No Regard for Risk

Marc Banyard considers the recent decision of the Court of Appeal in Herbert v HH Law Limited [2019] EWCA Civ 527 which addresses some important issues in respect of post-April 2013 success fees and ATE Insurance Premiums in the context of a Solicitors Act assessment.

Success Fee

Since the introduction of what are colloquially known as the ‘Jackson reforms’ by way of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 it has no longer been possible (subject to certain limited exceptions) to recover success fees and after-the-event insurance premiums from paying parties and payment of the same has shifted onto the client themselves.  The Conditional Fee Agreements Order 2013 limits the recoverable success fee against the client, for proceedings at first instance in personal injury claims, to 25% of damages (other than damages for future pecuniary loss).

This has led to a business model arising across the profession whereby some firms habitually set their success fees for all matters at the maximum 100% allowed by the legislation irrespective of the actual risk in each individual case so as to ensure that the limit of 25% of the damages is reached and then simply charge that 25% figure. 

This was the position in the case of Herbert v HH Law Limited.  Mrs Herbert had instructed HH Law in respect of a claim arising from a road traffic accident where she had been struck from behind by a bus.  She had entered into a Conditional Fee Agreement with the firm which provided for a 100% success fee. 

No risk assessment had been undertaken on the file and witness evidence in the detailed assessment proceedings by a director of the firm confirmed that the model the firm had adopted was to set a success fee of 100% on all cases with the same subject to the statutory limit of 25% of damages such that ‘an individual client would always retain 75% (at least) of his/her damages’.

On detailed assessment, DJ Bellamy concluded that a success fee of 100% was not justified and substituted one of 12.5% stating that he found it difficult to see how an uplift of any greater amount could ever be justified on the (very straightforward) facts of the case. 

On appeal, Soole J stated that he did 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.”  In fact, he concluded that, on an assessment of a success fee as between solicitor and client, risk was “likely to be the primary factor.”

HH Law appealed further to the Court of Appeal.  The argument on appeal was that Mrs Herbert was effectively precluded from taking issue with the success fee by operation of CPR r. 46.9(3) which states that costs are presumed to have been reasonable in amount if their amount was ‘expressly or implied approved by the client’.

This is the Rule that is commonly relied upon to preclude a client from challenging, on detailed assessment, the rates charged by their Solicitor where the same are those stated in the retainer signed by the client.  In this case, it was argued that, inasmuch as Mrs Herbert had signed up to a Conditional Fee Agreement which stated a success fee of 100%, she could be taken to have approved the same and was now precluded from challenging the same on detailed assessment. 

The issue argued in the Courts below was whether Mrs Herbert’s approval, so far as the same could be inferred from her ratification of the firm’s terms, needed to be, and was, “informed”.  On appeal, Soole J stated as follows: “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 [2011] 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.”

By the time the case reached the Court of Appeal, the parties were agreed that Mrs Herbert’s approval did need to be informed and the issue to be determined was whether that approval was sufficiently informed to engage CPR r. 46.9(3).

Nicholas Bacon QC, acting for HH Law, submitted that, unless Mrs Herbert could demonstrate that she was misled, mistaken or failed to understand the material matters relating to the success fee, she was to regarded as having given her informed consent.  The Court did not agree and indicated that it was open to Mrs Herbert to show that the documentation supplied by HH Law was “inaccurate or misleading or, in some other respect, insufficiently comprehensive in an aspect material to her understanding of the nature or amount of the success fee.”

In fact, the Master of the Rolls concluded that, subject to the argument on litigation risk, Mrs Herbert had no real complaint and that “the totality of [the] information [afforded to her] provided a clear and comprehensive account of her exposure to the success fee” (inasmuch as the client care documentation clearly stated the level of the success fee and the 25% damages cap).

The Court of Appeal did, however, conclude that a success fee set at 100% irrespective of the level of risk was sufficiently ‘unusual’ to require further advice to the client in order that her approval be deemed informed.  It was found that neither the effect of the 25% damages cap nor the assertion that this was a business model adopted across the profession (a point made in the absence of any empirical evidence to this effect, it has to be said) was sufficient to dislodge the need “to have told the client that the success fee of 100% took no account of the risk in any individual case but was charged as standard in all cases.”

