Funding Options for Legal Services Flashcards
The retainer
- The retainer is the contractual relationship which exists between solicitor and client.
- One important aspect of the contract which must be agreed at the outset is the fees and charges the solicitor will levy for acting for the client and the manner in which those fees and charges will be met.
- Although, as in any contractual relationship, the parties are generally free to agree terms, certain restrictions are placed upon the fees a solicitor may charge, and also upon how the solicitor will be remunerated, by the Solicitors Regulation Authority (SRA) and the general law. These restrictions vary depending upon what type of work the solicitor has agreed to carry out for the client.
Professional conduct
A solicitor may charge a client for work done on a number of different bases. Whichever method of charging the client and solicitor agree, the solicitor must always comply with their overarching professional conduct obligations.
Paragraph 8.7 of the SRA Code of Conduct for Solicitors, RELs and RFLs:
* Solicitor must provide clients with the best possible information about how their matter will be priced and, both at the time of engagement and when appropriate as their matter progresses, about the likely overall cost of a matter and any costs incurred.
SRA Transparency Rules:
* In relation to certain types of legal services, particular costs information must be provided.
* That information includes the circumstances in which clients may have to make any payments themselves for the services provided by the solicitor, including from any damages received.
The rules of professional conduct are not solely concerned with costs information; they also extend to the level of charges.
* A solicitor must act in the best interests of the client (SRA Principle 7) and act with integrity (SRA Principle 5)
Where a costs officer (when assessing a solicitor’s bill in a non-contentious matter) reduces the amount of the costs by more than 50%, they must inform the Solicitors Regulation Authority.
A solicitor should make the client aware of the funding options and, if necessary, direct the client to take separate advice on their availability. - For example, a solicitor may not carry out legal aid work, but if the solicitor thinks that the client may be eligible the solicitor must advise the client accordingly and, if necessary, direct the client elsewhere.
Private funding
A client may choose to fund their solicitor’s fees privately or simply have no other alternative. This is the traditional method of funding and it remains appropriate for many clients.
The solicitor’s fees are calculated according to the time spent on the case at a given hourly charging rate (disbursements and expenses are charged separately).
The client will be informed at the start of the matter which fee earners will be working on the client’s file, and the fee earners’ respective charge-out rates.
The ultimate cost to the client is open-ended because it will depend on how long it takes to conclude the case and how much work the solicitor has to undertake on the client’s behalf. Nevertheless, the solicitor must still give the client the best possible information on the likely overall cost of a matter.
With this type of funding the client is personally responsible for solicitor’s fees and disbursements irrespective of the outcome of the case.
Fixed fees
Type of private funding
A solicitor may agree with the client to complete the work for a fixed fee, or for a fixed fee plus VAT and disbursements.
Fixed fees are common in some types of work, such as conveyancing transactions.
It is vital that the solicitor obtains all the relevant information in order to set a fixed fee at a reasonable but remunerative level. A fixed fee cannot be altered at a later date (unless the client agrees) if the work turns out to be more expensive than the solicitor first expected.
Inventors Friend Ltd v Leathes Prior (a firm) [2011] EWHC 711:
* A firm of solicitors agreed a fixed fee to briefly review and comment on the terms of a document.
* The fee was agreed before the solicitor involved had seen the actual document.
* The client later sued the firm for negligence.
* Cranston J commented: ‘When solicitors undertake work at a specific fee, they are generally speaking obliged to complete it exercising the ordinary standard of care, even if it has become unremunerative.’
