The oncoming storm

The year 2020 is likely to mark a watershed in the structure of the personal injury litigation industry, in England and Wales due to a package of reforms which are clearly designed to reduce the compensation bill for damages and costs, currently born by compensating parties.

For anyone who has been living in a cave for the last few years, the measures likely to come into force in 2020 include: the increase in the Small Claims Track limit, the introduction of tariff based awards for whiplash injuries largely rendering such awards nugatory and wider reforms to costs recovery rules, with the widespread introduction of fixed costs including an increase in the Fast Track jurisdiction to £100,000.

Although the full impact of such reforms will take several years to filter through, as there will be a tail of claims currently progressing through the system, by 2022 the current regime for claiming and awarding damages and costs for personal injury claims will have changed significantly.

So much for the headline changes, but the fundamental change consequential upon the detail of the reforms, is likely to be in the structure of the solicitor’s profession (and to a lesser extent the Bar) by reason of these reforms.

In crude terms many solicitors’ firms currently practising in this area are dependent for their income, their ability to meet their overheads and their ability to make a profit on having a basket of claims, of varying values, complexity and turn around times, in order to manage their financial risk.

The smaller, less valuable and shorter claims, cross subsidise the ability of a firm to undertake more involved or valuable claims, with a longer timespan and hence a delay in payment. If the smaller claims are taken out of the mix, where does that leave firms who depend on them for a steady turnover of work and costs?

Putting matters bluntly it leaves them in trouble: and this is discernible now, in advance of 2020 by the trickle that might yet become a flood of firms either withdrawing from the personal injury market place, or sadly, sliding into administration. So, what can be done to mitigate the impacts of the reforms noted above, to thrive in the years to come, or simply to survive? I think that there are a number of matters to be considered, which I will assess against the broad headings of implications for turnover, profit and cash flow.

Turnover

The exit from the market of a number of firms will undoubtedly create a gap in the market, which firms will seek to fill. The key question is how: particularly as the surviving firms will all be seeking to draw from the pool of larger value cases, with consequently higher claims for costs due to the value and complexity of the work that is required to be done.

It may be that the rise of the ABS often threatened, usually derided as a “game changer” is finally, here by reason of the industry squeeze, as the surest way to comply with the referral fee ban, but also to engage the volume building benefits of marketing and advertising, is to have the marketing and advertising and legal practices working under one roof.

Consolidation of existing practices is also likely but the devil here, is in determining which firms with ostensibly healthy WIP balances, actually have valuable cases worth taking over, as opposed to headline figures which will crumble into dust when the cases are tested in the forensic fire of litigation. Moreover, there is a real question as to what areas of work to concentrate on.

The reforms in 2013 saw an influx of “clinical negligence specialists” whose claims to expertise were slender, but who were pivoting away from areas of work where fixed costs were introduced: in a sense a bigger reform than the abolition of recoverable success fees and ATE insurance, given that clients can still be charged success fees and QOCS mitigates the costs risks that might otherwise deter claims from being brought. It may be that instead of seeking new areas, firms will as a matter of logic seek new work from existing clients: from Court of Protection work to disability discrimination, to the more mundane areas of cross selling private client services.

Profit

One of the documents in the world of costs and litigation funding that everyone has heard of, but few people have actually read (largely due to the lack of a modern edition) is The Expense of Time. It is often forgotten that the original purpose of this document was not to construct hourly rates for the purposes of taxation or assessment, but rather to enable solicitors’ firms to know the profitability of the work that they undertake.

What has astonished me in recent years, is the lack of analysis by solicitors acting for claimants in personal injury work, as to how much of their work is in fact profitable not only on the conventional management accounts basis, but by factoring in costs budgeting and management?

Much greater analysis is needed to be brought to bear on variables beyond hourly rates, to include success rates, costs budgeting and management, and relative delays in payment across types of work. Costs budgeting is really beginning to bite: in the last 6.5 years I have yet to see a case, where a “good reason” has been found to depart from a cost’s management order.

It follows that if a solicitor is routinely writing off (or having written off) 20%-30% of time by reason of failing to manage the budget constraints with the case requirements, that needs to be the subject of scrutiny and revision as to how a firm does its work.

Profitability considerations in turn lead to consideration of the role of solicitor-own client charges, and how they are to be gauged in an ever-expanding world of fixed costs. Post Herbert v HH Law [2019] EWCA Civ 527, the client care requirements placed on solicitors and the need to provide detailed explanations to clients of their costs liabilities has come more to the fore.

A solicitor is entitled to charge clients 100% on their fees by way of success fee, without reference to case specific risks, but must ensure that the client is fully informed of the context. A solicitor may charge a client a risk-based success fee on costs but must put forward a realistic set of reasons to justify their assessment.

Or a solicitor might simply charge clients an hourly rate without a success fee and treat recoverable fixed costs as a contribution to the client’s liability, having taken care to explain to the client and obtain their consent in writing of this practice. It may well be the case that a solicitor-own client charge needs to be made to make a case profitable, not least if a solicitor is bearing the burden of financing disbursements but the danger of a client having second thoughts about their fee arrangements and seeking an assessment of costs under section 70 of the Solicitors Act 1970 is very real.

