This commentary on the Success Fee Agreement Regulations welcomes their coming into force, but highlights that the legislation contains a lot of detail to master

In a time of unparalleled crisis, you would be forgiven for missing the introduction of a new set of regulations designed to promote access to justice for those who seek to claim compensation. You would also be forgiven for taking the view that such changes in the law are of little relevance in the current scheme of things. 

I wouldn’t go out of my way to dissuade you from that notion, but with the advent of the Civil Litigation (Expenses and Group Proceedings) (Scotland) Act 2018 (Success Fee Agreements) Regulations 2020 (SSI 2020/110) on 27 April 2020, I thought it at least worth recognising that, after seven years of hard work on the part of many, the regulations have arrived.

They promote access to justice by making it easier for claimants to avail themselves of affordable professional services. Their effect is to allow solicitors to enter into fee charging agreements with their clients where a success fee can be charged by the lawyer based on a percentage of the compensation recovered. The regulations, along with the Civil Litigation (Expenses and Group Proceedings) (Scotland) Act 2018, also set out fundamental requirements for lawyers and claims management companies to follow when entering into such agreements, promoting clarity and certainty for those making the claim.

And if this is of no interest as the world fights the current pandemic, the comments below will hopefully be something that practitioners can refer to when normality resumes and there is a wider inclination to start entering into these regulated agreements. The regulations apply to any success fee agreement entered into on or after 27 April 2020. The date of the delict, breach of contract or whatever forms the basis of the claim is irrelevant.

A novel concept?

The public perception of claims lawyers may be that they have always been allowed to enter damages (or contingency) based agreements and charge a percentage of compensation as a success fee. Whilst such agreements are not illegal, they have not, until 27 April, been enforceable. So, what have solicitors been able to do up until now?

Since 1992, solicitors have been able to enter into speculative fee charging agreements with their clients. A speculative fee agreement is governed by s 61A(3) of the Solicitors (Scotland) Act 1980, under which a solicitor can enter into a conditional, otherwise known as a speculative, fee charging agreement if certain conditions are met. The conditions relate to how the client is charged. This can be done in one of three ways:

  1. The solicitor can accept the judicial expenses which they get from the opponent and at the same time charge their client a success fee which should be no more than 100% of the judicial fees. The success fee calculation is not based on the total of the judicial account, i.e. it ignores those parts relating to VAT and outlays. Nothing is charged to the client if the action is unsuccessful.
  2. Alternatively the solicitor can charge the client on an agent-client basis and can, if they wish, set the chargeout rates at a higher level than they normally would to reflect the speculative nature of the work. However, in this situation no success fee can be charged over and above the agent-client account. The recovered judicial expenses require to be offset against the agent-client account. Nothing would be charged to the client if the action is unsuccessful.
  3. The third option is for the solicitor again to fee on an agent-client basis and to charge a higher hourly rate if the action is successful and a lower hourly rate if it is unsuccessful. No additional success fee can be charged.

Until the commencement of part 1 of the Civil Litigation (Expenses and Group Proceedings) (Scotland) Act 2018, a solicitor was prevented from enforcing pacta de quota litis – agreements for the share of a litigation. We know them as contingent, or damages based agreements. As mentioned above, such agreements are not pacta illicita (unlawful agreements). There is no legal prohibition on a solicitor entering into such an agreement with a client but a solicitor, until now, has not been able to enforce such an agreement if challenged by a client.

No such enforceability issues affected claims management companies, even if those CMCs were owned and operated by solicitors, and even if they were not subject to any regulation or oversight. Many of the larger firms of solicitors, dealing with volume personal injury work, circumvented the issue of enforceability by setting up their own CMCs which were able to charge a percentage of the client’s damages, whilst the solicitor was able to retain the recovered judicial expenses. Whether these were truly CMCs, or merely companies providing a method of indemnifying the client from having to pay anything towards their own outlays or their opponent’s judicial expenses, will be looked at in more detail below.

Taylor and the Act

The Taylor review of Expenses and Funding of Civil Litigation in Scotland, in chapters 7 (speculative fee agreements) and 9 (damages based agreements), analysed the pros and cons of these funding methods and concluded that they provide a method of promoting access to justice, particularly given the limited availability of legal aid. The Taylor report made various recommendations to allow solicitors to enter into damages based agreements. It further recommended that caps be set for the level of success fee that can be charged, that a written agreement dealing with a variety of specific issues is entered into at the outset, and that any unrecoverable costs including counsel’s fees require to be borne by the solicitor out of the success fee.

