SUMMARY
The past seven years have witnessed some important developments in the ways that clients can pay their lawyers in England and Wales. Some of these have been the result of policy decisions (e.g. the introduction of Conditional Fee Agreements and the 'downsizing' of legal aid). Others, such as the growing influence of insurers, have been market responses to these. It is important that the distributional and efficiency implications of these changes are understood, both to evaluate present policy and to inform future decisions.
We have collected data from claims closed mainly during 2000 and 2001 using a stratified, clustered sample design in order to draw inferences about the population of solicitors doing personal injury work in England and Wales. The picture that emerged was one of a "mixed economy" of fee arrangements in support of litigation services by lawyers. Lawyers could choose to use hourly fees, or give their clients a choice of CFA arrangements at an agreed percentage uplift on their normal hourly rate (capped by an agreed percentage of the final award). This agreed uplift was, for the majority of cases in our sample, recovered from the client's award rather than from the defendant [Note: The legal status of this practice has changed since our data were collected. Following the Access to Justice Act 1999, for claims opened since April 2000 the success fee and/or insurance premium became recoverable items, and the occasions where they are recovered from clients will have been significantly reduced.]. Alongside CFAs, lawyers could offer a range of after-the-event insurance contracts to permit their clients to insure against the risk of losing and having to pay both sides costs. Alternatively, lawyers could work on behalf of third party payers such as before-the-event legal expenses insurers or trade unions, and receive payment for work done on an agreed hourly basis. In this case the risk of paying costs in the event of failure was borne by the third party, and not by either the lawyer or his client. Finally, the lawyer could accept cases which were referred to her by a referral company, who agreed to bear the risk of paying costs in the event of failure in exchange for a fee, recoverable from the client. The lawyer could then recover her costs from the defendant in the event of success, or the referral company in the event of failure.
The type of personal injury cases brought under each of these various arrangements for financing litigation was determined jointly by decisions made by client and lawyer. We found that hourly fee cases (with a private client) were characterised by defendants who admitted a much higher proportion of liability - they were "less risky" cases than those run under CFAs. The same was true for referral company cases, but legal aid cases and third party payer cases did not differ significantly from CFA cases with respect to the proportion of liability admitted. CFAs had fewer cases in which there are no evident problems with liability or causation than any of the other fee schemes. The difference was greatest in relation to hourly fee and referral company cases. On the whole, our evidence in relation to liability and causation suggests that CFA cases were relatively complex and "risky" compared with hourly fee and referral company schemes, and broadly comparable with legal aided cases. In relation to quantum, CFA cases tended to have an initial assessed value which was close to the average of those in our sample. Legal aid cases had the highest assessed value, and referral companies the lowest.
Within CFA cases, we found some evidence to support the hypothesis that lawyers charging higher success fees (particularly those with uplifts around 100%) tended to have cases with greater risks on average. However, it was also noticeable that for many CFA lawyers the choice of uplift was converging at the 100% level (capped at 25% of damages), and that there was a considerable variation in the "riskiness" of cases run with that uplift. Of course, this kind of risk-pooling is implicit in many forms of insurance arrangements, including before-the-event legal expenses insurance, as well as with the common US contingency fee practice of maintaining a fixed fee percentage (say, 33%) across the firm's caseload. If the CFA lawyer is acting as an insurer against the risk of paying her own costs, she is entitled to make a judgement that the administrative costs involved with calculating differential uplifts are not justified, and that the 100% uplift represents an appropriate "premium" for the pool of cases that are taken on. In any case, the changes introduced since April 2000 allowing recovery of the uplift from defendants have also had the effect of increasing the likelihood that solicitors are asked to justify the uplift as they attempt to recover it. In effect, the practice of setting a fixed uplift for a portfolio of cases has been made more difficult as a consequence.
In relation to litigation outcomes, we have found that CFAs pose some interesting distributional questions. By comparison with "traditional" cases financed either through standard hourly fees by the client, or through legal aid, they appear to produce higher payouts from defendants, both in relation to settlement awards agreed and costs recovered. The additional costs recovered from defendants may reflect the combined effect of insurance premiums and insurance monitoring costs, but they do not appear to reflect any differences in the duration of cases. However, for the majority of the cases in our sample, the solicitor's success fees were recovered from the client rather than the defendant, and so the overall effect on the claimant's net award is negative by comparison with hourly fees and legal aid. For referral companies, the picture in relation to outcomes is substantially different. By comparison with CFAs they obtain much lower damages for their clients (around 27% lower). Because they also charge their clients ex post, inevitably they compare badly in terms of the amounts paid to clients: they pay around 40% less to clients than CFAs, after controlling for case characteristics. Third party payers, by contrast, have a very similar set of outcomes to CFAs in terms of recovered costs and damages. The main difference is that third party payers do not deduct a fee from the client's settlement award, but instead fund their litigation expenses from premiums or subscriptions paid by the client in advance.
In relation to the duration of cases, our results confirm the evidence we have found elsewhere with other datasets that settlement timing is highly sensitive to the parties' prior estimates about the likely outcome in court, both with respect to quantum and liability. Cases with higher estimated quantum have lower settlement probabilities and therefore longer durations. Cases where liability is more fully admitted by the defendant have higher settlement probabilities and therefore shorter durations. After controlling for these factors, the fee arrangement is not a strong factor influencing the duration of cases. However, after allowing for the possible impact of the Woolf reforms on these results, there is some evidence to suggest that referral company cases take longer to settle than other fee arrangements, after controlling for other factors.
In conclusion, it appears that CFAs - particularly those with 100% uplifts - were providing access to legal services for the kind of cases which have traditionally been funded through legal aid: that is, the "merit" test as applied by such CFA lawyers appears to be broadly comparable with the "merit" test as applied by legal aid lawyers [Note: Clearly, a "means" test is not applied by CFA lawyers, so the kinds of clients using CFAs differ from those using legal aid.]. This risk-acceptance on the part of CFA lawyers was inevitably at some cost to both defendants and claimants, given the arrangements by which costs were recovered from each during the period of our survey [Note: Depending on the outcome of the currently uncertain situation in respect of recovery, the proportion of CFA costs borne by defendants and claimants should change in future. Our study provides baseline data against which to evaluate the impact of future changes to the rules. ]. Moreover, because claimants in our sample were on the whole bearing the cost of the CFA uplift, the final amounts received by them under CFAs were lower than under legal aid or third party payers [Note: Although this takes no account of the cost of premiums or membership subscriptions charged by third party payers. ]. Finally, what does seem clear on the strength of our evidence, is that the services provided by referral agents over the period of our survey had little to recommend: they were relatively costly to clients and yet yielded less in terms of settlement awards, even though their caseload seemed to be one of relatively low risk. Their main advantage would appear to be one of reach: they advertise widely and as a consequence may induce claims from people who are otherwise unaware of the potential for CFA arrangements.