Legal Aid
- Public money used to pay the legal fees of those eligible for it
- For every client - law firm is obliged to consider if that client is eligible
- Solicitor claims their fees from the Legal Aid Agency which pays out of public money
- To claim legal aid for civil or criminal litigation, a client must be eligible
Eligibility for CIVIL legal aid
- Legal aid must be in scope:
* Homelessness
* Family cases with domestic abuse
* Immigration
* Care proceedings
- Business cases and divorce not within scope - Client must be eligible. 2 tests:
1) Merits Test:
a) Client must have a 50%+ chance of success; AND
b) In a monetary claim, the damage is likely to be received must outweigh the legal costs OR in a non-monetary claim a reasonably private paying client would think that the benefits that can be granted from the case justify the cost
c) legal aid won’t be granted if the client can get other funding (e.g. ATE) or a CFA is available
2) Means Test:
a) Client must have capital of £8k (£3k if immigration case) or less; AND
b) Gross income of £2,657 pm or less;
c) Client must earn £733 or less pm in disposable income
Eligibility for CRIMINAL legal aid
No matter your financial position, everyone has access to a duty solicitor while at a police station. These are solicitors who are there to protect your rights at the station and can cover for a client until their lawyer arrives/they formally hire one.
For court, you have a representation order: grants legal aid to cover the legal fees of a client has been charged with an offence and has court proceedings. The court can be extended to cover appeals.
You must be eligible to receive a representation order - satisfy 2 tests:
1) Interest of justice test:
* Assesses the merits of the case - Automatically met if client is under 18 or the case is a crown court trial; or;
* Must be in the interests of justice: the more serious the consequences of the case to the client (e.g. will be locked up for years) or the more complex the proceedings (involves loads of witnesses or is important legally) the more likely the test will be satisfied
2) Means Test
* Automatically met is the client is under 18 or receives any benefits.
* Otherwise:
Adjusted income: £12, 475 or less: Magistrates Court = Funded : Crown Court = Funded
Adjusted income: £12,475 - £22,325: Magistrates Court = If disposable household (annual) income is £3,398 or less, funded : Crown Court = If disposable household (annual) income £3,389 - £37,500, eligible but must contribute
- If capital is above £30,000 they are eligible but have to contribute
Adjusted income: £22,325 or + : Magistrates Court = Ineligible ; Crown Court = ineligible, but if disposable household annual income is less than £37,500, eligible but must contribute. If disposable household income is £37,500 or more they are ineligible
Conditional fee arrangements / Contingency fee arrangements
(Payment on the condition the case is won)
“no win no fee”
- Payment on the condition the case is won
- The extra payment is a success fee - must be expressed as a percentage of a solicitor’s normal fees (chargeable rate). VAT is then added to the total amount.
NB: A question may ask what the success fee will be net of VAT - Net of VAT = VAT excluded - just calculate the fee and don’t add VAT
CFA must be valid. To be valid:
1. It cannot be used for family matters (e.g. divorce)
2. Must be in writing
3. Must state the success fee (the percentage increase amount)
Success fee cannot be over 100% of the standard fees
In personal injury cases there is an additional cap of 25% of the general damages recovered.
Success fee is NOT paid by the opponent loser when they are ordered to pay costs - opponent will only pay standard costs to cover the normal fees - client pays success fee
Disbursements are separate from the success fee
* If a client loses, they will not have to pay the solicitor any legal fees, but they will still have to pay their disbursements (incl. barrister’s fee) and the opponent’s costs and disbursements
* Client can take out ATE insurance to cover these costs
Consequences of a CFA
CFA: How to calculate success fee percentage
CFA Example
Imran is a solicitor. Imran is approached by Selina in relation to a contract dispute. Imran agrees to take on the case under a conditional fee agreement. Imran’s usual charging rate is £200 per hour. Imran proposes a ‘no win, no fee’ conditional fee agreement with a success fee of 40%. This means that Imran’s hourly charge out rate will be £280 per hour if Selina wins her claim. Selina agrees.
Scenario 1:
The judge finds in Selina’s favour and she is awarded damages of £20,000. Imran’s bill totals £3,000 but the success fee increases this to £4,200. The ‘usual’ fees of £3,000 and any disbursements would be recoverable from Selina’s opponent but Selina is responsible for any shortfall and also the success fee of £1,200, which would be paid from her damages.
Scenario 2:
Selina loses the case and she is ordered to pay her opponent’s costs and disbursements. In addition, Selina must pay her own solicitor’s disbursements but she is not liable for the bill of £3,000 (nor the success fee).
