication and privacy (defamation) cases up to 5 April 2019 and mesothelioma cases, the success fee will not be recoverable from the losing party in litigation.

What is payable if the case is lost or the predetermined success criteria are not achieved?

The client will pay reduced solicitors’ fees or no solicitors’ fees (subject to the terms of the CFA), plus all disbursements and expenses.

If the case is lost, there is a distinct probability that the client (the losing party) will be required to pay a contribution to the winning party’s reasonable and proportionate costs.

What is a damages based agreement?

A DBA is an agreement whereby a solicitor and a client can agree to share the risk of litigation. Payment of solicitors’ fees, counsel fees and VAT by a client under a DBA is dependent on achieving defined success criteria agreed when the DBA is entered into, and is based on a percentage of the sum recovered from the losing party/opponent.

To compensate the risk of not being paid fees in the event of the case losing and the success criteria not being achieved, save for appeal proceedings, the DBA fee payable for solicitors’ fees, counsel fees and VAT from monies recovered from the opponent will equate to a sum of up to 25% of general damages and pecuniary loss (other than future pecuniary loss) for a personal injury claim, and up to 50% of the sum recovered for all other matters (excluding employment claims). In respect of any appeal proceedings there is no limit on the DBA percentage fee payable.

The DBA percentage fee for solicitor fees, counsel fees and VAT is paid by way of deduction from the sum recovered (damages) from the losing party. In employment claims the DBA fee is up to 35% of the sum recovered for solicitors’ fees and VAT. All other disbursements (including expert fees) and expenses are payable by the client in any event, and in addition to the DBA percentage fee.

Where a client obtains an entitlement to costs from an opponent, it will not be entitled to recover a fee directly based on the DBA percentage fee, but may be entitled to recover solicitors’ fees based upon time spent and applicable hourly rates, plus all disbursements, reasonably and proportionately incurred and VAT if applicable. In any event, the receiving party cannot recover greater costs than incurred under the DBA.

Having regard to the rules relating to recovery of costs from an opponent, where a client enters into a DBA with a solicitor, there may potentially be an increase in irrecoverable costs from the opponent, in particular where disputes are settled at an early stage.

Can you protect against the potential costs payable to an opponent?

It may be possible to purchase 'after the event' legal expenses insurance (ATE). For more on this please see our guide to the implications of CFAs, DBAs and ATE insurance.

Should a CFA or DBA be notified or disclosed to an opponent?

For CFAs and DBAs entered into after 31 March 2013 no notice is required to be given to an opponent, save for CFAs in respect of insolvency cases up to 5 April 2016, publication and privacy (defamation) cases up to 5 April 2019 and mesothelioma cases, where the CFA includes a success fee.

If a CFA was entered into prior to 1 April 2013 notice in a prescribed form on entering into the CFA should have been given to the opponent. Failure to give notice when required, may result in a successful party not being able to recover the CFA success fee or a part of it from an opponent.

Where notice of a CFA with a success fee is required, such notification will include very limited information, and will not include detail as to the terms of the CFA or the level of the success fee. A client should not disclose any detail in respect of a CFA to its opponent or any other party without taking advice from their solicitor. Careful consideration should be given to court and other rules relating to funding arrangements.

A client is not required to disclose to an opponent the existence or any detail of a DBA entered into with its solicitor, save possibly at the time of any recovery of costs from the opponent.

What are the advantages for a client of entering into a CFA or DBA?

• Entering into a CFA or DBA with a solicitor will enable a client to share the risk and costs of litigation
• If a CFA is entered into and the case is lost, or predetermined success criteria are not achieved, a client may only have to pay reduced solicitors fees (and possibly no solicitors’ fees), and disbursements and expenses
• If a DBA is entered into and predetermined success criteria are not achieved the client should have no liability for solicitors’ and counsel fees, but will have to pay disbursements and expenses
• If a DBA is entered into and the predetermined success criteria is achieved (i.e. the case is won), but the recovery from the losing party is relatively low, the DBA percentage fee from recovered monies may be a sum significantly less than that which would have been payable by the client on a normal retainer basis or pursuant to a CFA.

What are the disadvantages of a client entering into a CFA or DBA?

• If a CFA is entered into and predetermined success criteria are achieved (i.e. the case is won), in addition to normal costs the client will have to pay the CFA success fee
• If a DBA is entered into and the predetermined success criteria is achieved (i.e. the case is won), depending upon the sum recovered from the losing party, the DBA percentage fee from recovered monies may be a sum significantly greater than that which would have been payable by the client on a normal retainer basis or pursuant to a CFA.

Benefits of funding arrangements

• CFAs and DBAs potentially enable a client to pursue good claims and facilitate access to justice
• Before entering into a CFA, DBA, or any funding arrangement it is necessary for a client to consider the financial implications of “sharing the risk”, what costs may be recoverable from an opponent (assuming any settlement or award includes an entitlement to costs), and as to the potential net proceeds from the litigation.

For more information contact Paul Abbott, head of law costs team at Pinsent Masons.