Contingency Fees © Daniel Atkinson 1999

Contractors who need to pursue their claims in arbitration or in the courts face a major financial risk. If they lose they will normally have to pay part of the other sides costs as well as their own lawyer's costs. The contractor's lawyer can take part of this risk by agreeing to a contingency fee arrangement, but in the past has been reluctant to do so because there has been doubt whether such agreements were enforceable. Recent legislation and two cases decided in 1998 have clarified this area of law and are of major benefit to contractors wishing to pass on part of the risk.

As a matter of public policy since the Statute of Westminster in 1275 the courts have always condemned contingency fee arrangements. It was considered that once the legal adviser had a personal interest in the litigation that he might be tempted to "influence the damages, to suppress evidence, or even to suborn witnesses" Lord Denning MR in Re Trepca Mines Ltd (No 2) (1963) CA. In this case the contingency fee was one-quarter of the sum recovered - a Speculative Fee Agreement. All contingency fee agreements have been held to be unenforceable without distinguishing the different types of fee arrangement.

Section 58(3) of the Courts and Legal Services Act 1990 changed the existing law and makes permissible conditional fee agreements for specified proceedings, presently personal injury, companies in administration or winding up and Human Rights proceedings. Whilst limited in application the Act has marked a distinct change in public policy, reflected in two recent decisions.

In Thai Trading v Taylor (1998) Mrs Taylor had won her case in the county court. She had an understanding with her husband solicitor, naturally, that she would not pay anything if she lost - a Discounted Fee Agreement. The agreement was outside the Act. On taxation of costs Thai Trading argued that the agreement with the solicitor was a contingency fee agreement and therefore contrary to public policy and unenforceable. This meant that she was not legally liable to pay her solicitor's fees. This being the case it was argued she could not recover her costs from Thai Trading. This is precisely the problem caused by an unenforceable contingency fee agreement. The losing party may unintentionally benefit.

The Court of Appeal reviewed the law governing contingency fees outside the Act. It was held that an agreement in which a solicitor was to be paid no more than his ordinary fees if he wins was not contrary to public policy today and it was doubted whether it ever was. A solicitor could lawfully forgo all or part of his ordinary fee if he lost. The Court of Appeal overruled the decision to the contrary in Aratra Potato Co Ltd v Taylor Johnson Garrett (1995) in which the agreement was for a 20% reduction in ordinary fees for any cases lost. This decided the case, but the Court of Appeal also stated that a contingency fee which provided the solicitor with a reward over and above his ordinary fee -a Conditional Uplift Agreement - should be condemned as tending to corrupt the administration of justice. It was recognised that only legislation could authorise such agreements, which it has done for only three types of proceedings.

In Bevan Ashford v Geoff Yeandle Limited (1998) decided after the Thai Trading, there were two agreements. One was a Discounted Fee Agreement and the other a Conditional Uplift Fee Agreement for 50% uplift in fees. Both agreements were for arbitration proceedings. Yeandle was a company being wound up and therefore if the proceedings had been in court the agreements would have fallen within the specified proceedings in Section 58(3) of the Act. The terms of both agreements otherwise satisfied the Act. The Vice Chancellor held however that the Act did not apply to either of the agreements since the Act only applied to proceedings in court and not arbitration. Were the agreements nonetheless enforceable?

It was argued that the public policy that prevented contingency fee agreements was to protect the integrity of the English judicial system and therefore did not apply to arbitrations. Indeed in Giles v Thompson (1993) CA Steyn LJ had remarked that the boundaries of the policy could possibly exclude arbitration. This statement was relied on in the case in Hong Kong Canonway Consultants Ltd v Kenworth Engineering Ltd (1994) in which it was held that the policy consideration did not apply beyond the public justice system and into the private consensual system which is arbitration.

Surprisingly the Vice Chancellor held that the public policy applied equally to arbitrations and proceedings in court. He held therefore that agreements which were lawful for court proceedings would not be condemned as unenforceable if used in arbitration proceedings. He held therefore that both agreements were free from public policy objections.

In summary, it now appears that Discounted Fee Agreements are generally enforceable. Conditional Uplift Fee Agreements are enforceable only if they are in relation to specified proceedings under the Act. Speculative Fee Agreements are not enforceable.

It is suggested that there has been a major advance in this area of law. The Contractors can now share the risk of costs in legal proceedings, including arbitrations, using Discounted Fee Agreements. Crucial to success will be the estimation of risk and the assessment of the probability of success. It will be necessary to carefully identify the circumstances in which fees are payable and the part of proceedings to which the agreement relates, to avoid further disputes.