Damages Based Agreements (DBA)
Solicitor takes a cut of the damages
- Only applies to claimants
- If claimants wins: Solicitor’s fees will be paid out of the damages.
- If the claimant loses: No payment is made (exc. disbursements)
- The amount the solicitor will be paid is expressed as a percentage of the total damages
- If claimant wins, Defendant will also have to pay costs - set off against the total the solicitor will receive under the DBA, and the claimant pays the balance out of the damages award
Example:
* X wins and gets £10,000 in costs
* They owe a total of £20,000 to their solicitor under the DBA
* The 10k in costs goes towards this £20,000 figure so only £10,000 is actually paid out of the damages
- Like a CFA - if claimant loses - they will pay their own disbursements + opponent costs and disbursements (client should look at ATE insurance)
- If a claimant settles an agreement before going to trial and receives a payment, that payment must still be used to pay the solicitor for the work already done according to the percentage agreed
For a DBA to be valid:
* Total amount taken by solicitor (incl. VAT) cannot exceed 50% of the total damages awarded to the claimant
* For PI 25% - for employment - 35%
* The solicitor must give the client reasons why it reached that figure
DBA Examples
Example 1:
Winston makes a claim for design fees owed for work done on a building project under a DBA in which the fee is set at 25 per cent. He recovers damages of £28,000 plus his costs agreed at £5,000.
The payment due to Winston’s solicitors under the DBA is £7,000 (25 per cent of £28,000), £5,000 of which has been recovered from the defendant. Winston pays to his solicitors out of his damages the shortfall between the sum recovered (£5,000) and the payment due (£7,000), ie £2,000. He gets £26,000, his solicitors get £7,000.
Example 2:
Hannah makes a claim for design fees owed for work done on a building project under a DBA in which the fee is set at 33 per cent. She recovers damages of £51,000 plus her costs which have been assessed by the court at £21,000.
The payment due to Hannah’s solicitors under the DBA is £17,000 (33 per cent of £51,000), all of which will be recovered from the defendant. Hannah pays nothing to her solicitors out of her damages as there is no shortfall between the costs sum assessed by the court (£21,000) and the payment due under the DBA (£17,000). She gets £51,000, however her solicitors only get £17,000 as under the indemnity principle they cannot recover more from the defendant than Hannah is liable to pay them.
Comparison of CFAs and DBAs
- The enhanced rate is calculated by reference to an uplift in the solicitor’s usual hourly charging rate in CFAs, but is linked to the damages received in DBAs.
- The success fee is limited to 100% of the usual hourly rate in CFAs; but the contingency fee cannot exceed 50% of the damages in DBAs.
- In both arrangements, the client is not required to pay their solicitor’s fee if the case does not succeed, or pays a lesser amount depending upon the agreement.
- Neither CFAs nor DBAs cover the client’s own disbursements, or the opponent’s costs, which must be dealt with separately.
- Both must be in writing.
- The availability and terms of these funding arrangements will reflect the infinite variety of cases and the inherent difficulties of predicting the outcome of litigation.
Legal Expenses Insurance
Your client may be able to fund their case by means of LEI, either through a pre-existing insurance policy (BEI) or by purchasing insurance after the events giving rise to the claim have happened (AEI).
Before the Event Insurance (BEI):
* If your client has BEI, you should check the extent of the cover available and any conditions or exclusions.
* Claims will generally only be funded if the likelihood of success or reasonable prospects of success exceeds 50 per cent.
After the Event Insurance (AEI):
* Where there is no existing BEI policy, your client can purchase insurance specifically to cover the costs of the proposed litigation.
* Generally, if a claim is unsuccessful then the losing claimant will be ordered to pay their successful opponent’s costs.
* Exc. PI - losing claimant entitled to protection by QOCS
* In cases other than for personal injuries, AEI can cover a potential costs liability and is often used in conjunction with a conditional fee agreement (CFA) or damages based agreement (DBA) to do so.
* Your client can also take out AEI without a CFA or DBA to fund their own legal costs as well as their disbursements (eg court fees, counsel or experts) and liability for their opponent’s costs.
Funding comparison flowchart
