Report from the Ombudsman

The last decade has seen responsibility for funding legal services move further away from state provision towards commercial funding mechanisms. As a result we now have more complex methods of addressing the cost of legal services, including directly marketed services like ‘no win, no fee’ agreements.

With access to legal aid diminishing in many areas of law, these services enable people who otherwise might not be able to, afford to make personal injury claims, fight unfair dismissal or seek compensation for medical negligence. For these reasons then, these agreements are to be welcomed.

The Government has endorsed the ‘no win, no fee’ model and has recently introducing damages based agreements (DBA) – where a lawyer takes a percentage of any damages awarded to their customer – alongside CFAs. Both offer lawyers the means to make a fundamental promise to their customer: if you don’t win the case, you won’t have to pay.

But the advent of ‘no win, no fee’ has not been without its problems. The ‘no win, no fee’ model has played its part in fostering a culture of ‘ambulance chasing’ and fraudulent claims, which has inadvertently driven up insurance premiums. The Government has been so concerned about this that it has begun to make moves to rein in the burgeoning personal injury market by banning referral fees. As noted above, there have been warnings from regulators about the marketing of the agreements and strong concerns that the phrase ‘no win, no fee’ is “potentially misleading”.4

The Legal Ombudsman has begun to see cases where the fundamental promise which underpins the marketing of both CFAs and DBAs – that the consumer will not have to pay for losing cases – is being broken. Our cases show that people who have entered into ‘no win, no fee’ agreements have been hit with significant and unexpected costs when cases have failed. On occasions, we have also seen consumers who have won their case end up out of pocket.

The six cases included here raise questions both about how the agreements are structured and how they are marketed and explained.

We are not claiming that these sorts of problems are widespread. Only about 8% of the complaints we resolved last year related to CFAs. But the cases we have seen show that when things go wrong with these agreements, impact on the people involved is heavy. So we wanted to highlight these potential issues now and seek action to address them before they become prevalent within the industry. This is particularly important for ‘no win, no fee’ agreements as there are two areas of specific concern we wish to highlight :

• Transfer of risk – there is a structural weakness in the nature of the agreements which allows some lawyers to pass the risk of unrecovered costs onto the consumer.

• Unclear terms and conditions - the agreements are sometimes complex and there is evidence of some lawyers failing to make clear to consumers the financial risks that come with entering into a ‘no win, no fee’ agreement.

Transfer of risk

The financial risks of going to court are huge. Lawyers’ fees for both sides, insurance, court fees, disbursements (expenses incurred by a law firm on behalf of a client) and, sometimes, a success fee can be involved. Litigation lawyers have to find ways of making their services accessible and affordable for consumers, while ensuring all of these costs are paid for.

Because of this, ‘no win, no fee’ agreements are attractive both to lawyers and consumers. For the consumer, the attractions are obvious: they can take their case to court with no upfront fees and at no apparent risk to their purse. For the lawyer, there is, in theory, greater risk: if the case loses, they are left responsible for the other side’s costs as well as their own. So long as lawyers are careful in their selection of cases, the downside of the occasional loss will be more than swallowed up by the success fees generated by the winning cases.

But, if a lawyer is under financial pressure, has a run of bad luck, or, for whatever reason, has poorly judged his or her selection of cases, even a single ‘no win, no fee’ agreement gone wrong can threaten their business model. We have seen cases where, faced with these circumstances, lawyers are tempted to try and pass the risk onto a customer or to simply go back on the terms of their agreement to get out of a problem that they created.

Miss A’s case study demonstrates this problem clearly. She was asked to pay almost £15,000 to cover her firm’s mistakes – they had proceeded with her case despite knowing it had less than a 50% chance of success. And her case was unsuccessful. As a result the terms of agreement with the insurer were broken and it refused to pay out, leaving Miss A with the bill.

Our investigation showed that the firm had made it quite clear to Miss A that she wouldn’t have to pay anything if she lost the case. We found that the firm had contradicted its fundamental promise to her – that she wouldn’t need to pay as she was using a ‘no win, no fee’ agreement. In this case, the firm failed to stick to its terms and conditions and in doing so provided a poor service. The Ombudsman’s investigation concluded the agreement had been mis-sold to Miss A, and, because of our involvement, the firm agreed with Miss A that it would honour its promise and pay the other side’s costs.

Similarly, Ms B was asked to pay more than £30,000 when her firm decided to stop her case - citing reasons that the firm had known about right from the start. Our investigation showed that the firm failed to take out an insurance policy on behalf of Ms B, despite telling her that they would do so, leaving her to pay the other side’s considerable costs as there was no safety net of insurance.

