Contingency Fees to be regulated…? July 1, 2009
Posted by Richard Moorhead in : Contingency, Costs, Uncategorized, no win no fee , add a commentThe government is consulting on regulating the current use of ‘damage based agreements’ (contingency fees) for consumer protection purposes. The three areas in which they are considering regulation are:
- the provision of clear and transparent information to consumers under DBAs, on all costs and expenses and alternative methods of funding;
- regulating a maximum % of the damages that can be recovered in fees from the award; and,
- the use of unfair terms and conditions (such as penalty/exit and settlement clauses).
A new clause in the Coroners and Justice Bill, introduced today in the House of Lords, is expected to provide the statutory framework for regulating DBAs.
My own research on contingency fees has begun to look at the need for regulation of contingency fees (one a practitioner survey, the other a qualitative study with claimants) in emploment tribunals and the consultation paper refers to the research at a number of points.
The first thing to say is that, inspite of Jack Straw’s public hostility to no win no fee agreements, there are no proposals to ban their use (although the Bill may give the Government power to do so). This in my view is a victory for common sense. Contingency fees provide access to justice for those members of the public who are not able to use either trade union or legal expenses insurance funding. They are sometimes used by as alternatives to trade union and insurance funding. The evidence does not suggest that contingency fees are used to bring suprious claims or that they have lead to an avalanche of unmerited claims.
The second point is that the consultation is rather light on detailed proposals.
The desirability for lawyers (and claims managers) to provide clear information to clients is familiar and not likely, in my view, to be advanced by beefing up professional rules. A particular problem will be getting adisers to tell clients about alternative forms of fudning that they themselves do not provide.
More radical steps may need to be taken. Whilst clearer information for clients is eminently desirable, information would need to be standardised and rendered intelligble to the general public for it to have more impact. The provision of comparator information on percentage fees and the like, perhaps along the lines of insurance and utilities price comparison sites, might have some impact. Trying to force advisers to give ‘better’ advice is likely to fail.
The suggestion that consumers might challenge the payments they make under DBAs has superficial appeal. Inadequate costs advice might be punished by this route, and act as a disincentive against sharp practice. However, my research suggests that in spite of the lack of clarity in costs advice clients remain largely happy with their lawyers costs or so beaten down by the resolution of their case that they simply give up on any lingering grievances. In such circumstances, they are unlikely to complain and if they do they are likely to face stiff opposition from their former lawyers.
The arguments for regulating the percentage fee are more finely balanced. In general my research found no evidence that lawyers overcharged in terms of the actual percentages used. In actual fact, the current arrangements appear to be working fairly well. A disadvantage is that limiting percentage fees charged would limit the types and number of cases brough on.
There is a desire in the paper that percentage fees bear some relation the risks and effort required in an individual case. A laudable sentiment but not probably very workable in practice. Also ther eneeds to be some cases where profit outweighs effort to compensate for cases which become hard fought and unprofitable. As the costs war in or civil courts shows, argung about success fees after the event is a costly and probably fruitless exercise. That said some maxima and powers to revist percentage fees in exceptional cases would provide some protection against truly egregious charging should that occur.
The regulation of unfair terms is perhaps the most fruitful avenue to be explored. Whilst overcharging in terms of percentages was not found in my research, a great variety of practice in charging what I called ‘hidden extras’ was found. So, some firms charged a 33% contingency fee and added VAT on top, some just charged 33% inclusive of VAT. Some charged disbursements win or lose, some charged them only if they win but on top of a percentage fe and some wrapped it up into a contingency fee. Variataions are not endless but they are confusing to consumers: almost no one we spoke to understood their contingency fee agreements. In my view, a standardised contingency fee agreement which specified what could be charged on top of a contingencey feewould enable clients to understand the agreements and would provide a level playing field for firms to compete against each other. One option that ought to be seriously considered in my view is prohibiting extra charges – extras could be borne in the risk as part of a contingency fee percentage.
The final point is the consultation paper’s criticism of ‘golden handcuff clauses’. These are clauses which tie the client to their lawyer’s reasonable advice on settlement. These raise tricky conflicts of interest between lawyer and client. Both have a legitimate interest in settlement but under many firms clauses the firm’s judgment about when to settle trumps the client. This is fine on one level: the firm is the expert and so should know what they are doing but not fine on another- they may be settling when it is in the client’s interests to push harder. A balance needs to be struck. Some hard thinking needs to go into how to design usch clauses. Lawyer’s already have considerable advantages over clients in being able to frame their advice and a tapered percentage fee (which increases substantially when a case goes to hearing) may also serve to concentrate a client’s mind. Settlement clauses are only necessary for the firms in exceptional cases: where a truly unreasonable client pushes a firm all the way. It may be that for these cases some kind of escape clause is necessary. Firms might be able to invoke the clause and then invite the client to seek a second opinion at the firm’s cost. This model is advocated by Kerry Underwood, for instance and I understand used by his firm.
There are also questionmarks over the practice of firms charging clients a fee under no win no fee agreements when they reject advice to settle. This too might be seen as part of the firm’s risk which is then shifted unfairly back onto the clients. There is a case to ban such penalties.