Charging 100% success fees and risk assessments

There are three significant points arising from the decision of the Court of Appeal in Herbert -v- H H Law Ltd (Final) handed down yesterday, which are of general importance to the profession, and not just that part of the profession which undertakes personal injury litigation.

The first point is whether when running a case under a conditional fee agreement (CFA) which provides for a success fee, it is necessary to undertake a risk assessment and to charge a success fee which is commensurate with the prospects of success in that individual case as the “just price” which a client may be charged, or whether it is possible and indeed proper, to charge a client a success fee which is divorced from considerations of risk and takes into account other factors.

The second point which arises, is how closely the court will hold a client to the bargain that they struck at the beginning of the case, when making a CFA which provided for a defined success fee and which the client now wishes to argue should have been a lower fee. This requires consideration of the nature and purpose of a solicitor own client assessment under section 70 and the application of the presumptions which can apply to the agreement of a fee, pursuant to rule 46.9 CPR.

The third point is to the nature of an ATE premium payable by the client in respect of a policy of ATE insurance effected through the agency of the solicitor, and to what extent this ATE premium, when disputed by the client can be challenged through the mechanism of a solicitor-own client assessment pursuant to section 70 of the Solicitors Act 1974.

In this post I will consider the first of these points, decanting consideration of the latter two points into subsequent articles on this blog.

It is now clear that a success fee, grounded as it is, in statutory innovation wrought by the Courts and Legal Services Act 1990, is conceptually different from other items of costs such as an hourly rate, an experts fee or counsels fees, and can be regarded as a category of sui generis costs, which must be charged in a particular way, by reference to a percentage uplift of base costs. It is also right to note that the starting point for charging a success fee and quantifying it, is the quantum of risk posed in a particular case that the solicitor will not be paid.

In Herbert the CFA provided for a 100% uplift, which was subject to the statutory cap of 25% of relevant categories of damages as provided by the Conditional Fee Agreements Order 2013. The Court of Appeal noted in respect of the retainer documentation that had been prepared for the client the following:

48. It is important to bear in mind that the complaint of Ms Herbert on this issue is not that she should have been sent a more detailed invoice or further invoices but that she did not give her informed consent to the charging of the success fee and its amount. There is no merit in that complaint (subject to the risk point addressed below) because all the information relating to its imposition and calculation and to her exposure to HH’s fees generally, in the circumstances which occurred, was clearly set out in the documentation with which she was provided before agreeing HH’s retainer. The retainer letter said that any contribution by her towards HH’s costs under the CFA would be limited to 25% or less of her recovered damages. It told her who, within HH, would have the initial responsibility for dealing with her claim and the person having overall supervision for the claim. The CFA said that, if she won the claim, she would pay HH’s basic charges, their disbursements, the success fee and the ATE premium. It said that HH would use their best endeavours to recover maximum costs from the defendant and their insurers. It set out the way the success fee would be calculated, and specified that there would be a cap of 25% of the elements of damages described. The “What you Need to Know” document also stated that, if HH won her claim, she would be liable to pay HH’s basic charges, their disbursements, the ATE insurance premium and a success fee, and that her contribution towards her costs liability would be limited to up to 25% of the damages she obtained. That document also set out how the basic charges were calculated, and the hourly rate to be charged, and the imposition of VAT. Subject to the point on litigation risk and the success fee, the totality of that information provided a clear and comprehensive account of her exposure to the success fee and HH’s fees generally.

But the Court of Appeal then went onto consider the 100% fee in the context within which success fees are calculated:

50. The fixing of a success fee uplift in the context of a conditional fee agreement has traditionally been related in this country to an assessment of the risk of the proceedings being lost. Soole J set out in his judgment (at [29]-[30]) a clear and detailed account of the difference between the way that an uplift under a conditional fee agreement was treated on an assessment of costs as between the parties and an assessment as between solicitor and client before and after LASPO. It is sufficient, for the purposes of this appeal, to say the following. Prior to April 2013, in deciding whether a success fee was recoverable between the parties as a reasonable cost, the CPR stated that the relevant factors to be taken into account included “the risk that the circumstances in which the costs, fees or expenses would be payable might or might not occur”, judging the facts and circumstances as they reasonably appeared to the solicitor or counsel when the funding arrangement was entered into and at the time of any variation of the arrangement: see the then 44PD.5 paras. 11.7 and 11.8(1)(a). The same consideration applied, on a solicitor and client assessment, where the client had entered into a conditional fee agreement: see the then 48.PD.6 paras. 54.5(1)-54.8. LASPO abolished the right of recovery of a success fee as between the parties. Those provisions in the former Practice Directions, and the corresponding provisions in the CPR, have been revoked. They are not reproduced in the current CPR 46.9 or in PD 46. As Soole J observed, however, and Mr Kirby submitted, the wording of CPR 46.9(4) shows that it was envisaged that a success fee would be related to risk: the reference to the perception of the solicitor or counsel when the conditional fee agreement was entered into or varied closely reflects the language in the former 44PD para. 5 11.7 and 48PD.6 para. 54.5(2).

