The text of this lecture was delivered at the Ropewalk Chambers Personal Injury Conference on 8th March 2014.
Introduction
1. It is now just over 11 months since “J day”, when the package of reforms in the Jackson report were implemented. Since then the pace of change has been relentless, and progressive, in the sense that each month has seen fresh developments, whether it be a further tranche of reforms, the introduction of a new set of Protocols, or a further appellate case, which places a gloss on some aspect of the reforms, or indeed serves to provide a new set of exhortations for the county court judiciary.
2. Over the next 20 minutes, I want to look at what I foresee as some areas of interest that are likely to trouble the courts and the profession, over the next calendar year and to consider one particular area of practice, in a little more detail, that of costs budgeting.
3. I have selected costs budgeting, because in my experience to date, the area of practice where it has proved most contentious is that of personal injury litigation. Contentious, in the sense, that although both sides to the litigation, are now demonstrably better informed and versed in costs budgeting, it produces by far the greatest number of contested costs management hearings.
4. Conversely, in other areas of practice, eg commercial litigation, I have found that it is far easier to agree budgets, on a reciprocal basis, which instantly causes the court to lose interest in the costs budgeting process.
Interesting issues
5. Before we get on to the detail of costs budgeting, however, I want to talk about a number of areas, which I think have the potential to raise difficult issues of practice, in the months to come.
These are (in no particular order of priority)
- Solicitor/own client charges
- The role of the Legal Ombudsman
- Damages based agreements, claims management companies and the Code of Conduct
- Proportionality
6. I am conscious this will be something of a whistle stop tour. There are any number of interesting areas, which I will have to leave out, such as the scope to make a solicitor-own client charge, on a compromise of an infant’s claim, or the burgeoning amount of litigation against ATE companies, who running off their personal injury books, may be prepared to pay adverse costs (not least because if they don’t an application for a non-party costs Order may be made against them by an outraged Defendant) but who strive to avoid paying disbursements in failed claims.
Solicitor/own client charges
7. It seems so long ago, that solicitors firms could market themselves, on the basis of no-win, no-fee, with clients keeping 100% of their compensation. Or even 110% of their compensation, or their compensation and a “free” Ipad.
8. What I predicted a year ago, was that solicitors would not seek to charge success fees, for cases taken on post 1st April 2013, as their clients would not be prepared to pay them, or they would dare not, for fear of losing market share to their competitors.
9. I was wrong.
10. Far more pressing concerns, were the fact that many firms carrying heavy overheads, or used to a certain level of profit, meant that success fees have had to continue being charged, and as most firms of solicitors are in the same position, charged with a default rate of 100% as a success fee, subject to the 25% cap. In effect, solicitors recovering what costs they can from the other side, and also taking 25% of the relevant heads of damage.
11. In terms of the Bar, one observes that the market is more sensitive: I have observed solicitors willing to pay counsel’s success fees, solicitors refusing to agree to pay a success fee, and some barristers, eager to gain market share, by positively advertising that they won’t charge success fees. Obviously much depends on the variables in play: the firm, the barrister and the case.
12. But what this means, is, that in a very real sense, for the first time, solicitors are likely to find themselves at odds with their clients, in the heady aftermath of victory, where the client having won the case, now finds that the pie is not only 25% smaller than they thought it would be, but that they are expected to share it with their lawyer.
13. Conflicting interests, result in conflict. So much is a truism. So how will that find expression? The initial forum will of course be a complaint, to the firm, utilising the complaints procedure. But in circumstances, where the client’s complaint is that they are being charged, what they have contractually agreed to pay, such complaints may be given short shrift by the firms complaints resolution procedure. So the client might seek to escalate the matter.
14. One option for a client is to seek a solicitor/own client assessment. I am always struck by how rare these are and how often, when I am instructed to represent a firm of solicitors in the throes of one, how my role is not only to advise on the merits, but also to explain the procedural requirements, and the norms of this type of. It is perhaps a testimony to how many solicitors do manage to preserve good relations with their clients, or are prepared to reach sensible accommodations with their clients in terms of fees. Many solicitors, have never undergone one, and regularly fall foul of the requirements of the Solicitors Act 1974.
15. Common errors that I have seen in the last year, include:
-Not sending a proper Bill of Costs to the client, which complies with the formal requirements of the Solicitors Act 1974.
-Not waiting one month from the service of the Bill, to take proceedings, as required by the Solicitors Act 1974 rendering the action an expensive nullity.
-Not realising that the County Court has no jurisdiction, when the Bill is more than £5000 to hear a solicitor/own client dispute.
-Believing that the application for a solicitor/own client dispute has to be made in London, instead of a more convenient District Registry.
-Failing to analyse, what items have been specifically agreed with the client and are not subject to the scope of review in an assessment, and what items may properly be reviewed by a Costs Judge.
16. In the context of a personal injury case, because the success fee is a percentage multiple, of the base costs, the client would be seeking to reduce the base costs. Some Conditional Fee Agreements that I have seen, also give the Costs Judge a discretion to reduce the success fee on a solicitor/own client basis.
17. Of course, a client may have wider concerns, than that he simply wants to pay less, by way of fees. He may have a genuine concern, that the claim has been mishandled, and thus will seek to escalate the dispute over fees into an action for professional negligence.
18. In this case, the classic argument, is that the case has been settled at a discount to its true value, not for good and proper reasons of litigation risk, but rather because the solicitor has misunderstood its true worth.
