In its regular monthly column, law firm Weightmans looks at the controversial practice direction on conditional fees which came into force last week

Legal aid for most negligence claims – clinical negligence excepted – was withdrawn from 1 April 2000. As a result, the majority of personal injury cases have been removed from the scope of state funding. Many are likely to be brought under a conditional fee arrangement with a success fee backed by after-the-event insurance.

The final practice direction on conditional fee arrangements, which forms the last – and for defendants the most important – piece of the jigsaw, came into force last week (3 July). It has now been published and can be accessed on the Lord Chancellor's website at

The practice direction clarifies the following:

  • when success fees and premiums may be recoverable
  • the notification requirements – when and what information must be disclosed
  • when the courts will assess the success fee and/or the premium
  • what information paying parties are entitled to see at that stage
  • the criteria – when will a success fee or insurance premium be unreasonable?
  • the transitional arrangements

    It is on the basis of these rules that success fees and premiums may be challenged. Despite lobbying by the insurance industry and insurance practitioners, the new rules appear to be a diluted version of the Government's recommendations. The balance is weighted in favour of protecting those entering into conditional fee arrangements from disclosing their hand at an early stage.

    Two fundamental objectives of the new civil procedure rules are transparency and proportionality. In a drive to open up alternative methods of funding to replace legal aid, there is a risk that those objectives may be sacrificed, unless defendants familiarise themselves with the increasing range of insurance products available to fund litigation.

    It is vital you know the key ins and outs. The criteria by which the court will assess success fees will include:

  • was the risk assessment reasonable and based on information the solicitor knew, or ought to have known, at the time the agreement was entered into?
  • was the legal representative liable for any disbursements?
  • what other methods of financing the costs were available to the receiving party – for instance legal expense insurance that was taken out before the event or insurance against both sides' costs. Varying percentages may be allowed for different items of costs or different periods during which the costs were incurred
  • should the risk be re-evaluated and reduced if liability is admitted or agreed?

    Assessing insurance premiums

    The criteria by which the court will assess the insurance premium will include:

  • where the insurance cover is not purchased in support of a conditional fee arrangement with success fee, such as, for instance, where insurance is taken out against both sides' costs
  • how its cost compares with the likely cost of funding the case with a conditional fee arrangement with success fee and supporting insurance cover
  • the level and extent of cover provided
  • was the projected estimate of costs reasonable?
  • the availability of any pre-existing insurance cover
  • whether any part of the premium would be rebated in the event of early settlement
  • the amount of commission payable to the receiving party, his legal representative or other agent.

    Keep up to date with developments in the after-event insurance market in order to compare the cost of alternative products. After-event insurance against both sides' costs may sometimes lead to greater savings than a conditional fee arrangement with success fee and insurance against opponent's costs.

    Be aware that the underwriter may receive only a small percentage of the premium. The premium may in reality consist largely of acquisition costs, advertising expenses or commission. It is open to debate whether those items are recoverable.

    Membership organisations will only recover a sum representing the likely cost to the receiving party. This is the insurance premium for the risk of incurring a liability to pay the costs of other parties to the proceedings.

    Another question that needs to be asked is whether the total figure for costs – base costs plus additional liability – have to be proportionate and reasonable.

    When deciding whether the costs claimed are reasonable and proportionate, the court will consider the amount of any additional liability

    separately from base costs. In reality, under their discretion, courts may be prepared to reduce the amount allowed for the additional liability if costs are wholly disproportionate.

    There is no hindsight test. When assessing an additional liability, the court will have regard to the facts and circumstances as they appeared reasonable to the solicitor or counsel when the funding arrangement was entered into, and at the time of any variation of the arrangement.