The New CFA and DBA Regime Simon Edwards
CFAs post 1 April 2013 Section 58A (6) Courts and Legal Services Act 1990 (CLSA) provides that a costs order made in proceedings may not include provision requiring the payment by one party of all or part of a success fee payable by another party under a conditional fee agreement. Similar provision is made by the repeal of sections 29 and 30 Access to Justice Act 1999 in respect of ATE insurance premiums and the cost of trades unions etc undertakings as to costs. So, from then on the client will have to pay any success fee. For claims that are not claims for personal injuries as defined by CPR 2.3, the rules are still the same. The agreement must be in writing, it must not relate to proceedings that cannot be the subject of a CFA, it must specify the success fee and that success fee must not be more than 100%. For claims for personal injuries, there are new additional requirements pursuant to section 58 (4A) and (4B) CLSA.. Briefly, the success fee must be subject to a maximum limit and that maximum limit must be expressed as a percentage of specified descriptions of damages. Failure to satisfy the section 58 conditions will continue to render a CFA unenforceable.
The Conditional Fees Order 2013 Article 3 specifies the maximum percentage for all proceedings as 100% Article 4 specifies claims for personal injuries as those in respect of which there must be a cap. Article 5(1) specifies that at first instance the cap is 25% of the specified damages and 100% in all other proceedings (eg appeals) Article 5 (2) specifies the damages that are available for the capped success fee as general damages for pain suffering and loss of amenity and past pecuniary loss net of CRU. Interest does not appear to be included and there will be the problem of the very common situation of lump sum settlements. The Order is silent as to VAT. The explanatory note says that the success fee shall be limited to the maximum inclusive of VAT as does the explanatory memorandum. See; http://www.legislation.gov.uk/ukdsi/2013/9780111533437/memorandum/contents 58 (4B) requires the success fee to be subject to a maximum limit. To a client a fee includes the VAT. It will be a brave lawyer who seeks VAT on top of the 25% maximum especially as if he gets it wrong he gets nothing. The Order and section 58 make no explicit reference to counsel. The explanatory memorandum appears to proceed on the basis that the client s contribution the overall success fee will be limited to the prescribed amounts. The effect of section 58(2) is that a success fee is the amount by which fees of the person providing advocacy or litigation services is increased. Fees (for a solicitor) exclude expenses and, as between solicitor and client, counsel is an expense (ie a disbursement). Thus, can counsel claim a success fee limited to the 25% and then the solicitor pass that on to his client as an expense and at the same time claim from the client his own success fee limited to the 25%? The result of that in a big case with two counsel both on CFAs could be that 75% of GDs for PSLA and past pecuniary losses net of CRU could go on success fees. A strict reading of the section and Order makes that possible.
Exceptions Section 44(6) LASPO provides The amendment made by subsection (4) does not prevent a costs order including provision in relation to a success fee payable by a person ( P ) under a conditional fee agreement entered into before the day on which that subsection comes into force ( the commencement day ) if (a) the agreement was entered into specifically for the purposes of the provision to P of advocacy or litigation services in connection with the matter that is the subject of the proceedings in which the costs order is made, or (b) advocacy or litigation services were provided to P under the agreement in connection with that matter before the commencement day. The latter is designed to deal with CCFAs. If the legal representative provides litigation or advocacy services pursuant to a CCFA before the commencement date, then the success fee is recoverable. Note that the CA in Gaynor v Central London West Buses Ltd [2006] EWCA Civ 1120 held that a solicitor does not provide litigation services until (at least) the client has decided whether or not to pursue the claim. At paragraph 17 Dyson LJ went further and held that advising a client whether he has a good case and writing a letter of claim are not litigation services (although the latter was perhaps not necessary for the decision).
Legal Aid, Sentencing and Punishment of Offenders Act 2012 (Commencement No. 5 and Saving Provision) Order 2013/77 provides at Article 4; Article 2(1)(a) and (c) and article 3(a) and (c) (that bring into effect sections 44 and 46 LASPO preventing the recovery of success fees and ATE insurance premiums) do not apply to (a) proceedings relating to a claim for damages in respect of diffuse mesothelioma; (b) publication and privacy proceedings; (c) proceedings in England and Wales brought by a person acting in the capacity of (i) a liquidator of a company which is being wound up in England and Wales or Scotland under Parts IV or V of the 1986 Act; or (ii) a trustee of a bankrupt's estate under Part IX of the 1986 Act; (d) proceedings brought by a person acting in the capacity of an administrator appointed pursuant to the provisions of Part II of the 1986 Act; (e) proceedings in England and Wales brought by a company which is being wound up in England and Wales or Scotland under Parts IV or V of the 1986 Act; or (f) proceedings brought by a company which has entered administration under Part II of the 1986 Act.
