Filthy lucre: lawyers' fees and lawyers' ethics – what is wrong with informed consent?

Filthy lucre: lawyers’ fees and lawyers’ethics – what is wrong withinformed consent?lest_194 345..371

Richard Moorhead*Cardiff Law School, Cardiff University

This paper concentrates on the ethical tension created by lawyer billing. In particular, itexamines the tension between a lawyer’s commercial imperative to make a profit and theirethical obligation to promote their clients interest over their own. Conventionally, thisconflict is resolved through the lawyer providing disinterested advice on (their own) costsand the client granting informed consent to billing arrangements on that basis. This paperuses empirical data to suggest that notions of disinterested advice and informed consentare deeply flawed when it comes to lawyers’ fees. Clients passively consume exploitativepractices. As a result, this paper argues that, where possible, regulators should supplantinformed consent with an approach requiring simple charging: reducing professionaldiscretion over charging practices and strengthening the market-based regulation of price.This requires a significant simplification of lawyers’ fees wherever possible.

INTRODUCTION

‘An ancient, nearly blind old woman retained the local lawyer to draft her lastwill and testament, for which he charged her two hundred dollars. As she rose toleave, she took the money out of her purse and handed it to him, enclosing a thirdhundred dollar bill by mistake. Immediately the attorney realised he was faced witha crushing ethical question: should he tell his partner?’

Marc Galanter Lowering the Bar, Lawyer Jokes and Legal Culture

Lawyer jokes remind us of what we do not need to be reminded: greed is fundamentalto the public’s perception of lawyers. Indeed, dissatisfaction with costs is a recurrentclient complaint,1 as is the capacity of the profession to commit clear breaches of costobligations contained in the Solicitors Code of Conduct.2 Similarly, the idea that the

* Email: [email protected]. In Whose Interest? Annual Report of the Legal Services Ombudsman for England andWales 2003/2004, available at http://www.olso.org/publications/AnnualReports/AR2004.asp,pp 8,52; see also the most recent report Building on Success: A New Ombudsman’s Office:Annual Report and Accounts of the Legal Services Ombudsman for England and Wales 2007/2008, available at http://www.olso.org/publications/AnnualReports/files/AR2008-english.pdf(last downloaded 13 September 2010).2. See, for example, Legal Services Ombudsman Annual Reports for the years 2006/2007,2003/2004, available at http://www.olso.org. J Sandbach, No Win, No Fee, No Chance: CABEvidence on the Challenges Facing Access to Injury Compensation (2004), available athttp://www.citizensadvice.org.uk/no_win_no_fee_no_chance-2 (last downloaded 13 Septem-ber 2010).

Legal Studies, Vol. 31 No. 3, September 2011, pp. 345–371DOI: 10.1111/j.1748-121X.2011.00194.x

© 2011 The Author. Legal Studies © 2011 The Society of Legal Scholars. Published by Blackwell Publishing, 9600Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA

legal profession charges too much looms large in the policy debate about legalservices. In the UK, legal aid and civil justice debates have been dominated by ideasof supplier-induced demand3 and the US debate about the exploitative nature ofcontingency fees has been fierce.4 Yet these concerns must be located in largerquestions around access to justice and the legitimacy of litigation.5 Although there aredoubts that contingency fees are inherently exploitative (a point to which this paperturns below), regulators in several US states6 and now the UK government7 haveturned to caps on the percentage fee chargeable under contingency fees as a way oflimiting the risk of such exploitation (and/or inhibiting litigation).

Academics have been quick to evidence the access to justice problems caused bycaps8 but there is little or no literature that engages with alternative ways of regulatingthe ‘problem’ posed by contingency fees. This paper debates an alternative approach.In so doing, it concentrates on the ethical tension created by the profit motive. Inparticular, it focuses on the tension between the commercial imperative to make aprofit and the ethical obligation on lawyers to promote their clients’ interest over theirown. The inherent conflict is fundamental and apparently intractable. That lawyerjokes treat lawyer greed with something akin to amused resignation is indicative ofthis intractability. Yet intractability leads to a key question: when it comes to charging,is it possible to invest a lawyer’s duty to their client with any meaning, or is billing anarea where the professional can legitimately expect to shape practice to their owninterests?

Conventionally, disinterested advice from the lawyer on (their own) costs and thegiving of informed consent by the client ‘resolves’ this tension. The basic idea is thatthe client understands the lawyer’s charges, understands the pros and cons of anyalternatives, and then gives their informed consent to the lawyer’s approach to fees.This paper suggests that such an approach does not work, at least with lay clients.

The paper concentrates on two main types of fee agreement: contingency fees(being the most controversial fee agreement in use) and hourly fees (being thedominant fee mode employed by the profession). Empirical data are analysed tosuggest that notions of disinterested advice and informed consent are deeply flawedwhen it comes to lawyers’ fees. It may not be too reductive to suggest that informedconsent is a trope employed to legitimise a professional inclined to exercise itsdiscretion to its own advantage. This paper will argue that regulators should take the

3. G Bevan ‘Has there been supplier-induced demand for legal aid?’ (1996) 5 Civil JusticeQuarterly 98.4. L Brickman ‘Effective hourly rates of contingency fee lawyers: competing data andnon-competitive fees’ (2003) 81 Washington University Law Quarterly 653–736 and ‘Advocacyand rhetoric vs. scholarship and evidence in the debate over contingency fees: a reply toProfessor Brickman’ (2004) 82 Washington University Law Quarterly 477–507.5. D Luban ‘Speculating on justice: the ethics and jurisprudence of contingency fees’ inS Parker and C Sampford (eds) Legal Ethics and Legal Practice: Contemporary Issues (Oxford:Clarendon University Press, 2005).6. See R Moorhead and P Hurst Improving Access to Justice’ Contingency Fees:A Study of Their Operation in the United States (London: Civil Justice Council, 2008), SSRN,http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1302843.7. The Damages-Based Agreements Regulations 2010 (SI 2010 No. 1206).8. PM Danzon and LA Lillard ‘Settlement out of court: the disposition of medical malprac-tice claims’ (1983) 12 Journal of Legal Studies 345; E Helland and A Tabarrok ‘Contingencyfees, settlement delay and low-quality litigation: empirical evidence from two datasets’ (2003)19 Journal of Law, Economics and Organization 517–521.

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discretion out of lawyer fees and put the market back in: they should require thatinformed consent be supplanted by simple pricing wherever possible. This requiressignificant simplification. The current approach to lawyers’ fees supports a passivityand submissiveness amongst consumers of legal services, whereas a simpler approachcould stimulate a more active and consumer-sensitive market, which can respondbetter (albeit still not perfectly) to concerns about cost, access to justice and quality.

Structure

Although the concerns of the paper are wider than contingency fees, a major focus iscontingency fees. The paper thus begins with some context for our discussion byexplaining when contingency fees are permitted in England and Wales. Section twodiscusses the ‘ethic of greed’. This semi-ironic label has been chosen to emphasise theparadox that legal costs present to lawyers and the public interest. To put it anotherway, an ‘ethic of greed’ illustrates how the professions legitimately seek to make avirtue of their high costs. The third section will examine how the ethic of greed issupposed to be moderated by the ethical imperative of putting the client’s interest first.It outlines associated regulation designed to achieve that, principally the vehicle ofinformed consent.

The fourth section will discuss the author’s empirical research on contingency andhourly fees. It will concentrate in particular on whether contingency fees are moreexploitative than hourly fees and also on whether the ethical imperatives of putting theclient first and ensuring their informed consent to billing arrangements are honouredin practice. In so doing, it will also discuss the nature of the lawyer–client relationshiprevealed in this work. Finally, I discuss how regulators should respond to the conun-drums posed by lawyer billing.

The paper does not seek to deal with all of the ethical issues associated withcontingency fees. In broad terms, I would argue that the evidence on whether contin-gency fees are more likely to promote under-settlement is inconclusive,9 and ratheragainst the notion that contingency fees drive an explosion of poor quality claims,10 butthere is not space to consider these issues here. Similarly, this paper does not deal withthe claim that a lawyer’s duty to the client and the lawyer’s duty to the court and thepublic interest are more likely to be violated by lawyers acting on contingency fees.11

1. SOME CONTEXT

In England and Wales, the lawful use of contingency fees is a relatively new phenom-enon. Conditional Fee Agreements (CFAs) were first permitted in litigation in 1995.CFAs generally operate on the basis that the lawyer gets paid nothing if they lose buttheir normal fee plus a percentage of that same fee (the uplift or success fee) if they

9. See, R Moorhead and R Cumming Damage-Based Contingency Fees in EmploymentCases: A Survey of Practitioners (Cardiff Research Paper Series No 6, 2008), available athttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=1306308 (last downloaded 13 September2010) and R Moorhead and R Cumming Something for Nothing? Employment tribunal Claim-ants’ Perspectives on Legal Funding, ERRS No101 URN 09/813 (London: BERR, 2009).10. R Moorhead ‘An American future? Contingency fees, claims explosions and evidencefrom employment tribunals’ (2010) 73 Modern Law Review 752–784.11. See also Moorhead and Cumming cited n 10.

