Challenges to Solicitors charges in the post Jackson era

Challenges to Solicitors charges in the post Jackson era Keith Hayward Victory Legal Costs Solicitors Tel: 0844 980 1690 Fax: 0844 980 1691 Web: www.victorylegal.co.uk E-Mail: keith.hayward@victorylegal.co.uk

The new Jackson era has introduced some significant changes to the litigation funding landscape. We now have a new method of funding in Damages Based Agreements (DBAs). Clients must now fund success fees and ATE premiums from their damages as they cease to be recoverable inter partes. Client protection regulations and orders have been introduced for both DBAs and CFAs respectively that must be complied with in order to have a valid retainer. These changes raise two important questions that all litigators need to carefully consider: 1. Will defendants seek to challenge the validity of retainers now that we have the CFAO 2013 and the DBA regulations? 2. Will clients seek to challenge their own solicitor where they are not happy with deductions made from their damages? The answer to both questions is almost certainly yes! Practitioners will need to carefully consider what steps can be taken to protect themselves as far as possible against these risks. This paper seeks to explore these risks and the steps that can be taken. Challenges by Defendants In order to consider what the future might hold it is first necessary to review the past. In April 2000 success fees and ATE premiums became recoverable from Defendants for the first time. As a result aggrieved liability insurers found themselves paying up to double the usual fees. The reason for the change was to allow access to justice following the removal of legal aid for personal injury claims. The consequence of this reform was the start of the costs war. Specialist Defendant costs firms entered the arena to run challenges to reduce the impact of the reforms for the insurers. It was not long before they sought to exploit the CFA regulations 2000, as failure to comply resulted in an invalid retainer. Numerous technical challenges were run, many all the way to the Court of Appeal. In an attempt to stem the satellite litigation on 1 November 2005 the CFA regulations were abolished. Client protection became solely a matter of professional conduct between the solicitor and client. That did not stop an attempt in Garbutt v Edwards by the paying party to argue that they should be allowed to rely upon breach of professional conduct rules and stand in the client s shoes, but without success. So did the abolition of the CFA regulations 2000 end the costs war? Absolutely not! Whilst there may have been a truce over retainer arguments, there have been numerous challenges to costs brought before the courts post 2005 notwithstanding the abolition of the CFA regulations. The Defendant costs firms, at least in the personal injury world, remain instructed to deal with any challenge they can run in order to reduce the receiving party s liability. It therefore seems inevitable that the truce in the battle over the validity of retainers is about to be lifted and once again added to the paying party s armoury in their quest to reduce insurer s outlay. To avoid the risk of an invalid retainer litigators must ensure that the legislation is complied with. Thankfully the Conditional Fee Agreements Order 2013 ( CFAO 2013 )

is much less onerous than the 2000 regulations. Nevertheless there are traps for the unwary. To summarise the legislation, in order to have a valid and enforceable CFA the agreement must be in writing and not relate to family and crime, and if a success fee is charged that success fee cannot be more than 100% of base costs. In addition in personal injury claims a cap must be imposed on the success fee so that it cannot exceed 25% of damages at first instance and 100% of damages in any other proceedings, namely any appeal. For the purposes of calculating the cap the damages to which these percentages are to be applied must exclude future pecuniary loss, and be net of any recoverable CRU benefits. Whilst the CFAO 2013 does not say so in the order itself, the notes state that the percentage should be inclusive of VAT. Where counsel is to be used on a CFA, consideration needs to be given to how counsel s success fee will be charged to the client and whether it is included in the cap or will be charged in addition. Whilst it was the government s stated intention that it should be included within the cap, the CFAO 2013 is silent on the point. Consequently charging counsel s success fee in addition will not invalidate the retainer. Note that there is no restriction whatsoever on what can be charged for base costs, as the statutory cap in the order relates solely to the success fee. The retainer will be valid as long as the success fee is capped as prescribed even though the agreement provides for the client to be liable for the shortfall in base costs not recovered inter partes. This will be the case even though this could in theory eat up the rest of the compensation in its entirety. Consequently any consumer protection intended by this cap is entirely meaningless. In March 2013 the Law Society published their model CFA for use in personal injury claims. However the agreement failed to recognize that there are two 100% limitations on success fees referred to in the CFAO 2013. First there is the maximum increase on base costs permitted, and secondly in personal injury claims a cap of up to 100% of damages (as defined) in relation to appeals. The Law Society s agreement covers appeals made by defendants but only imposed the 25% cap at first instance. There was no cap at all should the defendant appeal. This meant that the success fee, which could be 100% of base costs, was capable of exceeding 100% of damages on any appeal, and was thus in danger of falling foul of the legislation. In May 2013 the Law Society posted a revised agreement on their web site with very little publicity to rectify this fundamental error. As a result there may well be many firms around the country who adopted the first draft agreement without appreciating this error, or being aware of the revision. All solicitors who are using the Law Society Model Agreement are encouraged to check immediately, and if they find they are using the March agreement they should consider rectifying the position by entering into a new retrospective CFA as quickly as possible, and certainly before the case settles. Another area ripe for challenge is where a solicitor changes firms and takes cases with them, or where a firm sells its caseload to another firm, and in either case the CFAs are assigned with the intention of avoiding a new CFA with a view to retaining the right to recover the success fee inter partes. It is likely that paying parties will seek to challenge

