Contingency fees, penalty clauses and illegal contracts

Scottish Legal News reported on 23 December 2008 that the Court of Session had struck down as illegal and unenforceable contracts between Newcastle-based English lawyer Stefan Cross and clients for whom he worked on equal pay cases in Scotland.

The opinion, if one has been issued, is not yet available on the Scottish Courts website, so the full story is not completely clear.  But it seems that Mr Cross specialises in equal pay cases against local authorities and charges clients 10% of whatever settlement he obtains for them, plus VAT.  The contract with clients also contains clauses covering the eventuality of clients changing their lawyer or otherwise terminating the contract, with charges of £500 for each period of six months during which Mr Cross acted for them, payment of his costs in the event of the case being won, and 10% of the compensation eventually achieved.  All this certainly smacks of the illegal pactum de quota litis and the unenforceable penalty clause, but in the absence of a published opinion it is not yet possible to say what the legal significance of the case may be.  Conditional fees of the type apparently used by Mr Cross are legal under certain conditions in England, but the position is of course different in Scotland, where it is lawful to agree that the lawyer gets paid only if the case is won (the speculative action) but not to fix a percentage of the client’s winnings as the amount of the fee.  It has been legal since 1990 for the lawyer and client to agree a percentage increase in the former’s fee in the event of success in the action (Law Reform (Miscellaneous Provisions) (Scotland) Act 1990 s. 36). 

The case in question was one where Mr Cross had begun to act for an Edinburgh City Council employee who had subsequently discovered that her trade union (Unison) was already dealing with her claim along with many others.  As a result, the employee terminated her contract with Mr Cross, who then claimed from her on the basis of the clauses in the contract described above.   It also seems that Mr Cross has acted for many other clients in Scotland.