A conditional fee agreement (CFA) is used in commercial claims and litigation by establishing a financial arrangement in which a client will only be responsible for paying the solicitors' fees if the litigation is successful. This provides an effective means for the client and attorney to share risk.

How Does a CFA Work?

A CFA hinges on defined success criteria, which is usually winning the case or being awarded a specific amount of damages. If you lose the case or are awarded damages below the CFA threshold, you will pay no, or limited, lawyer fees based on the terms of the agreement. With commercial CFAs, the client is responsible for all expenses and disbursements.

Attorneys are typically only willing to use CFAs for specific types of cases. For commercial dispute resolution, they often only risk a small fee percentage rather than the entire fee.

The attorney can also offset risk in commercial cases with a higher success fee. This can be up to 100 percent of his or her standard fee for the type of case in question. The success fee is determined by the risk level, the merits of the claim, the typical costs, how likely it is that the case will be settled, the involvement of uncertain evidence, and the extent of available documentation.

The success fee cannot consist of a portion of the damages awarded in the case.

Costs of a CFA

Every CFA should clearly detail the agreement between the attorney and client, including the success fee percentage. With most CFAs, when the attorney wins the case the client is required to pay standard costs in addition to a CFA success fee as established by certain criteria in the agreement. This may not exceed 25 percent of the total damages paid in personal injury claims.

In some cases, the legal fees will be paid by the party that loses the case, which may include:

  • Medical costs
  • Court fees
  • Costs associated with police and accident reports
  • Travel expenses

You will not be responsible for the legal expenses of the other party unless:

  • The claim exploited the court proceedings
  • No reasonable ground for the claim existed
  • You behaved dishonestly in court
  • The claim was only made for the financial benefit of another

After-the-Event Insurance Policy

Depending on the language of your CFA, you may be required to reimburse your attorney for costs. If you have a legal insurance policy, your premium may cover these fees. This type of insurance, called After-the-Event (ATE), protects you from exorbitant costs. You pay for the policy at the time when you win the case and do not pay if you lose the case.

When you lose your claim, you are responsible for not only your own costs but also the lawyer's costs and the defendant's costs. If you have an ATE policy, these costs would be covered, thus removing a substantial financial burden.

The premium depends on the type and level of coverage you want, the level of risk, and whether or not your claim is litigated. You may need to repay premium costs when your case is settled, but these cannot be recovered from the losing party. The only exception to the latter is in certain cases involving mesothelioma, defamation, and insolvency.

In some cases, an ATE policy or other legal expenses insurance is included as a credit card benefit or as part of your travel, home, or auto insurance policy. If you already have insurance for legal expenses, you do not need a CFA. Just provide your attorney with a copy of the insurance policy, but keep in mind that the policy may require you to work with a specific lawyer or firm.

What Is a Damages-Based Agreement?

With a damages-based agreement (DBA), the lawyer and client also share the risk of a particular case based on established criteria for success. The attorney fee is a percentage of the damages awarded in the case. If none are awarded, the client is not required to pay attorney fees. Typically, fees are about 25 percent for general damage cases and personal injury and about 35 percent for employment cases.

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