the validity of any assignment, which if successful could result in there being no valid retainer in place. Alternatively the new arrangement might be held to be a novation and in effect a new agreement from the date of the purported assignment resulting in the success fee not being recoverable. Solicitors need to be very careful how this is dealt with should they seek to take an assignment of an existing CFA, and should consider specialist advice on the best way to minimize the risks involved. What is the position with Damages Based Agreements? This is an agreement where the solicitor charges the client a percentage of damages regardless how much time has been spent on the case. Just like CFAs, failure to comply with primary and secondary legislation will result in there being an invalid retainer. The primary legislation is Section 58AA Courts and Legal Services Act 1990, which makes such agreements unenforceable if either the primary or secondary legislation is not complied with. The secondary legislation is the Damages Based Agreement Regulations 2013. The regulations have received wide scale criticism. The Law society issued the following warning: The society has serious concerns about the drafting of the DBA regulations and the enforceability of such agreements in certain situations. We understand that the Ministry of Justice (MoJ) is considering suggestions which have been put to them for improvements. Consequently the Law Society has temporarily suspected work on a model DBA until such times as we can obtain further clarification from the MoJ. In the light of this we urge members to think very carefully about entering into such agreements with their clients until such time as the regulations have been amended. If notwithstanding this warning a solicitor still decides to use a DBA they do so at their peril and must ensure they comply with the regulations to have a valid retainer. The solicitor will need to study the legislation and the regulations to satisfy themselves as to what they believe they mean as they are not clear and appear in part to be contradictory. Some of the key problem areas to note are as follows: The maximum contingency fee that can be charged is 25% of damages in personal injury, 35% in employment matters and 50% in all other matters. The percentage must be calculated on the damages net of future pecuniary loss and CRU benefits and must be inclusive of VAT. There are specific requirements as to what must be set out in the agreement in all types of DBAs. The agreement must specify the claim or proceedings that the agreement relates to; the circumstances in which the representative s payment, expenses and costs (as defined below), or part of them are payable; and the reason for setting the amount of the payment at the level agreed. 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, (other than an employment matter), counsel s fees.

