Work is needed to determine whether solicitors who offer contingency fees could find themselves on the hook for a successful defendant’s costs, Lord Justice Jackson said last week.
Addressing a seminar on contingency fees hosted by City firm Herbert Smith, the judge suggested a working party may be needed to resolve several outstanding issues raised by the introduction of contingency fees in the Legal Aid, Sentencing and Punishment of Offenders Bill, where they are known as damages-based agreements (DBAs).
One of these was what would happen if the client accepted liability for adverse costs but then did not pay them. Should the solicitors then be liable for them? If so, the judge asked, would this be on the Arkin principles (that is, up to the level of how much they have put into the case), or might they even be liable for them all?
Other issues highlighted by Jackson LJ included whether DBAs should be subject to statutory regulation or whether the provisions in the professional codes of conduct will suffice; outside of personal injury (where there will be a 25% cap), whether there should be a cap on the level of fee; and whether model DBAs would be needed.
While he said he did not know when his reforms would be implemented, he acknowledged that the date may slip from this October to the first half of 2013. This, at least, would give a working party “a reasonable amount of time to study these issues in appropriate detail”.
The judge predicted that the advent of alternative business structures will make “a significant difference” to the new litigation landscape, and also predicted that there will be an “inevitable expansion of third-party funding”.
Leslie Perrin, chairman of Calunius Capital and of the nascent Association of Litigation Funders, told the seminar that was an “uneven playing field”: under the capital adequacy requirements in their new voluntary code of conduct, funders need to have the resources to cover their funding liabilities for at least the subsequent 36 months; solicitors offering contingency fees have to prove nothing.
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John Kunzler, senior product manager at insurers Travelers, pointed out that there are examples of overleveraged contingency fee firms in America that have collapsed.
SRA chairman Charles Plant pointed to principle 8 of the code of conduct – which requires solicitors to run their business soundly – and drew an analogy with the collapse of Halliwells, caused by overexposure to property. He said the SRA “would have the power to go into firms and ask how they are addressing these issues”.
If regulation is left to the SRA Handbook, Mr Plant said the authority will almost certainly conduct a thematic review of how it will supervise firms working under DBAs. He added that if Parliament decides against setting a cap on DBAs, it is unlikely the SRA will.
Also on the panel, Michael Napier – one of Jackson LJ’s assessors and the man who led the Civil Justice Council working party on the third-party funding code of conduct – urged clients to demand their lawyers offer contingency fees, but predicted that satellite litigation will inevitably arise from them.