What Constitutes a Fee Protection Agreement?
Fee Protection Agreements (FPAs) are written agreements between a firm of solicitors (or other providers of professional services) and a client in respect of the proposed services to be performed by the law firm and the fees to be charged by that firm.
Having reached a considered view as to the means by which the proposed services will be funded, the parties should enter into a FPA. Such an agreement confirms the role of the solicitor, and typically covers a number of areas including the nature and scope of the intended services , the fees payable, the timing for payment of fees and disbursements, rules and guidelines for the settlement of fees, dispute resolution, the term of the agreement, and anti-claw back and notice clauses.
FPAs are typically preconditions to the payment of any legal fees, and they are often signed and exchanged on or before the date of the facilities agreement (FA). In particular, lawyers, lenders and sponsors should ensure that a FPA is entered into and agreed by all the relevant parties.
Key Elements of Fee Protection Agreements
The essential elements of fee protection agreements include, but are not limited to, the following:
Parties
A fee protection agreement will set out all of the parties to the agreement and the parties to the transaction. This will usually include the financial institution lending the money and the company receiving the funds. In some cases, a fee protection agreement will involve a number of lenders.
Fees payable
Fees often come in various forms, including commissions, monitoring fees, and arrangement fees. Fees may be paid to various entities, such as a financial institution and an agent for the financial institution. A fee protection agreement will almost always set out which fees are covered by the agreement and which parties are entitled to them.
Duration
A fee protection agreement may be limited to the life of a single transaction, or it may apply to all transactions involving the parties (since often the same parties lend to the same companies on numerous occasions). The duration of a fee protection agreement is generally linked to the duration of the loans, and the agreement will usually specify whether the fees are earned upon closing or disbursing, or upon the early repayment of the loan.
Independent of other agreements
A fee protection agreement is often expressed to be independent of any other transaction documentation. This is important because if the loan documents, and for example the form of securities, refer to the fee protection agreement then it can inadvertently become part of the main transaction documentation. In such circumstances, if a court were to find that the fee protection agreement had been breached, it could rule that a lender’s right to collect the fees had been waived.
Filing of fee protection agreement
Some parties often require their fee protection agreement to be filed on a non-public basis on the public register maintained pursuant to the Personal Property Securities Act in addition to filing the relevant security. It is unlikely that a fee protection agreement will be regarded as a security interest per se, since it does not relate to a future event. However, despite this, a fee protection agreement may be ancillary to a larger transaction to secure the benefitting party’s fees.
Advantages of Fee Protection Agreements
The contractual fee protection agreement offers dependable financial cover and a comprehensive risk-management solution for both client and professional. Through these agreements, procedures are in place to manage the relationship between client and advisor / solicitor to ensure that all parties are satisfied prior to any work commencing. Clients are given peace of mind by knowing that they will not be facing any hefty legal fees if their solicitors cannot recover their costs later on. In fraud cases, where the funds have been misappropriated, these agreements are especially important to provide clients with the extra assurance that they will not incur legal fees during the recovery process. Fraud cases tend to last a lot longer than initially anticipated; sometimes clients may find themselves stuck for cash, and tapping into depleted financial resources can be particularly difficult and damaging to a claimant who is looking to show willing to pay legal fees when the evidence comes through. Some fee protection arrangements can extend past the litigation phase to encompass any enforcement actions. Pre-litigation advice on the strength of a possible case can also be covered as part of a fee protection arrangement with certain providers. In short, fee protection agreements provide clients and professionals with an equitable approach to settling the issue of payment and cover all eventualities.
How Fee Protection Agreements Operate
The structure of a typical fee protection agreement is as follows: The LLP will typically no longer be obliged to meet the costs or expenses of any claim, however arising, against the client. The other party, however, will agree to pay the legal costs and other properly incurred expenses of the defence of the claim as long as these are within the limits set out in the FFA and properly advanced to the LLP by the client in advance of the expiry of the relevant time limit. In circumstances where litigation is inevitable, the client will be asked to confirm that it is able in advance to meet both the costs of its own defence as well as any adverse costs liabilities that may be awarded against them.
It is in the preparation of the budget for the defence of the claim that the FFA is distinguished from most other types of defence funding. On the day of the service of the claim form in the event of a dispute, there will typically be insufficient time for the client and the LLP to formulate a detailed strategy for the defence of the claim and, as such, a provisional budget (which is often a best estimate) will be agreed. This is regularly reviewed.
Steps taken by the LLP and the insured with a view to mitigating the costs of defence (and, equally important, to avoid an award of costs if the claim is lost) must be properly documented in order that those costs can be recovered if a claim is subsequently made on the policy. This also ensures compliance with the terms of most types of FFA, which require the LLP to take all reasonable steps with a view to minimising the defence costs and to mitigate its losses.