19. The starting point, is that when assessing the quantum of a personal injury case, there is never one “right” answer, but only a bracket of values. Depending on the factual matrix of a case, that might range from a few hundred pounds, to a couple of million, depending of course, on whether a case falls within the top or bottom of the bracket of the Judicial College Guidelines applicable to whiplash injuries or whether you accept the Claimant’s or Defendant’s obstetrical evidence on causation.
20. As the Bolam test applies to such anxious analysis, and advice, it has classically been extremely hard, to say that a solicitor was negligently wrong, when giving an opinion on quantum to a client. It is simply not enough to say that another solicitor would have given different advice, if both opinions are on the spectrum of reasonableness, even if at different ends of it.
21. But there is greater scope for such an attack to be made these days, in my view, because of the way that much personal injury litigation is conducted. Many cases, particularly at the bottom end, are conducted by unqualified, inexperienced staff, only as good as the case management system that they operate. If that system is deficient, or is unable to cope with contingencies, then systemic risk enters the picture. And because the risk is systemic, the scope of an error, may be very large indeed, as it could run across a whole caseload.
22. Take for example the case of Procter.v.Raleys (Leeds County Court 6th November 2013, His Honour Judge Gosnell) an interesting decision, some months ago in the county court. The following abstract, is courtesy of Westlaw.
The claimant (P) brought a claim in negligence against the defendant solicitors (R). P, a former miner, had instructed R in 2000 to pursue a claim for damages as a result of developing vibration white finger (VWF). With R’s help, he made a claim for compensation against his previous employers under a scheme which provided tariff-based compensation for people who had developed VWF as a result of their employment at British Coal and subsequent employers. In November 2003, he agreed to settle his claim for £11,141. That sum was paid in settlement of his claims for general damages and handicap on the labour market. No payment was made in compensation for services required as a consequence of his disability, no such claim having been registered under the scheme. P claimed that before becoming symptomatic with VWF he had done gardening, DIY, decorating, and car maintenance and washing, and that once he became symptomatic he needed help from his wife and son with those tasks. His case was that if R had properly advised him about the nature of the scheme and the claims which were open to him he would have made a claim for services and could have received £11,079 under that head. P had no meetings with anyone at R. In September 2001, the lawyer dealing with his claim noted that there was a potential services claim, having received a medical report which indicated that P had difficulty gardening. Shortly thereafter, a standard letter was sent to P in which it was said that he might qualify for a services claim; P was asked to tick boxes indicating the type of claim he wished to pursue, but he ticked only the box for general damages. In January 2003, R sent P a further letter. It was similar in terms to the earlier letter with a summary of the claims, including for services, which could be made. A further copy of the tick-box form was enclosed but P ticked only the box for handicap on the labour market. In October 2003, R sent a letter to P notifying him of the offer which had been made for general damages and handicap on the labour market; that letter also referred to the possibility of making a services claim.
23. The court found judgment for claimant in part. R had been negligent. Certain aspects of P’s case should have rung alarm bells. For example, the medical assessment carried out on him justified a medical presumption that there were certain tasks he would need assistance with, and a file note from October 2003 appeared to recognise a possible DIY/gardening claim. It was not too much to ask the solicitor concerned to directly consult with the client to advise him in layman’s terms what a services claim was and whether on the facts he was qualified to claim.
24. The system set up by R, involving as it did the extensive use of questionnaires and standardised letters with very little personal contact with the client, enabled them to deal with a very high number of claims at limited cost. The disadvantage, however, of such a system was that it was heavily reliant on the client carefully reading all the correspondence and completing the questionnaires accurately. It was foreseeable that some clients (particularly these clients, who were not likely to be highly educated) would not fully understand the long and detailed letters and might misunderstand whether they had a right to claim or not, with the result that potentially valuable claims might never be made when they could have been.
25. The evidence suggested that a number of R’s clients did not fully understand the right to make a services claim until they actually had a meeting or telephone discussion with a lawyer who would fully explain the subject. P’s claim had a real and substantial prospect of success that was more than negligible. His prospects of succeeding with a services claim were good overall. The best assessment of his statistical chances, given all the circumstances, was 50 per cent; he was therefore entitled to recover one half of the sum claimed (see paras 27-29, 41-42 of judgment).
26. It is interesting to note, that the emphasis in the judgment is on the human element of litigation: one suspects that the decision by the solicitors professional indemnity insurers to defend the case, was based on the clear references in file and correspondence to a services claim: equally the judge’s judgment was based on the fact that the client simply did not understand or appreciate what those meant, and the solicitor as the learned professional, could have done better, to ensure that he did.
27. In a sense, both the possibility of a solicitor/own client assessment, and a claim for professional negligence, are unattractive options for a client, just as much as they would be for the receiving solicitor, due to what I would term the transactional costs that a client must face. Having already been burned by litigation once, would a client necessarily be eager to try again, against his own former lawyers? Instead, I think a far simpler option now presents itself to a client. This is the Legal Ombudsman.
The role of the Legal Ombudsman
28. The Legal Ombudsman is free and impartial. What’s not to like, if you are a former client, now only a few clicks of the mouse away from justice? The Legal Ombudsman, has recently published a report on complaints made to him about solicitors where Conditional Fee Agreements, are involved.
29. The report makes for fascinating reading, and also indicates the scale of the problems, which are starting to land on his desk. In particular one notes that over a 12 month period, financial remedies for consumers (for which read, penalties for solicitors) reached almost £1 million. The summary of the report notes the following:
Over recent months, the Legal Ombudsman has become increasingly concerned about the operation of ‘no win, no fee’ legal services. We have made conduct referrals to regulators about the way some law firms have handled these agreements. Our scheme has also made financial remedies to consumers of almost £1 million in the past year.1
‘No win, no fee’ agreements promise customers a way of funding litigation at minimal financial risk to themselves. They are usually formally referred to as conditional fee agreements (CFAs), and are sold on the understanding that a lawyer will not take a fee if the claim fails. In most cases, if the claim is successful, the lawyer will charge an uplift (known as a success fee) in addition to their base costs.
