Understanding No Win No Fee cost agreements and their pitfalls

No-Win-No-Fee-lawyer

As we’ve mentioned yesterday, many lawyers (and law firms) enter into ‘no win‐no fee’ costs agreements with their clients, undertaking legal work on their behalf on what is sometimes called a ‘speculative’ basis ( because the lawyer agrees to take the risk that the case might lose)
The idea behind a ‘no win ‐ no fee’ cost agreement is that it gives people with limited finances access to justice…

For many poverty-stricken injured workers who can’t afford to pay their legal costs up‐front or on a ‘pay as you go’ basis, this type of agreement enables them to engage a lawyer to help them pursue their legal rights.
They basically pay the lawyer (or law firm) only after their case is settled or otherwise decided, and only if they are successful.
However, as with any contract (a no win-no fee cost agreement is a contract indeed), there can be pitfalls, and injured workers should be aware of these before entering into such an arrangement.

Understanding No Win No Fee cost agreements and their pitfalls

No-Win-No-Fee-lawyer

What is a ‘no win ‐ no fee’ costs agreement?

In a ‘no win ‐ no fee’ costs agreement, a lawyer agrees with a client (e.g an injured worker) not to charge any fees for their services unless and until the client ‘wins’ their case.

The lawyer agrees to take the risk that the case might lose – and if this happens, the lawyer “does not charge any fees”. The client/injured worker basically agrees to pay the lawyer if the case succeeds (typically, but not always, out of the money recovered from the other party).

However, and importantly, injured workers should note:

  • Generally the lawyer (or law firm) is still entitled to recover their outlays (also known as disbursements). These are monies the law firm has spent in pursuing the claim and include court filing fees, the cost of expert/ doctor’s reports and barristers’ fees. The terms of the ‘no win ‐ no fee’ costs agreement should state whether or not the firm can recover their outlays.
  • While a lawyer may carry the risk for their own fees, it is highly unusual for them to carry any risk for the other party’s legal costs. Typically, if a case is lost, the injured worker (client) who loses must pay the other side’s legal costs, irrespective of whether or not they have a ‘no win ‐ no fee’ costs agreement with their own lawyer.

‘No win ‐ no fee’ arrangements are one type of what the Legal Profession Act 2007  calls ‘conditional costs agreements’. The Act defines conditional costs agreements to be agreements which provide ‘that the payment of some or all of the legal costs is conditional on the successful outcome of the matter to which those costs relate.’ (Every state has its own Legal Profession Act, i.e. Queensland Legal Profession Act 2007, Victorian Legal Profession Amendment Act 2007 , etc.)

In what kinds of cases can I ask for a ‘no win ‐ no fee’ costs agreement?

Lawyers and their clients can enter into this type of arrangement in any case except criminal matters or family law matters. However, law firms typically offer ‘no win ‐ no fee’ terms only in cases where there is, or is likely to be, money available to pay the costs after the matter is settled.

The most common cases are personal injury claims( and some types of deceased estate matters). Many personal injury law firms offer no win no fee. If not, you can always ask your lawyer if they are prepared to enter into a no win no fee cost agreement.

What if my lawyer won’t enter into a ‘no win ‐ no fee’ costs agreement?

A law firm is not obliged to take any matter on a ‘no win ‐ no fee’ basis. Some firms never offer these terms at all.
Shop around if you can.

Different law firms offer different fees, funding arrangements and expertise. Ask several firms how they would approach your matter and if they will agree to a ‘no win ‐ no fee’ arrangement.

If the lawyer you consult will not accept such an arrangement, find someone who will or talk to them about an alternative arrangement. For example, some firms will require their fees to be paid whether you win or lose the case, but will not need to be paid until the end of the case.

If you cannot afford legal services and cannot find a lawyer who will act for you on a ’no win ‐ no fee’ basis, you could consider the following options:

  • Your state’s Law Society  keeps lists of lawyers who practise in a variety of fields around your state – Ask them to refer you to a lawyer who may consider a ‘no win ‐ no fee’ arrangement.
  • Free legal advice is available from your local community legal centre (search for your local centre in your state).
  • Contact Legal Aid in your state to see if you qualify for legal aid to pursue your matter
  • Some law firms offer a ‘pro bono’ service for certain cases (which usually mean they charge nothing or a nominal fee for services). Approach these law firms direct to see if they will take on your case under this arrangement. (Most firms state on their websites if they act in pro bono matters.)

My lawyer will take my case on a ‘no win ‐ no fee’ basis. What do they have to do now?