Lawyers’ fees and lawyers’ ethics 347


win. ‘US-style’ damage-based agreements are the contingency fee agreements con-centrated on in this paper. With these, the lawyer’s fee is calculated as a percentage ofthe client’s damages. They have been, and currently remain, forbidden in relation tolitigation through the courts. Although both conditional and damage-based agree-ments are contingency fees, this paper focuses only on damage-based agreements,relying on common usage in referring to them as contingency fees.

For solicitors, contingency fees are permitted outside of ‘litigation’. This permis-sion includes cases brought before tribunals rather than courts. They have garneredparticular attention in employment cases which the empirical research here is basedon. Unlike court cases, in tribunal cases each party bears their own costs ordinarily.This means that any compensation recovered by a claimant will be reduced by anypayments made to their lawyer. In respect of costs, the situation is more analogous totort cases in the USA than it is to civil cases in our courts.

The importance of contingency fees in the UK context has been strengthened by agrowing debate about the desirability of permitting contingency fees within litigation.Jackson LJ’s review of the civil costs system has culminated in a recommendation forOntario-style contingency fees which, broadly speaking, the government is willing toaccept.12 The previous government intervened to regulate contingency fees in employ-ment tribunal cases by imposing a cap on the level of any percentage fee claimable andtinkering with informed consent provisions. The government claimed to base suchproposals, in large measure, on the findings of the research set out below. They werealso severely criticised for posing threats to access to justice and client interests bymyself and several interest groups involved in the field.13 A particular object ofcriticism was the imposition of a cap on the contingency fee. Government proposalsfor contingency fees in litigation continue to argue that there is a need for a cap. Thesituation is complicated by the contingency fee proposals being based on an Ontariomodel. Under this model, a lawyer claims their normal (hourly) fees from an unsuc-cessful opponent and their success fee from their client’s damages. The proposed capwould operate on the uplift and be limited to 25% of damages other than thoseattributable to future care or losses. In employment tribunal cases, the cap operates at35% of (all) damages inclusive of VAT.14

2. AN ETHIC OF GREED? THE IMPOSSIBILITY OF PUTTINGTHE CLIENT FIRST

If lawyer jokes are illustrative of the public conception that lawyer ethics should betreated as an oxymoron,15 it might be argued that the ethics of lawyer fees should betreated as the oxymoron’s oxymoron. In simple terms, that oxymoron derives from aninherent dilemma in the commercial supply of professional services. Lawyers have anethical duty to put their clients’ interests before their own; yet, as market actors, theymust also strive to make a profit.

12. See Ministry of Justice Proposals for Reform of Civil Litigation Funding and Costs inEngland and Wales – Implementation of Lord Justice Jackson’s Recommendations: Consulta-tion Paper CP 13/10 (London: MOJ, 2010).13. See, in particular, Merits of Statutory Instrument Committee (House of Lords) sixteenthReport of Session 2009–10, HL Paper 110 (London: The Stationery Office).14. See the DBA Regulations n 8.15. C Parker and A Evans Inside Lawyers Ethics (Melbourne: Cambridge University Press,2007).



In suggesting there is an ethic of greed, I am seeking to emphasise the double-edged nature of the profit motive. That is, where legal services are commerciallyprovided, there is a public interest in the ability of lawyers to make a profit and thatthere may even be a public interest in ensuring that lawyers are free to make aconsiderable profit in appropriate circumstances. Conversely, there is significantpublic interest in ensuring such profits are not exploitative and that the distributionalconcerns exacerbated by high fees are countered (see below).

The first justification for the profit-motive is that profit is necessary for survival. Alawyer who is not making any profit will not be able to provide legal services for long.Efforts to restrain legal aid fees have prompted significant concerns about the profit-ability of such work and, arguably, led to a significant exodus of private practitionersfrom legal aid work in England and Wales.16 Of course, such a justification onlylegitimises a modest profit.

The second is that profit is consistent with quality. Hadfield suggests how importantit is to understand this argument at a range of levels.17 One is that the training andregulatory costs of being a lawyer have to be recouped and so higher profits arenecessary than for ordinary services. A second is that law, being unusually intel-lectually demanding, must compete for a limited number of would-be entrants withthe requisite intellectual abilities. Good entrants, being scarce, can raise the cost ofsecuring their services. This argument does not look persuasive during a recessionwhen there is much talk of an oversupply of law graduates but over time there isevidence that there may be an undersupply of good law graduates passing the LPC firsttime and entering the solicitors’ profession.18 A third is that with much law beingadversarial in nature, clients have a significant interest in securing the best lawyer tomaximise their advantage. This enables lawyers to bid up their services on the basisthat a marginal increase in quality can be crucial to a successful result. This tendencyis exacerbated by the credence nature of legal services. Clients uncertain of the valueand quality of those services have to speculate on who constitutes the best lawyer. Insuch contexts, the economic success of the firm may be taken to act as a signal ofquality. A firm’s high cost acts as an indicator of quality to clients which, in turn,permits the raising of those costs as the firm’s services become scarcer.

In this way it can be argued that quality and status claims made within theprofession and quality and status claims made in competition with other professionsdemand that successful lawyers strive to make the largest profits possible. To get thebest clients one needs to attract the best new recruits, have the most impressive supportand premises and be clearly ‘seen’ to be the best.

At the same time, this social construction of quality poses obvious problems.Consumers of legal services lack the capacity to know when professional services arerequired, how much work needs to be done, what quality it should be supplied at, andwhat they should pay for that level of quality. These information asymmetries providethe potential for lawyers to exploit their clients, charging prices above that which

16. R Moorhead ‘Legal aid and the decline of private practice: blue murder or toxic job?’(2004) 11(3) International Journal of the Legal Profession 159–190.17. GK Hadfield ‘The price of law: how the market for lawyers distorts the justice system’(2000) 98 Michigan Law Review 953–1006.18. R Moorhead History of LPC Numbers (2010), available at http://lawyerwatch.wordpress.com/2010/11/09/a-history-of-lpc-numbers/ (last downloaded 16 November 2010).



an efficient market would require. If price acts as a signal of quality, the risk ismagnified.19

The socially constructed nature of the market for lawyer quality is problematic, butthat is not the same as saying the argument in favour of profit is purely presentational.All things being equal, a lawyer with more resources is likely to be able to do a betterjob than one with fewer resources. Work in the legal aid field has shown a positivecorrelation between quality and cost.20 It also shows that whilst lawyers may induceand exacerbate demand for their services,21 elements of cost are driven by externalforces, such as legislative reform and practices of evidence gathering.22 Similarly,whilst clients may not understand the quality of their lawyers individually, it ispossible that collectively, as they respond to the service and outcomes they receive,they do respond to some fuzzy signals of quality: those who generally have moresatisfied clients, get more referrals, become more successful and can charge more.

Whilst there is something dangerously self-fulfilling about a market which treatsprice (size and status) as a signal of quality, there is also a more fundamental problem.Notions of efficiency and value demand that there is a limit to the extent to which legalservice providers can drive up their own costs.23 In particular, there are distributiveissues. Hadfield notes how the driving up of elite law costs (and the associatedapproaches to law that elite firms use) inhibits access to justice for those left behind.24

Also, if legal costs exceed the real value of legal services, there are distributiveproblems created by law sucking graduates from other careers. With the ethic of greedarguments having more than some echoes of arguments being made in favour ofbankers bonuses, it is hardly necessary to remind ourselves of the challenges tolegitimacy posed by visible excess.

The purpose of this discussion is to outline the importance of profit in the supplyof legal services, to acknowledge that there is an argument in favour of law being aprofitable, even highly profitable, business but also of the need for limits. An ethics oflawyer fees has to balance quality, access and efficiency arguments. How can such anethics be found?

There are counter-forces designed restrain the profit motive. One is the regulationof lawyers and their own sense of fair play. Kritzer suggests, for example, thatcontingency fee lawyers in the USA will not take their contractual entitlement to feeswhere this will leave the client taking less from a claim than they themselves do.25

Similarly, behavioural economists would argue clients have their own notions of what

19. See D Webb, ‘Killing time: a limited defence of time-cost billing’ (2010) 13 Legal Ethics39, 55. Also, H Leibenstein ‘Bandwagon, snob and veblen effects in the theory of consumers’Demand’ (1950) 64 Quarterly Journal of Economics 183–207.20. R Moorhead et al Quality and Cost: Final Report on the Contracting of Civil, Non-FamilyAdvice and Assistance Pilot (Norwich: Stationery Office, 2001); C Tata and F Stephens‘ “Swings and roundabouts”: do changes to the structure of legal aid remuneration make a realdifference to criminal case management and case outcomes?’ (2006) Criminal Law Review722–741.21. Bevan cited n 4.22. E Cape and R Moorhead Demand Induced Supply? Identifying Cost Drivers in CriminalDefence Work (London: Legal Services Research Centre, 2005).23. This is in large part what lies behind concerns about the proportionality of costs in civillitigation in England and Wales.24. Hadfield n 18.25. HM Kritzer Risks, Reputations and Rewards: Contingency Fee Legal Practice in theUnited States (Stanford: Stanford University Press, 2004).



is fair in charging which may provide some restraint.26 Intra-lawyer competition mayalso keep prices down.27 Courts and procedural rules can also regulate costs (egthrough fixed or predictable costs and case management).

