The ongoing saga surrounding personal injury firms’ tussles with costs recovery specialists has resulted in some important guidance for solicitors on permissible fee arrangements. The implications on the charging structures for the sector could be profound, especially in respect of conditional fee agreements (CFAs) and the charging of success fees.
In Herbert v HH Law Ltd, the Court of Appeal upheld an initial decision to reduce the percentage increase on a solicitor/client assessment from 100% of basic charges to 15%. The defendant had adopted, post-LASPO, a business model of a flat 100% success fee chargeable on base costs for each case, to be limited to 25% of recovered damages. This was irrespective of the risks to the individual case. This would, the defendant submitted, create a transparent system and enable them to offer CFAs to all clients regardless of the risk of their individual cases, in a nod to ensuring access to justice.
It was submitted that as the success fee was incurred with the express approval of the client, it was thus recoverable from them. This was rejected due to the lack of “informed consent” for the client at the point of entering into the CFA. It was highlighted that there was no evidence that the lay client approved, with full knowledge, the cost to be incurred.
This added another layer of consideration to CPR 46.9 which governs these assessments:
“(2) Section 74(3) of the Solicitors Act 1974 applies unless the solicitor and client have entered into a written agreement which expressly permits payment to the solicitor of an amount of costs greater than that which the client could have recovered from another party to the proceedings.
(3) Subject to paragraph (2), costs are to be assessed on the indemnity basis but are to be presumed –
(a) to have been reasonably incurred if they were incurred with the express or implied approval of the client;
(b) to be reasonable in amount if their amount was expressly or impliedly approved by the client”.
The presumptions under CPR 46.9(3)(a) and (b) were rebutted and pursuant to CPR 46.9(4) all relevant factors available to the solicitor at the time the CFA was entered into were considered, including risk. Given the relatively low risks to this specific case, the uplift was reduced to 15%.
Whilst this may seem to follow the traditional model of success fee assessment, it will come as quite a shock to many in the personal injury sector. One of the inevitable consequences of the Jackson reforms was to ensure that not all costs incurred on a client’s behalf are recovered between the parties. The pre-LASPO manner of calculating success fees based upon the ready reckoner is, perhaps, outdated. That system was designed to ensure a revenue neutral regime; the success fee on successful cases paid for the lost fees on the unsuccessful. Today the deductions of the success fee from damages are, in many cases, merely making up the shortfall in costs not recovered between the parties on successful cases, let alone the unsuccessful ones. To have this reduced significantly below the statutory cap could well leave a black hole in many a firm’s finances.
So what can be done to prevent this? This ruling will undoubtedly compel firms reliant on the 25% of damages deduction model to adapt their retainers with their future clients. To avoid similar challenges, firms will need to provide suitably detailed explanations to their clients as to how any level of success fee has been arrived at, thus ensuring informed consent was obtained. This should protect the percentage uplift with the presumptions in CPR 46.9(3)(a) and (b).
It is also likely that firms will move away from a 100% success fee model which was criticised in the first instance as unusual both in nature and amount, taking into account the case specific risks. Operating under CFAs which provide for a lower, risk-based success fee, and are thus less vulnerable to challenge, may present a more cost-effective way forward. This can be coupled with a provision for a maintained right to deduct unrecovered base charges from damages, up to the statutory limit. This would ensure that the full 25% damage deduction cap, relied upon by many firms in this sector, is utilised on a solicitor/client basis.
However, the above approach may well lend itself to a new round of disputes arising out of the operation of CPR 46.9(2) and the issue of consent. If we are to follow the logic of Herbert, the deduction of unrecovered base charges under a CFA, as well as perhaps a lower, but more secure success fee, would still rely upon informed consent. Can a client give such informed consent to the deduction of these costs from their damages if they do not know the level of, firstly, total costs to be incurred and, secondly, what amount will be recoverable between the parties? The first point is no great departure from the current regime, but in respect of the second point, should a client be informed of all the various scenarios which may arise out of the convoluted fixed costs and budgeting regimes at the point of entering into a CFA? The point at which firms will have obtained informed consent is not clear.
It is thus likely that the ongoing battles between clients and their solicitors may well take place on new fronts, but will show no signs of easing.
Adam Grant is a costs lawyer at Pure Legal Costs Consultants and is a council member of the Association of Costs Lawyers.