These agreements can offer customers an affordable and simple solution. Not all the time though – we are seeing examples of very poor service in some of the cases that come to us and have made conduct referrals where service providers have failed to honour agreements with customers or have exploited loopholes in the contracts, with serious consequences for their clients.
These raise questions about the way that such agreements are structured and sold. There are signs that these cases may be representative of a wider problem with ‘no win, no fee’ agreements which, if unaddressed, may lead to significant market issues arising. Some, such as the Committees of Advertising Practice (CAP), have previously warned that the phrase ‘no win, no fee’ is “potentially misleading, because it can imply that the client will be liable for no costs whatsoever”. Its guidance note advises that generally, these agreements should not be used unless the service is genuinely free of cost to the claimant. The Advertising Standards Authority has upheld complaints against firms claiming ‘no win, no fee’ because, unqualified, it implied the client would be liable for no costs whatsoever.
30. The report also contains six carefully anonymised case studies, of example complaints where the Legal Ombudsman has intervened. Identified, as A to F, I set them out here, in full, as they are instructive as to how badly things can go wrong.
Miss A
Miss A was hit with a bill for the other side’s costs of nearly £15,000 by her law firm after her personal injury claim was unsuccessful, despite proceeding under what should have been a ‘no win, no fee’ agreement.
The bill came as something of a shock to Miss A. Not only did the firm agree to such terms, it had taken out after the event (ATE) insurance on her behalf to cover any costs – she thought all financial risks had been protected against. However, our investigator discovered that the firm had broken the conditions it had agreed with Miss A and her insurer by proceeding with the case despite it having less than a 50% chance of success. When the case lost, the insurance company refused to pay out. As a result the firm then tried to make Miss A pay for its mistakes.
Miss A was extremely upset. As far as she was concerned the firm had made it quite clear she wouldn’t have to pay anything if she lost the case. She was also worried about how she would afford it. She complained to the firm in the first instance but the firm claimed it had done nothing wrong. Miss A then contacted the Legal Ombudsman for help.
We resolved the dispute informally by asking the firm to honour its agreement and pay the other side’s costs. Miss A told us that she was happy and relieved that we could help.
Ms B
Ms B instructed a firm to assist her with a claim for the mis-selling of a payment protection plan on a debt consolidation loan. At the outset she informed the firm that she had been declared bankrupt, meaning she couldn’t pay any fees. As a result the firm agreed to act for her on a ‘no win, no fee’ basis, taking a success fee if they won the case.
Upon agreeing the case, the firm noted that Ms B did not have any suitable insurance to cover her in the event that the other side wished to recoup its costs. The ‘no win, no fee’ agreement specified that a suitable insurance policy should be in place to protect her and so, having discussed this with Ms B on the phone, the firm agreed to put one in place.
As far as Ms B was aware matters with her claim were progressing and she provided information when requested by the firm. However, some time laterthe firm told Ms B that due to various circumstances she should discontinue her claim. This was confirmed in an email. Though disappointed, Ms B took their advice and thought that this was the end of the matter.
The firm then wrote to Ms B a short while later to say that the court had issued an order for her to pay the other side’s costs, which were in excess of £30,000. They asked if she had any means to pay them. Ms B responded raising concerns that she had not been made aware of any liability for costs and had only discontinued the matter on their advice.
After failing to sort the matter out with the firm directly, Ms B brought her complaint to the Legal Ombudsman.
Our investigator found that there had been poor service on behalf of the firm. It had failed to take out an insurance policy on her behalf, despite saying it would do so, did not advise her of the risks her bankruptcy would cause, and also failed to advise her about any costs associated with discontinuing her claim. Given this, we decided that the firm should waive the other side’s costs and that it should pay Ms B the sum of £600 in recognition of the considerable anxiety the matter had caused her.
Mrs C
Mrs C had instructed a law firm via a claims management company in making a ‘no win, no fee’ personal injury claim following a road traffic accident.
Initially, the case had progressed well. However, the firm suddenly told Mrs C that they were withdrawing from the case as she had not told them that she had previously been involved in a similar accident four years before, leaving her to pay the other side’s costs of £6,000.
On investigation, we found that although the CFA agreement allowed withdrawal if the customer had concealed an important fact, the firm had never asked her about previous accidents and, on the balance of evidence, appeared to have used the issue as an excuse for withdrawing from a case with less than a 50% chance of success. The firm was ordered to pay the costs involved, together with a sum for the inconvenience caused.
Mr D
Mr D’s firm helped him to make a personal injury claim under a CFA based ‘no win, no fee’ agreement, which he understood to mean that he would not have to pay any costs – win or lose. He told us that he was delighted with the outcome of his case until he found out that the firm were keeping almost a third of the damages awarded to him to cover their costs as well disbursements. At that point he complained and came to the Ombudsman.
Our investigation found that the CFA had been written in such a way that it meant costs couldn’t be recovered from the defendant. However, we found that this wasn’t made clear to Mr D when he first instructed the firm. The firm may have been confused as a result of taking over an existing case – since the original firm had ceased business. Nevertheless, it should have been clearer about its costs and how Mr D should pay them. Our investigation concluded that Mr D had not been given a thorough explanation of how the firm’s costs would be recovered.