Yet, the ethic of profit is deeply ingrained in the professional culture. Some see thisas ethically neutral. Tata suggests that because the need for legal services is uncertain(whether a client ‘needs’ a lawyer and whether the client needs the lawyer to do morework to stand a better chance of a good outcome) there is ‘ethical indeterminacy’.28

Where lawyers face a choice between taking a step on a client’s case which may be intheir interests or not taking that step, they are likely to see the decision which fits bestwith their self-interest as the most ethical course of action. Partly this is because neitherclient nor lawyer knows whether taking that step is in the client’s best interests. Becausethere is ethical indeterminacy, economic incentives nudge that lawyer towards takingthe step and adding it to the bill. Bevan similarly distances himself from the view thatlawyer-induced demand for their own services is ‘morally’ dubious, or at least that it isnot always morally dubious.29 Both Bevan and Tata appear to suggest commercialpressures reshape professional discretion in somewhat subtle or subconscious ways.Economic self-interest reshapes ethical judgement. It is not simply cynical exploitation.

At the very least, all of these theories tend to point towards economic incentiveshaving some impact on what lawyers do. This is a point which would be banal ifprofessional rhetoric did not protest so strenuously that it should resist self-interestand put the client’s interest first. The question that remains is that if a degree offinancial self-interest is not only inevitable but substantial, then how does an ethics oflawyer fees take seriously the lawyer’s duty to put the client first? Should they onlyhold to Unger’s fiduciary standard, ‘each party [is] to give some force to the otherparty’s interests, though less than to his own’?30 Or should it be as May suggests:‘Surely it is not too much to require professionals to place the interests of their clientat least on a par with their most strongly held personal interests’?31

3. AMELIORATING THE ETHIC OF GREED: THEORY AND REGULATION

There is very little ethical literature which has significant purchase on the fundamentaltension between the lawyer’s profit motive and the client’s interests.32 The so-called

26. E Zamir and I Ritov ‘Revisiting the debate over attorneys’ contingent fees: a behavioralanalysis’ (2010) 39 The Journal of Legal Studies 245 and E Zamir and I Ritov Neither Saintsnor Devils: A Behavioural Analysis of Attorneys’ Contingent Fees, available at http://works.bepress.com/cgi/viewcontent.cgi?article=1000&context=eyal_zamir (last downloaded30 June 2010).27. S Domberger and A Sherr ‘The impact of competition on pricing and quality of legalservices’ (1989) 9(1) International Review of Law and Economics 41–56.28. C Tata ‘In the interests of commerce or clients – Which comes first? Legal aid, supply,demand, and “Ethical Indeterminacy” in criminal defence work’ (2007) 34 Journal of Law andSociety 498–517.29. Bevan cited n 3.30. RM Unger The Critical Legal Studies Movement (Cambridge, MA: Harvard UniversityPress, 1983) p 83.31. L May The Socially Responsive Self: Social Theory and Professional Ethics (Chicago andLondon: Chicago University Press, 1996) p 136.32. Webb discusses the range of factors that should be bore in mind in considering lawyers’fees in a principled way, n 20. Woolley critiques value-billing. A Woolley ‘Evaluating value: a



standard conception (or zealous advocacy) model of ethics permits or requires alawyer to do all that they can to advance the client’s interests (so long as they do notbreach the law of professional rules).33 Whilst one might argue that this model requireslawyers to charge their client as little as possible, the model also requires a lawyer toleave no stone unturned in the advancing their client’s case. The two positions aremutually incompatible. Insofar as the literature deals with the point at all, the sug-gestion is that the hourly fee is associated with opportunism, dishonesty and doublecharging.34 whilst Brickman, vigourously contested by Kritzer, accuses contingencyfee lawyers of similar.35 There has been some attempt to link the ethics of fees to theidea of a lawyer as friend,36 where one would see the lawyer as making wise choiceson behalf of and in discussion with their clients, although this is not developed indetail. Webb has recently set out the competing values of different billing systemsarguing in favour of hourly fees, ‘for all its warts, time-costed billing satisfies many ofthe features that clients want from a billing system’.37 The data I will discuss belowcast some doubt on this assertion.

The most sustained position is developed by May in his work on conflicts ofinterest.38 He emphasises the need to understand some conflicts of interest betweenprofessional and client as ‘ “inevitable” or at least not necessarily problematic inprofessional settings’, putting the emphasis instead on the importance of honesty:‘What makes some conflicts of interest morally problematic is that they involvedeception or they infringe client autonomy’.39 The solution, he claims, is to ‘allowclients to become fully informed about them through a full and open disclosure of theconflict of interest’.40 Key to this argument would be the idea that both lawyer andclient can acknowledge and accept the idea that, when it comes to fees, there is nounconflicted self: there is no ‘type of professional judgment that is trustworthy andreliable in that it is completely uninfluenced by the material considerations of one’sother interests’.41 Similarly, the idea is advanced that a renewed honesty on the part ofthe lawyer will also encourage a greater vigilance amongst clients. Those clients, nolonger expecting unmitigated loyalty from their lawyer, will scrutinise their profes-sionals to ensure a higher standard of behaviour.42 Through informed consent, lawyer–client relations become more contested but also more honest, more mature andultimately of better quality.

Notions of informed consent are important in the professions’ and governments’regulation of the ethic of greed. I am here going to concentrate on the profession in

historical case study of the capacity of alternative billing methods to reform unethical hourlybilling’ (2005) 12/3 International Journal of the Legal Profession 339–365.33. Most strongly associated with Pepper’s seminal article, ‘The lawyer’s amoral ethical role:a defense, a problem, and some possibilities’ [1986] American Bar Foundation ResearchJournal 613–635.34. WG Ross ‘The ethics of hourly billing by attorneys’ (1991) 44 Rutgers Law Review1–100; GM Giesel ‘Ethics and hourly billing’ [2006] Bar Briefs, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1026913.35. The Brickman Kritzer debate is contained in the references at n 5.36. Parker and Evans cited n 16.37. Webb cited n 20 p 63.38. May cited n 31.39. Ibid 125.40. Ibid 128.41. Ibid 131.42. Ibid 137.



England and Wales and the solicitors’ profession in particular. Partly because thepaper deals with this at a level of some generality, one can say the position is similarin some respects in, for example, Australia and in parts of the USA.43

There are three main (and overlapping) approaches currently to regulating lawyercosts.

One is contractual. This sees the lawyer–client relationship as dominated byagreement. If there is agreement as to what fees should be charged then that is primafacie reasonable. Review of those fees may take place by the court (through assess-ment, especially if the case involved, or was a prelude to, litigation) or increasingly byprofessional regulators (in England and Wales this is now done through a clientmaking a complaint of inadequate professional services44).

The contractual approach has been supplemented by a series of regulatory require-ments designed to secure contracts based on informed consent. Rule 2 of the SolicitorsCode of Conduct sets out the kinds of advice a lawyer must give their clients about thenature of the costs, encouraging as much specifity as possible about likely costs andalso, to a limited extent, requiring them to counsel their clients on the alternativesources of funding that may be available to them (in particular, requiring them toadvise clients of insurance, legal aid and trade union funding as alternatives to payingprivately on hourly rates).

The guidance to r 2 (which is not binding) emphasises the need to act in the client’sbest interests and not to exploit any vulnerability but also the solicitor’s freedom tocontract. It relies on the professional obligations to put the client first and advisingclients of the implications of the funding method under consideration as sufficientrestraint on the desire for profit:

‘You will usually be free to negotiate the cost and the method of paymentwith your clients. It will not normally be necessary for the client to be separatelyadvised on the cost agreement. Different cost options may have different implica-tions for the client – for example, where the choice is between a conditional feeagreement and an application for public funding. In those circumstances clientsshould be made aware of the implications of each option.’45

A central concern of this paper is whether such provisions lead to ‘informed consent’from clients to the funding arrangements they contract into.

The third approach is statutory regulation brought in as a response to the perceivedfailings of professional regulation. In the USA many states have brought in percentagecaps on contingency fees, especially in medical malpractice cases, ostensibly toprevent exploitation by lawyers of their clients but also, it is claimed, to inhibit thebringing of such claims. The access to justice implications of such caps are well-demonstrated in the literature: caps reduce the number of cases brought and candiscriminate between particular groups (the elderly and women are particularlyaffected by caps in US tort claims). The UK government has introduced similar capson contingency fees in employment tribunal cases (one of the main areas where‘US-style’ percentage fees are permitted).46

43. Parker and Evans cited n 16 Hurst and Moorhead cited n 7 Webb cited 20.44. Until recently it was possible to seek a remuneration certificate for non-contentious work.45. SRA Code Guidance para 31.46. The regulations are cited at n 8.



Empirical analysis

This section of the paper discusses empirical findings relevant to this discussion. Twomain studies were carried out, relying on three main sources of data: a practitionersurvey; claimant interviews; and, analysis of existing data from a survey of employ-ment claimants conducted for what subsequently became the Department of BusinessInnovation and Skills (BIS). The projects were financially supported by the NuffieldFoundation and provided with institutional support from BIS and its researchersBMRB. Data collection took place in 2008.

the practitioner survey

Interviews with 191 employment advisers were conducted, including both thoseworking in solicitors’ firms and those working in non-solicitor settings (referred togenerically, for convenience, as claims management consultants (CMCs)).47 The studyaimed to provide data on a range of issues such as the extent to which practitionersused contingency fees in employment cases; the nature of the agreements they used;the types of cases in which contingency fees were (or were not) used; the pros andcons of using contingency fees from the perspective of practitioners; and any broaderissues practitioners believed contingency fees raised in practice.