Expenses means disbursements incurred by the representative, including the expense of obtaining an expert s report and, in an employment matter only, counsel s fees. costs means the total of the representative s time reasonably spent, in respect of the claim or proceedings, multiplied by the reasonable hourly rate of remuneration of the representative. As can be seen above, how counsel s fees are to be dealt with in the agreement in order to comply with the regulations will depend on the type of case and whether it is an employment or a non employment matter. In non employment matters a DBA must not require an amount to be paid by the client other than: the payment, net of any costs (including fixed costs under Part 45); and counsel s fees, that have been paid or are payable by another party to the proceedings by agreement or order; and 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. The fact that the agreement must specify the circumstances where the solicitor is seeking to charge costs, chargeable on an hourly rate, would suggest that it is permissible to actually do so. But the regulations then say that for non employment matters the solicitor must not charge the client anything other the payment, which is the contingency fee, net of any recoverable costs from the paying party. Any attempt to charge the client at all upon termination would appear to breach the regulations. Indeed charging the client anything at all would appear to breach the agreement unless sums have actually been recovered. Consequently if the agreement defines the client s liability as win this might not be compliant unless win is defined as actually receiving the compensation. Practitioners are not permitted under the regulations to charge the client the full percentage where costs are recoverable inter partes. The solicitor is only permitted to charge the client the percentage net of any costs paid or payable by the losing party, regardless as to whether they are actually paid. This means that the sums the solicitor can charge will not be known until costs have been agreed or a detailed assessment has taken place. Great care needs to be taken to word this correctly. In employment matters certain information must be given to clients in writing prior to entering into a DBA which are remarkably similar to the old regulation 4 of the CFA regulations 2000. The payment in an employment matter can be up to 35% of any award inclusive of VAT. Unlike non employment matters there is specific provision within the regulations for termination providing the regulations are complied with (see regulation 8). DBAs remain a minefield of uncertainty and are best avoided until the regulations are reviewed and amended.

Challenges by clients Government policy is that clients should have an interest in costs and the funding of their claims. Where clients are paying for legal services, complaints are likely to follow. The Legal Ombudsman has reported that cost disputes remain the single largest source of complaints that they deal with. As a result they have produced booklets to assist both the public understand more about funding, entitled ten questions you should ask your lawyer about costs, and the profession to understand what is expected of them called an ombudsman view of a good costs service. Both of these can be found on their web site and are essential reading for practitioners who wish to avoid complaints. The Ombudsman has recently published a report in which he expressed concern about CFAs. The report confirms that between November 2012 and November 2013 8% of complaints related to CFAs, and financial remedies were made under the ombudsman scheme during this period of just under 1,000,000 where they found poor service. We are now likely to see this percentage increase with clients now losing part of their compensation. If a client is unhappy about a solicitor s charges they have the following options: 1. Use the firm s complaints procedure; 2. Where the complaint is not resolved the client can complain to the Legal Ombudsman; 3. If the complaint includes professional conduct issues the client might, or indeed the ombudsman might, refer the matter to the SRA; 4. Apply to court for a solicitor and own client assessment; 5. Seek independent advice elsewhere Howsoever a client chooses to proceed, practitioners will need to demonstrate compliance with the SRA s code of conduct 2011, and in particular the following core principles: Act with integrity Not allow your independence to be compromised Act in the best interests of each client Behave in a way that maintains the trust the public places in you and in the provision of legal services Where the client applies to court for a solicitor and own client assessment, Part 46.9 provides that the bill will be assessed on an indemnity basis. Under 46.9(3) there is a rebuttable presumption that costs are reasonable if they have been incurred with the express or implied approval of the client, and unreasonably incurred if they are unusual in nature or amount and the solicitor did not tell the client that as a result the costs might not be recoverable inter partes. Paragraph 6.1 of PD46 makes it clear that this information must be given to the client before the costs are incurred.