There is, therefore, a stay of execution in relation to these types of claims. Section 48 LASPO requires a consultation before a change is made in diffuse mesothelioma cases. The exception in relation to certain types of insolvency related proceedings appears to be mainly for the benefit of HMRC, one of the largest creditors in insolvencies. The Recovery of Costs Insurance Premiums in Clinical Negligence Proceedings Regulations allow the recovery of as part of costs that part of an insurance premium taken out to cover the insured s liability to pay for experts reports obtained in relation to liability or causation unless the cost of the report is not allowed under the costs order.
Damages Based Agreements The effect of section 58AA CLSA is to create three categories of DBAs. Two are regulated by section 58AA, one is not. The one that is not is that class of DBA to which section 57 Solicitors Act 1974 applies and does not relate to an employment matter (that is to say non contentious business ).. The two that are regulated by section 58AA are DBAs that relate to an employment matter and all other DBAs A DBA is per section 58AA (3) (a); a damages-based agreement is an agreement between a person providing advocacy services, litigation services or claims management services and the recipient of those services which provides that (i) the recipient is to make a payment to the person providing the services if the recipient obtains a specified financial benefit in connection with the matter in relation to which the services are provided, and (ii) the amount of that payment is to be determined by reference to the amount of the financial benefit obtained Claims management services are defined by section 58 AA (7) as claims management services has the same meaning as in Part 2 of the Compensation Act 2006 (see section 4(2) of that Act). An employment matter is defined by section 58AA (10) for the purposes of (9) as; For the purposes of subsection (9) a damages-based agreement relates to an employment matter if the matter in relation to which the services are provided is a matter that is, or could become, the subject of proceedings before an employment tribunal Note that an employment tribunal has jurisdiction to hear a very wide variety of claims including employment contract claims limited to 25,000.
Damages-Based Agreements Regulations 2013 Section 58AA (4) requires a DBA to which the section applies to be in writing and to comply with the requirements specified by regulations made by the Lord Chancellor. These regulations contain those requirements. They are not a masterpiece of the draftsman s art. There is an explanatory memorandum that helps somewhat. See; http://www.legislation.gov.uk/ukdsi/2013/9780111533444/memorandum/contents Regulation 3 applies to all such DBAs. It provides; The requirements prescribed for the purposes of section 58AA(4)(c) of the Act are that the terms and conditions of a damages-based agreement must specify (a)the claim or proceedings or parts of them to which the agreement relates; (b)the circumstances in which the representative s payment, expenses and costs, or part of them, are payable; and (c)the reason for setting the amount of the payment at the level agreed, which, in an employment matter, shall include having regard to, where appropriate, whether the claim or proceedings is one of several similar claims or proceedings.
Regulations 5 to 8 apply to DBAs in an employment matter. Regulation 1(2) defines an employment matter as set out above. In summary, they require the giving of information in writing about specified matters and such further explanation etc as the client may request (regulation 5) That if there is an amendment to the DBA, that must be in writing and signed by both client and representative. (regulation 6) That the payment to the representative cannot exceed an amount including VAT that is equal to 35% of the sums ultimately recovered. (regulation 7) Payment is defined by regulation 1(2) as; payment means that part of the sum recovered in respect of the claim or damages awarded that the client agrees to pay the representative, and excludes expenses but includes, in respect of any claim or proceedings to which these regulations apply other than an employment matter, any disbursements incurred by the representative in respect of counsel s fees; So, in this case, the representative (defined as the person providing the advocacy, litigation or claims management services) can add expenses to the 35% including counsel s fees. So, can counsel also act on a DBA (or CFA) and his fees expressed either as a % of recoveries or as a fee plus success fee be added to the 35%?