Specialist employment solicitors were randomly sampled from the register of theEmployment Lawyers’ Association. They were written to and then invited to partici-pate in the survey by telephone. The response rate for solicitors was 57%, a veryrespectable figure, but likely to be somewhat biased towards those who do have someexperience of damage-based contingency fees. It is not claimed, therefore, that thissample is representative of all employment firms, but it does represent a wide andsignificant range of practice within the employment advice sector. Response rateswere much lower for CMCs because they could only be recruited for interviews bypost (the response rate was as poor as 16%).

It is important to acknowledge that survey data have limitations. Practitioners maynot always be able to describe accurately what they do (through faulty recall, forexample). Also, they may not wish to reveal certain behaviour, particularly aberrantbehaviour. This has been borne in mind whilst conducting data analysis and triangu-lation of interview findings with SETA data (see below) and the broader literature oncontingency fees where possible. This triangulation suggests that practitioners gener-ally discussed their approaches with candour and this in turn supports the accuracy ofthe findings.

seta data

In addition to the interviews, original analysis of survey data was conducted. Thesedata were collected for the (then) Department for Trade and Industry (DTI). TheSurvey of Employment Tribunal Applications (SETA) dates from 2003 and covers alarge random sample of completed employment tribunal applications. It contains dataon case types, advice/representation and outcomes. It identifies claimants who appearto have brought cases using contingency fees and other sources of funding, albeit with

47. For a full discussion of methods and results, see R Moorhead and R Cumming cited n 10.



some error.48 The data are confined to cases where an employment tribunal applicationis issued including those settled or withdrawn before a final hearing, meaning resultsmay not be typical of all employment claims (especially those settled or droppedbefore proceedings are begun), but it should provide a representative sample of allcases issued in the tribunal.

claimant interviews

Short, semi-structured telephone interviews were conducted with individuals who hadissued claims in the employment tribunal using one of four funding arrangements(private payment, contingency fees, legal expenses insurance (LEI) and trade unionfunding).49 This paper concentrates on the results for private paying and contingency feeclients. Quotes from the former are labelled ‘PP’ and quotes from the latter ‘CFC’ witha serial number denoting each interviewee. The sample was taken from a list ofindividuals who participated in the most recent SETA survey (2008) who had agreed tobe re-contacted. For the SETA survey, BMRB contacted a random sample of employ-ment tribunal applicants50 whose cases had completed between January 2007 andJanuary 2008. The sample includes a range of outcomes for tribunal applicants (thosewho withdrew their claim; those who settled their claim; and those who proceeded to afinal tribunal hearing). The claimant response rate to requests for interview was 66%.

Having conducted their interviews, BMRB kindly provided us with access tocontact lists, from which we were able to identify claimants who were likely to havebeen funded under one of the four funding arrangements we were interested in. Usingthe SETA data, it was possible to compile separate lists of those who were likely tohave funded their case privately (on a ‘normal’ hourly basis) and those who fundedtheir case using a contingency fee. The SETA survey data did not distinguish betweenLEI and Union clients, so we compiled one combined list of claimants apparentlyfunded under either of these arrangements and sought to interview roughly equalnumbers from each group.

We contacted 128 individuals by letter, aiming to interview about 15 individualsfrom each funding group.51 Once this target was reached we sought no further

48. Given the questions that were asked of claimants there was the potential for claimantsinterviewed for the SETA data to misidentify the type of funding their lawyer was operatingunder. See Hammersley et al The Influence of Legal Representation at Employment Tribunalson Case Outcome (London: BERR, 2007), at 11 onwards. The difficulty was dealt with by usingtwo definitions of contingency fee in this study. The broader definition treats all claimants whosaid they had to pay their adviser ‘if they won the case’ as being under contingency fees. Thenarrower definition treats only those who said they had to pay ‘if they won the case’ and thatthey paid only if they won. Because it is possible for someone to pay some costs win or loseunder contingency fees, it is possible that either definition is more accurate; hence the need tolook at both.49. For a fuller discussion of methods and results, see R Moorhead and R Cumming, citedn 10.50. They also interviewed defendants but defendants did not fall within the remit of our study.51. All potential interviewees were sent a letter and information sheet setting out the researchaims and inviting them to participate, making clear that participation was voluntary and thatthey could withdraw from an interview at any time. Contact was made at various times of theday to ensure maximum and unbiased coverage of the sample provided by BMRB. Consent toparticipation was confirmed on the telephone before any interview commenced. All data wasanonymised and securely stored.



interviews,52 meaning that only 107 of those we wrote to were telephoned. Theresponse rate from this group (excluding failed contacts) was 78%.53 All interviewswere conducted on the telephone according to an interview schedule. The key ques-tions were generally open, to encourage free-flowing discussion of the issues. Inter-views were recorded digitally, transcribed in full and analysed using NUD*IST N6,54

to ensure the themes emerging during these conversations were properly reflected inanalysis.

Whilst there were high response rates and claimants discussed the issues candidly,their views are circumscribed by their own experiences, expectations and understand-ings. Legal funding arrangements can be complex and claimant understandings ofthem limited. Claimants may also seek to conceal aspects of their behaviour orunderstanding which they feel, rightly or wrongly, would show them in a bad light.Care was taken to reflect on this in the analysis. Further, the sample size, respectablylarge as it was for such qualitative work, means it would be premature to generalisesolely on the basis of any such findings.

Results

the idea of reasonableness and fairness

One strain of debate noted above is that fees should be reasonable. It is worthcomparing and contrasting the views of lawyers and clients on what constitutes‘fairness’ in a fee arrangement.

The first point is that the lawyers we spoke to tended to have a self-serving view oftheir fee arrangements. This was particularly true of lawyers operating on hourly feeswho were keen to emphasise the fact that their fees were tied to effort. By way ofcontrast, in their view, contingency fees were divorced from effort, rendering theminherently unfair and also likely to be more expensive as a result. Contrarily, whenemphasising the benefits of hourly fees they pointed to the predictability, profitabilityand cash-flow benefits to the firm of working on the basis that they were paid for mostof the hours that they worked, win or lose.

They also tended to suggest that contingency fees were unfair because theyinvolved a deduction from damages for the client, whereas hourly fees, being paid winor lose, would not be deducted from compensation. This is an untenable position.Only rarely did hourly fee lawyers acknowledge that a client’s hourly fees reduced thevalue of any compensation (the money had to come from the client in some shape orform, and part at least tended to come from the client even before compensation waspaid making it harder for the client to pay). This is an interesting sign that the hourly

52. Once we had interviewed 17 private payment and DBA clients we simply stoppedcontacting individuals on each of those lists. The position was slightly different for the LEI/TUlist. We could not tell without ringing which of the two funding arrangements the individual hadused. In seeking (unsuccessfully) to reach our target for LEI interviews we contacted some tradeunion clients and were forced to decline interview once a funding arrangement was established.53. Eighteen individuals declined to be interviewed, primarily because, despite agreeing to berecontacted at the time of the SETA survey, they did not want to take part in another survey. 25individuals were ‘failed contacts’. This generally meant that the individual was contacted atleast six times but we failed to get an answer, though in some cases this meant that the contacteehad not used a relevant funding arrangement.54. This is an analysis package which facilitates the coding and analysis of qualitative data.



fee lawyer is de-moralising their own income: rendering it the source of a consumerchoice rather than a drain on their clients’ damages. Their view also fails to recognisethat the client may be economically worse off on an hourly fee basis as they are notprotected from the risk of losing.

A crucial issue is whether contingency fees were more expensive than the caseswould have been had they been brought on an hourly fee basis. To assess this we askedcontingency fee practitioners for information on the last contingency fee case theycompleted:

• what level of compensation was paid;• what the fee paid out of that compensation was;• how many chargeable hours they spent on the case; and,• what the normal hourly charge out rate would have been for similar cases.

Respondents were also asked to indicate their normal hourly rates for similar cases.Because we knew both the compensation, number of chargeable hours worked and thepercentage fee charged we could calculate a notional hourly rate for those cases.

The notional hourly rate on the contingency fee was higher than the practitioner’sequivalent hourly rate on 17 occasions and lower than equivalent hourly rates on 21occasions. Summary data can be seen in Table 1.

The difference in the means of the notional and equivalent hourly rates is verymodest and not statistically significant. This suggests there was no difference betweenthe two fee types in terms of their expense.55

Of course these figures need to be treated with caution. Contingency fee practitio-ners may have been tempted to underplay the level of fee in contingency cases or, inspite of the exhortation to focus on the most recent case settled, pick a case that wasunprofitable. Data were available from 38 practitioners only, further emphasising theneed to treat the results with some caution. Nevertheless it is notable that there wasconsiderable variation in hourly rates for contingency fee cases (which one wouldpredict whether or not contingency fees were more profitable or not) showing, at thevery least, that respondents were not always picking cases that would show contin-gency fees were less profitable. There are some other reasons for placing moreconfidence in the results. A similar exercise, conducted in the USA by Kritzer, showedup significant increases in notional hourly rates on contingency fees suggesting that

55. A paired sample t-test was conducted (p = .708). Because a Q-Q plot suggested thedistributions of these variables may not be normal a Sign test was also conducted which also didnot reveal significant differences (p = .626).

