REUTERS | Mike Blake

“Old style” CFAs: the last hurrah for success fees?

It is almost six years since section 44 of the Legal Aid (Sentencing and Punishment of Offenders) Act 2012 (LASPO) was enacted on 1 April 2013, under which success fees in conditional fee agreements (CFAs) and after-the-event (ATE) insurance premiums ceased to be recoverable from opponents in most types of litigation. Exceptions were carved out which applied to mesothelioma claims (and still do), insolvency cases (until April 2016) and privacy (under sentence of death from 6 April 2019). Transitional provisions, however, left untouched CFAs made and ATE premiums taken out on or before 31 March 2013 (see CPR 48.1-2), and by now, it might be expected that all issues with funding arrangements of this type would long since have been resolved.

Not so! The “old style” CFAs have a long tail and, even now, decisions at High Court level are being given to settle disputes arising under the CPR in force before 1 April 2013. Whether Sir Rupert Jackson could have envisaged that the recommendations contained in his Final Report on Civil Costs published in 2009 would still be the subject of expensive costs litigation nearly a decade on is a matter upon which it is only possible to speculate. In that context, however, it is worth recalling what he said all those years ago (see the executive summary at paragraph 5.10-11):

“I have recommended that lawyers’ success fees and ATE insurance premiums should cease to be recoverable for all types of civil litigation. If this recommendation is adopted, it should go a substantial distance to ensuring that unsuccessful defendants in such proceedings are not faced with a disproportionate costs liability.”

Ten years on, insofar as it is permissible to speculate, it is reasonable to suppose that Sir Rupert’s metaphorical hair will be standing on end in horror that battles are still being fought over lawyers’ success fees under “old style” CFAs.

NJL v PTE, is one such, and whether it is to be the “last hurrah”, so far as these types of funding arrangements relate to success fees are concerned, remains to be seen. Whatever, NJL is an interesting case because not only does it go over old ground (what level of success fee can be justified where liability was admitted before the CFA was made?), but it also covers in detail how much should be allowed for the “Part 36 risk” offer: by that is meant the risk of the solicitors going unpaid where their client has failed to beat a Part 36 offer at trial and has thereby not only forfeited the costs that would have been recovered had that not happened, but is also on the hook for the opponent’s costs from the last date on which the offer could have been accepted.

The facts in NJL are straightforward. The defendant, PTE, had been convicted of dangerous driving following an accident on 6 June 2011 in which NJL, then aged 20, had suffered life changing injuries. Liability was not in issue having been admitted in December 2011. Thereafter, on 20 August 2012, NJL’s litigation friend had made a CFA with solicitors Irwin Mitchell (replacing an earlier CFA), which had provided for a two-stage success fee; 25% payable if the claim settled more than three months before trial and 100% if it did not. The CFA was “lite”, meaning that any costs not recovered from the opponent would be waived.

The claim settled within the three-month window before trial for £1,150,000, plus periodical payments of £34,000 per annum and the costs of the action to be paid on the standard basis. The 100% success fee provision had thereby been triggered, albeit that on detailed assessment NJL’s solicitors had indicated that they would accept 67%, equating to a 60% chance under the “ready reckoner” of winning the case and recovering their costs.

On detailed assessment, the district judge had allowed 65%, rejecting PTE’s contention that it should be 12.5%, being the prescribed figure permitted in personal injury cases under CPR 45.18(1) as then in force. In doing so, the district judge had accepted NJL’s application under CPR 45.18(2) that as the damages had exceeded £500,000, the fixed success fee payable under CPR 45.18(1) would be disapplied and, since 65% exceeded the CPR 45.18(2) threshold (being a figure “greater than 20%” as set out in the rule), that amount would be allowed instead.