As a result, an investigator recommended that it would be fair for the firm to reimburse Mr D; returning an additional £7,500 of the compensation originally awarded. Mr D accepted the decision.
Mr E
Mr E instructed a firm to represent him in his litigation claim for unpaid contractual work.
The firm agreed to act on his behalf under a ‘no win, no fee’ agreement but withdrew representation two weeks prior to the court hearing. As a result, Mr E had to act as litigant in person. He was successful with his case and received an award of around £5,000.
However, despite it being the firm’s decision to sever ties with Mr E two weeks before the hearing, they contacted Mr E claiming that they had carried out £24,000 worth of work and that he should settle with them. Mr E felt that this was completely unreasonable as no such costs had been outlined in the contract he signed at the start of the case.The firm threatened Mr E with legal action and so he brought his complaint to the Legal Ombudsman. When we looked at it we found that the agreement he signed stated only that he should pay disbursements in the event of winning, should the firm withdraw its services. We decided that they were not entitled to claim anything other than disbursements and that they should pay Mr E £200 for the distress and inconvenience it had caused him. Mr E accepted our decision.
Mr F
Mr F instructed a firm on a ‘no win, no fee’ basis to represent him in a medical negligence claim.
The firm began the work and commissioned medical reports to support his case. However, eighteen months after the case began, the firm ceased trading, leaving Mr F to pay the medical experts’ costs and the work carried out by the other side.
Mr F had nowhere else to turn and so he brought his problem to the Legal Ombudsman.
Following an investigation we found that the agreement Mr F had entered into made no reference to him having to pay costs in the event of the firm ceasing to trade.
Unfortunately he had already paid out £10,000, having been uncertain where he stood on the matter. We therefore suggested that Mr F liaise with the firm’s indemnity insurers to see if there was any way in which he could recover his costs.
31. One does get the impression, that there is more to these cases, than meets the eye. In one recent case I dealt with this year, a litigant under a no win, no fee agreement had neglected to tell his retained solicitor that he was subject to a Civil Restraint Order (a vexatious litigant) in relation to the Employment Tribunal. His reasoning, was that since the Order did not apply to the County Court, it was irrelevant!
Judicial review of the Legal Ombudsman
32. In a very real sense the Legal Ombudsman functions as judge jury and executioner, when it comes to resolving complaints against the legal profession. There is however a safeguard, in that his decisions are subject to judicial review.
33. The first case to proceed to a full judicial review, is that of Layard Horsfall Ltd v Legal Ombudsman [2013] EWHC 4137 which was decided in the Queen’s Bench Division (Administrative Court) on 20 December 2013. The extract below, is derived from the very helpful analysis on Westlaw.
The claimant firm of solicitors (L) applied for judicial review of the defendant Legal Ombudsman’s decision to limit the fees it charged a client. L’s client had brought proceedings against a builder. L agreed to act on the basis of a conditional fee agreement, the success fee being 67 per cent of base costs if the case was successful before trial and 100 per cent at trial. L set a limit of £5,000, excluding VAT, on the charges the client would incur. When the builder declared himself bankrupt before trial, the client and L agreed that they should discontinue the proceedings. L invoiced the client for a fee of £5,000, including VAT, in respect of its base costs. The client complained to the ombudsman, who found that despite there having been no win under the agreement, which would ordinarily have meant the client was not liable for fees, and despite L’s delay in invoicing the client, it would be fair and reasonable for the client to pay £1,500 plus VAT. L argued that (1) the client’s complaint that it was not entitled to £5,000 under the agreement was not within the ombudsman’s jurisdiction, which was limited by the Legal Ombudsman Scheme Rules r.2.8 to complaints about the standard of service provided by a solicitor to a client and did not include issues about whether a sum was contractually due; (2) the complaint had been time-barred; (3) the ombudsman’s decision was irrational because it failed to recognise that the £5,000 fee was not just a sum due under the contract between it and the client but an agreed settlement figure.
34. The application was refused. (1) Rule 2.8 did not provide that complaints had to be about services provided, let alone about the standards of service. It would be an artificial and unworkable distinction if the ombudsman could consider the quality and levels of services but not issues of wrongful charging or overcharging. The Legal Services Act 2007 s.137(2) provided that the ombudsman could direct that the fees to which a respondent was entitled were limited to a specified amount. That would be a difficult provision to apply if the ombudsman could not consider what was the correct contractual starting point before making such a determination. Further, the ombudsman’s final decision was, in any event, firmly based on a consideration of the level of service which L provided to the client in the context of advising her on her liability of fees under the agreement and the consequence of discontinuing the proceedings, as well as the delay in invoicing her. There was no basis on which that approach could be said to be outside the jurisdiction of the ombudsman (see paras 21-22 of judgment). (2) To require a client to bring complaints in relation to poor service or poor advice in relation to ongoing fees before being invoiced for those fees would be unrealistic and absurd. But in any event, it would have been be appropriate, had it been necessary, because of L’s late submission of the invoice, to have extended under r.4.7 the time limits for bringing a complaint (paras 29-30). (3) In fact, the ombudsman’s decision had largely accepted L’s analysis of the contractual arrangements and the liability of the client as a matter of strict contractual analysis. The decision was based firmly on the ombudsman’s assessment of the manner in which L dealt with the client’s liability for costs and the financial implications of discontinuing. The contractual arrangements set out in the retainer letter and the attached conditional fee agreement were confusing and open to more than one interpretation. It was entirely open to the ombudsman, exercising her wide discretion as to what was fair and reasonable in all the circumstances, which was the test set out in s.137 and r.5.36, to take into account the fact that L appeared to have provided little or no explanation or advice in relation to such matters. The fact that L procured that the client entered a settlement agreement with it at the same time as discontinuing her claim did not remove the concerns that she was not properly advised as to her right and liabilities by L. It was therefore impossible to say that the ombudsman’s view of what was fair and reasonable in all the circumstances, including the amount by which L’s fees should be reduced, was wrong, let alone irrational (para.33).
