The end of free movement: what SMEs need to know
When a client decides to pursue a claim under the Inheritance (Provision for Family and Dependants) Act 1975 for reasonable financial provision, one of the first discussions between lawyer and client is how the claim will be funded.
Funding is an important question given that a potential claimant’s entitlement is not yet determined and potentially one reason they are seeking to make a claim is because they do not have access to income or capital sums. It is because of this lack of immediate access to funds that parties to litigation enter into funding arrangements, including Conditional Fee Agreements (“CFA’s”), more commonly referred to as “no win, no fee” arrangements.
CFA’s are funding arrangements between the potential claimant and legal representative which provide that the legal representative’s fees and expenses, or any part of them, are only payable in certain circumstances. Those circumstances are almost invariably only if the client wins the case, which is often defined in the agreement as the client gains a benefit from the claim.
Generally if a client loses their case, they will not be liable to pay for the fees and expenses that are subject to the CFA and so, to balance the risk of potentially not recovering their legal fees, if the client wins their case the legal representative is entitled to claim an uplift on their fees in the form of a success fee. The success fee is subject to a maximum limit, which will be expressed as a percentage up to 100%. The legal representative will calculate the success fee at the time of entering into the agreement and will be based on the risk of losing the litigation (the risk element) and the cost of funding the litigation (the postponement element).
Prior to April 2013 parties were entitled to recover the success fee and their legal expenses from their unsuccessful opponent, however the change to the recoverability of success fees was introduced by section 44 of LASPO 2012 which came into force on 1 April 2013. In respect to CFAs entered into on or after 1 April 2013, the success fee is no longer recoverable from the opponent and will have to be paid by the successful clients, save for exceptional cases.
In the recent decision of SH v NH and KH  EWHC 1134 (Fam), the Court had to grapple with the question as to whether the success fee due to the Claimant’s legal team could form part of the financial award from the Deceased’s estate. Given the use of CFAs in these types of cases, rather surprisingly, the Judge was referred to only two previous cases where this has had to be decided.
In summary, the Claimant made a claim for financial provision from her deceased’s father’s estate valued at approximately £554,000. The Claimant suggested that her needs included a variety of things, including a provision for her legal costs of approximately £130,000. In this regard, her solicitors had agreed to act under a CFA and, if the Claimant was successful, were entitled to a success fee of 72%, which added an extra £48,175 to her incurred legal costs of £85,000. This would mean that the Claimant’s legal costs would be approximately £130,000 (the Court were aware of the precise terms of the CFA as to the definition of “success” under the terms of the agreement).
The first case Mr Justice Cohen was referred to was Re Clarke  EWHC 1193 and 1194 (Ch). In this case, Deputy Mater Linwood declined to increase an award to include a success fee on 5 grounds:
i) The calculation of damages is a matter of procedure carried out before costs are considered and has never included an element of costs;
ii) To allow it would contrary to legislative policy that the losing party should not be responsible for a success fee – s.58A(6) Courts and Legal Services Act 1980;
iii) It would amount to an increase in damages by way of costs;
iv) It may put a CFA funded litigant in a better position in terms of negotiation due to the risk of a substantial costs burden;
v) It would put a claimant in Inheritance Act proceedings in a better position than, say, a claimant in a personal injuries claim.
In the second, unreported case of Bullock v Denton, the Claimant had entered into a CFA with her second solicitors. In this CFA, the success fee was 50%. Although the legal costs were unquantified at the date of trial, almost a year previously, they had been £24,000. It was therefore taken that these costs would have increased substantially as at the date of the trial. HHJ Gosnell agreed to allow a figure of £25,000 by way of a contribution to the CFA which was added to the Claimant’s award.
In the case of SH, the Judge concluded that it was appropriate for him to consider the cost liability as part of the Claimant’s needs but he emphasised that this was for case specific reasons. The reasons the Judge gave for considering the Claimant’s costs liability was because he was not making a large award to the Claimant, and that it was “not an award that permits of much elasticity”. If an allowance for costs was not made, one or more of the Claimant’s primary needs (i.e. continued therapy for her medical needs) would not be able to be met. The liability for costs could not be recovered from any other party and the Claimant had no other means of funding the litigation. The Judge had to balance these reasons with the “risk of injustice to the estate” and held that he could not see how he could “avoid some potential (and it is only potential) injustice to either the Claimant or the estate.” He concluded that all he could do was “mitigate the potential by taking a cautious approach towards this liability”.
The Judge had to balance the needs of both the Claimant and the Estate (and, in particular, the needs of the widow of the Deceased who had her own care needs) and he felt that the chance of the Claimant failing to obtain an award in the case was unlikely, therefore the success fee of 72% was too high. He therefore reduced the success fee to £16,750, which equated to approximated 25%. In total, the Claimant was awarded £138,918 inclusive of the sum which the Judge considered was “a reasonable CFA mark-up”.
CFA’s can be a very effective way of funding 1975 Act claims, and importantly a route to giving claimants access to justice. However, each judgment and award is fact specific in these type claims, so for both clients and legal advisors considering entering into a CFA, it will be important to fully consider the merits of the case in order to attribute an appropriate success fee. Parties should also think carefully about whether a success fee could reasonably be considered as a “financial need” when quantifying the claim, and the viability of a CFA must be considered in the context of the value of the estate and impact on all the beneficiaries.
As illustrated by the judgment, there is a risk that if the Claimant’s success fee is paid from any award that they receive, this may mean that one of their financial needs (such as home or income etc.) cannot be met, which could rather defeat the purpose of the claim in the first place. It is important that lawyers and clients have clear discussions at the outset about the impact of a CFA across a range of possible outcomes so that the client only enters into the arrangement on a fully informed basis.
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