Table 1: Hourly rates and contingency fees compared (notional hourly rates)

Contingency fee(notional hourly rates)

Hourly rates onequivalent cases

Minimum £0 £40Maximum £495 £250Mean £162 £155Median £125 £168N 38 38



practitioners will reveal higher charging where it occurs.56 It also needs to be empha-sised that the hourly rates do not take into account the level of cases being lost undercontingency fees. SETA data suggest practitioners on contingency fees would belikely to lose between one in four or one in five cases issued in employment tribunals.This would be likely to mean that contingency fees were significantly less profitablethan hourly fees, at least in this data.

It would be interesting to establish whether deferring payment has any genuineeffect on how clients perceive their lawyers’ fees. There is experimental evidence thatclients prefer a contingency arrangement over an hourly fee approach.57 Our owninterview data suggested not so much a different judgement on the reasonableness oftheir fees but a difference of emphasis. We asked both contingency fee and privatelypaying claimants whether or not they were happy with the legal fees they agreed withtheir representatives (and why). Of the 17 contingency fee respondents, the vastmajority (14) indicated that they were happy with their percentage fee; two wereunhappy; and one was unsure. The results for the 17 privately paying claimants werealmost identical, with 14 saying they were happy with the costs agreed on and 3 sayingthey were not happy.

Overall, however, private payment claimants tempered their satisfaction with anunderlying acknowledgement that they had paid for something universally accepted asexpensive:

Were you happy with the costs agreed on?

Well as happy as you can be yes. (PP17)

Whereas contingency clients did not generally offer this qualification:

What percentage of your compensation did you agree?

20%. I didn’t think that was bad.

OK, so you were happy with the percentage?

Oh very happy. (CFC3)

It was also clear that contingency fee clients (unsurprisingly) welcomed the fact thatthey were not paying their lawyers’ fees if they lost, not an advantage available tohourly fee clients. Such findings may also support in part some of the claims made byZamir and Ritov who have sought to demonstrate using experimental methods thatconsumers are likely to put a significant economic value on this protection.58 They alsopoint out that fairness can be judged on a number of bases: by reference to effort; byreference to output; fairness of the process by which fees are agreed; and fairness ofdivision of compensation.59 It may be that if contingency fees are set by a fair processand with a suitable division of compensation they may be perceived as fairer thanhourly fees. Our evidence leans, albeit very gently, in that direction.

fairness of process, clarity and informed consent

I have noted that, in broad terms, contingency fees have not been shown to be moreunreasonable than hourly fees in terms of overall costs and some reasons for seeing

56. Kritzer cited n 26.57. Zamir and Ritov, n 27.58. Ibid.59. Ibid.



them as more reasonable in ‘objective’ terms (given the way in which the client isrelieved of some risk). What issues arise in terms of the way in which such fees areagreed? Here the paper turns to the clarity of the fee agreements and informedconsent.

Clarity and informed consent operate at a number of levels. At the most basiclevel, the lawyer must explain (and the client understand) the basis on whichtheir lawyer charges. At a higher level, there is a sense in which the client understandswhat they are being charged for and is able to exercise some scrutiny or restraintover those charges as the case progresses or in evaluating the total costs at the end ofa case. Relatedly, there is the capacity of the client to understand how a chargingregime relates to the quality of service or the settlement decisions that are taken ontheir cases.

contingency and hourly fees – some clarity problems

Our interviews with practitioners indicated a number of potential problems with howfirms approached contingency fees and how clients might understand those agree-ments. The basic model of a ‘no win no fee’ contingency fee agreement is that theclient pays nothing if they lose and a percentage of their compensation if they win.This simplicity is one key benefit claimed for contingency fees.60 Yet, the way inwhich win and fee is defined belies this simplicity.

basic understandings of the agreement

Generally, contingency fee claimants appeared to have a basic understanding of theirfee arrangements. The vast majority understood that they would be parting with aproportion of compensation should their claim be successful. All the contingency feeparticipants bar two volunteered that a percentage fee was agreed on, and in mostcases they recalled an exact figure.

Particularly interesting was contingency fee clients’ initial discussion of financialliability on losing. Six explained that their adviser had indicated that they would paynothing where the case was unsuccessful:

What did your legal adviser tell you at the outset about how your legal feesand other costs would be calculated and paid?

Basically just that if I didn’t win the case I wouldn’t have to pay. (CFC14)

He just roughly went over saying . . . he went through it saying obviously ifyou don’t win you don’t have to pay us anything. (CFC13)

Interestingly, a minority (five) contingency fee clients volunteered that some costscould be payable on losing.

One reason why Webb (and many practitioners) supports the hourly fee is that,‘clients understand how it works’.61 Our data enable some evaluation of how true thatis. The majority of private payment claimants indicated that their adviser had

60. K Underwood ‘The real no win no fee case’ (2001) 6 Litigation Funding 6.61. Webb n 20, p 42.



discussed an hourly rate in explaining how the fees would be calculated.62 All under-stood that their adviser’s time would be charged for by the hour. The majority had tobe prompted to recall an hourly rate, a contrast with the relatively ready reflections ofcontingency fee clients and only seven thought that they could recall their adviser’shourly fee.

Interestingly, amongst the private payment clients there was greater focus on initialestimates of overall costs than on the hourly rate. They were clearly more concernedwith the total expense than the hourly charge:

I think he gave me an approximate idea you know of how much it would costat each stage, it went through a few stages I think like writing to the employer firstbefore we went to the employment tribunal and he gave me a price for sort of, arough price for everything really.

What did he say right at the start with relation to the fees?

I can’t remember, I don’t know what you mean, do you want to know exactlyhow much he charged do you mean or?

[W]hat hourly rate did you agree that the solicitor would be paid?

[To husband] Can you remember how much an hour – was it £200 orsomething? (PP9)

The approach of these private payment claimants is interesting. A positive inter-pretation would be that solicitors are increasingly providing estimates of total cost fortheir clients.63 Certainly, this would accord with what claimants appear to want andexpect. In fact, 12 interviewees received an overall costs estimate and one was quoteda fixed fee.

Conversely, it suggests a dissonance between how solicitors think of their chargesand how claimants think of them. A number of practitioners in our interviews empha-sised that the benefit of hourly rates was the clarity provided to a claimant: they knewwhat effort had been put in and what cost attached to that effort.64 This is not borne outby claimant understandings: they did not recall the hourly rates easily; they did notunderstand what work was put into the case; and they appeared to think much moreglobally about their solicitor costs – it was the bottom line not the calculation of coststhat mattered.

When it came to the arrival of the eventual bill, six private payment clients wereparticularly worried or confused about the costs, adding weight to the assertion thatsuch claimants often concentrate on total cost and do not understand the mechanics oftheir fee arrangements. Two had final bills which vastly exceeded costs estimatesinitially received. Interestingly they did not blame their advisers for this uncertainty:

62. Of the remaining two private payment respondents, one had been charged a fixed fee of£1500 and the other could only recall his adviser giving him estimates.63. In line with Rule 2.03(1) of the Solicitors Code of Conduct, which requires solicitors togive clients ‘the best information possible about the likely overall cost of a matter both at theoutset and, when appropriate, as the matter progresses’.64. Some practitioners commented that using hourly rates led to improved client relationsbecause clients preferred the certainty, transparency and/or simplicity of hourly rate fee struc-tures: see Moorhead and Cumming (2008) cited n 10 para 80. Conversely, other practitionersthought that contingency fees out-performed private fees in this regard: ibid, para 199.



[I]nitially I thought it would only be £4000–£5000 and I’m sure if I was toldit was £20,000 . . . I might have tried to do it a cheaper way . . . But he did explainexactly how his costs would be charged . . . (PP1)

The benefits of having a clearer idea in advance of global costs are shown by PP12,who withdrew his claim when the costs looked set to exceed £1000 because he did nothave enough money to continue and was also worried about losing. His adviserinformed him of the hourly rate (£200/hour), but he had not received a total costsestimate. Had he been given such information he may have been better informed indeciding to claim in the first place. £1000 would not cover the cost of most employ-ment claims and had the claimant appreciated this then he could have saved himselfa bill of over £700.

In addition to those confused about their final bills, two private payment claimantsexpressed confusion about how their advisers incurred their hourly charges:

I was clear how their fees would be calculated on the hour but I wasn’t surewhen they were actually doing work for me. So when they were making telephonecalls, when they were typing letters. (PP11)

what is a win?

Under a contingency fee, a win can be defined either as compensation awarded oragreed or as compensation actually paid to the client. The latter is most beneficial tothe client and so most consistent with a lawyer putting the client’s interest before theirown. Under such an approach, where there are deductions from compensation paid(for example because of recouped welfare benefit payments) or where the compen-sation is awarded but not recovered, the lawyer bears the risk. A substantial minorityof lawyers we spoke to indicated they would calculate the fee on the basis of moneyawarded or agreed rather than money received. As one might expect, the clients weinterviewed showed no appreciation of this. The contractual position was contrary totheir common-sense understanding of the agreement and it was a position agreedagainst their better interests. Thus, it shows a substantial minority of lawyers employ-ing their discretion in the drafting and application of agreements in the interests of thelawyer rather than the client.