Damages based agreements, claims management companies and the Code of Conduct
35. Damages based agreements, are useless for personal injury litigation, due to the complexities of the Ontario model, which have been adopted, and more prosaically due to the ability of the client to end the agreement, and walk away without any effective liability to pay the solicitor for the work done under the agreement. There remains also the interesting possibility that the agreements are contentious business agreements, giving the court wide power to review the agreements. And they are pointless, when an appropriately drafted CFA-Lite, with waivers, or hold harmless clauses, can be used to achieve the same effect.
The Damages Based Agreements Regulations 2013
36. The mischief which precludes a solicitor charging his client, when the client elects to terminate the DBA, and change solicitors is found in the restrictive terms of regulation 4 which reads as follows:
Payment in respect of claims or proceedings other than an employment matter
4. (1) In respect of any claim or proceedings, other than an employment matter, to which these Regulations apply, a damages-based agreement must not require an amount to be paid by the client other than—
(a)the payment, net of—
(i)any costs (including fixed costs under Part 45 of the Civil Procedure Rules 1998); and
(ii)where relevant, any sum in respect of disbursements incurred by the representative in respect of counsel’s fees,
that have been paid or are payable by another party to the proceedings by agreement or order; and
(b)any expenses incurred by the representative, net of any amount which has been paid or is payable by another party to the proceedings by agreement or order(2) In a claim for personal injuries—
(a)the only sums recovered by the client from which the payment shall be met are—
(i)general damages for pain, suffering and loss of amenity; and
(ii)damages for pecuniary loss other than future pecuniary loss,net of any sums recoverable by the Compensation Recovery Unit of the Department for Work and Pensions; and
(b)subject to paragraph (4), a damages-based agreement must not provide for a payment above an amount which, including VAT, is equal to 25% of the combined sums in paragraph (2)(a)(i) and (ii) which are ultimately recovered by the client.
(3) Subject to paragraph (4), in any other claim or proceedings to which this regulation applies, a damages-based agreement must not provide for a payment above an amount which, including VAT, is equal to 50% of the sums ultimately recovered by the client.
(4) The amounts prescribed in paragraphs (2)(b) and (3) shall only apply to claims or proceedings at first instance.
Contrast that with the more expansive wording, which deals with employment matters:
Terms and conditions of termination in an employment matter
8. (1) In an employment matter, the additional requirements prescribed for the purposes of section 58AA(4)(c) of the Act are that the terms and conditions of a damages-based agreement must be in accordance with paragraphs (2), (3) and (4).
(2) If the agreement is terminated, the representatives may not charge the client more than the representative’s costs and expenses for the work undertaken in respect of the client’s claim or proceedings.
(3) The client may not terminate the agreement—
(a)after settlement has been agreed; or
(b)within seven days before the start of the tribunal hearing.
(4) The representative may not terminate the agreement and charge costs unless the client has behaved or is behaving unreasonably.
(5) Paragraphs (3) and (4) are without prejudice to any right of either party under general law of contract to terminate the agreement.
37. The problems with the Regulations are well known: including the difficulty that I have identified above. Indeed, there was meant to be an early review of the Regulations (for which read, tear up and start again) in April 2014, but this has now been kicked into the long grass.
38. However, DBAs, are used, and in large numbers by claims management companies, who are using them to circumvent the ban on referral fees. In terms, what a claims management company will do, is “capture” the client, by making them sign a DBA, so that there is a direct liability between the CMC and the client, so that when a client is referred to a solicitors firm, no payment arises between the CMC and the solicitor. No fee to trouble the regulator.
39. But this arrangement, in itself, might yet prove problematic to solicitors firms, when one considers the view that has been taken of similar arrangements, in the dim and distant past, i/e pre 2004, when referral fees were outlawed under the former ban. The case of Beresford.v.The Solicitors Regulation Authority [2009] EWHC 3155 is instructive. The following extract, is drawn from the Westlaw analysis.
The appellant solicitors (B) appealed against a decision of the respondent authority that they had been guilty of conduct unbefitting a solicitor and would be struck off the roll of solicitors. The Department of Trade and Industry had been found liable in negligence for two serious industrial injuries suffered by miners and had entered into claims handling agreements (CHAs) with solicitors representing the miners and with the miners’ union, in order to manage the large number of claims. The CHAs provided that the solicitors’ costs would be paid by the DTI in accordance with a pre-determined tariff. B had acted for a very large number of miners in relation to their claims under the CHAs. B received instructions directly from miners, who were each required to enter into agreements that success fees would be deducted from their compensation. B also received referrals from the union via a claims management company (V), to whom B paid a fee for vetting, marketing and administration in each successful case. The union clients also signed an agreement with V that an administration fee, to cover the cost of pursuing the claim, would be deducted from their compensation. Complaints were made about the legitimacy of the success fees charged and the permissibility of the fees paid by B to V.
