Francis Kendall examines a recent case on 100% success fees
One of Lord Justice Jackson’s many complaints about the pre-LASPO personal injury (PI) market was that there was precious little competition between law firms. But his hope that removing recoverability and capping at 25% the amount solicitors could deduct from clients’ damages would change this has not come to pass.
Rather, the market has adopted a model of applying a standard 100% success fee on every conditional fee case and deducting the full 25%. And with the government’s new regime for low-value PI cases due to kick in next year, law firms will want to make the best of the time they have left.
But a recent High Court ruling has thrown a spanner in the works by finding that solicitors still need to undertake individual risk assessments before setting the success fee in minor road traffic accident cases, (RTA) and also obtain their clients’ “informed consent” to the figure.
Market norm
In Herbert v HH Law Ltd [2018] EWHC 580 (QB), claimant Nicky Herbert was advised by her solicitors, Hampson Hughes (HH), to accept an offer of £3,400 for a rear-end shunt by a bus, of which £829 would be deducted as the firm’s success fee (25% of damages) and £349 for after-the-event (ATE) insurance.
She accepted the offer but subsequently instructed JG Solicitors, which has been much in the news of late for its work challenging deductions from personal injury clients’ damages.
JG argued that HH had failed to conduct a risk assessment justifying the level of success fee and that the 100% uplift was out of step with the fixed success fee of 12.5% under the previous costs regime for RTA claims which settled before trial. In its evidence, HH said that, like most of the market, it had adopted a post-LASPO model of routinely charging a 100% success fee, capped at 25% of the damages.
In a witness statement, HH director Craig Ralph explained that, post LASPO, in order to continue as a business it had become necessary to restructure the charges to clients in order to cover overheads and make a profit.
He said: “As a firm, we considered that the easiest and most transparent way was to make a solicitor own client charge, by way of a success fee which the client could pay out of damages. The success fee would be based on the basic costs that we actually recovered from the other side, thus limiting the fee.
“We considered that clients would readily understand that method in principle, and we also thought it was fair, as the client’s interests would be protected by the statutory cap on deductions from certain categories of damages of 25%. An individual client would therefore always retain 75% (at least) of his/her damages.”
The other option was charging the client an increased hourly rate, or requiring the client to pay hourly rates when only fixed costs were going to be recovered. This seemed “more cumbersome”, Mr Ralph said, and would result in the hardest fought and most difficult cases carrying the heaviest burden of irrecoverable costs. This would be less fair.
Mr Ralph said he had “no doubt” that the claimant was fully aware of the charging structure and it was expressly set out in her conditional fee agreement and funding documentation. The claimant as client was free to ask questions if there was anything she did not understand. In this case, neither at the outset of the case when funding was discussed, or at any point to its conclusion, did Ms Herbert raise a concern, or seek to suggest that the fee was unfair.
Critically, he did not accept the proposition that the size of the success fee must be calculated according to the risk in the particular case. He argued that, in return for the success fee, the client obtained “a number of valuable benefits including (i) the writing off of fees if the case was lost (ii) the financing by this firm of the claimant’s disbursements (iii) the deferral of fees until the end of the case, whenever that might have been”.
Thus much turned on CPR 46.9(3)(a) and (b), which presume that the client has given their “express or implied approval” to the fees charged. At first instance, District Judge Bellamy said: “There is no clear evidence the claimant approved either expressly or impliedly, with full knowledge, the cost to be incurred, and more particularly, a success fee of 100% could easily be said to be unusual both in nature and amount given the circumstances of the claim that were known to the solicitors at the time. Further, there is no risk assessment on the file that would in any event justify as being reasonable, a success fee of 100%.”
He found it difficult to say that a success fee of much more than 12.5% “could ever be justified” in a case of this nature. “On the circumstances described by the client the facts of the case was straightforward, the nature of the injury was minor soft tissue damage and whiplash, there was no time off work, and it was likely this case would be settled for a modest amount in a short period of time.”
Given this, and allowing for the fact that the “modest” disbursements were funded by the solicitors for a “fairly short” period, the judge said the appropriate success fee was 15%.
On appeal, Mr Justice Soole upheld the ruling. He said: “I do not accept that the ‘approval’ of the client is satisfied by the mere fact of the client’s consent to the relevant type or amount of cost to be incurred. The language of ‘approval’ evidently requires something more.
“I respectfully agree with Holland J in Macdougall [v Boote Edgar Esterkin [2001] 1 Costs LR 118] that approval requires an informed consent. It follows that the simple refrain of freedom of contract establishes neither the presumptions nor the reasonableness of the success fee in the particular case.
“Secondly, I do not accept that the requirement of approval is directed only at cases where the client has been misled by the solicitor… Thirdly, I do not accept that the LASPO changes had the effect of removing risk assessment as a relevant factor when considering the success fee percentage increase on a solicitor-client assessment.
“Whilst LASPO excluded the success fee from the inter partes assessment, CPR 46.9(4) demonstrates that it did not do so for the purpose of a solicitor-client assessment.”
This meant, Soole J said, that when the costs judge was faced with a client’s application under rule 46.9(4) for a reduction of the percentage increase, there was no good reason for the risk in the individual case to be excluded as a relevant factor: “On the contrary it is likely to be the primary factor. This reflects the fact that the assessment is concerned with the circumstances of the particular retainer.”
He concluded: “Putting the point another way, if and insofar as HH took no account of the risk in the individual case and provided for a 100% uplift (subject to the 25% cap) in all cases by reason of its particular post-LASPO business model, I consider that informed approval would require this to be clearly explained to the client before she entered the agreement.”
With the presumptions not arising, Soole J said it was for the judge to assess the reasonableness of the success fee in the particular case. “He rightly held that the risk in the individual case was a relevant factor and rejected the arguments based on HH’s business model. There being rightly no challenge to his assessment of the risk factor at 15%, this ground of appeal must be dismissed.”
Soole J also upheld the district judge’s decision that Ms Herbert’s ATE insurance premium was a solicitor’s disbursement.
HH argued that the premium was a client disbursement, paid over to the insurer by the mere agency of the solicitor, which would have put it beyond the scope of a solicitor-client assessment. “In my judgment, the purchase of ATE insurance cover is an inextricable part of the package which the solicitor provides to the client in such litigation and which HH provided Ms Herbert in this case,” Soole J said.
“The fact that that there was a contract between client (insured) and insurer is not decisive. The reality is that the insurance cover is offered and provided as part of one overall package presented by the solicitor to the prospective client; and then, pursuant to the terms of the retainer, the solicitor pays the premium to the insurers from the gross settlement sum received from the third party.
HH has applied for permission to appeal and we await to hear whether the Court of Appeal will take up the case – given the implications for many claimant PI solicitors, there has to be a good chance it will.
In the meantime, solicitors are left with a High Court ruling that upsets their core business model. At the moment, there is no sign that firms are changing it, but with other lawyers now developing practices specifically to attack previous deductions from damages, they need to think hard.
One must also question the need for such a model in the first place. Appreciating that this point is an application of hindsight, there must be a majority of such cases where nothing like 100% uplift is required to achieve 25% of the damages awarded or agreed.
The reality is that, in all but early settled claims, the objective of recovering by way of costs 25% of the damages in as many cases as possible could arguably be achieved by a much lower and bespoke level of uplift as highlighted as correct practice by this ruling.
In cases that settle early or carry significant damages, the judgment highlights, arguably quite rightly, that the lawyers simply can’t justify a 25% slice of the damages.
Francis Kendall is vice-chairman of the Association of Costs Lawyers
This article was first published in PI Focus in June 2018.