Claimant lawyer business model using CFAs with success fees taken out of damages under threat
24 August 2015
A new threat has emerged to the way in which most claimants’ solicitors charge their clients in cases brought against insurers. It will be interesting to see what changes happen in claimant lawyer business practices as a result, and how soon they happen.
The threat comes about rather unexpectedly from a case called A and M v Royal Mail Group from the Regional Costs Judge for Birmingham, District Judge Lumb.
CFAs with 100% success fees
Pre-LASPO, when success fees were recoverable from insurers in successful cases, the level of them was fixed in certain types of claim. The fixed success fees were 12.5% in motor cases and usually 25% in EL claims. If any such claim went to trial then these success fees were increased to 100%, on the basis that if the claim were being defended, there must have been a high prospect of it being unsuccessful at trial.
After LASPO, it seems that most claimant lawyer business practices quickly became established on the basis that the claimant lawyer’s income would be supplemented by a success fee taken out of the client’s damages, and that those success fees would be fixed at the maximum allowed, that is 100%.
At the same time, to meet the requirements of the new law, the actual amount of the success fee would then be limited by reference to the damages recovered. Specifically, the success fee would not exceed in value 25% of PSLA and past losses in injury claims. It was at this stage that the claimant solicitor saw the client as being protected, that is, in an injury case, the claimant would give up a maximum of 25% of the damages to the lawyer.
Currently, only a minority of claimant firms will usually act without charging a success fee taken out of damages, it seems.
Claimants’ damages for PSLA post-LASPO are increased by 10% to offset this cost, of course.
Some figures on success fees
If a typical small motor claim now settles in the portal for £2,500, then the solicitor’s fixed costs of £500 would be supplemented by £500 taken out of the claimant’s damages, if the model we are describing is being followed. This is the success fee of 100% calculated by reference to the costs payable which effectively doubles the solicitor’s income from £500 to £1,000. As a success fee of £500 does not exceed the cap of 25% of damages it would not need to be reduced by the imposition of that cap. In this example, the success fee is therefore 20% of the damages and fits within the cap.
If a similar EL claim settled in the portal for £2,500, then the fixed costs would be £900, while the success fee calculation would begin at 100% of that figure, which is £900. But the cap would then operate at the level of 25% of damages, and would limit the success fee to £625. So this claimant would be being charged 25% of his damages as a success fee, while the solicitors operating this model would be paid £900 + £625 = £1,525.
Under the pre-LASPO regime, using the fixed success fees then applying, the success fees would of course not have been anywhere near 100%, but instead they would have been 12.5% in the motor example and most likely 25% in the EL case. Both are much less than 100% of course.
Lord Justice Jackson’s views
In his Final Report, while advocating the post-LASPO system now in use, Sir Rupert Jackson did not anticipate the widespread use by most claimant solicitors of their current system so that the maximum success fees allowed would in fact be charged as a matter of routine. He anticipated that competition would operate between firms so that, in his words, “lower success fees would be charged.” In other words, claimants would negotiate on the level of the success fee payable. In practice, this is yet to happen on a wide-ranging scale, even though there is a minority of claimant lawyers who are prepared to work on cases without success fees.
In the view of District Judge Lumb, the Jackson report did not expect that a success fee set at 100% which then effectively became 25% of the damages would become the norm. In fact, DJ Lumb thought that Sir Rupert expected a success fee would seldom be that high.
DJ Lumb’s judgment
With a note of caution that he had not heard argument on the point, the judge noted in his judgment of the current mainstream practice as seen in the case before him:
“Disturbingly, what it perhaps portrays is an intention that the formulation of the success fee at 100% is designed to ensure that the cap on the success fee at 25% of the damages is always reached”.
Assuming that is an accurate assessment of usual practices in this type of claim on the part of most claimant law firms, which in our view too is correct, then there seems validity in the judge’s viewpoint.
In the words of the judge: “Whether it is fair for solicitors and clients to enter into CFAs with success fees of 100% in these cases may depend on the quality of advice given by the solicitors or, some may suggest, upon the scruples of the solicitor”
The correct approach
The judge noted that there was no longer an obligation in law on the solicitors to prepare a risk assessment, though as the cases before him were from minors who needed the court to approve any offset of costs from damages, there was in fact an obligation to file a risk assessment at court. From which it could be taken that it would have been a good idea to have done one.