Much of what the Taylor review recommended appears in the 2018 Act and the implementing regulations.

Scope of the provisions

The Act regulates success fee agreements, which are defined as an agreement between a person providing relevant services (the provider) and the recipient of those services (the recipient) where the recipient pays a success fee to the provider if the recipient obtains a financial benefit “in connection with a matter in relation to which the services are provided” (s 1(1)(a)), but “is not to make any payment, or is to make a payment of a lower amount than the success fee, in respect of the services if no such benefit is obtained” (s 1(1)(b)).

The definition covers both conditional (speculative) and contingency (damages) based agreements.

“Relevant services” are defined in s 1(2) as legal services or claims management services provided in connection with a matter:

(a) which is the subject of civil proceedings to which the recipient is a party before a Scottish Court or tribunal, or

(b) in relation to which such proceedings are in contemplation.

“Legal services” means services consisting of the provision of legal advice, assistance or representation.

The definition of “claims management services” is services consisting of the provision of advice or services, other than legal services, in connection with the making of a claim for damages or other financial benefit, including:

(a) advice or services in relation to (i) legal representation; (ii) the payment or funding of costs associated with making the claim;

(b) referring or introducing one person to another;

(c) making inquiries.

A success fee agreement is not unenforceable merely because it is a pactum de quota litis, i.e. an agreement for a share of the litigation. But that does not affect any other basis for rendering a success fee agreement unenforceable. As we will see, if the terms of the written agreement are materially at odds with the requirements of the 2020 Regulations it will be deemed unenforceable.

If the recipient of legal services is successful with their claim and is awarded expenses, or becomes entitled to expenses as part of the settlement agreement, the provider of the services is entitled to recover and retain the expenses as well as the success fee. The recovered expenses do not have to be set off against the success fee unless the agreement between provider and recipient provides otherwise: s 3(1) and (2).

If the recipient, either before or after entering into a success fee agreement, has been in receipt of civil legal aid, any expenses recovered from an opponent must be paid by the provider into the hands of the Scottish Legal Aid Board (s 3(3) of the 2018 Act and s 17(2A) of the Legal Aid (Scotland) Act 1986). This includes not only the judicial expenses but also the success fee, and the provider would provide SLAB with the account synopsis form and breakdown of fees, VAT, non-Faculty outlays and Faculty outlays in the normal way.

Success fee caps

The 2018 Act allows for the introduction of caps on the level of success fees which can be charged in different types of cases. A success fee agreement is unenforceable to the extent that it provides for a success fee of an amount that is higher than the cap. The Act however does not say what the caps should be. Sheriff Principal Taylor made recommendations in his report as to the level of the caps (chapter 9, paras 88-90). Following a consultation exercise by the Scottish Government, the recommended caps were adopted and introduced by the 2020 Regulations, effective from 27 April 2020.

In short, a success fee agreement must not require a recipient to pay a higher success fee, inclusive of VAT, than the caps set out in reg 2. The calculation of the success fee is based on the financial benefit derived by the recipient (reg 2(2)).

Different caps apply to different types of civil claims.

In a matter that is or could become a claim for damages for personal injuries or the death of a person from personal injuries, the maximum caps are:

  • 20% of the first £100,000 of damages;
  • 10% of the financial benefit between £100,000 and £500,000, i.e. 10% of up to £400,000; and
  • 2.5% of the financial benefit over £500,000 (subject to the conditions mentioned below in relation to future damages).

For example, a personal injury claim settles for £650,000. The maximum success fee chargeable by the provider is £63,750 (£20,000 plus £40,000 plus £3,750), inclusive of VAT and unrecoverable outlays.

In a matter which is or could become the subject of proceedings before an employment tribunal, the success fee cap is 35% of the financial benefit (reg 2(4)); and in any other matter to which the regulations apply, the success fee cap is 50% of the financial benefit (reg 2(5)).

The caps are of course maximums. A provider and recipient can agree that lower percentages will be charged. For those recipients who shop around, providers will have to take a view on how far they are prepared to reduce the success fee percentages having regard to the risk and anticipated level of work which the claim presents. Too many unsuccessful claims with no return, taken on initially to simply undercut a competitor, present significant problems to the profitability and long term business model of providers.

Further limitations

Only one success fee can be charged (reg 2(6)). If a recipient enters into more than one agreement, say with their initial provider and there is then a change of agency, the providers will require to agree amongst themselves how any success fee is to be apportioned between them. Normally law accountants would be asked for advice on a fair allocation of the success fee between the different providers having regard to the extent of the work done by each.

