The proposals for conditional fees in construction disputes

Conditional fees in construction disputes - a realistic prospect?

Kate Tye reviews the impact of conditional fee proposals

In March 1998 the Lord Chancellor, Lord Irvine, issued a consultation paper entitled "Access to Justice with Conditional Fees". Although primarily concerned with the modernisation of the legal aid system the Lord Chancellor declared one of his aims as to "promote access to justice for the majority of the population in England and Wales through the wider availability of conditional fees".

The Lord Chancellor proposes to allow conditional fees in all areas of litigation save for criminal and family work. For a number of reasons the impact of this reform in construction disputes resolution may be less than many had hoped or feared.

What is a conditional fee arrangement ?

A "conditional fee" is the term used to describe the specific arrangements permitted by section 58 of the Courts and Legal Services Act 1990 and associated statutory instruments. A conditional fee arrangement allows a lawyer to take a case on the understanding that if the case is lost there will be no charge for the work carried out. If the case is successful the lawyer will be able to charge a "success fee". The success fee is to be a percentage of the lawyer's normal charges. The maximum success fee permitted under the Act is 100% of the lawyer's normal charges, whilst the Law Society recommends that the success fee should not exceed 25% of the damages recovered.

What is a contingency fee ?

A "contingency fee" is a generic term used to describe cases where the fee payable is dependent upon the outcome of the case. Until March of this year it had been thought that contingency fees - i.e. fee arrangements based on results but outside the scope of section 58 of the 1990 Act - were unlawful in England and Wales. However the Court of Appeal has recently ruled (Thai Trading Co. (a firm) -v- Taylor, Times 6 March 1998) that a contingency fee is not unlawful, provided that the solicitor does not seek to recover more than the usual costs and disbursements if successful at trial. Until recently there was also some doubt whether this principle applied to arbitration proceedings. However, the case of Bevan Ashford (a firm) -v- Geoff Yeandle (Contractors) Limited (1998) ALLER (D)138 confirmed that arbitration is subject to the same rule.

A contingency fee arrangement is not permitted under the Solicitors' Practice Rules, even though it is no longer unlawful for a solicitor to act on a contingency fee basis. The Law Society decided in late April that the Rules need to be amended, but it is likely to take some months for any changes to be approved.

The English contingency fee and conditional fee should be distinguished from the American version of the contingency fee where the lawyer is permitted to take a slice of the winnings.

Assessing and Insuring the Risk

According to the Lord Chancellor conditional fee arrangements allow the client and the lawyer to share the risk of litigation, with higher risks justifying higher success fees. The key word here is "risk" and the assessment of it. In his consultation paper the Lord Chancellor assumes that a party will be protected against having to pay his successful opponent's costs by obtaining after-the-event insurance. If conditional fees spread as widely as the Lord Chancellor hopes it is hard to imagine many clients entering into litigation without insurance, since if the case is lost there is the possibility that the loser will have to pay not only his opponent's costs, but also his success fee and insurance premium.

Insurers will provide insurance only after a risk assessment has been carried out. Nevertheless it is more than likely that legal advisers will only take a case on a conditional fee basis if they are confident that the result will be in their client's, and therefore their own, favour. Consequently solicitors and clients will need to become adept at risk analysis, before deciding on whether to pursue a claim. This is certainly no "bad thing" but how this will this risk assessment be carried out in construction cases?

Potential impact of these changes in construction litigation or arbitration

How, for example, will a party and its legal advisers be able to judge the risk in a construction loss and expense claim or delay claim with sufficient certainty to take on a considerable financial investment and bring a claim ? Alternatively, where expert opinion is needed to identify the cause of a defect, how will a party be in a position to tell whether the initial view of his expert is more credible than any other and therefore whether the risk is good?

In contrast, in other areas of litigation the assessment of risk is often more clear cut. For example, where a victim of a traffic accident loses his leg, and the accident is clearly not his fault, the risk of taking the case is much lower for both client and lawyer. Clients, and lawyers too, may not be willing to spend a considerable amount of time, money and effort weighing up the risks of a case simply to decide how to pay for the legal fees.

Further, in the construction industry examples above, the relative strengths and weaknesses of a case may only become clear after an action has started and once an opponent's position has been made clear, by which time the charging method should have been agreed. In such circumstances early risk assessment is at best an art and not a science and may not accurately reflect the true position. Until the decision in Hodgson -v- Imperial Tobacco Ltd (1998) ALLER (D)48 there were concerns that solicitors advising clients in litigation funded by means of conditional fees might be personally liable for the costs of their opponents. However such liability was ruled out by the Court of Appeal and that risk, at least, has been minimised.

Profitable

The same sort of risk assessment exercise must also be carried out before proceeding with a case on the basis of a contingency fee arrangement, since bringing a claim on this basis also represents a financial investment for both client and lawyer. Again it is doubtful whether clients and lawyers will welcome these new opportunities, if they do not make their construction projects any more profitable and their disputes less time consuming to resolve.

The potential impact of these changes in the construction industry may also be reduced by the continued popularity of arbitration as a means of dispute resolution. The conditional fees consultation paper does not state whether conditional fees will be available to fund arbitration and, as yet, the legal profession does not expressly permit contingency fees, which are available to fund arbitration. It would seem therefore that the choice available to construction industry clients is not as wide as it first appears.

Consultation period

The consultation period for the Lord Chancellor's proposals closed on 30 April 1998. The future timetable for the proposals remains unclear. It also remains to be seen whether the radical proposals Lord Irvine has put forward will have any noticeable impact in the construction industry.