The Ombudsman’s investigation concluded that the firm had sought to end the agreement due to its failure to gain insurance cover (and not for the reasons it said). We concluded that the firm should be required to waive the other side’s costs and pay Ms B £600 as a way of recognising the considerable anxiety the matter had caused her.

Then there is Mrs C’s case. She was asked to pay the other side’s costs of £6,000 when her firm withdrew from the case, saying that new information had changed the firm’s assessment of success. Our investigation found that although the ‘no win, no fee’ agreement allowed the firm to withdraw if the customer had concealed an important fact, the firm, when first taking on the case, had never asked her about previous accidents, even when it had the chance to do so. Our investigation concluded that it seemed likely that the firm’s assessment of its own risk had changed as the case progressed. The balance of evidence suggested that the firm used the new information as an excuse for withdrawing from a case with less than a 50% chance of success. In this case, we concluded that the firm had exploited a loophole in its terms and conditions to end the agreement and seek to ensure it faced no financial liability. We ordered the firm to pay the costs involved, together with a sum for the inconvenience caused.

These cases raise an important question: what outside pressures are prompting firms to take on cases that have no or very little chance of succeeding, requiring them to resort to exploiting loopholes in the agreements?

Market forces

The ‘no win, no fee’ market has become increasingly aggressive, with many law firms competing for cases and sometimes prioritising sourcing a large number of customers over a careful selection process. In the case of personal injury claims (which account for almost 70% of the complaints the Ombudsman sees about CFAs) many service providers now use national advertising and marketing campaigns to generate leads. It may be that firms are forfeiting a robust vetting process in favour of a high risk approach that sees them taking on cases with a low chance of success.

Other explanations may lie in the necessarily risky nature of litigation. Cases that may have looked like winners at the beginning can turn out to be turkeys by the end. This again cries out for lawyers to be more thorough in their preliminary investigations. A business model which consistently overvalues the chances of success can drive lawyers into unethical practice in order to avoid financial meltdown. It is for these reasons we have made referrals to regulators; to assist them in looking for patterns and risks so they can inform future action to prevent market distortions and consumer detriment.

Unclear terms and conditions

Understanding the fine print

The manner in which such agreements are marketed and explained is also causing problems. The headline marketing mechanic is the phrase ‘no win, no fee’, which directly implies that the consumer will not have to pay unless the claim is successful. However, that is not necessarily true: there are circumstances where the consumer will have to pay for losing cases. This raises real questions about whether the phrase ‘no win, no fee’ should continue to be used.

The agreements themselves are not simple to understand. And if CFA agreements are complex documents, the new DBAs are even more impenetrable to all but the most sophisticated and literate consumer. In our view, this places a strong obligation on lawyers to explain the way the agreements operate to their clients - and a particular obligation to highlight the potential risks. Alongside this report we have published an overview of the terms and conditions found in a ‘model’ agreement – we have used this to highlight areas where, from our experience in resolving complaints, problems can emerge if they are not explained properly.

In many of the cases we see, there is little evidence that this sort of explanation of complex terms and conditions has taken place. This is hardly surprising; with many firms sourcing volume customers via advertising or using claims management companies, there may be little incentive or opportunity to ensure that the complex nature of the agreement is fully explained.

Lawyers must explain the circumstances in which a losing case can incur a cost for a consumer and the limitations of the ‘no win, no fee’ promise must be properly set out before a customer signs up. And it isn’t just at the start that problems from unclear terms and conditions can arise. We have seen cases where people have been hit with surprise costs after winning their case. Usually, this entails confusion around the amount payable towards a success fee, but can also involve payment of disbursements and the other side’s costs. Our interactive contract shows how these problems can arise.

Recent changes to CFA contracts, introduced as part of Lord Justice Jackson’s reforms to seek to better control costs, mean that the majority of success fees and after the event (ATE) insurance premiums are now no longer recoverable from a defendant and are instead payable by the customer. This means the customer will pay costs from any damages they recover. However, the Ombudsman’s experience of the cases we see is that many customers are not aware of the detail of agreements and what this means for costs in winning cases under ‘no win, no fee’ agreements.

Take Mr D’s experience. His relief at winning his personal injury claim was short lived after the firm informed him that almost a third of the damages awarded would be taken as a success fee and to cover disbursements. Upon investigation it became clear that the firm had not explained its costs under the contract, and particularly how its success fee would be recovered. Mr D believed his costs would be recovered from the defendant.