Family proceedings (as defined by s 135 of the Courts Reform (Scotland) Act 2014) cannot be the subject of a damages-based agreement, i.e. one where the success fee is determined by the amount of financial benefit derived by the recipient: reg 3. They can however be the subject of conditional or speculative fee agreements (see s 61A of the Solicitors (Scotland) Act 1980).

The Act allows for regulations to be introduced to exclude additional categories of civil proceedings from being dealt with under a success fee agreement, whether contingency (damages) based or speculative (conditional) based fee agreements, but at the time of implementation of the regulations the only specified exclusion is for family proceedings, and only in so far as contingency feeing is concerned – there is no prohibition on speculative agreements being entered into in family proceedings.

Form and content of a success fee agreement

A success fee agreement must be in writing (s 7(1) of the 2018 Act). It must also specify the basis on which the success fee is to be determined: s 7(2).

Beyond that, the 2020 Regulations prescribe additional requirements in relation to content, in reg 4. Success fee agreements must:

(a) include details of the matter, claim or proceedings, or parts thereof, to which the success fee agreement relates;

(b) specify the type of civil remedy which the recipient seeks;

(c) include a description of the work to be carried out by the provider;

(d) provide that in the event of a conflict with the provider’s standard terms of engagement, the terms of the success fee agreement take precedence;

(e) specify the basis on which the amount of any fee potentially payable under the success fee agreement is to be determined;

(f) oblige the provider to consult with the recipient on any significant development including, but not limited to, the receipt of an offer of settlement;

(g) specify whether or not the provider intends to retain any expenses which are awarded to the recipient in civil proceedings or which it is agreed with another person that the recipient is entitled to recover;

(h) explain how to access the relevant procedure for dealing with complaints about the provider or providers;

(i) set out the circumstances in which the provider may, as a consequence of the recipient’s conduct, terminate the agreement prior to the resolution of the matter to which it relates and require payment from the recipient for services provided prior to termination;

(j) provide that where the recipient terminates the success fee agreement prior to the resolution of the matter to which it relates, the recipient will normally be liable to pay for services provided prior to termination; and

(k) provide details of the fee which would be charged by the provider and any other sums which would be payable by the recipient to the provider, in the event of such termination.

The Law Society of Scotland set up a working group to draft a success fee agreement which would be compliant with the Act and regulations, and therefore enforceable. This will be posted on the Society’s website, along with the cooling-off notice which requires to accompany the agreement if it is to be signed outwith the provider’s place of business – the cooling-off notice must be served for the success fee agreement to be an enforceable contract under the Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013.

It is not mandatory for providers to use the success fee agreement style mentioned above; it has simply been published as a suggested version which is believed to be compliant with the legislation. The style is specifically for personal injury claims, but should be easily adapted for other types of claim such as employment or commercial.

The requirements for the content of the agreement are to ensure clarity as to what will happen if certain situations arise and to ensure that the recipient, who is often a consumer with little or no experience of the legal system, has a succinct and easily understandable contract regulating their dealings with a provider. To protect the recipient, reg 5 provides that a success fee agreement is unenforceable to the extent that it makes provision which is materially contrary to s 7(1) or (2) of the 2018 Act or the 2020 Regulations.

Specific provisions for personal injury claims

Section 6 of the Act provides special rules that apply only to personal injury actions or damages for the death of a person due to personal injuries, containing additional requirements relating to the content of atheagreement and how future damages require to be dealt with.

An agreement must provide that the recipient is not liable to make any payment, including outlays incurred, to the provider apart from the success fee: s 6(2). Outlays do not include any sum paid in respect of insurance premiums in connection with the claim to which the agreement relates: s 6(3). So, any premium for an after-the-event insurance policy can be deducted from the recipient’s damages.

The implication of s 6(2) is that the provider cannot charge the recipient for any unrecoverable outlays. If a provider fails to obtain certification of a skilled person, the costs associated with the instruction of that skilled person cannot be charged by the provider but must be paid out of their own pocket. Similarly, if a provider is unable to obtain sanction for the employment of counsel in sheriff court proceedings, the recipient cannot be charged for counsel’s fees. There are endless possibilities for outlays not being recoverable from an opponent, such as the auditor of court disallowing them at taxation. The recipient is protected from having to pay anything towards their own legal costs other than the success fee and, if appropriate, the legal expenses insurance premium.