The lawyers’ justifications for doing so tended to focus on securing a greater returnfor the firm, although some argued that the claimant has benefited from the money‘awarded’ that is being recouped, seeking to argue it was fairer that the lawyer takesa percentage of the full award. This is specious reasoning. Where welfare benefits arebeing recouped, the claimant would have had the recouped money whether or not theyhad sought compensation. A more obviously fair basis for calculating the lawyer’s feeis the added value the lawyer gives to the client: the compensation net of deductions.Even so, in this regard, the position of contingency fee clients is generally better (ifmore confusing) for contingency fee clients (as a group) than hourly fee clients, as thelatter could expect to pay their lawyer in full whatever recovery or award is made.

what is a fee – the vat issue

Another important issue is the treatment of VAT. Some firms included VAT in theirpercentage fees (54% of our interviewees said they did) and some did not (46% of ourinterviewees). This makes a substantial difference to costs: a percentage fee of 33%



which does not include VAT at 20% is equivalent to a percentage deduction fromcompensation of 39%. There is a risk clients will be misled into thinking net percent-age fees are lower than they are. Broadly speaking, of our 17 contingency feeclaimants, six said that their percentage fee included VAT; seven said that VAT wasadded; and four did not know or were unclear. There is plainly some uncertaintyamongst clients but also a possible degree of fit with the likely picture (if (and it is abig if) those who thought they were subject to VAT on top were correct and viceversa).

Again, however, the position of hourly clients is worse in terms of clarity andtransparency. The vast majority (98%) indicated they would add VAT on to theirhourly fee. This also suggests that a significant proportion of practitioners saw thedesirability of quoting fees inclusive of VAT for contingency fees (and also perhapsthat they are less reflective of the consumer interests in hourly fee cases).

what is a fee – the disbursements issue

Another way in which contingency fees are often not as simple as they appear isthat where disbursements were charged they are treated separately from the ‘fee’.As a result, no win no fee does not necessarily mean no disbursements (expenses).Eighty-four per cent of our interviewees indicated they always or sometimes chargeddisbursements in addition to a percentage fee. Only 10 (16%) indicated they did notcharge for them separately (ie they would meet disbursement costs out of the adviser’spercentage).65 It was not uncommon for disbursements to be charged to a client evenif they lost.

These extra costs could include counsels’ fees (so consumers are expected todistinguish between one lawyer’s charges as a fee and the other as a disbursement) butalso medical and/or other expert reports; travel expenses; photocopying; postage; andhotel costs. There were other less common examples, including charging for the costof ‘long’ telephone calls and filing costs separately.

Most of the claimants we spoke to did not recall having to pay any extra expensesover the contingent or hourly fee, although it is likely that this is an underestimate asclaimants had to be probed to glean this information and it is possible that our probingdid not expose all hidden costs:

[D]id what you were actually charged differ in any way from what youthought you would be charged?

I wasn’t charged anything because I didn’t win the case.

OK but you were charged for the barrister’s fee?

I was just charged for the barrister’s fee, that’s all. (CFC10)

Six contingency fee participants mentioned costs over and above a percentage in theirinitial description of their adviser’s explanation of fees. Three of the four contingencyfee claimants who paid counsels’ fees as an extra considered that this was not properlyexplained to them at the start of their cases:

65. As with recoupment, our respondents tended to indicate the relative rarity of disburse-ments in employment tribunal cases.



Did what you were actually charged differ in any way from what you thoughtyou would be charged?

It did slightly in as much as they put the barrister’s costs on top as well.I would have thought that would have all come out of the 33% . . . In all honesty Ican’t remember them actually saying that to me at the time. (CFC8)

Another respondent had been provided with a contingency fee contract which clearlystated that the percentage fee was exclusive of ‘submissions by a barrister’. Thefollowing quote indicates her confusion with this part of the contract:

I didn’t understand the ‘what is not covered by this agreement submissionsby a barrister’ because I didn’t understand at the beginning that if there was abarrister at the hearing I would have to pay for it. . . . But it does say what is notcovered by this agreement and that was submissions by a barrister.

OK but at the start you didn’t feel that was made clear?

Well it is clear but you don’t understand that this person that you are trustingis not a barrister and I didn’t know what the person was at all. I mean I thought hewas a solicitor to start with and he wasn’t, he was a student solicitor so that wasnot clear what he actually was and all he was really was a legal adviser, wasn’t he?(CFC10)

A related issue is costs payable where the case is lost. Three of the four intervieweeswho paid separately for counsel thought they would not have had to pay anything ifthey had lost the case. However, the excerpts that two of these claimants read out fromtheir agreements suggested otherwise. CFC14 explicitly suggested that she ‘wouldn’tbe charged anything’ on losing but later commented that she had paid counsel after thetribunal dismissed her case.

What is covered by this agreement? Your employment tribunal claim relatingto your employment with so and so. What is not covered by this agreement? Anysubmissions by a barrister . . . If you lose the case you do not pay us anything. . . .I did pay for the barrister at the hearing. (CFC14)

Thus, whilst advised that barristers’ ‘submissions’ are not covered by the agreement,she is then told that if she loses her claim she does not pay anything. ‘Us’ is the crucialword and requires the claimant to distinguish between costs paid to the solicitor fortheir work and costs paid to the solicitor for someone else’s work. Whilst arguablyintelligible, the capacity of the agreement to mislead the claimant, as in fact occurredhere, is obvious.

Amongst those who had not in fact been charged any extra charges (either becausethere had not been any or their firm had not charged them for any) there was significantuncertainty as to the contractual position. Over half of the contingency fee users (9 outof 17) were somewhat uncertain as to the costs they might have had to pay. CFC15appeared particularly confused about disbursements. She is worth discussing in somedetail as an indication of the way legal cost agreements can confuse clients. Sheworked in sales (and so claimed a degree of financial literacy) and appeared to havea generally good understanding of her staged-percentage agreement, under which hercases would be charged a higher percentage if it proceeded to a hearing. However, sheappeared confused on the issue of extra costs. She thought that if she lost she wouldbecome liable for disbursements, but was not sure if they were payable where the casewas won. Further, she was not clear on what the term ‘disbursement’ actually covered:



[It] was clear that [disbursements] were not included. It said plus disburse-ments but what they didn’t qualify is what did they mean? What exactly are theygoing to include and what they will not include and that should have been clarifiedbecause it is a technical term. (CFC15)

Additionally, she was unclear as to whether the highest percentage fee in a staged feesystem was inclusive of any barrister charges:

If a barrister was involved additional cost and so on. . . . If it was to be afterthe tribunal, so let’s say the tribunal took place and then let’s say that the barristerwas involved . . . then they would charge let’s say 44%.

[W]ith the 44% that would have included the barrister?

Well this is what I would assume. I don’t actually know whether that wouldbe the case or not.

Interestingly, she refused to accept a barrister:

[T]he date was set but they actually called me and asked me if I would givethem permission to get a barrister . . . and I said absolutely not. And the reasonactually, the reason I refused the barrister was because I actually believe that thecase was not going to go to court and it was that they would basically get paid, youknow the solicitor would then be able to take more away from the actual claim.

She appeared to think that the solicitor would bring in the barrister in order to take thetop fee (ie 44%) without actually having to go to tribunal. However, previously sheindicated that the 44% fee applied only if the case actually went to tribunal, andfurther she was unaware if the 44% included the barrister’s fee. Clearly, this partici-pant was unsure about her potential financial liabilities and took important tacticaldecisions in apparent ignorance of the true position.

the broader context – what the data suggests aboutthe lawyer–client relationship

The data above suggest a situation which is often contractually weighted towards theinterests of the lawyers and that these arrangements are not clearly understoodby claimants. Regulations designed to secure informed consent within the lawyer–client relationship does not appear to be working: clients do not understand theiragreements.

One of the purposes of informed consent is to ensure that consumers make wisechoices about the purchase of legal services. The data suggested further broaderproblems. What was very clear from discussions with claimants is that very few hadengaged in an informed choice of representative. Most depended on recommendationsfrom friends and colleagues or on a cursory scan of lists of solicitors (such as those inthe yellow pages or a web search). A few sought a solicitor who was local or those whooffered contingency fees. Only rarely did they attempt to identify solicitors whospecialised in employment tribunal work and such attempts were rudimentary. Mostlyclients picked the first firm they came to in a list. For example:

[O]nce the results came up how did you pick the one that you eventually wentwith?

I think he was top of the list. (CFC16)



Only handful of respondents engaged in some comparison of alternative lawyers. Twoused the Yellow Pages to ring different potential representatives but did not indicatehow they then made their choice. One had sought to compare costs but had found thatall the solicitors he rang charged similar rates. Another investigated the companies’websites and read some of their marketing information.