If a lawyer and an injured worker (client) agree that a case will be conducted on a ‘no win ‐ no fee’ basis (that is, if there is a conditional costs agreement between them), then the (state) Legal Profession Act 2007 imposes certain requirements.

In general, the no win no fee cost agreement:

  • must set out the circumstances that constitute a ‘successful outcome’ of the matter;
  • may provide for outlays to be paid (possibly with interest) irrespective of the outcome of the matter;
  • may provide for payment of an ‘uplift fee’ (see an explanation below);
  • must be in writing; in clear plain language; and signed by the client;
  • must contain a statement that the client (injured worker) has been informed of his/her right to seek independent legal advice before
  • must contain a cooling‐off period of not less than five clear business days during which the injured worker (client), by written notice, may terminate the agreement.

However, while these requirements must be observed, there is no ‘standard’ form of agreement.

What is an ‘uplift fee’?

The fees charged in a ‘no win ‐ no fee’ costs agreement can be higher than those charged in a standard costs agreement between a lawyer and client. This is because the lawyer is taking the risk that the matter might not be successful and hence that he/she may not be paid for their services.

The Legal Profession Act 2007 also allows a law firm to charge an ‘uplift fee’ in a conditional costs agreement. This is an additional fee over and above any fees that are otherwise payable, and it is payable only on the successful outcome in the matter. An uplift fee may be stated in dollar terms but is usually calculated as a percentage of the fees (excluding outlays) otherwise payable.

In either case however, the uplift fee must (generally) not exceed 25% of the fees otherwise payable.

The uplift fee  must also be separately identified in the costs agreement. The lawyer must give the injured worker (client) an estimate of what the uplift fee is likely to be, and explain what they will take into account in deciding how much the fee will be.

→ Not all lawyers charge an uplift fee! ←

The ‘50/50’ rule protection: what is this?

If you have a ‘no win ‐ no fee’ arrangement with a lawyer and your claim is for damages for personal injury, then the Legal Profession Act 2007  generally makes the arrangement subject to what is often referred to as the ‘50/50’ rule.
This protects a person making a claim (called the claimant) in personal injury matters by restricting the amount that a law firm can charge them.

Its objective is to ensure that claimants (injured workers) are not worse off financially after pursuing a legitimate personal injury claim.

The rule puts an upper limit on the professional fees (including GST) that a law firm may charge in such cases. The maximum a law firm can charge (including GST) is one half (or 50%) of the settlement amount (Note that the settlement amount includes any costs that are recovered from the other party) after refunds (e.g. to Medicare or Centrelink) and outlays have been deducted.
The formula used is roughly stated as follows:
Maximum fees = [settlement amount – (refunds + disbursements) ÷ 2]
An example is set out below:
There are however some important qualifications:

  • The formula does not apply to any case that is not a claim for ‘damages for personal injury’. For instance, it does not  apply to disputed estate matters.
  • There are certain types of cases that might be thought of as personal injuries cases but which, on a strict reading of the section of the Act, might not be ‘caught’ by it. These may include claims against insurance companies under life or disability insurance policies; claims for government benefits such as a disability pension; claims for workers’ compensation benefits; and claims for criminal compensation. The courts have not yet ruled on whether these types of cases are subject to the ‘50/50’ rule or not, so its application is uncertain.
  • The formula does not take into account the interest on any loans (whether a litigation loan or a personal loan) made in connection with the claim. This interest must be paid from the client’s ‘share’ of the settlement or judgment.

What happens if I change law firms under a ‘no win ‐ no fee’ costs agreement?

If you change law firms during the course of your claim, both law firms may charge you legal fees.

Usually, the firm that acts first will release your file to the second firm with an agreement from you, or the second firm, to pay their fees once the matter is finalised.
However, not all firms will agree to this arrangement; so carefully check your costs agreement (and speak to your lawyer, if possible) before changing firms. It is important that you know exactly what will happen if you change firms.

How does the ‘50/50’ rule work if I change law firms?

If you change firms and the ‘50/50’ rule applies to your claim, there may be a dispute as to what each firm is entitled to.

Although the courts have not decided this issue as yet, the Legal Services Commission believes that the rule is designed to ensure that a client receives a fair proportion of any settlement or judgment.
The Commission’s view is that the rule should cap the total costs payable by the client to both (or all) law firms which acted in the matter. How that cap is divided between those firms can be negotiated commercially between them. In most cases, this would involve the amount being divided proportionately between them, depending on the amount of work done by each firm.