Typically, the overall fees and disbursements of the LLP will be capped to a specified limit (under an Non Critical FFA – otherwise known as a "claims made" FFA). As the defence of the claim progresses the costs incurred (incorporating all number of factors including fee earners, billing rates and billing categories) will be monitored with a view to ensuring that the matter remains in budget. A list of the costs incurred in defending the claim are regularly provided to the insured in order that they can see the position as it develops.
Any decision to settle a claim should likewise be agreed between both parties although, in the event of a settlement being agreed with the Claimant, in circumstances where the defence is not involuntary (i.e. the defence has been neither conceded nor abandoned), the policyholder will typically be liable to pay the excess and usually responsible for meeting the costs of the settlement (albeit that these will usually be subject to recovery under the subrogation clause in the policy, subject to the limits of indemnity).
If you would like a copy of a typical non-critical FFA, please contact the insurance team.
Common Situations for Implementing Fee Protection Agreements
Fee protection agreements are commonly used in a variety of situations across many industries, signifying the broad versatility and importance of these contractual documents. Most often, fee protection agreements are used in conjunction with legal services. They afford clients the ability to instruct legal representatives to commence litigation on their behalf, or on behalf of other interested parties, without the need to pay the legal costs upfront.
In contract law, an issue may arise in connection with a consultancy project. For example, if a developer has engaged a consultant to undertake a specific project for a payment of fees, and the consultant requires a fee protection agreement, the agreement will act as an assurance that payment will be received once the work is completed . Once again, this is perfect for the client as it means there is no upfront cost to retaining the services of the consultant. The consultant needs to be aware, however, that there may be costs incurred throughout the consultancy project, and they will not receive these until the completion of the project. This could also present a problem where the client then refuses to pay the agreed fees at the end of the project, as they have already incurred the time – but not the money – to complete the project.
In the insurance industry, fee protection agreements may be requested by those pursuing settlement on an insurance claim. Similar to their use in the legal industry, this allows the claimant to benefit from a higher level of legal representation without the need to pay upfront for their solicitors.
Potential Issues with Fee Protection Agreements
The use of fee protection agreements is common in the walk-up, deal contingent law firm space. Some of the conflicts that can arise with these fee agreements can be mitigated through the use of a sophisticated credit agreement as opposed to an informal fee agreement.
1. Conflicts of Authority
Many disputes arise from one party exceeding its scope of authority. If no specific limits of authority are set, disputes can arise years later when another decision maker claims that the original decision maker had no authority to bind the company.
Mitigation:
The parties should formularize the decision making process for any fee arrangement and specifically define what actions require party approval.
2. Conflicts of Laws
The laws of multiple jurisdictions often conflict when it comes to authorizing payments to creditors. Many fee protection agreements choose a single forum, jurisdiction or governing law. This choice may not reflect the inherent multi-jurisdictional nature of the transactions the fee protection agreements often relate to.
Mitigation:
Consider allowing payment under the fee protection agreement in any jurisdiction whose laws do not prohibit the payment.
3. Conflicts of Interests
Conflict of interests requires a balancing act to ensure all parties are fairly compensated (including the lender). The legal fees that trigger the interest rate and application of that interest rate can be a sore point. Where disputes often arise is when the legal fees are in excess of the expected spend or if the legal services were not necessary with respect to the Chapter 11 process.
Mitigation:
If there is not already a robust approvals process, a robust pre-approval process should be added to the fee protection agreement. This step would go a long way toward ensuring that the parties are able to discuss whether the work is in scope and if not whether it is still necessary (and who could assume the cost).
Points to Consider when Drafting Fee Protection Agreements
In circumstances where the relationship between a fund and a fund manager is covered by a fee protection agreement, there are many factors to consider in the drafting of the agreement, not least because they represent a marked departure from the concept that a fund manager’s entitlement to fees under its investment management agreement (or other agreement) must be enforced through the recourse available against the underlying fund (and its assets). Written fee protection agreements can, however, undermine this. A key consideration when drafting such an agreement is whether the terms are in the best interest of the fund. Consideration should be given to how likely a fund manager is to exercise its rights only as a last resort and the extent to which certain potential trigger events could affect the focus of a fund manager in the short and medium term. Other considerations will require greater focus in certain sectors than in others – for example , to what extent would any arrangements offer unwelcome comparables to competitors of the fund manager in securing inward investment? Are the fund manager’s demands reasonable or are they too "pushy"? These are all points that need to be considered carefully and balanced with the bargaining power of the fund manager when looking to negotiate and draft a fee protection agreement. Drafting the fee protection agreement itself would be relatively straightforward – but it can be difficult to resist the protocols developed in the context of high value mergers and acquisitions transactions and to take a more customary approach such as the model set out below (which is based on English law). Fee protection agreements will only work if they are clear and can be enforced with certainty – a failure to consider the points above may result in the agreement being rationalised in the future by the courts to reflect its true intention.