On appeal, Martin Spencer J was unimpressed with the allowance. Accepting that the leading authority was still C v W, where liability had been admitted by the time the CFA had been made, the judge continued that the decision of Sir Robert Nelson in Fortune v Roe at paragraphs 36 to 37 could be applied “almost without alteration”. That judgment had said:

“As judgment had been entered, there were no assessable risks on the issue of liability… There is no material to suggest that the claimant was likely to lose a specific quantum issue that would result in a separate costs order… The risk of the basic charges not being recovered would therefore only arise if a Part 36 offer was made, rejected and on Irwin Mitchell’s advice, the claimant pursued her claim and then failed to beat the Part 36 payment. It is probably in substantial personal injury cases of this kind that a Part 36 offer will only be made at a period close to trial when the expert evidence on the quantum issues has been resolved, or at least is close to being resolved”.

In NJL, the factors advanced in support of the success fee were that there had been significant and real risks regarding quantum, causation and proportionality on account of the abuse and violence perpetrated upon NJL prior to the accident.

That cut no ice with Martin Spencer J. At paragraph 20 he said:

“… A 100% success fee can never be justified in a case where liability has been admitted and there has been no Part 36 offer of settlement. The challenge is to assess the risk that some of the costs incurred will be unrecoverable.”

Here, the only circumstances which could arise which might alter that were those potentially consequential upon the making of a Part 36 offer. In the judge’s view, two risks needed to be brought into consideration for these purposes.

First, there was the question of timing. In that respect, the likelihood was that a Part 36 offer would be made at a later stage in the litigation, after the expert evidence had been exchanged. Suppose, in that eventuality, Martin Spencer J postulated, that the overall costs were expected to be £400,000 and at the date of the offer, £300,000 had been spent. That would have meant that £100,000 was at risk if a Part 36 offer had been made and not beaten at trial. It would follow that the success fee would need to take into account and reflect the risk of losing 25% of the costs.

Second was the risk of rejection, that is to say, the risk of the solicitors advising the client to reject the offer, continuing to trial and failing to beat it. In those circumstances, the claimant would be ordered to pay the costs of the opponent from the last date upon which the offer could have been accepted. As the judge expressed it by way of example:

“Suppose, instead, the solicitor anticipates a Part 36 offer at a stage when the costs at risk will be 50%. And suppose the case is so difficult to call that he gives himself no better chance than 50% of giving the correct advice in response to a Part 36 offer. The risk in such a case is 50% of 50% or 25% so that the prospects of success are 75%. Using the ready reckoner, the percentage increase for all the costs would therefore be 33%, so as accurately to reflect the risk to the solicitor in such a case. If on the other hand, he assesses the risk of him getting it wrong is only 20%, then the risk is 10% and there is a 90% chance of success: this would justify a success fee of 11%”.

Applying these principles to the facts, Martin Spencer J’s view was that the solicitor could have anticipated that no more than 25% of his costs would have been at risk, taking account of the timing of any Part 36 offer, when the CFA was made. As to the chances of failing to beat the offer, in addition to the solicitor’s own experience, he would have had the advice of leading counsel in such a case to rely on. Even if the risk were to have been taken at 50% of not beating the offer, only 25% of the costs would have been at risk, so the overall chance of success would have been 87.5% (100% – (50% x 25%). Using the ready reckoner, that resulted in a success fee of just 20%. Since that was not greater than 20% needed to trigger CPR 45.18(2), the solicitors had failed to justify a fee more than the fixed amount of 12.5% under CPR 45.18(1). Accordingly, that was the figure which would be allowed.

Lesson for the future?

First, for those remaining CFAs to which section 44 of LASPO does not apply and in mesothelioma claims, it is that if liability is admitted before the CFA was made, a success fee of 100% will never be allowed even if it is staged. Second, the maximum that the Part 36 risk is likely to add is 20%, so if anything is offered by an opponent above that figure, notionally there should be a biting off of the hand in acceptance of it.

“Last hurrah” for success fees in the light of that guidance? Probably, but do not breathe a sigh of relief quite yet. ATE premiums are just around the corner: West v Stockport NHS Foundation Trust lies in wait in the Court of Appeal.

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