The use of conditional fee agreements in managing construction disputes

From 4 May 2022, parties can enter into conditional fee agreements (“CFA”) with law firms in Singapore. These agreements were previously not allowed in Singapore due to common law’s prohibition against contracts for maintenance and champerty. With the new Part 8A of the Legal Profession Act 1966 (“LPA”) (as amended by Legal Profession (Amendment) Act 2022), lawyers and clients now have greater flexibility in structuring their fee arrangements.

CFA and what it covers

A CFA is essentially a fee agreement which specifies the circumstances and amount payable for legal fees incurred in respect of contentious proceedings. Such agreement may also include an “uplift” fee, i.e., payment of an amount that is higher than the legal fees otherwise payable, if certain agreed circumstances are met.

Parties are free to specify what these circumstances can be. Possible permutations include payment of more legal fees if the lawyer is successful, and payment of less or no fees if the lawyer is not[2].

At present, CFAs are applicable only for “prescribed proceedings”. These are namely:

1. arbitrations (whether based in Singapore or not);

2. court proceedings (whether in Singapore or not) that are arising from or out of or in any way connected with arbitrations, including but not limited to applications to stay court proceedings in favour of arbitration, and applications for the enforcement of arbitration agreements or awards;

3. proceedings in the Singapore International Commercial Court; and

4. mediation proceedings arising out of, or in any way connected to (i), (ii) and (iii).

The Legal Profession (Conditional Fee Agreement) Regulations 2022 also prescribe certain information which the law firm must communicate to the client before parties enter into a CFA[3], and certain terms and conditions which must be included in a CFA[4].

Utilising CFA in pre-arbitral steps / proceedings

A CFA can cover legal fees incurred prior to the commencement of arbitrations. The fees under a CFA can include costs incurred for “preliminary and preparatory advice and other legal services” for the purposes of the prescribed proceedings, even if they are incurred before the commencement of the prescribed proceedings: see Section 115B(6) of the LPA.

Construction contracts with multi-tiered dispute resolution processes could benefit from such fee arrangements. To minimise costs, contractors and/or employers of a construction project often rely solely on its in-house resources to navigate these clauses and the pre-arbitration proceedings. It is not uncommon to see parties defer legal advice or representation for as long as possible to avoid incurring legal costs, sometimes to parties’ detriment. With Section 115B(6) of the LPA, parties can now manage the costs of engaging legal advice / representation to deal with the dispute at a much earlier stage under a CFA as part of the legal services rendered for the purpose of an arbitration, allowing a more holistic approach to managing the dispute and arbitration proceedings.

For instance, dispute resolution clauses in standard form contracts require parties to refer contractual disputes during the lifespan of a project to a dedicated contract administrator for determination. An example in Singapore is the Public Sector Standard Conditions of Contract for Construction Works (8^th Ed, July 2020) (“PSSCOC”). Clause 35.1 of the PSSCOC requires a dispute to be first referred to the Superintending Officer (the “SO”), or the SO’s Representative for a decision. A party can refer the dispute to arbitration only if it is dissatisfied with the SO’s decision, or if the SO fails to give notice of his decision before the contractual deadline to do so. The party has to do so within 90 days from either the date of receipt of the SO’s decision, or from the expiry of the deadline (as the case may be).

As the reference to the SO is a pre-condition to arbitration, legal services rendered during such a process could arguably fall within the plain reading of Section 115B(6) of the LPA. The possibility of managing these costs through a CFA may encourage parties to seek legal advice earlier to manage the dispute rather than on the eve of arbitration.

Dispute board proceedings are another common step in construction dispute resolution clauses. They are often (though not exclusively) seen in Fédération Internationale des Ingénieurs-Conseils (FIDIC) conditions of contract. A dispute board is a neutral panel, often comprising of one to three appointed members, with the task of adjudicating and resolving project specific disputes within a contractually stipulated time period. The FIDIC standard forms[5] contemplate the reference of disputes to a dispute board prior to the commencement of arbitration. Where these processes are a pre-condition to commencing arbitration, there is a basis to include the legal costs incurred within a CFA. A properly structured CFA could help parties manage the legal costs of these earlier dispute board proceedings as part of a wider arrangement to manage the legal costs for the construction disputes / arbitration.

Conclusion

The introduction of CFA comes at an apt time. With the construction industry still recovering from effects of COVID-19 (see our article here), contractors now have the option of CFAs to help prosecute claims. Those, in particular with cashflow issues, are likely to benefit the most from such arrangements. They now have an additional option to pursue their claims, which otherwise they would have previously abandoned or forced to settle at a steep discount.

Please do not hesitate to contact us if you would like to discuss any of the issues considered in this article.