What should I be aware of when considering a ‘no win ‐ no fee’ costs agreement?

You must consider the following before you enter into a ‘no win ‐ no fee’ costs agreement:

  • Know what you’re getting into. Carefully read the terms of the agreement and understand them. If you are unsure, ask for them to be explained.
  • Any ‘no win ‐ no fee’ costs agreement must have a five‐day cooling off period. Use this time to think about the terms of the agreement. Most importantly, if you’re unsure about anything, seek independent advice (for instance, from your local community legal centre).
  • You have a right to independent legal advice, so use it if you are in any way unsure about what you are getting into.
  • Check to see if the law firm is charging an uplift fee, and how much it is. This can heavily affect the ultimate cost of the case, and the amount you will recover.
  • The law firm must give you an estimate as to how much the case will cost you. Consider the estimate carefully and ask questions if you don’t understand it.
  • Remember that a ‘no win ‐ no fee’ costs agreement for a personal injury claim is subject to the ‘50/50’ rule. This should be stated in the agreement.
  • Remember that even with a ‘no win ‐ no fee’ costs agreement with your lawyer, you will still have to pay the other side’s legal costs if you lose your claim.

What is a litigation loan?

As noted above, while a law firm accepts the risk of not being able to charge for their work under a ‘no win ‐ no fee’ costs agreement, they are usually entitled to recover any outlays.
Some firms pay the outlays out of their own money, and recover them once the case is finalised; typically with an interest charge added. Where there is an interest rate charged, the rate should be stated in the costs agreement.

Other law firms may ask you to enter into a litigation loan. This is a commercial loan from a credit provider that covers the cost of the outlays while the case progresses, but which has to be paid back (with interest) once the matter is finalised.

If you are asked to enter into a litigation loan arrangement, be aware of the following:

  • Any loan is separate from the ‘no win ‐ no fee’ costs agreement.
  • These loans sometimes carry significant interest charges and other fees; all of which must be repaid at the end of the matter. This can mean that the ultimate amount you receive in the hand can be much less than you expected.
  • Before entering into a litigation loan, ensure you receive the full terms for the loan and understand the interest, fees and charges that you are taking on. Seek independent legal and financial advice before committing to such a loan.
  • Some firms and companies offer a different type of loan; one that is not used just for outlays, but which can provide cash to an injured person while their claim goes through the system. Be aware that these loans often carry significant interest charges and other fees, and they must be repaid once the matter settles. Again, this can significantly reduce the ultimate payment to you.
  • Interest on a litigation loan is not counted in the ‘50/50’ rule. It will come out of your ‘share’ at the end of the matter.

Summary

We repeat: if you are in any way unsure about what you are getting into, seek independent advice.

It is important that you understand as much as possible about how fees are calculated before you enter into any fee agreement.

  • Lawyers should always provide clear and tangible information about their fee arrangements so that injured workers can make a fully informed choice.
  • Injured workers should have fee arrangements that ensure that the benefits of their claim are not eroded by legal fees.
  • All fee arrangements should be fair, ethical and transparent.

Impairment Claims and WorkCover

A decent, ethical lawyer/law firm will  guarantee a capped fee arrangement to ensure that legal fees do not erode the benefit of your impairment payment. Most impairment claims are resolved without court action.

Decent, ethical lawyers/law firms:

  • Offer a no win – no fee arrangement.
  • Have fees based on the Practitioners Remuneration Order (i.e.Vic), the official scale that should be used for non litigated matters, and do NOT use an “in house” scale that usually greatly inflate charges.
  • Ensure that legal fees do not erode your impairment payment.
  • will discuss your injuries with you and provide you with an estimate of the impairment payment you may receive.
  • If, in the unlikely event, litigation (court) is necessary to obtain your impairment payment they will offer you their litigation fee arrangements  which are based on Court Scales and not expensive “in house” scales.

Litigated WorkCover Claims (Victoria)

In 1994, the Victorian Government made it legal for lawyers to enter into ‘Conditional fee’ agreements with their clients in matters that involve litigation. …

This can be an excellent arrangement for an injured worker BUT only if it contains fair terms and conditions and clear information is given to the injured worker before entering the arrangement.

In matters involving litigation, a conditional fee agreement can allow for an uplift fee (sometimes called a success fee) to be payable in the event that the matter is successful. Part of the reason for allowing an uplift fee in litigious matters is to compensate a lawyer who conducts the matter on a “no win no fee” arrangement.

