jump to navigation

Regulating contingency fees July 7, 2009

Posted by Richard Moorhead in : Contingency, Costs, Jackson Review, no win no fee , add a comment

With the government consulting on the regulation of damage based agreements (DBAs more commonly known as contingency fees) and the Jackson Review also seeking views on whether to introduce them into litigation and if so how to regulate them (key points summarised here), it is worth considering how such agreements might need regulating.

Regulating the percentage fee

Jack Straw is reportedly keen on putting caps on the percentage that a lawyer can deduct from their client’s damages under a DBA.  I am not in favour of capping the percentage fee.  The evidence is not generally consistent with overcharging either here or in the United States (see Moorhead and Cumming 2008 and Bert Kritzer’s work in particular).  Caps on percentage fees clearly reduce the number of cases brought (it increases the risk aversion of lawyers) and so squeezes out of meritorious cases (and some less meritorious cases) .

Thus there is no evidence of a need to protect the consumer’s interest. That leaves regulation of percentage fees to the market.  My own research suggests that competition on price (percentages) is weak and there is very little evidence in the US of price competition, save perhaps in cases action cases (Moorhead and Hurst 2008).   There may be things to do which could promote price competition (see below on consumer information).

There are two areas where there may be some extra pressure to cap percentage fees:

Both these points are emphasised in the government’s paper.  I am pretty unconvinced of the need to regulate in the latter case.  For contingency fees to work, there needs to be cases where reward exceeds effort to compensate for cases where effort exceeds reward.  There might be some merit in a longstop requirement, where the return grossly exceeds the effort, but unless the test for such cases was very tight it would simply serve as gateway to costs disputes.  Conversely, claimants would be unlikely to take up powers to challenge percentage fees in any event and this would mean the impact of an ability to challenge would have minimal impact.

Multi-party cases is a bit more difficult to assess.  This is the area where, as I understand it, there has been more concern in the US about costs. I suspect this is because it is more often the case that a) courts oversee such costs and b) unsuccessful defendants sometimes pay those costs on a loser pays basis.  Some court oversight of the fees in such cases might be sensible to ensure the class is not being exploited.

More generally on multi-party cases, it seems to me there might be an issue which relates to the opt-out and opt-in procedures.  I confess to being slightly squeamish about the opt-out approaches (all potential claimants are part of the class unless they opt-out), whilst also having serious reservations about opt-in (only indeitifed claimants who ‘opt-in’ are parties to the collective action).  One approach would be to ensure that multi-party lawyers are only paid contingency fees on the proportion of damages actually paid out to claimants (rather than the sum awarded to the whole class).  This would provide incentives for them to maximise the return to actual claimants (as opposed to a notionally large class) and minimise windfalls from identifying a very large class that then shows no interest in making the claim.

Charging ‘extras’

My research has suggested solicitors have highly variable practises on charges additional to the percentage fee of a DBA.  Some charge VAT on top of a percentage, some include it within a percentage.  Some charge disbursements on top, some only if the client wins, some whether or not the client wins or loses.  I would suggest clear rules on what can be charged in addition to the percentage fee.  Rules need to cover: VAT, counsels fees, other disbursements and other costs/fees.

In particular, I would advocate the prohibition of charging extras in addition to the percentage fee for unsophisticated clients.  This is a fairly radical approach but it would be a necessary step – I believe – on the way to price competition: the consumer gets one clear signal on price – the contingency fee percentage.  Under this approach lawyers would be expected to bear the entire risk/cost of a case within their percentage fee.  The downside risk is that this may make DBAs uneconomic for certain disbursement heavy cases; although this could be met by charging higher percentage fees.  The problem could be ameliorated somewhat by allowing the full recoverability of disbursements where successful.

Having a clear rule that limits the charges to a percentage only may also have the advantage of reducing the likelihood of Beresfords type charging problems developing.  A clear rule prohibiting complex charging might become sufficiently known to the general public that firms would not dare to try Beresford style charging (or modifications of it).

Without this approach one is left with the option of allowing extras to be charged and requiring clear information to the clients.  This is pretty much what is required anyway, although obligations could, I suspect be set out with greater clarity.  My own view is that some firms have a tendency to write client care letters in terms which are not clear.  Even clear advice and letters will pose significant challenges for many clients (a trades union legal team has told me they pitch their literature at a reading age of 11 or 12).  I turn separately to the issue of consumer information below.

There ought to be a clear rule on VAT and percentage charges. My own preference is that percentage charges should be quoted inclusive of VAT; but the main issue is that the approach is consistent across the sector (see below).  A VAT inclusive approach might not work with capped percentage fees as they would be vulnerable to increases in the applicable VAT rate.

A half-way house, might be to require a simple, no extra charges agreement unless the client has received independent advice on the terms of their funding agreement.  This is an expensive and, for regular clients, probably rather questionable benefit (they will likely be referred to a friendly firm who may have reciprocal relationships with the claimant firm).  Clients who had inhouse legal expertise or were otherwise ’sophisticated’ might permitted to enter into such agreements without further independent advice.

If information and advice requirements are to be beefed up, it is worth requiring the claimant lawyer to specify counsel’s fees and disbursements separately.  In my view, clients are more confused by being charged extra for counsel’s fees (which they would expect to be taken as part of a percentage) than they are (say) an expert’s report on top of a percentage.