Many firms are now charging high hourly rates with a 100% success fees in every case with the intention of maximizing their chances of reaching the cap. In lower value cases where the cap would apply anyway if lower rates had been charged, it may not make any practical difference. But in multi track cases it can potentially make a significant difference to what the client has to pay. Can a firm who has charged an unqualified fee earner out at for example 400 per hour with a 100% success fee in an RTA shunting accident satisfy the ombudsman, or indeed the SRA, that they have complied with the core principles set out above? On a solicitor and own client assessment the practitioner will no doubt argue that both the hourly rate and success fee was expressly agreed with the client and thus presumed reasonable. But there must be a risk that if the court take the view that a high hourly rate cannot be justified in any particular case that they find the excessive element to be unusual in nature or amount. Where this is the case they will no doubt want to see what the client was told could be recovered inter partes at the time the agreement was entered into. If the solicitor gave inadequate information about this, the shortfall over and above what the court consider is reasonable may well be presumed unreasonable and could be disallowed on assessment. Even where they did provide the required information, the presumption that the costs are reasonable can still be rebutted. Now that the government has seen fit to reintroduce consumer protection regulations for both CFAs and DBAs, clients who are unhappy about deductions made from any award will now have the ability to investigate whether they have an unenforceable retainer. Unlike challenges made by the paying party, there will also be no issue over disclosure of the agreement for obvious reasons. Should the client seek independent advice it is likely that the retainer issue will be examined carefully. To avoid this possibility solicitors would do well to ensure that any complaint is resolved within their own complaints procedure wherever possible. Whenever the SRA or the Ombudsman are involved they will be looking at compliance with the code of conduct. In addition to the core principles referred to above practitioners should take note of the following outcomes that are to be achieved and the indicative behaviours set out below and ensure that they can demonstrate compliance: Outcome 1.1 you treat your clients fairly Outcome 1.6 you only enter into fee arrangements that are legal, and which you consider are suitable for the client s needs and take account of the client s best interest. Outcome 1.12 clients are in a position to make informed decisions about the services they need, how their matter will be handled and the options available to them. Outcome 1.13 Clients receive the best possible information, both at the time of engagement and when appropriate as their matter progresses, about the likely overall cost of their matter. Indicative behaviour 1.13- Discussing whether the potential outcomes of the client s matter are likely to justify the expense or risk involved, including the risk of having to pay someone else s legal fees.

Indicative behaviour 1.14 Clearly explaining your fees and if and when they are likely to change. Indicative behaviour 1.15- Warning about any other payments for which the client may be responsible. Indicative behaviour 1.16- Discussing how the client will pay, including whether public funding may be available, whether the client has insurance that might cover fees, and whether the fees may be paid by someone else such as a trade union. Indicative behaviour 1.17 Where you are acting under a fee arrangement governed by statute, such as a CFA, giving the client all relevant information relating to that arrangement. Indicative behaviour 1.19 Providing the information in a clear and accessible form which is appropriate to the needs and circumstances of the client. There are many possible reasons why a client might be unhappy with the sums they are ultimately charged by their solicitor. Listed below are some of the issues that solicitors might face: 1. The client did not realise how much the costs had reached as they had not been kept informed Outside of the personal injury arena litigation practitioners will undoubtedly be used to keeping clients informed on costs, particularly where they are interim billing. But most personal injury practitioners acting under a CFA have not had to worry about this for many years where most clients have kept 100% of their compensation, and any failure to keep a client informed of the costs incurred had no practical consequence for the client. But now there has to be a change of mind set. It is the writer s experience to date that many personal injury practitioners are not taking this fundamental change seriously. Many proceed on the basis that the client is expecting to lose 25% of their compensation anyway. This is a dangerous assumption. All practitioners must be in control of the costs that are being incurred and must keep clients informed. If the final bill takes a client by surprise, the solicitor should not be surprised if the client complains. In multi track cases practitioners will need to budget in any event as formal budgets need to be produced. Clients need to be brought into that process and kept fully informed. If the court impose a restrictive budget the client needs to know, and a discussion needs to be had with the client to discuss the extent to which that budget will need to be exceeded to win the case, as the client will be paying that shortfall out of their damages. A failure to keep a client informed is likely to result in a complaint being upheld. The Ombudsman has given the following guidance:

Consumers will almost always want to know what the total cost of their case is likely to be. A lawyer should use their best judgement to provide an estimate. We recognise that in cases where litigation is likely, it may not be easy to give a precise answer. However, we believe it s important to manage customers expectations about the possible cost range. We will ask whether an estimate, however cautious, was given. We would expect that estimate to give the customer the best information and take into account information and conditions specific to the case. We know an estimate differs from a fixed fee, but not all customers understand this distinction. We therefore look for evidence that this has been explained. An estimate being exceeded would not necessarily constitute poor service, but we would normally expect to see reasons for this and look for evidence that the customer had been warned beforehand that this would happen. We would expect lawyers to know the estimate is being reached and advise the customer accordingly as they may want to change instructions on how to proceed in light of the information. 2. The client is unhappy with the hourly rate as they did not realise that a much lower hourly rate was recoverable inter partes. Where a solicitor has significantly increased their normal hourly rate with the intention of charging the client the shortfall to maximise the chance of reaching a 25% cap, have they complied with the core principles? There must be a risk that the ombudsman and/or the SRA might feel that the firm has not. Will an SRA investigation show that lower rates are charged in other departments by the same level of fee earner? If this is the case firms will need to be ready to justify this to the SRA. Where an hourly rate is being charged that is unlikely to be recoverable in full inter partes, not only must the solicitor be able to justify that the rate is reasonable, it is also important to explain to a client the likely hourly rate that can be recovered in writing so that they are aware of the shortfall. It should also be borne in mind that on a solicitor and own client assessment, even where there is a presumption that the hourly rate is reasonable because it was expressly agreed with the client, this is a rebuttable presumption and the court has the power to reduce the same on a solicitor and own client assessment. Burying this information in the small print may well be held by courts to be insufficient and enough to justify a court rebutting this presumption. 3. The client did not really understand how the success fee was calculated and now feels the percentage was far too high If the practitioner charges 100% in every case will that comply with the core principles? How will they justify this to the SRA? Will that be treating the client fairly? There is no requirement in either the primary or secondary legislation for the practitioner to carry out a risk assessment for setting a success fee. Some commentators

have suggested that the absence of such regulation justifies charging 100% in every case. However, the writer suggests that the court is unlikely to agree. The absence of such a requirement in the legislation simply means that a failure to assess the risk cannot invalidate the retainer. It is quite clear that the court has the power to reduce the success fee on a solicitor and own client assessment. Part 46.9(4) states that when assessing the success fee on a solicitor and own client assessment the court will have regard to all the relevant factors as they reasonably appeared to the solicitor when the conditional fee agreement was entered into. Indicative behaviour 1.17 suggests that all relevant information needs to be given to clients in relation to CFAs. It would seem highly likely that both the Ombudsman and the SRA may well consider that this would include telling a client how the success fee has been calculated. Whilst this may only be an indicative behaviour and not mandatory, the basic principle here is that clients should make informed decisions and fees should be transparent. A failure to provide this information may well result in any complaint being upheld. The Law Society s model agreement contains a brief list of the general factors taken into account when setting success fees, but does not deal with case specific risks. The writer strongly recommends that the practitioner sets the success fee at a level that can be justified to the ombudsman, SRA or to a judge on assessment, and sets out the reasons for setting that success fee to the client in writing for transparency. In the Ombudsman s guidance it says this: A customer should never be surprised by the bill he or she receives from a lawyer. However, it is clear that some customers who come to the Legal Ombudsman have failed to understand the basis on which they were billed. This is not helped by the different sorts of charging structures lawyers currently offer: fixed fee, hourly rate, conditional fee and so on. Each of these is different and each has advantages and disadvantages from the customer (and lawyer) perspective. Whatever charging structure a lawyer uses, we would expect the lawyer to explain how it works and what it does and doesn t include. It must be crystal clear. 4. The client was not consulted before the solicitor accepted an offer for costs from the paying party and the client was deprived of their right to proceed to assessment It is a common misapprehension amongst solicitors, particularly with personal injury practitioners, that costs belong to the solicitor. They do not. Costs belong to the client who is entitled to an indemnity from the paying party against their own liability to pay their own solicitors costs. That indemnity is limited by the extent to which the costs have been reasonably and proportionately incurred. For this reason if the client is not involved in the final decision to accept a figure from the paying party where the solicitor charges the client the shortfall, the solicitor will be vulnerable to a complaint on the basis that the solicitor has acted without authority and as a result the client has suffered a loss of chance of recovering more on assessment.

