Key Takeaways

  • A conditional fee arrangement (CFA) allows clients to pay legal fees only if the case is successful.
  • Success criteria and percentage uplift on legal fees (success fee) must be clearly defined in the CFA.
  • After-the-Event (ATE) insurance helps cover adverse costs if the case is lost.
  • Damages-based agreements (DBAs) differ from CFAs in that they allow lawyers to take a percentage of awarded damages.
  • Courts strictly scrutinize the enforceability of CFAs, especially in cross-border or arbitration disputes.
  • The CFA's enforceability depends on compliance with statutory requirements and public policy considerations.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.

Enforceability of Conditional Fee Arrangements

Courts closely examine whether a conditional fee arrangement complies with statutory and professional conduct rules. A key consideration is whether the agreement aligns with the applicable legal framework, such as the Courts and Legal Services Act 1990 (in the UK) or similar legislation in other jurisdictions.

In Diag Human SE v Volterra Fietta, the English High Court refused to enforce a CFA in an arbitration context, citing that the agreement was unlawful under the Arbitration Act 1996. This underscores the importance of using CFAs appropriately and within permitted legal contexts.

Firms and clients must ensure:

  • The CFA is in writing and meets regulatory formalities.
  • The success fee is stated clearly and does not exceed permitted caps.
  • The arrangement does not conflict with public policy or statutory prohibitions.

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.

Advantages and Risks of Conditional Fee Arrangements

A conditional fee arrangement offers clear benefits to clients who lack upfront capital but have meritorious claims. However, it also introduces several risks and practical challenges:

Advantages:

  • Access to justice for clients who cannot afford traditional hourly fees.
  • Motivated legal representation aligned with the client’s success.
  • Potential to shift adverse costs through ATE insurance or court orders.

Risks:

  • If a case is lost, clients may still owe disbursements or insurance premiums.
  • Success fees can significantly reduce the net recovery for a client.
  • Courts may reduce or disallow success fees if deemed excessive or unreasonable.

Additionally, not all cases are suited to CFAs—particularly complex, high-risk litigation or cases with uncertain evidence may lead law firms to decline this model.

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.

CFA Use in Commercial Litigation and Arbitration

The use of a conditional fee arrangement in commercial litigation is growing, particularly where claimants seek to mitigate financial exposure. However, in arbitration, enforceability may be constrained by different statutory regimes.

In commercial disputes:

  • CFAs can help SMEs or individuals pursue claims against larger entities.
  • They are often used alongside litigation funding or ATE insurance to reduce financial risk.

In arbitration:

  • Legal practitioners must assess whether jurisdictional rules permit CFAs.
  • Courts may not uphold CFA terms if they contravene arbitration laws or public interest principles.

Legal advice should be sought to confirm the appropriateness of a CFA in specific commercial or cross-border contexts.

CFA Use in Commercial Litigation and Arbitration

The use of a conditional fee arrangement in commercial litigation is growing, particularly where claimants seek to mitigate financial exposure. However, in arbitration, enforceability may be constrained by different statutory regimes.

In commercial disputes:

  • CFAs can help SMEs or individuals pursue claims against larger entities.
  • They are often used alongside litigation funding or ATE insurance to reduce financial risk.

In arbitration:

  • Legal practitioners must assess whether jurisdictional rules permit CFAs.
  • Courts may not uphold CFA terms if they contravene arbitration laws or public interest principles.

Frequently Asked Questions

1. What is the difference between a CFA and a DBA? A CFA bases legal fees on case success but doesn’t allow the lawyer to take a portion of damages. A DBA permits fees as a percentage of awarded damages.

2. Can I use a conditional fee arrangement in arbitration cases? It depends on the jurisdiction. Some legal systems restrict or prohibit CFAs in arbitration, so legal advice is essential.

3. Do I have to pay if I lose my case under a CFA? Usually, you won’t pay your solicitor’s success fee, but you may still owe disbursements or ATE insurance premiums.

4. What is a success fee? A success fee is an agreed percentage added to a lawyer's base fee if the case is successful. It compensates the lawyer for the risk of non-payment.

5. Is a CFA suitable for every case? No. CFAs are typically used in claims with strong legal merits and clear evidence. High-risk or speculative cases are less likely to qualify.

Legal advice should be sought to confirm the appropriateness of a CFA in specific commercial or cross-border contexts.If you need help with a conditional fee agreement, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.