Success fee arrangements in the UAE…how successful?

June 2024

The Federal Decree No.34 of 2022 introduced changes to the legal position of success fees. Amr Bajamal, partner at NHB Legal, considers the current reality of fee arrangements in the light of the development and if it has affected change in the offering of services.

This marks my first contribution to the Oath Magazine, which will be the beginning of a series of articles through which I look forward to sharing my views on a range of legal topics. I enjoy exploring these and hope that the readers will find them both entertaining and insightful.

The topic of choice for this article is success-based fee arrangements for law firms in the UAE. Having crossed the first anniversary of the full legalisation of success fees for lawyers at a federal level, it is a good time to look at the legislative and commercial aspects of these arrangements in the ever-evolving UAE legal industry, with a view to shedding some light on an area with which many clients remain largely unfamiliar. There are many terms used to describe success fee arrangements such as ‘alternative fee arrangements’, ‘no win no fee’, and ‘contingency fees’, each of which continues to describe various fee structures that revolve around the concept of litigation lawyers being paid an agreed fee conditional on the outcome of the proceedings before the courts or in arbitration. For clarity, this article adopts the term ‘success fees’ as a reference to any form of fee arrangement where lawyers or law firms agree to provide representation services in consideration, in whole or in part, of receiving a portion of the value of the judgment or award the client seeks to recover, payable upon collection.

Historically, the legal profession in the UAE was regulated at a federal level under Federal Law No.23 of 1991 for Organising the Advocates Profession. Pursuant to Article 31 of the law, it was prohibited for a lawyer to have an interest in the outcome of proceedings handled on behalf of a client. The vast majority of case law passed over decades showed that the courts interpreted this provision to include a prohibition on lawyers entering into success fee arrangements. The rationale behind such an interpretation was mainly that, by being allocated a portion of the amount sought to be recovered, a lawyer carries a personal interest in the outcome of the proceedings. The court precedents also show that a balanced approach was adopted upon finding invalidity of success fee arrangements. Rather than the legal practitioner being deprived of any fee entitlement, the courts mandated a reevaluation of the time and effort spent by the practitioner to arrive at a fair assessment of a lump sum fee, which would still be awarded to the practitioner or law firm.

This traditional approach to interpreting the 1991 law was also contrasted by a more flexible approach adopted in other court precedents. In another line of court precedents, the prohibition was narrowed down to only include fee arrangements under which the payment of the success fee is to be made upon collection of the amount recovered. Pursuant to this interpretation, if the client was contractually obliged to pay the success fee upon a judgment or an award being rendered, as opposed to the amount being actually recovered by the client, the arrangement was considered valid.

The enactment of Federal Decree No.34 of 2022, which came into force on January 2, 2023, introduced a complete overhaul of the legal position on success fees. Article 49 now expressly permits success fee arrangements with a maximum cap of 25 per cent of the proceeds sought to be recovered by the client. This was certainly a game-changer from a legislative perspective. However, the question remains – how has the industry reacted to this legislative change? Are these arrangements being offered to clients in practice?

Given the usually confidential nature of legal fee arrangements, it is not possible to answer these questions with a great degree of certainty. However, interactions with practitioners and clients, together with information shared during industry events, provide insights into the current situation. These observations suggest that success fee arrangements are only being considered by law firms for limited types of claims and clients. The majority of these are construction-related claims, insurance claims, and large-scale portfolio debt recoveries.

In my view, such limited application of success fee arrangements is attributable to several reasons which include: (a) law firms’ essential need to generate guaranteed cash flow to maintain commercial viability, (b) the lack of implementation of practical assessment tools/processes that enable law firms to assess the success rate of claims, (c) the absence of communication mediums through which clients can gain more awareness of the availability of success fee arrangements as well as post their potential mandates.

Law firms are naturally for-profit enterprises that need to maintain a balance between the number of mandates carried under regular and success fee structures. Otherwise, firms would struggle to meet their basic survival needs. With that said, there is still considerable room to offer success fee arrangements while maintaining commercial viability. Equally, the fact that each law firm is only able to offer the arrangement as a limited percentage of the overall number of mandates it accepts each year means that there is a market share for anyone willing to participate. This should also contribute to providing clients with a healthy range of choice when selecting a firm.

However, having the willingness and appetite to offer success fee arrangements is hardly enough for a law firm to convert the concept into a workable model. The real test is how you put the offering into an efficient and practical framework that can be applied consistently and enhanced as the firm goes through the learning curve. The most basic requirement is for firms to implement a clear assessment criterion that assists them in assessing the viability of each claim from both the legal and subject matter perspective. An efficient assessment manual will go a long way in reducing the time needed to accept or reject a mandate, as well as gaining the much-needed confidence to keep success fees as a permanent offering. Of course, no assessment would be complete without expert knowledge in the subject matter field of the proceedings. As such, it is important for firms to have collaborations with experts in the most relevant fields, such as construction, finance, and forensics.

Of equal importance to having a unified legal and subject matter assessment of claims is clear communication. Firms should have an open communication channel, for example on their websites, about whether they offer success fee arrangements and, if so, outline their broad criteria for accepting mandates. When meeting with clients to discuss the topic, the conversation should not be surrounded by vagueness and the usual “it depends” answer. Clients should be presented with a clear step-by-step explanation about the eligibility criteria, together with what happens next if the mandate is eligible.

Lastly, even if you do tick all the above boxes, you would still have one problem: how do you actually connect with clients who are interested in success fee arrangements? Thinking outside the box of traditional marketing avenues, there is one possible solution. Law firms with an interest in offering such fee arrangements should collaborate to establish an online platform that enables clients to confidentially post current mandates for which they seek success fee arrangements. Depending on capacity and interest, law firms can choose whether they would like to pitch for the mandate. Sounds simple, right? Yet, to the best of my knowledge, no one has taken steps to create such a platform.

To conclude, given the legislative change, success fee arrangements in the UAE are here to stay. However, evolving them into a well-tailored legal product will depend on the industry being able to create some structure and marketability around them.

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