Conditional Fee Arrangements Singapores New Regime

Cost is a key factor for almost any party considering whether to defend or fight a claim. Conditional fee arrangements (CFAs) are a common way for parties to minimise exposure to legal costs in many jurisdictions, including the UK and several Australian jurisdictions, however, until recently, CFAs were not permitted in Singapore.

Amendments to the Legal Profession Act passed in January 2022 will now allow lawyers and their clients to enter CFAs in certain proceedings. This is a significant development and in this article we consider the implications for international commercial parties involved in or contemplating litigation or arbitration in Singapore. We also comment on practical steps required to agree and implement a CFA that will be relevant to parties contemplating entering into CFAs in other jurisdictions.

What are CFAs?

The terminology around CFAs is not always clear, and the concepts of 'conditional fees' (as implemented in Singapore) and 'contingency fees' (as implemented in American jurisdictions) are often confused.

Broadly, a CFA is an arrangement whereby a lawyer receives payment of the whole or part of his or her legal fees only in specified circumstances. A CFA may provide that the lawyer receives no fees if the client loses its case but receives fees plus an increased percentage (a 'success fee') if the client wins. This is sometimes referred to as a 'no-win no-fee CFA. Perhaps more common, however, is a so-called 'discounted CFA' where the lawyer receives a lesser percentage of fees, irrespective of outcome, plus fees at the full rate, together with any success fee, if the client wins.

It is important to note, however, that under the Singapore regime, and in contrast to the US, lawyers still cannot charge fees as a proportion of the amount of damages awarded to a client (that is, a 'contingency fee').

When are CFAs permitted?

Initially the Singapore regime will permit CFAs in international and domestic arbitration proceedings, certain proceedings in the Singapore International Commercial Court (SICC), and related court and mediation proceedings. The Ministry of Law has stated that it will continue to review the litigation funding landscape, to consider and study whether CFAs can promote access to justice for other categories of proceedings, including domestic proceedings.

What are the benefits and disadvantages of CFAs?

Commenting on the then draft amendments to the Legal Profession Act, Singapore's Ministry of Law identified three key benefits of allowing CFAs.

First, CFAs enhance access to justice by providing businesses and individuals with additional funding options to pursue meritorious claims, which they may otherwise not pursue. This is particularly relevant given the disruptions arising from the coronavirus (COVID-19) pandemic.

Second, Singapore's new framework will level the playing field for Singapore lawyers in areas such as international arbitration or SICC proceedings, vis-à-vis their counterparts in foreign jurisdictions, who are already able to offer such agreements.

Finally, as fees under a CFA are dependent on the outcome, CFAs may also help to discourage lawyers from pursuing weak cases and frivolous claims.

However, some commentators have raised concerns that CFAs give rise to conflicts of interest. For example, a lawyer might push a client to accept a low settlement offer to avoid the risk of losing the case and, with it, fees. They may also encourage the pursuit of low-merit nuisance claims against organisations with sizeable assets and can give rise to satellite litigation over the recoverability of success fees.

Also, the additional cost of the success fee and the front loading of costs may deter use. Lawyers will only be prepared to act under a CFA where there are good prospects of success. As such, the lawyers will need to consider the strengths and weaknesses of a case before they agree to act under a CFA. Although these costs will be incurred in any event, the front loading of costs required may not be attractive to a client.

Does a CFA affect costs that can be recovered from a losing party?

In common law jurisdictions such as Singapore, costs typically 'follow the event' (that is, a losing party will be ordered to pay some or all the winning party's costs). In Singapore, the existence of a CFA will not affect the recovery of costs from the client by the other party. However, where a CFA includes a 'success fee' element, that element cannot be recovered from a losing party as part of an adverse costs order against the losing party. Also, the existing professional rules against overcharging will continue to apply.

What does this mean in practice?

The introduction of CFAs, together with the earlier relaxation of restrictions on the use of third-party funding, is significant in providing funding options for international commercial parties who are considering using Singapore as an arbitral seat or location for the resolution of their disputes. Third-party funding is usually only available for claimants because funders will seek a percentage of the amount recovered in the proceedings, whereas CFAs will also be available for respondents.

In practice, parties contemplating a 'discounted CFA' should first familiarise themselves with the practical steps required for its implementation.

The intention to operate under a CFA does not negate the need for agreed terms of engagement between the lawyer and client. The CFA will form part of those terms of engagement and will address the basis of charging. Matters such as the scope of work, resources and reporting will be covered by the remaining terms.

The CFA should then set out the definition of the 'agreed discounted rate' of fees payable by the client, irrespective of outcome, and the basis of calculating any 'success fee' payable if the client 'wins' the case.

Throughout the course of the matter, the lawyer will bill the client for work carried out (usually on a monthly basis) at the agreed discounted rate (calculated as a percentage of the firm's normal rates). These non-conditional fees will include disbursements, (that is, any expenses, fees of an arbitral institute, counsel and expert fees, disbursements and internal charges, such as photocopying) and will be payable in the usual way.

The balance of the fees beyond the agreed discounted rate are the conditional fees. Conditional fees only become payable if and when the client 'wins' the case. The definition of 'winning' will be contained in the CFA. It should be carefully defined in light of the specifics of the case concerned. If the client is the claimant, 'winning' will usually mean the other side being ordered to or agreeing to pay damages. If the client is the defendant, 'winning' could mean either settling below a certain level or succeeding at trial.

In the event of a 'win', the client may also become liable for the lawyer's success fee, if that is included in the CFA. The success fee is calculated as a percentage uplift on the firm's normal rate (that is, the non-conditional plus conditional fees). The level of the success fee in a discounted CFA is calculated by reference to the risk to the lawyer of losing the case, in which case the lawyer will not be paid the conditional fees. This is calculated by reference to its assessment of the merits of the case — the stronger the merits, the lower the success fee.