The view of decent and ethical lawyers on the proper approach that should be taken on uplift fees:

In WorkCover matters there are a number of areas where litigation is either not possible or relatively rare and uplift fees should not be applied to these matters. In these matters lawyers are able to set their own fees at any level that is “reasonable”. Some, but not all lawyers, will charge according to their own “in house” scale of costs. There can be a large disparity between lawyers on what they believe is a “reasonable” charge. It is therefore very important to receive a clear and binding estimate of the costs you are likely to be charged.

Decent and ethical lawyers believe that factors which can affect the legal fees charged should be clearly defined and explained to an injured worker before they enter into a fee agreement. They will always provide a clear guide to fee rates which they may invite you to compare with other lawyers.

There are a number of components to legal fees.

What is a conditional fee agreement?

A Conditional fee agreement (aka no win no fee cost agreement) is an arrangement where the injured worker and his or her lawyer enter into an arrangement that all or some of that lawyers fees will not be payable by the client unless the claim is successful.

The agreement should clearly set out the lawyer’s obligations under the agreement. The agreement normally contains an increased fee rate in the event that the claim is successful and an agreement not to charge all or some of the fees in the event that it is not successful.

The increase in the fees by law can be an increase of up to 25% of the fees and disbursements. This does not mean that a lawyer is able to claim 25% of your award. It merely means that the fees may be increased by that percentage. In the event that the claim is unsuccessful, the agreement may provide that the lawyer will forgo all or some of the fees and disbursements. This will depend on the exact arrangement that you negotiate with your lawyer.

Could I have to pay the other parties legal costs?

A conditional fee agreement usually provides that if you are unsuccessful in your claim you will not be charged legal fees by your lawyer. The agreement does not protect you from an adverse costs order.

This is an order given by a court that the unsuccessful party in litigation must pay the successful party’s legal costs.

Proper assessment and preparation of your claim by your decent and ethical lawyer will provide the best protection against an adverse costs order.

It is for this reason that it is essential that your lawyer continually reassess your claim as it progresses to ensure that you are not unreasonably exposed to an adverse costs order.

Opportunities to use alternative dispute resolution processes should be used wherever possible to reduce this risk.

In most WorkCover cases the risk of actually having to pay an adverse costs order is reduced by a formal policy implemented by the Victorian WorkCover Authority that it will not seek to recover costs from an unsuccessful litigant other than in carefully defined circumstances. The most important of these is where an injured worker is found to be fraudulent or dishonest on a major issue.

What are the terms and conditions?

Generally, the terms and conditions are reasonably standard.

Normally you are required to tell the lawyer honestly and openly of all relevant information about your claim.

This obligation extends to informing your lawyer about any relevant change in your circumstances during your claim.

This is an important condition to enable the lawyer to make an accurate judgment about the degree of risk in your case.

You will also be required to do all the normal things to progress your claim such as attending medical appointments.

There is usually one further and important condition in these agreements – an obligation to abide by reasonable advice.

It is important to ensure that this condition does not operate to take the control of your case away form you.

This can be achieved by having a condition in the agreement that if you and your lawyer disagree over the reasonableness of advice the matter can be subject to the opinion of an expert independent barrister selected by the Law Institute.

In exchange for these conditions, your lawyer will be required to conduct your claim efficiently, honestly and professionally.

Understanding the actual charge rate?

It is critically important that you understand the exact charge rate contained in a fee agreement.

Most, but not all, lawyers use court scales as the basis of their charges. These may be described as Supreme Court scale or County Court scale.

Firstly, you should check which court your claim is likely be conducted in and ensure that the scale that applies to that court is used.

Some lawyers do not use court scales at all and charge based on their own in house scales! If you are presented with an in house scale, it is important that you understand how that scale compares to court scales. We think that the variation of in-house scales from court scales should always be clearly expressed in percentage terms. We have seen variations which we estimate to be approximately 30-40% higher than the court scale (depending on which court scale you use) before the uplift fee is applied to it! This means that after the uplift charge is applied you may be charged costs that are 50% higher than the court scale!

If you are presented with an in house scale, demand details about the average percentage variation of the in house scale from court scales.

The fees of decent and ethical lawyers  in litigation matters are always based on an applicable court scales.

How much is the uplift fee?

Beware of fee agreements that contain a general discretion to charge you a success fee of “up to 25%”! You are entitled to know the exact percentage of the uplift fee. Is it likely to be 10% or 25%?

If a lawyer declines to specify the uplift or give you clear information on what factors will affect it, you should work on the basis that you would be charged the full 25%!

