Contingency fees involve lawyers taking on cases on a “no win, no fee” basis and, if their clients win, receiving a share of their clients’ compensation as their fees. These arrangements are currently prohibited in litigation in the UK, but that is set to change in England and Wales within the next year. The Government has said that this fee will be capped at 25% in personal injury cases but no cap has yet been proposed for other types of cases.
This is a troubling development, since contingency fees are synonymous with the US culture of litigation driven by entrepreneurial lawyers with a direct financial interest in the cases they run. In the US, contingency fees have given rise to a number of serious issues:
- Conflicts of interests for lawyers: Contingency fees give lawyers a direct financial interest in the outcomes of their clients’ cases. This creates an incentive for them to extract the highest possible settlements and that incentive may conflict with their professional duty to act in clients’ best interests.
- Claims being treated as investments: Lawyers acting on a contingency fee basis in multiple cases can treat those cases like investments, taking on risky cases with low prospects of success (but potentially large fees) and balancing them against cases with better prospects of success. This increases the potential for speculative claims of low merit to be brought as part of a wider “portfolio” of claims.
- Lawyers promoting litigation: The prospect of taking a share of the money recovered through litigation creates an incentive for lawyers to promote litigation. This is especially concerning in relation to collective litigation, where the huge sums at stake can incentivise lawyers to seek out potential claimants and recruit them to commence or join claims where they would not otherwise have done so. Since the lawyers’ contingency fee will be calculated as a percentage of the amount recovered by all the claims put together, the end financial result could be that lawyers receive larger payouts from litigation than the individuals they claim to represent.
- Lawyers taking on excessive risks: There is a danger that if lawyers take on too many cases on a contingency fee basis then they will not have sufficient resources to maintain their clients’ cases for as long as necessary. This could be a particular risk if lawyers who enter into contingency fee agreements are required, as they should be, to contribute to the costs of the opposing side in unsuccessful cases
In the UK, contingency fees are sometimes referred to as “damages-based agreements.” This is intended to distinguish them from other forms of “no win, no fee” agreement such as conditional fee agreements (CFAs). Under CFAs, lawyers receive higher fees than usual if their clients are successful but the additional amount, sometimes referred to as an “uplift”, is a percentage of their usual fees rather than a cut of the client’s damages.
While CFAs have been allowed in the UK for some time, contingency fees are currently prohibited in relation to litigation before the courts. Legislation has been passed, however, which will remove the prohibition on contingency fees in litigation in England and Wales. It is expected that this change will be implemented in April 2013.
In April 2012, the Civil Justice Council set up a working party to produce advice to the Government on what regulations are required (if any) in relation to contingency fees.