The solicitors disciplinary tribunal found B guilty of conduct unbefitting a solicitor on the grounds that
(i) charging success fees had not been in the best interests of the clients and had been improper;
(ii) B’s agreement with V was in conflict with the interests of B’s clients, and B had failed to advise clients about the propriety of the administration fee agreement with V;
(iii) they had failed to give their clients adequate information about costs and the funding of the claims generally;
(iv) the payments made by B to V were referral fees in breach of the Solicitors’ Introduction and Referral Code 1990, and the agreement with V was a sham intended to disguise that fact; and
(v) they had breached the Solicitors’ Practice Rules 1990 r.9 by entering into an arrangement for the introduction of clients with personal injury claims with claims assessors who solicited or received contingency fees in respect of such claims. The tribunal made a full costs order against B, even though they had successfully defended three allegations against them. On appeal B accepted that they had failed to give their non-union referred clients sufficient information about costs or the funding of the claims in general, but appealed on the basis that the tribunal’s finding were wrong in fact and law, and the reasoning was inadequate.
40. The Divisional Court, upheld the stance taken by the SRA.
(1) The fact that B had been prepared to accept referrals from the union with no success fee and an obligation to make payment to V indicated that their own general assessment of the commercial risk of such cases did not deter them from taking cases with no success fee at all. It was therefore unconscionable to require non-union referred miners to enter into agreements for success fees to be paid from their compensation, without at least full and proper individual explanation that the DTI were paying ample fees for successful cases and that a proper assessment of risk would scarcely justify any success fee, because the features of the CHAs removed most risks associated with fully contested litigation.
(2) The payments that the clients had agreed to make to V were an obligation that arguably they should not have been induced to undertake as V did not conduct the claim for the client, it merely referred the client to B. There was a plain conflict of interest between B and their clients because B had an interest in maintaining the flow of union clients being referred to them, but the clients had an interest in being advised, and ought to have been advised, that the fee to be paid to V was at best questionable.
(3) B had failed to give its union-referred clients sufficient information about costs, as it had with its non-union referred clients.
(4) The payments made by B to V were not genuine payments for services and B knew they were not. They had dishonestly assented to the arrangement intending, if necessary, to mislead anyone who might question the genuineness of the payments.
(5) The union and V were not themselves solicitors or advocates and their fees were payable only in the event of success. The clients had been formally joined as plaintiffs to existing proceedings begun before a court, albeit that they were stayed under the terms of the CHAs, and therefore the claims were contentious business within r.8. Accordingly, B were in breach of r.9 by paying contingency fees to V.
(6) The tribunal had been justified in ordering B to pay the whole of the authority’s costs, even though three allegations had not been proved against them. Taken in the round, the tribunal had made a cumulative series of findings of very serious misconduct on a huge scale and in relation to thousands of vulnerable clients in proceedings which were expensively contested in nearly every particular. The allegations that were successfully defended were a small fraction of a very serious whole.
Proportionality
41. One of the big ticket changes coming into force last April, was the abolition of the Lownds test, and its replacement with a new, more astringent test of proportionality. In a sense, this should have been the single most significant reform: Lord Justice Jackson’s review was meant to assess the causes of perceived disproportionate costs, and come up with proposals for a system of proportionate costs.
42. So proportionality should have been at the centre of the review, and subject to a rigorous definition, within a review system of law and procedure. Instead, the review elected for a series of pragmatic reforms, which have dealt with matters on a piecemeal basis: and without respect for both the law of unintended consequences, and due regard for transactional costs.
43. By way of example, the new rule 3.9, which has already generated an avalanche of satellite litigation, and costs budgeting, which has demonstrably added to the court’s workload and delayed the resolution of cases, probably adding substantially to the costs of litigation.
44. Proportionality then is both a missed opportunity and also, a likely source of further friction in the civil litigation system, because the new principle will generate both uncertainty, and scope for argument. To date, the generous lag provided by the transitional provisions, meaning that cases commenced before 1st April 2013, have not been subject to proportionality, means that it has largely, not been an issue.
45. But this year it will be. So let us remind ourselves, what it means, or at least, how it is defined in the rules. Rule 44.3 says, so far as is material:
(2) Where the amount of costs is to be assessed on the standard basis, the court will –
(a) only allow costs which are proportionate to the matters in issue. Costs which are disproportionate in amount may be disallowed or reduced even if they were reasonably or necessarily incurred; and
(b) resolve any doubt which it may have as to whether costs were reasonably and proportionately incurred or were reasonable and proportionate in amount in favour of the paying party.
(5) Costs incurred are proportionate if they bear a reasonable relationship to –
(a) the sums in issue in the proceedings;
(b) the value of any non-monetary relief in issue in the proceedings;
(c) the complexity of the litigation;
(d) any additional work generated by the conduct of the paying party; and
(e) any wider factors involved in the proceedings, such as reputation or public importance.
46. What therefore does this mean?
47. Well, with the application of skill and thought it might not mean a great deal. The starting point for the defence, will be to argue at the commencement of the proceedings, that if a case on a rough evaluation is worth £30,000 then a costs budget, should not exceed £30,000 and indeed should be less than that. Or alternatively that if a claim settles for £30,000 say, costs, should not exceed £30,000 when a detailed assessment is undertaken.
48. But that is a false analysis. Because “conduct” is very much part of the criterion, it should be possible for a Claimant to argue that costs have been built up by the conduct of the defence: suppose for example, a case fights all the way to trial, on the Multi-track, but the Claimant’s case on causation collapses, so he is awarded £2000 not £200,000 but the defence have made no offer? In those circumstances, any argument that the Claimant’s costs should be circa £2000, should be kicked out of court.
Front loading of costs: strategy, tactics and avoiding costs budgeting
49. The other point to note is that costs budgeting, only applies to issued claims. So in the vast majority of cases, which settle without the need for the issue of proceedings, costs budgeting, and costs management in consequence can never apply. So there will be no prospective application of the proportionality principle at all.