Conclusion

It is clear, going forward, that if any firm wishes to adopt a business model whereby they charge a 100% success fee as a matter of course on all cases, in order to avoid a subsequent challenge to the same they will need to ensure that each client’s approval is fully informed.  This is to say that the firm will almost certainly need to advise the client that the success fee, whilst commonly predicated on litigation risk, is not so predicated in their case and that the same has been set at a flat 100% as this is the firm’s business model irrespective of the fact that a risk-based calculation would almost certainly lead to a much lower success fee.

It might well be the case that the client signs up to the CFA anyway (indeed, they might struggle to assimilate exactly what this information means); however there will surely be a significant proportion of clients who, when informed that their Solicitor effectively intends to charge them more than that to which they are properly entitled, decide to look elsewhere for representation.

ATE Insurance Premium

Another issue which arose in this case was that of the proper approach to an ATE insurance premium.  HH Law, whilst detailing the amount in respect of the ATE Premium in its cash account, had neglected to include the same in their bill of costs.  Mrs Herbert had submitted that the same ought to have been included in the bill of costs as it was a disbursement and both DJ Bellamy and Soole J on appeal had agreed with her.

On this issue, the Court of Appeal upheld the appeal, concluding that a payment in respect of an ATE Premium did not satisfy the definition of a disbursement as per the rather ancient authority of Re Remnant (1849) 11 Beav 603 and was instead simply a “cash payment” made by the solicitor as agent for the client. 

Conclusion

The point may strike as thoroughly arcane but this does have a very important practical ramification for clients wishing to challenge sums they have been charged by way of ATE Premiums.  If, as has now been decided, such sums do not fall as bona fide disbursements, then there is no requirement for a solicitor to include the same in his bill of costs and no avenue for the client to challenge the same under the Solicitors Act 1974.  Indeed, it is difficult to see quite what avenue of redress a client might now possess in respect of any such sum. 

The Master of the Rolls did state that “if this outcome is considered unsatisfactory within the profession, the Solicitor Regulation Authority and the Law Society can consider what could be done to bring an ATE insurance premium within the principle as to what is a solicitor’s disbursement” and one can readily envisage them so doing.

What can be done? A supplemental note from the editor

There is no doubt that the decision in Herbert has caused panic stations amongst personal injury solicitors up and down the country. But in my view the situation (at least moving forward) is not as bleak as some would like to make out.

It is useful to understand the business model utilised by firms like checkmylegalfees.com and JG Solicitors, which is essentially based upon issuing Part 8 solicitor-own client proceedings as quickly as possible in order to challenge the success fee charged to the former client by the solicitor. Pursuant to s. 70(9) of the Solicitors Act 1974, if a bill is reduced by one fifth or more, then the solicitor will usually bear the costs of the assessment (and vice versa).

Because the difference between a 100% success fee (albeit usually capped at 25% of the damages recovered) and the success fee allowed on assessment (i.e. a percentage based upon the actual risk of not being paid) invariably equates to more than one-fifth of the solicitor’s overall costs, the former client will invariably be awarded their costs on assessment.

The settlement mechanism used is Part 36. The offer is pitched at a sum which, by reference to the actual risk in the case, puts the solicitor in an invidious position: run this to assessment and the claimant will beat their own offer (and receive the CPR r. 36.17(4) benefits) or cut any loses now by accepting the offer by which acceptance the client is automatically entitled to their costs.This is not lost on most defendant solicitors to a solicitor-own client claim. Thus most claims settle on terms that the majority of the success fee deducted from the client’s damages is repaid plus the former client’s costs of bring the claim.

But as Part 36 does not apply to the small claims track (CPR r. 27.2(g) refers) I wonder whether there is mileage in the argument that solicitor-own client assessments, being Part 8 proceedings, can (or in some cases, should) be allocated to the small claims track as opposed the multi-track.