5. It was not made clear to the client the level of costs that would be incurred by rejecting the offer and going to trial, which meant the client was worse off than if they had accepted the offer A costs benefit analysis should be carried out throughout the litigation to justify all steps taken. Where an hourly rate is higher than can be recovered inter partes and that rate is then doubled by a 100% success fee it soon becomes clear how important it now is to ensure that the client makes an informed decision about what it will cost to proceed and what the possible outcomes might be should offers be rejected. The Ombudsman s guidance says this: There are various ways that a case can be progressed. Each of these ways has advantages and disadvantages and each has potential cost implications. Lawyers have a responsibility to give consumers the best possible information and advice so they can choose the way of dealing with their case that suits their needs. We expect lawyers to advise consumers about their options, by providing a cost benefits analysis, so they understand the choices available to them. It will allow them to make informed decisions about whether it is in their best interest to continue with a case and if so, how they should proceed. Although consumers are often making a guided choice, it is important they understand why the lawyer is recommending one particular course of action and what the costs implications are. This should happen before any work starts and it should be updated, when appropriate, as the case progresses. Good recording of what has been agreed often resolves disputes before they become a major disagreement. 6. Other methods of funding were not properly explained. It would have been cheaper to have used a DBA Clients should make informed decisions about what method of funding is suitable. The ombudsman has given the following guidance: Funding arrangements should be fully discussed before the service begins. We will look for evidence that the lawyer has discussed funding options such as insurance, unions and legal aid (even if in the latter case, the lawyer in question isn t registered to provide the service and by doing so they may potentially lose business) There is no reason why DBAs are any different even though the practitioner does not offer this as a method of funding. Failure to explain it properly to a client may well result in a complaint being upheld. In certain circumstances with a DBA a client will be able to keep all of their compensation if they had used a DBA due to the fact that the indemnity principle applies, and the paying party will not pay more than the contingency fee, and the sums recoverable must be set off against the contingency fee charged.

7. Other methods of funding were not properly explained. The client had legal expenses insurance which would have been cheaper This is the age old problem that practitioners are concerned about losing the client to the legal expenses insurer s panel solicitors if the client tries to use the insurance. But this does not change the fact that the solicitor has a professional obligation to consider this with the client so they can make a considered decision. But in the post Jackson era it is not a foregone conclusion that using legal expenses cover will not cost the client anything. Legal expenses insurance may well be evolving. Panel firms can no longer pay referral fees to the insurers, and this may well affect the level and type of cover offered. There is certainly some evidence to suggest that with certain policies the client will still lose 25% of their damages. 8. The client received nothing because thy failed to beat a Part 36 offer at trial and did not realise that they could have purchased ATE insurance. It is important that clients fully understand the risks they are taking in terms of adverse costs. Whilst QOCS will apply in the personal injury arena, clients still need to understand the circumstances in which they can be held liable, and what their options are. ATE insurance should be explained to clients at the outset so they can make an informed decision whether to purchase it or not. Practitioners need to decide whether the client will pay the premium over and above any cap applied or whether the premium will be included in the cap. Either way this needs to be explained to clients. Some firms are telling clients that they will consider insurance with the client as and when it becomes necessary. But premiums taken out during a case are likely to be more expensive. Furthermore clients need to understand who will be funding unrecovered disbursements. If the client remains liable then of course they will not be able to claim for any disbursements incurred prior to the policy being taken out. If clients are to make informed decisions it should be the client who decides whether to take out insurance and when. Acting for children Where practitioners act for children, the courts should approve any settlement. The court s role is to protect the child and to ensure any settlement is appropriate. But what view will the court take in terms of providing protection to a child where a solicitor seeks to deduct 25% or more from the child s compensation? In the writer s view the court should allow a deduction in principle to pay unrecovered costs as the government has chosen not to treat children differently to adults within the rules. Assuming the court is prepared in principle to release sums from damages to pay for legal fees, Part 46.2 provides the general rule that the court should order detailed assessment, and only allow the sums assessed to be deducted. Whilst there are exceptions, this raises a number of issues that practitioners need to consider which is

outside the scope of this paper. The following link is to an article that explores these issues in more detail www.victorylegal.co.uk/pdf/infant-settlement.pdf 2 March 2014