The evidence was that the success fee had not been calculated on the basis of risk at all:

51. Mr Ralph’s evidence in his witness statement was that HH’s charging model was the same as that of many of its competitors. He said as follows:

“I can say that the model we have adopted, is that opted for by most of our competitors. It is routine that solicitors now make a solicitor client charge in the form of a success fee: I also know that many of our competitors charge success fees in the same way that we do. Our policy on success fees and the amount therefore reflects the “market rate” for a person who wishes to instruct a solicitor will pay. Equally of course, clients are free to “shop around” for a better rate, or lower success fee.”

52. HH’s point on the business model is that it is a perfectly fair and reasonable way of addressing the limited recovery of costs, generally fixed costs, in small personal injury claims, and the abolition in such claims of the right to recover from the losing party a success fee payable under a CFA, and so enables solicitors to handle those types of claim, bearing in mind that the client does not pay under the CFA if the claim is lost, the solicitor is effectively funding the litigation as it progresses and the effect of the 100% standard uplift is to spread the risk across the range of cases handled by the solicitor. HH says that consumer protection is provided in these types of claim by the statutory cap of 25% of relevant damages.

In Herbert the Court noted that the client had not been told, that the success fee was calculated and charged, without regard to risk in an individual case:

53. Leaving aside that there is a substantial dispute between the parties as to the practical implications of the 25% cap on different amounts of damages and profit costs, I do not consider that either HH’s justification for its charging model or the 25% cap answer the point that in this country, in the context of a conditional fee agreement, the amount of a success fee is traditionally related to litigation risk, as reasonably perceived by the solicitor or counsel at the time the agreement was made. Across the broad range of litigation, it would be unusual for it not to be. It continues to be the case in those limited areas, such as publication and privacy proceedings and mesothelioma claims, where success fees are still recoverable from the losing party. Even taking the sub-set of low value personal injury claims, Mr Ralph’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.

54. Nor was the 100% uplift in the present case any less unusual in nature and amount just because it was capped, as required by LASPO and the 2013 Order, at 25% of general damages for pain, suffering and loss of amenity and damages for pecuniary loss, other than future pecuniary loss. While the level of the contractual cap was not unusual, and its practical effect may have been to reduce the success fee to an amount that was not in all the circumstances exorbitant, it nevertheless remains the case that the starting point of a 100% uplift, irrespective of litigation risk, was and is unusual.

These two paragraphs are crucial to understanding the judgment on this point. It is not the case that the Court of Appeal has found that it is unlawful for solicitors to charge a success fee irrespective of the quantum of risk in an individual case. Still less is it the case that a risk assessment must be undertaken.

What the Court of Appeal has pointed out, is that given the way that success fee is traditionally calculated by reference to a percentage uplift derived from the risks of the individual case, if a solicitor proposes to charge a success fee, on a different basis it is incumbent upon the solicitor to explain why the success fee is calculated in that way, and to be clear that risk plays no part in the calculation. The solicitor must also ensure that the client is in no doubt that the success is not recoverable from the opponent to litigation as part of the costs, and must be paid by the client from her own resources. If a client is told these three things, then informed consent to the success fee can be argued to have been given and the solicitor may rely on the application of the presumptions in rule 46.9 CPR.

So in summary, the model of charging clients 100% success fees, capped at 25% of relevant damages, remains a good one, sound in law, provided that the client has a clear explanation given to them of why and how the success fee is being charged at 100% and is told that the risks of their individual case are irrelevant and play no part in determining the level of the success fee, and that they will have to pay it out of their own money, it being irrecoverable as an item of costs from the opponent in the litigation. It follows that the quality of the written and oral explanations of the calculation of the success fee, will be key to determining whether a challenge to a success fee will itself succeed or whether a client will be held to their bargain. In the next post, I will consider the presumptions in more detail.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: