Bad bargains

In recent years there has been a growing tendency to consolidation in the personal injury marketplace, with many firms and their caseloads being acquired in whole or in part by other firms. The contexts in which this process has been occurring are legion.

Firms may have decided to cease doing personal injury work because of the reforms made by LASPO 2012, they may have dissolved due to the breakup of a partnership, sadly, some of them may have entered into an insolvency situation, due to a rising costs base and declining revenues.

The acquiring firm will wish to know what the value of the business is that it is acquiring or at the very least, the value of the work in progress of the cases that it is purchasing. Such a purchase is always inherently risky, but I would identify that there are a number of particular types of risk, which are peculiar to the personal injury market, and which at the current time are perhaps under appreciated by the purchasers of law firms.

Risks can be identified to arise from three particular sources. The first is the risk arising from clients who wish to challenge the amount of costs that they have agreed to pay to their own lawyers, a particularly pertinent consideration in a regime of solicitor-own client success fees paid out of damages. This deserves a post of its own.

I note with unease that many firms of solicitors regularly and by default charge a 100% success fee, as a matter of course, without regard to whether this can be justified on the facts of a particular case, whether it constitutes an item of unusual costs, and whether the client is giving informed consent with the requirements of rule 2, of the Code of Conduct firmly in mind.

Risks lying quiescently in the files from this quarter, may serve both to decrease the ostensible value of the work in progress and raise the spectre of litigation or complaints, consuming precious time and resource in dealing with disgruntled clients, the Solicitors Regulation Authority and the Legal Ombudsman.

The second source of risk, is the risk arising from inter-partes costs challenges made by paying parties: in a real sense those solicitors who make a living from personal injury litigation, do so by reason of the miscalculation of insurers whose failure to identify and settle all claims at a pre-litigation stage generate significant costs for claimants’ lawyers.

The insurers in turn will utilise all available arguments to decrease the amount of costs claimed by lawyers, including challenges to the solicitors retainer and its enforceability.

Judging the prospect of success on inter partes costs challenges is itself an art. The principal argument in this respect at the moment, is the ongoing doubt as to the assignability of conditional fee agreements, but there are refinements to this argument relating both to the unwitting termination of conditional fee agreements by incautiously worded letters and the construction of artificial principal-agent relationships, to seek to circumvent the stringencies of LASPO 2012.

The third and the most dangerous area, relates to the regulatory risk, that a solicitors business model, may infringe the Code of Conduct, leading to action by the Solicitors Regulation Authority, with disciplinary sanctions being pursed before the Solicitors Disciplinary Tribunal. An obvious area of risk, relates to the referral fee ban, and the acquisition of cases.

In this respect, many solicitors still take cases from claims management companies(CMCs), under “LASPO compliant marketing agreements”: but do so in the context of clients who have signed up to Damages Based Agreements (DBAs) with the claims management companies.

This can be no more or less than a transparent attempt to circumvent the referral fee ban, with instead of the solicitor paying the client a fee out of costs, the client paying a fee out of damages. The solicitor may also have agreed to send the CMC a cheque for 25% of the relevant heads of damages.

Such an arrangement is problematic in the extreme. It seems reasonably clear under the Damages Based Agreements Regulations 2013, that the only fee a client is liable to pay a CMC is up to 25% of the appropriate heads of damages, net of the costs the client receives from the paying party.

It matters not that the costs accrue to the solicitor, rather than the CMC. In most cases, this will mean that no fee is due at all to the CMC. A solicitor who fails to spot this, advise the client of the position or even worse send a cheque to the CMC does so at his peril.

Moreover a solicitor may not turn a Nelsonian blind eye, to the client’s agreement with the CMC, taking the view that this occurred before his instruction and is none of his business, but is under a duty to advise a client of the nature of the agreement and his obligations.

The sad cases of Beresford and Smith, where solicitors failed to do so and whose relationships with claims management companies were pored over and found wanting, are instructive and on point: the decision of the Solicitors Disciplinary Tribunal can be found here: 9666-2007 – Beresford & Smith and the High Court decision upholding the Tribunal’s decision can be read here: Beresford v Solicitors Disciplinary Tribunal High Court.

Although the Solicitors Practice Rules have been swept away and replaced by the Solicitors Code of Conduct, I do not think it is the case that the regulatory requirements have eased in the years since this case: far from it, if anything the regulatory net is likely to tighten further both for solicitors and CMCs who will shortly be regulated by the FCA.

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