Future damages

The question of whether future damages should be included in the calculation of a success fee was a contentious issue at the time of the Taylor review. Some were of the view that damages for future loss should be excluded altogether from the calculation, as to do otherwise would deprive an accident victim of a portion of compensation that they know they will need in future life, whether to make up for loss of earnings or to pay for care etc. Others argued that future loss can often be the most time consuming aspect of a claim which requires the most work and often gives rise to the most complex issues. To exclude future damages would deprive the provider from proper remuneration for a labour intensive part of the service provision.

The 2018 Act permits the inclusion of future damages in the success fee calculation provided certain conditions are met.

For the provider to be able to include future damages in the success fee calculation, the future element must come within the terms of s 6(5) of the Act. If it does not, the agreement must provide that any future damages will not be included in the value of damages used for calculating the success fee.

The future element is within s 6(5) if it is to be paid in a lump sum and

(a) does not exceed £1 million; or

(b) exceeds £1 million, and (i) the provider had not advised the recipient to accept that the future element be paid in periodical instalments, and (ii) the condition in subsection (6) is met.

That condition is that:

(a) where damages are awarded by a court or tribunal, the court or tribunal has stated that it is satisfied that it is in the recipient’s best interests that the future element be paid as a lump sum rather than in periodical payments;

(b) where damages are obtained by agreement, an independent actuary has, after having consulted the recipient personally in the absence of the provider, certified that in the actuary’s view it is in the recipient’s best interests that the future element be paid as a lump sum rather than in periodical instalments.

Commentary on the future damages provisions

There is no requirement for any independent oversight of a decision to pay future damages as a lump sum if the value of the future damages is £1million or less. It is worth emphasising that the £1 million figure is for the future element and not the overall value of the compensation award. A success fee on a £2,000,000 settlement could be charged on the full amount of damages if the future element is no more than £1,000,000.

Failure to set out clearly in the agreement how future damages are to be dealt with when calculating the success fee will result in the provider not being able to charge a success fee on the future element.

No procedure is set out for the court to follow in satisfying itself as to whether it is in the recipient’s best interests to award future loss as a lump sum. The fact that subs (6)(a) does not mirror subs (6)(b), i.e. the court does not have to obtain a report from an actuary, suggests that the court has a wide discretion as to how to handle such situations. There would be nothing to preclude the court from ordaining the recipient’s agents to obtain an actuarial report in the same way as would be required if there was an extrajudicial settlement. However, the court will have had the benefit of hearing evidence at the proof and it may be that that evidence allows the court to form a view on whether a lump sum or periodical payments are in the recipient’s best interests.

Neither the Act nor the regulations make any reference to the commonly encountered situation where the settlement is paid partly as a lump sum and partly as periodical payments. There may be a portion of the future loss element required straightaway to allow for the purchase of accommodation, house adaptations or other immediate capital expenditure needs, but the rest of the future loss is to be paid as periodical payments. In that situation, the question arises as to whether the portion of future damages paid as a lump sum falls to be included in the value of the financial benefit for the purposes of calculating the success fee. There is no logical reason why it should not, provided all the other requirements for dealing with future loss damages are met. The portion of future loss payable in periodical instalments cannot be included in the success fee calculation.

Who pays for the actuarial report or any other evidence ordered by the court to satisfy s 6? The Taylor report recommended that liability for the actuary’s fee should fall on the solicitor should the solicitor advise that a lump sum award be made, regardless of the actuarial recommendation.

That recommendation does not specifically appear in the Act or regulations, which is undoubtedly deliberate on the part of the Government drafters who would have been well aware of the Taylor proposal. That is not surprising. The requirement for actuarial oversight is a legal requirement for the resolution of a litigation. Expenses necessarily incurred as part of a litigation would, in the normal course of events, be payable by the unsuccessful party on the “expenses follow success” principle. Imposing a personal liability on a pursuer’s solicitor has only ever been seen in the context of adverse conduct of that agent and in my humble opinion that should remain the position.

Final thoughts

As a solicitor who has, for the last few years, been involved in the scrutiny of the 2018 Act and its associated regulations, I am delighted the day has come when solicitors can offer these agreements to their clients. The hope and expectation is that it will make it easier for claimants to secure the services of lawyers to deal with claims which might otherwise be turned away, thus restricting a claimant’s ability to vindicate their rights.

But as always, the devil is in the detail. And there’s a lot of detail. Whether anyone wishes to use the unusual amount of time currently available to digest it is of course another matter.

The Author

Iain W Nicol, legal director, Lefevres, solicitors, Glasgow and convener of the Law Society of Scotland's Civil Justice Committee

Any opinions or views expressed in the above article are personal and are not being offered on behalf of any firm or organisation with which I am associated.

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