CPR r. 8.9 provides that –

Where the Part 8 procedure is followed –

(c) the claim shall be treated as allocated to the multi-track […]

The word ‘treated’ received judicial consideration by the High Court in Kershaw v Roberts [2014] EWHC 1037 (Ch), wherein it was held that –

"However, Rule 8.9(c) does not automatically allocate Part 8 claims to the multi-track, as Miss Candlin suggests: it merely provides that such claims are “treated as allocated to the multi-track”. As a matter of language, that is not the same thing as, in fact, being allocated to the multi-track by the court; and it is clear from reading the CPR as a whole that the deeming provision of Rule 8.9(c) is not intended to – and does not – allocate all Part 8 claims to the multi-track. Thus, it is still open to the court in fact to allocate a Part 8 claim to a particular track, including the multi-track” (emphasis added).

By reference to the fact that the vast majority of these claims fall within the limit of the small claims track, there is certainly scope to argue that the usual factors determining allocation (e.g. value) should apply in solicitor-own client claims as they do in other claims of similar value.

Should this argument succeed then the former client would be limited to fixed small claims costs.

This is an argument which, as far as I am aware, has yet to be tested. But assuming that any given claim is heading for the multi-track then solicitors would be well advised to offer pre-issue ADR/invite settlement discussions immediately upon receipt of a letter before action. Any failure by the former client to engage is conduct contrary to the overriding objective, which places a duty upon the parties to ‘help the court to further the overriding objective’ (CPR r. 1.3) to save expense by dealing with cases in a proportionate manner by reference to the factors delineated at CPR r. 1.1(c). Any failure to engage in pre-issue ADR should therefore sound in any costs award made by the Court.

Solicitors would also be well-advised to make a Calderbank offer with a short expiry date – again, immediately upon receipt of a letter before action.  My advice to solicitors would be to cut your losses at this point: if you have charged a success fee which, in a way that is adverse to the former client, does not reflect the risks of the case, then you are simply not going to win on assessment. Rather, take a generous view and perhaps consider refunding the entire success fee in the knowledge that you will beat your offer on assessment. In this way the claim now represents a false economy to the former client.

Whilst I have every sympathy with personal injury solicitors, they must in my view shoulder ultimate responsibility for the decision in Herbert. JG Solicitors, Checkmylegalfees.com and the like are but creatures of the industry’s own creating: they exist only because the solicitors have (and they will argue of necessity post-LASPO) strayed from the fundamental principle that success fees are based on risk; the failure to recognise that fact has led to the formation of business models which are fundamentally incompatible with statute.

To that end the obvious solution – at least moving forward – is for solicitors to conduct a proper risk assessment at the outset and provide for the same within the CFA accordingly. But where that is not a viable (or desireable) option then Herbert itself provides the answer: informed consent. Practitioners must understand that there is nothing wrong about charging a success fee without regard to risk; the problems arise when the client has not been properly advised that the success fee has been set in that way. The Court in Herbert said it in this way:

“Even taking the sub-set of low value personal injury claims, [HH’s] evidence goes no further than that ‘most’ of HH’s competitors have adopted the same business model and ‘many’ of HH’s competitors charge success fees in the same way.

“That is insufficient to avoid the need, for the purposes of informed consent of the client under CPR 46.9(3)(a) and (b), to have told the client that the success fee of 100% took no account of the risk in any individual case but was charged as standard in all cases” (emphasis added).

The inference is clear: consent is deemed ‘informed’ when the client has been advised that the success fee takes ‘no account of the risk’ of the case and, in that way, can have no complaints when the agreed sum is deducted from their damages.

The fear of repelling clients in this way, whilst understandable, is probably overstated. But if that concern can be channelled in such a way that personal injury firms up and down the country subscribe to the same business model (i.e. one based upon informed consent rather than risk) for fast-track personal injury claims then arguments over risk are reduced to mere academia and everyone wins.

Please contact Marc Banyard to discuss any query relating to this article. Marc is based at our Cardiff office and can be contacted on 029 2034 9993.