No Regard for Risk
Marc Banyard considers the recent decision of the Court of Appeal in Herbert v HH Law Limited  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.
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  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.”
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.
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.
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.
BA (Hons) MA
Tuesday 9th April 2019