50. Following on from that, even in cases where claims are issued, costs budgeting and management, is prospective, not holistic. The court has no jurisdiction, to budget costs which have already been incurred.
51. So the clear consequence of the rules, for the rational practitioner, is to front load the costs, so that the most significant items, have already been incurred, prior to the issue of proceedings, and thus are immune from costs budgeting.
52. This, of course, does not assist with the application of proportionality, on any detailed assessment of costs, but as has long been demonstrated, detailed assessment, carried out long after the costs have been incurred, is much less effective as a tool to control costs, than prospective capping, managing or budgeting could ever be.
Costs budgeting
53. I now turn to consider costs budgeting, and its related subject of costs management. No area of the rules, in my experience, has resulted in more divergent practices across the country, and indeed, between different judges.
54. The rules, should be relatively clear.
55. Starting with the application of the Rules, it should be noted, that they apply to all multi-track cases, subject to certain exceptions, which will not trouble, for the most part, personal injury practice.
3.12
(1) This Section and Practice Direction 3E apply to all multi-track cases commenced on or after 1st April 2013, except –
(a) cases in the Admiralty and Commercial Courts;
(b) such cases in the Chancery Division as the Chancellor of the High Court may direct; and
(c) such cases in the Technology and Construction Court and the Mercantile Court as the President of the Queen’s Bench Division may direct,
unless the proceedings are the subject of fixed costs or scale costs or the court otherwise orders. This Section and Practice Direction 3E will apply to any other proceedings (including applications) where the court so orders.
(2) The purpose of costs management is that the court should manage both the steps to be taken and the costs to be incurred by the parties to any proceedings so as to further the overriding objective.
Filing and exchanging budgets
56. The first step in the process, and what may be the last, is to require the filling and exchange of budgets.
3.13 Unless the court otherwise orders, all parties except litigants in person must file and exchange budgets as required by the rules or as the court otherwise directs. Each party must do so by the date specified in the notice served under rule 26.3(1) or, if no such date is specified, seven days before the first case management conference.
The sanction for doing so, is well known, and inscribed on the heart of Mr Mitchell, who has, of course, made legal history for all the wrong reasons.
Failure to file a budget
3.14 Unless the court otherwise orders, any party which fails to file a budget despite being required to do so will be treated as having filed a budget comprising only the applicable court fees.
Costs management orders
57. It does not follow, that all budgets lead to anything. It is perfectly possible to argue, and I have, that because a budget is not obviously disproportionate, the court should stop there, and not make a costs management Order.
58. Note the use of the word “may”. But many District Judges will gamely roll up their sleeves, and follow Ramsey J’s exhortations, to make costs management Orders, in virtually every case.
3.15
(1) In addition to exercising its other powers, the court may manage the costs to be incurred by any party in any proceedings.
(2) The court may at any time make a ‘costs management order’. By such order the court will –
(a) record the extent to which the budgets are agreed between the parties;
(b) in respect of budgets or parts of budgets which are not agreed, record the court’s approval after making appropriate revisions.
(3) If a costs management order has been made, the court will thereafter control the parties’ budgets in respect of recoverable costs.
59. The requirements of costs management have not been thought out, or costed, or considered in relation to the frictional costs these reforms create. By frictional costs, I mean most obviously the “costs of the costs” but also, the additional cost to the court service, whether the District Judge’s time is best spent on this, as opposed to the 101 other things they are required to do, and the delay these hearings add to their general lists. If all cases are put back 3 months, how much additional cost does that generate in litigation overall? How much is that delay worth to the litigants? No one knows.
Costs management conferences
60. Rule 3.16(2) has been quietly dropped in many courts, who take the view that these must be dealt with by a face to face hearing.
3.16
(1) Any hearing which is convened solely for the purpose of costs management (for example, to approve a revised budget) is referred to as a ‘costs management conference’.
(2) Where practicable, costs management conferences should be conducted by telephone or in writing.
Court to have regard to budgets and to take account of costs
61. The sting in the process, at the end, is the de facto cap, that a costs management Order represents, and in effect the crock of gold at the end of the rainbow for a Defendant who of course, all things being equal, will be paying the Claimant’s costs.
3.17
(1) When making any case management decision, the court will have regard to any available budgets of the parties and will take into account the costs involved in each procedural step.
(2) Paragraph (1) applies whether or not the court has made a costs management order.
Assessing costs on the standard basis where a costs management order has been made
3.18 In any case where a costs management order has been made, when assessing costs on the standard basis, the court will –
(a) have regard to the receiving party’s last approved or agreed budget for each phase of the proceedings; and
(b) not depart from such approved or agreed budget unless satisfied that there is good reason to do so.
62. The Practice Direction provides some further flesh on the bones of the rules, but what is curiously lacking, is guidance to the court, as to when a costs management Order should or should not be made. Nor does it deal with the question as to how costs budgets are meant to evolve. Or when and in what circumstances, they can be uprated?
1 Unless the court otherwise orders, a budget must be in the form of Precedent H annexed to this Practice Direction. It must be in landscape format with an easily legible typeface. In substantial cases, the court may direct that budgets be limited initially to part only of the proceedings and subsequently extended to cover the whole proceedings. A budget must be dated and verified by a statement of truth signed by a senior legal representative of the party. In cases where a party’s budgeted costs do not exceed £25,000, there is no obligation on that party to complete more than the first page of Precedent H.
(The wording for a statement of truth verifying a budget is set out in Practice Direction 22.)
Costs management orders
2.1 If the court makes a costs management order under rule 3.15, the following paragraphs apply.
2.2 Save in exceptional circumstances –
(1) the recoverable costs of initially completing Precedent H shall not exceed the higher of £1,000 or 1% of the approved budget;
(2) All other recoverable costs of the budgeting and costs management process shall not exceed 2% of the approved budget.