Decent and ethical lawyers will always specify the exact uplift fee!

Does the uplift fee reflect the risk?

Many law firms automatically apply a 25% increase in fees as an uplift fee. This is difficult to understand, as part of the reason for allowing uplift fees is to compensate the lawyer for the risk that a case will not be successful. The risk however varies from case to case and the uplift fee you are to pay ought to reflect the actual risk in your case.

In a common law claim for damages for a work injury, there are three distinct areas of risk.

  1. The first area of risk is in the chance of obtaining serious injury certification,
  2. the second is in proving negligence and
  3. the third is in proving loss.

In some cases, the risk is spread across all areas in others the risk may be substantially in only one of the three areas. In some cases, there may be very little risk at all.

The best way to illustrate this is with an example.

If for example a worker had suffered an amputation of an arm, the employer had been convicted of a safety law breach then there would be little risk in the case. Automatically applying a 25% uplift fee would be extremely unfair.

Another case, for example, may involve a back injury where there is very clear loss and negligence but there may be a real risk that the worker will not receive a serious injury certificate. In this circumstance and uplift fee of 25% may be reasonable BUT is it fair that if the worker receives the certificate that the rest of the case is conducted on the same basis once that risk is removed? Decent and ethical lawyers do not think it is.

For decent and ethical lawyers the uplift will always be reasonably proportionate to the actual risk.

Defining Success

In conditional fee agreements there will always be a definition of success. It is important to make sure that the definition is fair. For example if the definition is that a claim is successful, if you receive any payment you should ask for the definition to be more specific. If all you eventually receive is a payment for permanent impairment, that should not qualify as a success in a fee agreement for a damages claim.

Uplifts on disbursements

Some conditional fee agreements apply the uplift fee not only to the lawyer’s direct fee but also to disbursements that they incur on your behalf. This means that if they obtained a medical report for $400.00 it will be charged to you at $500.00!

For decent and ethical lawyers  uplift fee will not apply to disbursements incurred on your behalf.

Applying an uplift charge to some disbursements can be very unfair.

  1. Firstly, there are some arrangements where some of the reports fees of treating medical practitioners can be recovered from the WorkCover Authority irrespective of the result of a claim particularly if they were used for an impairment claim or at conciliation of a dispute about your entitlements.
  2. Secondly some, but not all, barristers will increase their charge in a successful matter to compensate for matters where they are not expected to charge the solicitor if the matter is unsuccessful. This sort of arrangement is quite common and appropriate. If such an arrangement is in place between the solicitor and barrister it is very unfair if you are also charged an additional uplift charge on the barrister’s fee by the solicitor. This is because the barrister’s fee is already increased if the claim is successful. If the claim is not successful, the solicitor may not have to pay the fee! It would be in effect a double uplift in a situation where there is no actual risk!

Decent and ethical lawyers will not charge any uplift fee on disbursements incurred on your behalf.

Negotiating Fees

Before you enter into any fee agreement, you should try to understand all you can about your arrangements. As a conditional fee agreement is based on an assessment of risk you should talk in detail about the various risks in your matter with the lawyers you consult.

Remember the fees are negotiable and the lawyer should make you feel comfortable about discussing these issues with you. A lawyer may say to you that they cannot assess the risk until they have undertaken some investigations. To an extent, this may be correct. However, a lawyer who carefully collects detailed information from you should be in a position to make a preliminary assessment of the risk. They can then express a view subject to it being borne out by investigation.

We repeat: if you are in any way unsure about what you are getting into, seek independent advice.

Related post

Will you be charged a percentage of your compensation payouts? NO!!!

Other useful reads (links)

 

Revised May 2014



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One Response to “Understanding No Win No Fee cost agreements and their pitfalls”

  1. Further to some comments on the previous article: http://workcovervictimsdiary.com/2014/01/legal-costs-lawyer-shares-helpful-assistance-re-concerns-legal-costs/

    Legal costs in Victoria

    Section 134AB(27) of the ACT deals with costs payable in the context of applications under s 134AB(16)(b), depending on the outcome.

    Sections 134AB(28), (28A), (28B) deal with costs payable in the context of a common law damages proceeding.

    Sections 134AB (29), (30) and (31) regulate the recovery of party/party and solicitor/client costs in proceedings to which s 134AB applies.

    (http://workcovervictimsdiary.com/2013/12/common-law-damages-claim-victoria/)

    Thumb up 0 Thumb down 0

    workcovervictim3 January 29, 2014 at 11:20 am