If one had been carried out, then as the claims being made were from passengers which were “virtually certain” to succeed, the judge expressed the view that the appropriate success fee might have been as low as 5%, “or possibly nothing at all”.
What the solicitors were doing in effect was not to risk assess the case but to have simply taken 100% as an appropriate success fee, relying on the fact that whatever success fee they chose, would be limited in its impact by the restriction on its effect to 25% of the damages. This, said the judge, was a circular argument. In effect, that approach simply would not do when assessing risk.
The judge was concerned that the current mainstream claimant lawyer approach to setting success fees under CFAs “comes dangerously approach to a contingency fee which may be unlawful”. Certainly the arrangement did not fall within the permitted category of a DBA. Instead, it was a CFA, but success fees payable under it were not being properly assessed.
The market generally
DJ Lumb as the regional costs judge for his area clearly had knowledge of this. The claimant law firm involved in the case suggested in their skeleton argument that if they were not allowed to recover a success fee out of the minor clients’ damages, then solicitors would not be willing to act for children as it would be uneconomic to do so.
This position got short shrift. The judge dismissed it saying that it “is unfounded by the experience of the courts in dealing with the many thousands of these cases throughout the country”. If it was uneconomic for this law firm to do the work, then, simply, “Other firms will do that work instead”.
The argument advanced by the lawyers was said by the judge to be a “political assertion” rather than a legal submission and, he thought, had no place in legal argument.
The judge’s comments would appear to cover not just the situation with minors’ claims, but to other types of claims faced by insurers as well, on the basis that already some claimant firms (though only a minority) will work in these cases without charging their clients success fees.
The regulatory aspect
This may also be important in seeing where claimant lawyers go from here. In the Code of Conduct, solicitors are obliged to enter into fee agreements with their clients which are legal, suitable for their clients’ needs, and take account of their clients’ best interests.
The judge thought that any competent solicitor would be advising a minor’s litigation friend that other solicitors might be prepared to take the case on without insisting on a success fee, and that that would surely be required in view of the lawyer’s professional obligations.
Assuming that does not currently happen, the judgment has highlighted the need to do so going forward. Beyond cases involving minors, so in all cases where claimant lawyers act on a CFA, if it is the case that a minority of claimant lawyers will represent their clients without a success fee, then does it not follow that when setting up a new retainer, solicitors intending to charge a success fee taken out of damages should advise the potential client that other solicitors would take the case on without charging a success fee?
If this does not currently happen, the how can claimant lawyers currently comply with their professional obligations to advice their potential clients that it is in the potential client’s best interests to sign up to a CFA which involves a success fee taking away up to 25% of damages, when there are other lawyers who would be willing to take the claim on without that deduction?
In that way, might this judgment and the publicity surrounding it, finally move the position towards what Sir Rupert thought it might be, 2 years down the line?
Assuming District Lumb is right on the basis of his wide costs experience, then the judgment could have a number of effects:
ATE covering residual costs risks will be less frequently taken out. In this case, the judge decided that there were effectively no risks to insure against, and no competent solicitor would have advised the client to go to the expense of taking out a policy. He refused to allow the premium to be deducted from damages.
Claimant lawyers will have to consider whether they need to advise their clients that other lawyers would take on their cases without deducting a success fee from damages, and may conclude they will now have to do so, in order to meet their professional obligations.
The solicitors’ regulator, the SRA, will surely need to consider getting involved where it seems that at present there is a widespread practice in existence across most but not all claimant firms in which it seems that lawyers are not fully taking into account what is in their clients’ best interests when it comes to deducting success fees of 25% from damages.
Those lawyers who do not charge success fees should be more frequently instructed, and a consequential shift in the market may occur, where success fees begin to become outdated in most cases.
If in the meantime a claimant lawyer does intend to charge a success fee out of damages, then it will need to be specifically assessed by reference to the facts of the case, and cannot as a matter of routine be set at 100%. Any residual success fees charged should therefore be lower.
The profitability of undertaking these claims will reduce for the majority of claimant lawyers who currently operate this model. Current claimant business models will be disrupted again, and the move to larger, more efficient outfits, will be given another boost.
The claimant lawyers in the case are quoted as saying that an appeal is being considered. Time will tell whether that in fact happens.
This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.