The rules have only just changed regarding recovery of costs. So many people will still be in the dark about what is payable under the terms of their agreement unless this is explained to them clearly by their lawyer, including in any written contracts or agreements.

Good practice

The Law Society has produced a model conditional fee agreement for use in personal injury and clinical negligence cases, which sets out clearly what is covered by the agreement, what is not covered, how payment works if a customer wins, what expenses and disbursements are payable and what a customer pays if they lose. The model agreement also includes additional information about success fees and the calculation of basic charges.

As well as calling for lawyers to give their work due care then, lawyers can help themselves by drawing up clear, easy to follow contracts. The Law Society’s template seems like a great example of how to do this and is available from their website.

This is particularly important for customers considering whether or not to invest their time and energy into pursuing a claim. If the success fees and additional charges leave them with very little of their damages they may decide it’s not worth the effort. Claims can take years to resolve and involve much anguish for the people involved – they deserve to know what is ultimately going to be in it for them.

‘No win, no fee’ in practice

Having said all of this, Mr E’s case shows that even where a contract has been well written, it might not stop a firm from behaving contrary to the agreement.

Mr E entered into a ‘no win, no fee’ agreement with a firm, which then decided some way into the case that his chance of success was slim and stopped doing any further work on the case. However, Mr E continued with the claim, represented himself in court - and won. When the firm then learned of Mr E’s success it pursued him for costs in excess of £24,000. In essence, the firm wanted a success fee despite leaving their customer to fend for himself.

In this case the firm had drawn up a ‘no win, no fee’ agreement using a template very similar to the Law Society’s model agreement, and it had been clear about its costs in the event of the case winning or losing. The paperwork was clear that if the firm ended the agreement and Mr E won his case anyway, the firm would be able to claim disbursements, nothing more. Our investigation found that the firm was being completely unreasonable pursuing Mr E for additional costs. The Ombudsman decided that the firm was not entitled to claim anything other than disbursements and that they should pay Mr E £200 for the distress and inconvenience it had caused him. Mr E accepted our decision.

In our final example, Mr F instructed a firm on a ‘no win, no fee’ basis to represent him in a medical negligence claim. The firm began the work and commissioned medical reports. However, eighteen months after the case began, the firm ceased trading, leaving Mr F to pay a number of costs associated with his case. Following an investigation we found that the firm was wrong to leave Mr F to pick up its costs; the agreement made no reference to him having to do so. When our investigation concluded, we suggested that Mr F liaise with the firm’s indemnity insurers to see if he could recover the £10,000 he had paid out.

Though we are able to help people who find themselves in this kind of situation, dealing with lawyers that behave in this way - and contrary to their code of conduct - may require a robust regulatory response to ensure they do not make a habit out of it. We have reported some of the cases in this report to the relevant regulatory bodies and trust that they will now consider how to respond in due course.

Conclusion

Legal Services Board research suggests that the increase in ‘no win, no fee’ agreements, “has brought the profession closer to the consumer” since people find lawyers offering these services less formal and more accessible in terms of cost.5 Additionally, this research has shown that consumers find ‘no win, no fee’ firms more approachable than ‘traditional’ practices. So we are likely to see continued use of these agreements – and more of the risks we have outlined here.

We want to see legal service providers and regulators taking heed of this report and proposing responses to bring greater consistency in standards across the industry. This could be achieved by standardising due care on the part of firms, perhaps by enshrining it into regulatory codes of conduct, while universalising CFA and DBA contracts, to make sure the ones used set out terms and conditions clearly.

We will continue to watch closely to see if changes to ‘no win, no fee’ agreements under the Jackson reforms have an impact on numbers of complaints that come to the Ombudsman. The aim of these changes is to make legal services more accessible while managing costs – if this aim is achieved it should bode well for consumers.

Finally, we would like to see service providers handling complaints professionally, and any issues raised by customers taken seriously. The fact that some of the cases in this report were resolved informally suggests that the firms could have dealt with the complaints themselves had they been willing to try.

Additional resources for lawyers

Handling complaints competently can only enhance a lawyer’s reputation. To this end, we now offer the benefit of our experience in resolving complaints through our complaint handling courses. Available to all legal professionals, they are continuous professional development (CPD) accredited by the Solicitors Regulation Authority, and help attendees to clarify the process and principles followed by the Ombudsman when it investigates complaints. They also look at implications for best practice and internal complaint handling procedures.

Additionally, we have made a package available on our website to help lawyers direct customers to us if they can’t resolve a dispute internally.