Undersettlement

I not convinced that undersettlement is a general problem (i.e. one likely to depress damages payments generally) peculiar to contingency fees.  There may, however, be individual cases where there is a real conflict of interest.  It is an issue which is very difficult to regulate.  Regulating it through liability for professional negligence and professional rules is likely to have a minimal effect because: a) it requires a client sensing they have been undersettled; and b) finding someone to take the case on; and then c) proving that a case was undersettled (hard to do on an individual case).  An approach which monitored whole caseloads (as suggested in my one-way costs shifting paper) would probably be more effective but it would require a step-change in regulation of legal service providers.

Some regulation of handcuff clauses may make undersettling less likely.

Handcuff clauses

These are the clauses which require a client to accept the lawyer’s reasonable advice.  They are sometimes backed by potentially unfair charging clauses.  It could be argued that these clauses are contrary to the lawyer’s duty to the client.  The case is the client’s and once the lawyer accepts instructions they should bear the risk of the client not accepting their advice.  One approach would be to ban such clauses.  It does leave lawyers somewhat vulnerable to difficult clients willing to push the case all the way simply in the hope they will get a few pounds more (or because they want their day in court even though that is patently uneconomic).  The risk for the client is that they lose the case and receive no money whatsoever.  Therefore there is some restraint even on more unreasonable clients.

Whilst I think that banning handcuff clauses has some merit, I am sympathetic to the view that these clauses should be permitted but without penalty clauses.  I also think there should consideration of the need for a second opinion clause (see below).

At the moment lawyers can have clauses which, when the lawyer deems the client to have rejected unreasonable advice, charge the client on an hourly basis (or indeed a fixed fee basis) for all work to date.  These are not clauses which we found clients knew the existence of (Moorhead and Cumming 2009), let alone understood.  It seems to me that such clauses shift too much risk in rejecting a settlement offer back onto the client.   The lawyer should be free to terminate the retainer, where the client would not accept reasonable advice, but should not be in a position to charge for work done to date.  The risk that that occurs should be part of the risk the lawyer accepts at the outset of the case.  Termination of the retainer, or its threat, would also concentrate the client’s mind.  The lawyer would need to retain an interest in any compensation paid (to prevent sharp clients terminating a retainer and then accepting a settlement direct).

If that approach was felt to be too harsh on the lawyer’s interests an approach which allowed the lawyer to charge the agreed percentage of the last settlement offer might be a compromise approach.

Termination of retainer

Some firms charge a fee if their retainer is terminated by the client to compensate for work done and to prevent clients getting a settlement offer, terminating the retainer and then tkaing the offer without deduction.

Again one might argue that the lawyer should bear the risk of termination when they take on the case.  That is my preferred approach, otherwise clients may find themselves locked into DBAs because of sums payable should they wish to terminate.  Beyond that a quantum meruit approach with ceiling on it would provide some consumer protection.

Choosing between funding

Firms are bad at and/or consumers are bad at understanding the availability of funding options beyond those offered by the adviser they go and see.  There are some improvements that could be made in the professional rules (if solicitors are required to advise on other forms of funding such as insurance and legal aid then they should also be required to advise on contingency fee funding where it may be in the client’s interests (which must be nearly always given the risk protections for the client).  But tightening up the professional rules is likely to have little or no effect on consumer choices.  The only way to improve this is consumer education; not something easily achieved.

Improving information to consumers

Given the difficulties client’s face in understanding costs advice, and also given the paucity of shopping around in this market, two things might be considered.

A standard, well designed (with input from the Consumers Association and the Plain English campaign) which makes clear what the client should and should not be charged for.  This would work best if tied to a standardised, sector wide agreement.

A website which publicised and compard DBA rates and charging approaches.  I would esxpect this to emerge over time but the kind of database approach advocated with one-way cost shifting could form the basis of a consumer information system which provided key data on charges ‘in the sector’ which might encourage them to look for a better deal.

Recoverability

I have assumed for the purposes of this post that the percentsge fee is not recoverable from the opponent.  However an interesting approach would be to allow a capped percentage recovery from defendants (say 25%) and a further recover from claimants.  It might make sense to have the two rates tied rogether (so one can only charge the client the same perdentage as is charged ot the defendant).  If this were the case, the defendants might be relied on to keep percentage fees within reasonable bounds.  This would give rise to costs litigation, but it would not be as extensive as is currently the case.  In employment cases this would require the permission of a degree of one-way cost shifting.  It is diffiuclt to contemplate this happening.

Cross-sector

Regulations of DBAs should, in my view, be cross-sectoral: i.e. they should apply to regulated professions and others (notably claims companies) on a level playing field.

Sophisticated clients

Some work would have to go into defining which clients would be defined as sophisticated clients for the purposes of regulations.  I imagine that the SRA have begun to consider this in other contexts.  A starting point for me would be whether the client has in-house legal expertise or perhaps whether they are giving instructions on behalf of a commercial entity (be it as a sole trader, partnership, a company).  Cases of doubt would be resolved in favour of the client.  Clients who receive advice independent of the instructed lawyer or claims company (i.e. in-house or separate advice) would also be able to waive the regulations.