In Ontario, as in several other jurisdictions, many clients hire personal injury lawyers on a contingency fee basis. Generally speaking, a contingency fee agreement (CFA) means that the lawyer will not charge legal fees during the course of the case based on the number of hours they work, but instead will be paid a percentage of whatever they are able to recover for the client. An important element of a CFA is the idea that the client generally does not pay anything for legal fees if they do not recover any money for their claim. CFAs are essential because they facilitate access to justice. Often, accident victims and other plaintiffs do not have the financial means to pay a lawyer on an hourly basis, and would therefore be unable to pursue their valid claims unless the lawyer agrees to accept payment only at the end of a successful case.
The Solicitors Act governs CFAs in Ontario. A lawyer and a client may enter into a CFA in accordance with the Solicitors Act, except in matters related to family law, criminal cases or quasi-criminal matters. There is no standard CFA, so as long as the agreement meets the requirements of the Solicitors Act, every lawyer’s CFA could otherwise look quite unique.
On October 6, 2020 the Attorney General announced important changes with respect to CFAs. These changes will come into effect as of July 1, 2021.
In order to understand the changes to contingency fee agreements, it is important to first understand the various components of a settlement and how personal injury lawyers currently charge legal fees:
- Damages: This includes payments received by a plaintiff for losses such as pain and suffering, medical expenses and loss of income.
- Disbursements: These are out of pocket expenses incurred by a lawyer to pursue the client’s case. These expenses can include expert reports, medical records, court filing fees, photocopying, courier charges, etc.
- Costs: In Ontario, the successful party is able to recover a portion of their legal fees from the unsuccessful party. In the event of a successful personal injury claim, the defendant will pay an amount to the plaintiff to compensate them for part of the cost of retaining legal counsel.
Under the current provisions in the Solicitors Act, lawyers’ contingency fees are calculated as a percentage of the damages figure only, not the full settlement amount (which also includes disbursements and costs). In practice, this is problematic for a number of reasons.
Insurance companies and other institutional defendants often make settlement offers on an “all-inclusive” basis. This means that the settlement offer lumps together the amounts for damages, disbursements and costs. In this situation, the defendant does not tell the plaintiff what portion of the all-inclusive settlement has been allocated for costs or disbursements. As a result, it becomes the responsibility of plaintiff’s counsel to calculate these amounts themselves. Plaintiff’s counsel must determine what amount should reasonably be apportioned for costs, which would then be paid to the plaintiff to reimburse them for part of their legal fees. Various factors can impact this determination. For instance, if a case settles at an early stage, the costs that should be reimbursed to the client may be lower because the lawyer has done less work than they otherwise would have done.
The above situation can technically put the lawyer into a situation where they are in conflict with their client. This is because the more the lawyer allocates to costs for the client, the less the lawyer will receive for legal fees. This can create inconsistency in the legal community because the calculation is not regulated but rather governed by a lawyer’s personal practice. While the vast majority of lawyers deal with this issue reasonably and ethically, the Solicitors Act puts all lawyers in an unnecessarily difficult situation when making those calculations.
What Should You Know About the Reform?
The new contingency fee rules that will take effect on July 1, 2021 include three primary changes:
- Implementing a standard form contingency fee agreement for all lawyers in Ontario
- Requiring lawyers to provide prospective clients with a consumer guide to contingency fees
- Implementing a standardized universal formula for calculating contingency-based legal fees
The new standard agreement is shorter than many existing CFAs and is written in plain language. All prospective clients will be provided with a consumer guide that answers a number of common questions associated with CFAs. For instance, the guide outlines specific examples as to what can be charged to a client as a disbursement. The guide will hopefully make it easier for potential clients to precisely understand what they are being charged, and why.
While there is no cap on the percentage that can be charged for legal fees, a lawyer must consider, and clients should be aware of, the following factors when determining the appropriate rate to charge:
- Likelihood of success of the claim;
- The nature and complexity of the claim;
- The expense and risk of pursuing the claim; and,
- The amount of the expected recovery.
It is important for clients to be aware of these factors so they know when they may be able to negotiate a lower contingency fee percentage.
Calculation of Legal Fees Using the Standardized Formula
The most important change to the calculation of legal fees is the implementation of a standardized universal formula. Under the new simplified formula, costs are included in the amount on which a contingency fee is based. In other words, if a defendant provides a settlement offer on an all-inclusive basis, as most do, the plaintiff’s lawyer is directed to subtract the amount for disbursements and then calculate legal fees on the balance. Clients should also be aware that HST is charged on top of the legal fees.
The following is the new formula that will govern contingency fee agreements:
(Total Settlement – Disbursements) x CFA% = Legal Fee
The following is an example of how the new standardized formula would be applied.
Assume the following:
- The defendant makes an all-inclusive offer of $100,000
- Disbursements are $20,000
- The CFA is for 25% and HST on legal fees is 13%
Using this example, legal fees would be calculated as follows:
[$100,000 all-inclusive settlement - $20,000 disbursements] x 25% contingency fee = $20,000 fees, plus HST (13% of $20,000 = $2,600)
Therefore, the total fee payable, including taxes would be $22,600.
The balance that is left over, once the above formula and taxes are applied, is the amount that is payable to the client.
Under this new system, lawyers do not have to try to figure out what amount to allocate to “costs”, and the inherent conflict with the client is eliminated.
While it is too early to predict all of the effects of these reforms, they are certainly a step in the right direction. Under the current regime, contingency fee agreements, and particularly the concept of costs, are unduly complicated and can make an already difficult process even more stressful and confusing for plaintiffs. The amendments will make it easier for prospective clients to understand and compare lawyer retainer agreements and to make decisions on which lawyer to retain based on a clear understanding of the legal fees each lawyer proposes to charge.
At Howie, Sacks & Henry we work on a contingency basis, and we only charge legal fees when we successfully resolve our client’s claim. We always explain how we calculate our fees clearly and carefully at our first meeting with a potential client and we are happy to answer any questions about our legal fees throughout our engagement. Contact us to learn how we can help.