The limited exercise of choice over representative was compounded by the absenceof choice over funding mechanisms. Clients paying privately or on a contingency feeshould benefit from a discussion of their options. Under r 2.03 of their Code ofConduct, solicitors are obliged to establish ‘whether the claimant’s own costs arecovered by insurance or may be paid by someone else such as an employer or tradeunion’.66 It is worth noting here that the rules do not appear to mandate a discussionof whether private paying clients might want to consider a contingency fee lawyer, inspite of an obvious advantage to the client in taking the case on that basis.67 It is noanswer to this point to suggest that because a solicitor is not obliged to offer acontingency fee they should not be obliged to advise on their availability elsewhere.Solicitors are not obliged to offer legal aid, nor are they always able to take casesunder legal expenses insurance or for trade unions, but they are obliged to advise onthose forms of funding. Indeed, the rule emerged after research found that CFAsolicitors often did not advise personal injury claimants of alternatives which werelikely to be free to the client, such as union or insurance funding, because not doingso was not in the lawyers’ interests (because they were not panel firms for insurers ortrade unions and so would have to surrender the client to another firm).68

In our research, roughly two-thirds of claimants paying privately said they were notadvised of other funding options. Two participants appeared to have knowledge ofother arrangements but had not raised this with their solicitors. One appeared confusedby the possibilities:

I do wonder if I had been able to get help from the union how much, I don’tknow if you get a no win no fee thing, how much different the case might have beenbut . . .

Were those options ever discussed with you by your solicitor?

No. (PP9)

Interestingly, the comments of these interviewees suggest that even if individuals areaware of alternatives they may be reluctant to raise or pursue them. PP9 appeared toassume that because he had selected his solicitor he should simply accept the paymentoptions provided: a particularly interesting view in the light of the way clientsgenerally (do not) exercise an informed choice of solicitor. Indeed, many intervieweeswere surprised by the question, suggesting that they were unaware there was anychoice:

I didn’t know there was anything else or other ways of trying to fund itactually. (PP15)

66. Solicitors Code of Conduct 2007, rule 2.03(d)(ii), available at http://www.sra.org.uk/solicitors/code-of-conduct/195.article.67. Unless ‘someone else’ is read to include the claimant’s solicitor.68. S Yarrow and P Abrams Nothing to Lose: Clients’ Experiences of Using Conditional Fees(London: University of Westminster, 1999) pp 5–6, 17; S Yarrow Just Rewards: The Outcomeof Conditional Fee Cases (London: University of Westminster, 2000), pp 32, 35, 38–39,111–112. This research predated CFAs which operate at no cost to the client.



Of the six private payment claimants who did receive advice on other options, fourwere told about contingency fees and two about LEI. One interviewee advised aboutLEI did not have it, but the other chose not to look into it. This response may alsoindicate one of the problems associated with LEI restriction of client choice:

I suppose I put my belief in the fact that I had bought a solicitor in that thecouncil would actually make a settlement on that initial move and I think it’salways difficult, once you are underway with a solicitor with the home insuranceside of it, it seemed to me that you needed to let them know what was happeningand that they may have then come on board and put their own solicitors in placeand because it was such a massive unknown to me I suppose I delayed over it andin the end it was easier staying with the solicitor. (PP5)

Of the four private claimants advised about CFCs, three elected not to go down thatroute for price reasons: one thought the percentage too large, the other two wereadvised by their solicitors that private payment would work out cheaper. The fourthwas told that her solicitor did not work on that basis.

Roughly three-quarters of the contingency fee claimants indicated that they had notreceived advice on alternative funding options. Three indicated that they had activelysought a contingency fee and assumed that this meant no other funding options shouldhave been discussed:

I personally chose this particular no win no fee so there was never anynecessity really for him to be discussing it any other way. (CFC15)

Some clients stressed that they had chosen a contingency fee for financial reasons:

My main concern was that I didn’t have to pay if I didn’t get anythingbecause obviously I didn’t want to have a debt . . . being out of work. (CFC17)

Whilst many contingency fee clients may be unable to afford to pay privately, there isno obvious reason why trade union funding or LEI should not be discussed (althoughthis may mean the lawyer has to refer the case elsewhere).

the justifications for passing some costs back to the client

What these findings reveal are a range of practices in terms of charging contingencyfees clients some money (a) whether or not they win and (b) over and above anyagreed percentage fee. There is a significant likelihood these approaches violate a layunderstanding of what is meant by a no win no fee agreement and they certainlycontribute to a lack of understanding of what the actual agreement is.

It could be argued that these practices are legitimate attempts by solicitors to definethe terms on which such agreements are economic and properly balance the risksbetween lawyer and client. Further, it might be that this is necessary to protect thelawyer’s profit margin and essential if access to justice is to be ensured either for casesgenerally or for cases with (higher) disbursement costs specifically.

The economic point is not well supported by the evidence. Firms with higher levelsof contingency fee work in their caseloads were less likely to charge these extrascharges. They were also generally firms operating at lower levels of profitability,competing for lower-income clients. Similarly, significant proportions of our respon-dents could afford not to charge VAT or base percentage based on pre-deductionawards. That those who could least afford it were, in this respect at least, the most



ethical underlines the essential point that the (other) lawyers, faced with a choicebetween their own interests and their clients, chose their own even though it appearsthey could better afford not to. In the absence of a clear need to shift the costs, andclearer levels of understanding amongst consumers, these appear to be illegitimateattempts to shift some of the risks onto unwitting consumers, violating an apparentlysimple relationship with complexity which is both unnecessary and misunderstood byclients.

Disbursement costs and deductions from compensation are part of the risk thatpractitioners are much better able to assess than clients. It is strongly arguable thatthey should bear these costs within their more general acceptance of the risk of a case(they can afford it, and spread the risk across a number of cases in a way the clientcannot – particularly if clients are funding the case on a contingency fee because theycannot afford to pay privately). Similarly, where necessary percentage fees can beincreased to cover the extra costs at least where such fees are not unreasonablycapped.

A second reason for sharing some of the cost of the case with the client win or loseis a mixture of economic and moral argument, best characterised by the idea that itensures the client has ‘skin in the game’. That is, the client, through sharing some ofthe cost, is more committed to the case and more reasonable in any decisions on thecase (such as settlement) as a result. This argument is weakened rather by clientshaving a dim understanding of what these liabilities are. They have to know they haveskin in the game for it to have any influence. Also the fact that these liabilities oftenfell to be paid at the end of the case is important. By this which stage it is too late toinfluence the client.

4. DISCUSSION: FROM AN ETHIC OF INFORMED CONSENT TOAN ETHIC OF PRICE COMPETITION

This final section of the article stands back from the detailed empirical findings andadvocates a simplification of contingency fees. This would simplify the need for‘informed consent’ and rely on transparency and market forces to better protect clientinterests.

This article has raised the question of how it is possible to balance the client’sinterests with the quite proper interest lawyers have in making a decent profit. Theprofession’s approach is to rely on ‘informed consent’ to make the relationship bothhonest and reflexive. This is consistent with ethical precepts such as ‘the lawyer asfriend’69 and May’s recognition of inherent conflict in professional relationships.Under this approach an honest and reflexive relationship stands a better chance ofbalancing the competing interest of lawyer and client, but a balance must neverthelessbe struck.

In striking the balance, the rules suggest that the profession should put the client’sinterests before their own. The empirical data suggests that often they do not. Manylawyers structure their billing arrangements to put their own financial interests beforethose of their client. That a significant proportion also do not charge in this waysuggests that it is possible to charge the client on a more equitable and ethical basis.If it is possible, those lawyers who do not charge transparently and simply have to

69. C Fried ‘The lawyer as friend: The moral foundations of the lawyer-client relations’(1976) 85 Yale Law Journal 1060, see also Parker and Hunt n 16.



answer the question: why not? The only plausible explanation that they might rely onis that clients are adequately informed of the charges, understand them, understandthere are alternatives and choose to stay with their particular firm because they arepersuaded of the need to do so on the basis that these extra costs are justified on qualityor access to justice grounds.

Such an explanation is contrary to the picture from our interviews with clients.70

Clients seem to assume that all lawyers charge in the same way and have a verypassive approach to choosing and contracting with their lawyers. This is an approachthat sits well with the apparent failure of many lawyers to advise their clients onalternative funding arrangements.

Even a modest notion of informed consent that demands clients interests are on anequal footing with their lawyers is not fulfilled. Clients are not on a par, they aresubservient. This subservience is reflected in the contractual positions that many firmsadopt on costs which allow them to pass unexpected extra costs back onto submissiveclients. It is also reflected in other issues, notably settlement clauses which givelawyers the power to terminate contingency fee contacts and charge clients significantaccrued costs where clients pursue cases beyond a settlement offer which the lawyerviews as reasonable.71 Needless to say, clients do not understand these elements of thecontract either.

Whilst professional ethics demand putting the clients’ interests first, it is difficult tosee how such arrangements bear scrutiny. Some practitioners will argue that it is‘unfair’ for such costs to be borne by them and that they will make contingency feesunaffordable. Again, the fact that significant numbers of practitioners do not adoptsuch arrangements is suggestive of the weakness in this position. Some do not regardit as unfair and some (our data suggests the less wealthy firms) are capable of bearingsuch costs. In any event firms could increase their percentage fees to compensatethemselves for the extra costs (subject to laws on caps). It is patently unfair that clientsshould be contracting on an apparently simple no win no fee basis to discover that infact they have liabilities win or lose, or are charged more than they consented to. Putanother way, some lawyers have adopted a model of no win no fee which creates anillusion that the risk is taken away from the clients, whilst parcelling some of that riskup and passing it back to the clients. The profession’s pleas of affordability andfairness are self-serving and inconsistent with the notion of putting the client first. Ifsuch costs are genuinely not affordable by firms, we can be pretty sure that the costsare not affordable by clients either.