Regulation 8 deals with what happens on termination. A client cannot terminate after settlement or within 7 days before the start of the tribunal hearing. If the client terminates, then the representative may charge only his costs and expenses for work done. The representative may not terminate and charge costs unless the client has behaved or is behaving unreasonably. There is a saving for the right to terminate under the general law of contract. That would cover refusal to act for example. So far as DBAs that are not in respect of employment matters to which the regulations apply, the only requirement apart from that it be in writing and comply with regulation 3 are as to the limits on payment set out in regulation 4. Regulation 4 provides;
Payment in respect of claims or proceedings other than an employment matter 4. (1) In respect of any claim or proceedings, other than an employment matter, to which these Regulations apply, a damages-based agreement must not require an amount to be paid by the client other than (a)the payment, net of (i)any costs (including fixed costs under Part 45 of the Civil Procedure Rules 1998); and (ii)where relevant, any sum in respect of disbursements incurred by the representative in respect of counsel s fees, that have been paid or are payable by another party to the proceedings by agreement or order; and (b)any expenses incurred by the representative, net of any amount which has been paid or is payable by another party to the proceedings by agreement or order. (2) In a claim for personal injuries (a)the only sums recovered by the client from which the payment shall be met are (i)general damages for pain, suffering and loss of amenity; and (ii)damages for pecuniary loss other than future pecuniary loss, net of any sums recoverable by the Compensation Recovery Unit of the Department for Work and Pensions; and (b)subject to paragraph (4), a damages-based agreement must not provide for a payment above an amount which, including VAT, is equal to 25% of the combined sums in paragraph (2)(a)(i) and (ii) which are ultimately recovered by the client. (3) Subject to paragraph (4), in any other claim or proceedings to which this regulation applies, a damages-based agreement must not provide for a payment above an amount which, including VAT, is equal to 50% of the sums ultimately recovered by the client. (4) The amounts prescribed in paragraphs (2)(b) and (3) shall only apply to claims or proceedings at first instance
So, the agreement must not require the client to pay (in respect of a solicitor) more than his fees (that is to say the agreed percentage), counsel s fees and expenses (in this case counsel is not an expense) but each net of anything in respect thereof that has been paid or is payable by another party to the proceedings by agreement or order. This is designed to prevent a representative claiming the percentage of damages and whatever is recovered from the other party by way of costs. So far so good. The new CPR 44.18(2) (b), however, provides that a receiving party who has entered into a DBA may not recover by way of costs from the paying party more than the total amount payable by the receiving party under the DBA for legal services provided under the agreement. On the face of it, this gives rise to an indemnity problem in some cases. If the receiving party is entitled to damages of say 10,000 which, in a personal injury case are all available for the payment of fees and expenses, subject, in the case of fees and counsel s fees to the 25% cap (as to which below) then, assuming no expenses apart from counsel s fees, the maximum that the client can be required to pay is 2,500 less what is paid or payable by the paying party. If the costs paid or payable were 2,000, then the most that the client can be required to pay is 500. In that case, pursuant to the indemnity principle, should the amount that the paying party has to pay be reduced to 500? If that happened, though, the amount that the client could be required to pay would increase to 2,000 being 2,500 less 500. So, by a circular route we get back to the amount assessed.
If the amount available is higher than assessed costs, the problem does not arise. To take an extreme example; available damages 100,000. Payment to solicitor 25,000. Assessed costs 10,000. Amount that client can be required to pay 15,000. Still more than assessed costs. So far as personal injury claims are concerned, at first instance, the only amount that can be recovered from the client is a VAT inclusive sum equal 25% of GDs for PSLA and damages for past pecuniary loss net of CRU. Expenses, other than counsel s fees, are in addition, but it does not appear that you can take interest on these sums into account. Again, this gives rise to obvious problems with regard to the very common situation of lump sum settlements. In relation to all other non personal injury and non employment DBAs, the sum is a VAT inclusive sum equal to 50% of the sums ultimately recovered by the client. This appears to include interest and costs. Again, expenses, other than counsel s fees are in addition. In proceedings other than at first instance, these limits do not apply, so the only limit is the overall one that derives from the definition of payment and the effect of regulation 4(1) (a) that limits the amount that the client can be required to pay to sums recovered in respect of the claim or damages awarded plus expenses (other than counsel s fees) but net of costs recoveries. The result of the overall limit is that if nothing is recovered, the client can only be required to pay expenses but not counsel s fees. That means that there is no scope for discounted fees in the event the client loses the claim and recovers nothing.
So far as how a court will assess costs in a DBA case is concerned, the new CPR 44.18(2) provides that in those circumstances the party s recoverable costs will be assessed in accordance with CPR 44.3 44.3 is the rule that governs assessment generally and includes the new proportionality test. The indemnity principle will apply so that a party will not be able to recover more than the percentage plus expenses (except counsel s fees). This gives rise to questions of how a detailed assessment will proceed. If the amount claimed is proportionate, will the court insist on a line by line assessment? How will costs budgeting work when the claimant is using a DBA?