No win, no fee: no problem?

There is a growing demand from clients to find new ways of paying for their legal advice. Greater budget certainty at the outset of a case or transaction, and sharing of risk in the form of alternative fee arrangements, are increasingly expected.

It is not surprising, then, that addressing these concerns forms a central part of the current programme of reform of Scotland’s courts. At the end of January 2015, the Scottish Government issued a consultation on the Expenses and Funding of Civil Litigation Bill – a package of legislation with the twin aims of increasing funding options and creating greater predictability and certainty in the cost and funding of litigation.

The legislative proposals include speculative fee agreements (SFAs), damages-based agreements (DBAs) and qualified one-way costs shifting – identified by the Scottish Government as the keys to increasing access to justice. How does the legislation envisage that these concepts will work in practice? What can we learn from the introduction of similar concepts in England & Wales under Lord Justice Jackson’s programme of reform, and what other options might meet client appetite for alternative methods of funding litigation?

Background to the proposed reforms

The Scottish Government’s "Making Justice Work" programme sees the introduction of some of the most substantial changes to our justice system in over a century. It brings together a range of reforms to the structure and processes of courts. As an integral part of this programme, Sheriff Principal Taylor reported on litigation costs in September 2013, with his recommendations forming the basis for the proposed legislation.

Funding of litigation

Traditionally in Scotland, litigation has been financed in one of three ways – privately, by legal aid or with trade union funding. Cost pressures and declining trade union membership have limited the latter two, and funding litigation privately can be a daunting prospect, even for commercial clients. Increasingly, clients expect to share the risk of litigation with their lawyers through alternative billing arrangements.

Speculative fee agreements

SFAs take many forms, but generally the client is only required to pay their solicitor’s fees if the litigation is successful, with an enhanced fee payable in the event of success. Occasionally SFAs operate on a “no win, lower fee” basis. The “success fee” is calculated as a percentage of legal fees (as opposed to DBAs, where the fee is calculated as a percentage of the damages).

Lawyers in Scotland have always been able to enter into SFAs. Indeed, Sheriff Principal Taylor found that a large proportion of personal injury actions and an increasing volume of commercial and insolvency litigation in Scotland are already funded in this way.

The major proposed change to SFAs concerns the operation of caps on success fees in relation to awards of damages. In personal injury actions it is proposed that the cap is set at 20% on the first £100,000 of damages, 10% on damages between £100,001 and £500,000 and 2.5% of damages over £500,000. In applications to employment tribunals, the success fee will be capped at 35%. For all other civil actions funded by SFAs, including commercial actions, it is proposed that the maximum success fee be capped at 50% of the sum recovered.

Success fees are not recoverable from opponents in Scotland and there are no proposals to change that. In England the removal of the ability, post-April 2013, to recover success fees from opponents has made the English equivalent to SFAs (CFAs) less attractive. Litigants now have to bear the cost of those arrangements, and opponents can no longer be put under pressure to pay the other side’s success fees (which was often a risk factor enabling settlement of disputes).

Damages-based agreements

Like SFAs, under a DBA generally no fee is charged if the case is lost. If the case is won, the solicitor takes a percentage of the damages paid to the client. Solicitors in Scotland can’t enforce DBAs at present but, in practice they circumvent this by setting up claims management companies to offer this funding option to clients, notably in personal injury cases.

Sheriff Principal Taylor noted that clients like DBAs as they are easy to understand and provide greater predictability in relation to liability for fees than traditional models. In line with Taylor’s recommendation, the Scottish Government intends to legislate to allow DBAs to be enforceable by Scottish solicitors, except in family actions. This should result in their use in cases other than personal injury actions. Recognising this, a distinction will be drawn in relation to the operation of DBAs in personal injury and commercial actions.

In personal injury actions, DBAs will operate on a “no win, no fee” basis. However, in commercial actions, it will be open to lawyers to share risk with clients on a “no win, lower fee” basis, where the solicitor is paid less if the client loses but, likewise, an enhanced fee in the event of success.

The maximum success fee payable out of damages will be capped at the same rates as those applied to SFAs.

Flexibility: the key to success

DBAs ought to present clients with a viable further funding option where they are prepared to give up a share of the damages and share risk with their lawyers. DBAs were introduced for contentious work in England & Wales on 1 April 2013. However, lawyers there have been reluctant to offer this funding model because of the inability to offer partial or “hybrid” DBAs, whereby a lawyer would receive, for example a reduced hourly rate as the case proceeds, payable win or lose, plus a percentage of the damages in the event of success. In England, if a lawyer agrees to act under a DBA, the regulations envisage that the lawyer must take 100% of the risk, i.e. be paid nothing if no damages are awarded, and in the meantime fund their own costs. This has made DBAs in England commercially unattractive to most law firms.

At the end of last year, the Ministry of Justice asked the Civil Justice Council to review the English DBA regulations to consider possible improvements, but ruled out the introduction of hybrid arrangements on the basis that they “could encourage litigation behaviour based on a low risk/high returns approach”.

However, this exclusion of hybrid DBAs in England & Wales has been widely criticised, including by Lord Justice Jackson, the architect of the reforms in that jurisdiction, so it is heartening that the proposals in Scotland, at least in relation to commercial actions, will offer greater flexibility, which should in turn encourage lawyers to offer DBAs to their clients.

Liability for opponent’s costs

While DBAs and SFAs provide greater predictability in relation to the client’s own costs, the client remains liable to pay the opponent’s expenses if unsuccessful. After the event (ATE) insurance can plug this gap, but the cost of this option means that access to justice could be limited, particularly for modest claims. It is therefore proposed to introduce qualified one way costs shifting in personal injury actions. This means that an unsuccessful pursuer will not have to meet the defender’s expenses in all but exceptional circumstances.

Third-party funding

As well as DBAs and SFAs, Sheriff Principal Taylor’s report considered third-party funding (also known as litigation funding) as an alternative way to fund litigation. This can take many forms, but the report considered the position where commercial investors provide financial support to litigants in return for an agreed share of any sums recovered. As with SFAs and DBAs, the funder is paid only if the action succeeds.

Although litigation funders have not been as active in Scotland as they are south of the border, there is clearly potential for the market to develop in a wide range of cases, from professional negligence and clinical negligence to insolvency and commercial disputes.

Recognising the somewhat speculative nature of the Taylor report recommendations in this area, the Scottish Government has, at this stage, simply proposed that the legislation ensures the Scottish Civil Justice Council has the appropriate powers to allow the courts to take forward the proposals. These include joint and several liability of funders for the opposing party’s expenses (capped at the extent of funding provided). In contrast to the position in England, Taylor also recommended mandatory disclosure of funding arrangements. However, experience there suggests that there can be good tactical reasons for disclosure, not least because it demonstrates that the solicitor or a third party has confidence in the merits of the claim.

The package of legislative measures proposed by the consultation should enable greater numbers of clients to pursue good claims (and to defend unmeritorious ones), increasing access to justice, not just for those who fall into what the consultation document refers to as “the excluded middle”, but for a wide range of clients, individual and commercial. The consultation will close on 24 April 2015.

Find the consultation

The consultation on the Scottish Government’s proposals can be accessed at www.gov.scot/Publications/2015/01/9932 The deadline for responses is 24 April 2015.