There are other problems with the notion of informed consent. In particular, the wayit is currently regulated privileges the hourly fee over the contingency fee. Thesolicitors’ rules require a solicitor thinking of taking a client on a private fee basis toadvise them of alternative funders such as insurers, legal aid or trade unions. There is nosuch obligation to inform clients of the contingency fee arrangement, which is likely tobe significantly more appealing than an hourly fee, at least for a body of clients.

The complexity of fee agreements is likely to inhibit more consumerist behaviour.Our data suggests a range of factors inhibiting informed choice: clients were reluctant

70. See also the Vanilla Reserarch Referral Arrangements Research (London: LegalServices Consumer Panel, 2010). Available at http://www.legalservicesconsumerpanel.org.uk/publications/research_and_reports/documents/VanillaResearch_ConsumerResearch_ReferralArrangements.pdf (last downloaded 20 June2010).71. Moorhead and Cumming (2010) Chapter 9 and (2009) pp 111–116, cited n 10.



to challenge or criticise their lawyers; they accepted that costs were ‘complicated’;and they expected not to understand them. We saw some clients assume all lawyerscharge on similar bases with similar outcomes. Complexity prevents consumers (orintermediaries) exercising any scrutiny over this key activity. Cultural and structuralfactors militate against consumers challenging their lawyers on the bills They areexhausted at the end of a case; they must break with a relationship which has – inbroad terms – benefited them; they will worry about what a complaint will involve interms of adjudication and the like; and they ultimately do not know whether what theyhave been charged is right or wrong. For all these reasons, clients are predominantlybound into lawyer-client cultures of gratitude, subservience and powerlessness.

Both the professions and latterly the government have sought to emphasiseinformed consent as a vehicle for improving the position.72 Evidence from the finan-cial services sector tends to suggest such information-based approaches do not lead togreater consumer empowerment. Better information did not appear to reduce conflictsof interest, increase competition, promote consumer empowerment/shopping aroundor get consumers understand the cost of advice they incur (via commissions).73 Evenwhere information improved understanding, that understanding was limited and didnot influence behaviour.74 This was in spite of research suggesting consumers wouldreact warmly to information and the information being subject to detailed testingbefore hand.75 Why does such failure occur? There are problems of non-complianceby professional advisers: they do not give the information they are required to do.Complexity of the information requirements may be a factor, as may the problem thatsuch requirements – if carried out in good faith – may run counter to the adviser’s owninterests.76 Furthermore, clients’ psychological predispositions may inhibit them fromacting on the information they receive through:77

‘. . . a collection of deep seated cognitive biases that influence decisions inboth financial and non-financial contexts. These biases include, ‘procrastination,regret and loss aversion, mental accounting, status quo bias and informationoverload . . .’

All these problems afflict the informed consent provisions applicable to lawyers’ fees.Informed consent does not work.

The Government has also brought in caps in employment tribunals, claiming –contrary to the evidence – that there is evidence of overcharging in contingency feecases which will be tackled by such caps. Caps have the significant disadvantage ofinhibiting access to justice for cases which are genuinely more expensive to run.78

Is there an alternative?

72. Ministry of Justice Regulating Damages Based Agreements, Consultation Paper CP10/09 (2009) and Ministry of Justice Regulating Damages Based Agreements Response toconsultation, CP(R) 10/09 (2009).73. See, D Butterworth et al An Empirical Investigation into the Effects of the Menu (London:FSA, 2007); GfK Depolarisation Disclosure 2 (London: FSA, 2008).74. BRMB Services and Costs Disclosure, Qualitative Research – Mock Sales Testing(London: FSA, 2008).75. IFF Research Ltd and NOP Research Group Polarisation – Menu Testing Research,Research Prepared for the Financial Services Authority (London: FSA, 2004).76. TNS Depolarisation Disclosure – Mystery Shopping Results (London: FSA, 2006).77. D de Meza, B Irlenbusch and D Reyniers Financial Capability: A Behavioural Econo-mics Perspective (London: FSA, 2008) pp 3–4.78. See references at n 9.



In my view, the strategy most likely to lead to a better accommodation of clientinterests (and greater consumer activism) is a system which simplifies as far aspossible the economic transaction between lawyers and clients. With contingencyfees, this is relatively straightforward. It could be a requirement that lawyers chargingtheir clients on a contingency fee do so on a standard basis: a percentage fee inclusiveof VAT, disbursements and other costs calculated on the net compensation actuallypaid to the client after any other deductions. Clients would have a single, clear signalof price. Competition would be more easily stimulated and a more robust culture ofchoice might then follow. Similar uniformity would be beneficial in relation to settle-ment clauses and the like. The Legal Services Act, if it accelerates a commoditisationof legal services, will push the market in this direction. An emerging trend towardsprice and quality comparison sites would be facilitated. It is commonly thought thatthis will undermine ethics: that price competition will diminish quality and thatconsumer interests will be damaged. Yet, if price contains signals of quality and ifintermediaries and regulators act effectively to promote quality, then the market maywell work more effectively than it currently does.

To be sure this would not be a perfect system. Consumers and intermediaries arelimited in their ability to judge quality, but the same problems bedevil the currentmarket. Simplifying cost removes a level of complexity. Competition on price maystimulate competition on quality also. Some consumers will choose higher prices onthe assumption that they produce better quality. Firms (or regulators or intermediaries)may be forced towards developing indicators of quality to improve the nature of anycompetition. Consumer referral websites targeted specifically at lawyers clients arebeginning to move in this direction. Unless and until these work robustly in thepublic’s interest, some consumers will be duped into making choices which are notin their interests (as they are currently). Yet on balance, greater transparency on pricewould be an improvement on the situation as it is now and would not have thedamaging effects of caps on percentage fees: firms would be allowed to charge whatthe market will bear, and regulators could seek to ensure competition drives downexcessive pricing.

An interesting further question is whether the simplicity approach could and shouldbe broadened out beyond to other fee arrangements.79 Private practitioners generallyregard hourly fees as ethically unproblematic, in spite of literature pointing to thepotential for conflicts of interest, fee-padding and outright dishonesty.80 Their views ofhourly fees are in some contrast to the views of clients. In our research, practitionerstended to emphasise how such fees were clear, and provided a clear method by whichclients could monitor the cost of their case. Clients on the other hand showed a poorability to even recall the hourly rate and a much stronger emphasis on the provision ofestimates as the basis of charging. Clients needed these because they had no idea aboutthe amount of work that such cases required on average or specifically in their case.Lawyers were understandably comfortable with a system which provided a close fitbetween effort and reward and which fitted well with internal financial systems.

79. An interesting discussion, beyond the scope of this piece, is whether the arguments hereshould be confined to lawyers dealing with lay clients. Space inhibits a discussion of commer-cially sophisticated clients here, although the the professional press frequently discusses trendstowards more fixed-price billing. The idea that General Counsels successfully control lawyercosts can be contested.80. WG Ross cited n 34 and GM Giesel cited n 34. LG Lerman ‘Lying to clients’ (1990) 138University of Pennsylvania Law Review 659.



Clients tolerated this on the basis that this was the way it was and a pre-existingunderstanding and acceptance of the fact that lawyers were expensive.

An interesting indication of lawyers’ self-serving attitude to hourly fees was theway in which they moralised about the source of contingency fees (coming fromdamages) whereas hourly fees were not perceived as reducing compensation. Thisposition makes no sense from a client’s perspective: hourly fees come from compen-sation too, or from their savings, or from a bank loan. If anything, clients were lessperturbed by costs coming from compensation rather than savings. Nor did lawyersappear uncomfortable with the idea that hourly fees (because they were payable winor lose) might be a poorer deal than contingency fees (payable only if the client wins).A profession that puts their clients’ interests first should be uncomfortable with this.The arguments they employed to justify hourly fees were often self-serving (claiminghourly fees were ‘fairer’ but fairer to whom?) or dubious (claiming contradictorily thatcontingency fees were more expensive but also unprofitable). Similarly, a notion ofinformed consent would suggest lawyers should be advising their clients on thepotential availability of contingency fees and, in general, they were not.

One response to the problems of the hourly fee would be for regulators to encour-age or compel greater use of fixed fees in service areas where they are capable of beingsustained (that is where costs are sufficiently predictable, across a body of cases tomaking charging on a fixed-fee basis feasible). Again disbursements and the likewould, if possible, be best included within the fee but firms would be free to set thefees themselves at levels consistent with them making an appropriate profit.81 Con-sumer choice would enable users to make the trade-offs between quality, access andcost. As with the discussion of contingency fees, there is some way to go to ensure thatsuch decisions are taken in an informed way, but there would be some improvementin client choice and markets would again, perhaps, develop clearer signals on qualityto accompany those on price.

At bottom, it is difficult to see how improving signals on price can lead to anerosion of the consumer interest. It would stop trade-offs of between quality, accessand cost being made behind the self-serving veil of professional discretion andfiligreed with symbolic and ineffective notions of informed consent. The key questionwill be whether the market or the profession or both can combine to send clearersignals about quality at the same time.

81. In seeking to broaden the ideas beyond employment tribunals there is a great deal ofcomplexity to be worked through. In litigation, there are many controls on costs associated (inthe main) with costs shifting rules (predictable costs, case management, etc.). Disbursementcosts are different in different types of litigation. These can be more significant burdens onfirms, but equally firms do often bear these costs.



Filthy lucre: lawyers' fees and lawyers' ethics – what is wrong with informed consent?

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