Cash flow

Of the three points cash flow is the most important. A firm may have a large and substantial caseload. It may have a lot of profit locked up in the cases, but if it cannot realise the value of its work on a regular and predictable basis.

The obvious answer is to obtain litigation funding, effectively permitting the extraction of value from the work in progress (WIP) or disbursements or both. This is not necessarily an ideal course however: many solicitors firms are already dependent on high cost overdrafts or are on their seventeenth re-financing.  The release of cash comes at an erosion of profit.

In terms of disbursement funding, there is greater scope, due to the potential to effectively re-re-ensure any liability for disbursements at the client’s cost through ATE insurance or by asking the client to fund the disbursements through provision of a loan. Practitioners have long been aware that in the former regime of recoverable success fees, that element of the success fee, which related to the cost to a solicitor of delay in payment and/or funding the litigation was irrecoverable inter partes.

Accordingly, the decision reached by the Court of Appeal in the case of the Secretary of State for the Department of Energy and Climate Change and Coal Products Limited.v.Jeffrey Jones and others [2014] EWCA Civ 363 is an interesting illustration, of the way that solicitors were able to recover an element of interest incurred pre-judgment and the making of the costs order, for their clients on disbursements. The claimants had all entered, in addition to their CFAs, disbursement funding arrangements with their solicitors. These provided that the solicitor would fund disbursements as the case went along, in return for interest at 4% above rate. The interest was only payable if recovered from the paying party, and so was accurately to be described, as a contingent liability. Perhaps unsurprisingly, the Court of Appeal took the view, that the fact it was the solicitors who had funded the litigation, made no odds, as if the agreement had been made by the claimants with a bank or other commercial lender, the liability to pay the interest, was the claimants.

Accordingly, any firm which routinely finances on credit, the client’s disbursements should review its funding arrangements to ensure that in successful cases, a useful 4.5% of interest on disbursements is recovered, from the point when the liability is incurred.

There are potential mechanisms in the currently extant Civil Procedure Rules which in my view are not being utilised often enough to the detriment of solicitor’s firms.

The first and most obvious of these is the use of part 36 CPR, which remains in my view underutilised by those representing claimants. I am frequently struck by how often a case goes to trial, where there is no effective part 36 offer by the claimant. How can this be?

The utility of a part 36 offer, is not in the discretionary benefits which flow such as indemnity costs, the additional amount, enhanced interest etc, but the deterrent effect that it exerts on a defendant’s thinking, that these things might come to pass, so that a case is settled at a far earlier stage.

Yet routinely, in cases where there is a liability dispute, there is no 95% to 5% offer on liability put forward, which instantly makes liability disputed cases very difficult to defend.

The second of these is the ability in substantial cases, where liability is conceded for orders to be obtained for the costs of liability issues to be assessed and paid forthwith.

Moreover, there is now scope to argue that in such cases payments on account of quantum costs should be obtained where liability is no longer in issue and there is no part 36 offer on quantum: per the decision of HH Judge Robinson in the case of HI v Hull & East Yorkshire Hospitals NHS Trust, County Court at Sheffield  25 February 2019 on the scope of rule 44.2(1) and 44.2(2) CPR.

A further lost opportunity relates to the terms and conditions of conditional fee agreements, which often do not allow solicitors to take not only disbursements and expenses from interim payments of damages made to clients, but also reasonable amounts in respect of past and future profit costs incurred.

But the longer term solution seems inevitable: as the key problem is the cost of capital, to provide working funds, and to invest in cases, one way of securing a “war chest” is to go to market, either through the securitisation of the work, or the flotation of the firm. This in turn will mean larger firms who have the resources, name recognition and size to make flotation on AIM a realistic option.

Perhaps the key detriment, is the removal of that swathe of low value claims which provide the cross subsidisation noted at the beginning of this article. I have noted in discussions with various solicitors’ firms, actions they are proposing to take to keep working in fields such as “whiplash”. But why bother?

There is a disturbing analogy to be drawn with criminal work, where fees are set by government fiat. Is a regime of personal injury litigation subject to fixed recoverable fees set centrally so very different? For nearly 30 years we have witnessed year on year decline in criminal fees yet still good and able lawyers grub around, trying to “make it work”.

The only long term answer may be increasing automation of such claims: the relevant department in a firm having a skeleton crew of supervisors, with apps and web portals providing “added value” to clients with low value claims, but recognising that the days of mass employment of para-legal staff processing £2000 whiplash claims have come to an end.

But why not dispense with low value personal injury work all together, and look for other areas of low value high turnover but where there is no “disbursement carry” such as debt collection work, flight delay claims, low value data breach or low value financial mis-selling claims?

Solicitors have largely missed out on the huge number of PPI claims and subsequent Plevin claims, which have largely accrued to the claim’s management companies, but there will be further categories of claim in the years to come. The world after all, remains full of glittering prizes for those who have stout hearts and sharp swords to take them.

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