2.3 If the budgets or parts of the budgets are agreed between all parties, the court will record the extent of such agreement. In so far as the budgets are not agreed, the court will review them and, after making any appropriate revisions, record its approval of those budgets. The court’s approval will relate only to the total figures for each phase of the proceedings, although in the course of its review the court may have regard to the constituent elements of each total figure. When reviewing budgets, the court will not undertake a detailed assessment in advance, but rather will consider whether the budgeted costs fall within the range of reasonable and proportionate costs.
2.4 As part of the costs management process the court may not approve costs incurred before the date of any budget. The court may, however, record its comments on those costs and should take those costs into account when considering the reasonableness and proportionality of all subsequent costs.
2.5 The court may set a timetable or give other directions for future reviews of budgets.
2.6 Each party shall revise its budget in respect of future costs upwards or downwards, if significant developments in the litigation warrant such revisions.
Such amended budgets shall be submitted to the other parties for agreement. In default of agreement, the amended budgets shall be submitted to the court, together with a note of (a) the changes made and the reasons for those changes and (b) the objections of any other party. The court may approve, vary or disapprove the revisions, having regard to any significant developments which have occurred since the date when the previous budget was approved or agreed.
2.7 After its budget has been approved, each party shall re-file and re-serve the budget in the form approved with re-cast figures, annexed to the order approving it.
2.8 A litigant in person, even though not required to prepare a budget, shall nevertheless be provided with a copy of the budget of any other party.
2.9 If interim applications are made which, reasonably, were not included in a budget, then the costs of such interim applications shall be treated as additional to the approved budgets.
How are these provisions being applied around the country ?
63. The amount of regional variation is huge:
London-In London, the procedure adopted by the Designated Civil Judge, is that costs budgeting hearings, should take place with a time estimate of 90 minutes, and be in person, not by telephone, and listed before a full time District Judge.
Cardiff-In Cardiff, the Designated Civil Judge, in consultation with the Regional Costs Judge has decided to adopt the same approach.
Liverpool-In Liverpool, the same approach is adopted, but with the added twist that the costs budgeting hearing is to be treated as a mini-detailed assessment, with the District Judge making such decisions, as to which grades of fee earners should be used for the calculations, and at what hourly rates.
Truro-In Truro, if the budget seems to show a figure which is at or below, the likely recovery of damages, the District Judge will decline to make a costs management Order.
Bradford/Uxbridge-What a flexible concept the Fast Track is. Any case worth up to 50k, and where it can reasonably be expected to be completed in a day, is being allocated to the Fast Track, and thus avoiding the need for any consideration of costs budgets at all.
Nottingham-In Nottingham, costs budgeting hearings are again being listed for 90 minutes on a face to face appointment, with the consequence that I have been told that 3 months of delay has been added generally to the District Judge’s lists. The Voice of Common Sense on the District Bench, has (with the tape off) expressed his dismay at the time being eaten up by this activity.
Newcastle-And in Newcastle, it seems they have never heard of costs budgeting.
Tactics for Claimants
64. So what tactics can sensibly be adopted by Claimants and what should be avoided? The starting point for a Claimant should be, to seek to have a case if at all possible, allocated to the Fast Track. What is lost in relation to, for example, Fast Track fixed trial costs, will be easily recovered, through avoiding the regime of costs management.
65. If the case is a “proper case”, then I would suggest, that the more detail the better when starting to consider budgeting, even to the extent of drawing up the Bill prospectively, as it is much more difficult to attack detailed, reasoned justifications for work to be done.
66. This in turn gives rise to the consideration of the drawing up the Precedent H. For years, solicitors were used to submitted costs estimates, which were always rounded to the nearest £5000, drawn on the back of the metaphorical fag packet. These should always be bespoke: some budgets I have seen are clearly one size fits all, referring to multiple Defendants, when there is but one, or multiple experts, when all that is being relied upon is one orthopaedic report.
Tactics for Defendants
67. Conversely, for the unwary solicitor representing a Claimant, the Defendant has a real opportunity to make ground, in limiting any future claim for costs, by a sustained assault on the Claimant’s budget at the earliest possible opportunity.
68. The attached (suitably anonymised) Skeleton Argument, shows how I presented the arguments at a costs budgeting hearing just before Christmas. The Claimant’s opening gambit, had been to submit a generic budget seeking costs net of additional liabilities, at just under £50,000.
69. This was then withdrawn, and replaced, with a slightly smaller budget, but still seeking over £38,000 with a more tailored narrative.
70. The actual claim was for personal injuries, sustained in a tripping accident, at a hotel in the Caribbean, where a District Judge had allocated it to the Multi-track, initially, because of the fact that the accident took place outside of the jurisdiction.
71. The Deputy District Judge, making a costs management Order as a matter of course worked methodically through the budget, and with revisions, gave the Claimant a budget of £20,000-a very good example, of how substantial savings can be gleaned from this process, when argued fully.
82. What could the Claimant have done differently? Sought a re-allocation to the Fast Track. Put forward a detailed Bill, explaining how the money would be spent. Drafted the contingencies, with more imagination, to soft peddle the incurrence of those costs…All of these were options, which could, but were not taken.
IN THE BARCHESTER COUNTY COURT CLAIM NO: XX12345
BETWEEN:-
MRS PLAINTIFF
Claimant
And
NEGLIGENCE INCARNATE LIMITED
Defendant
________________________
SKELETON ARGUMENT
ON THE PART OF THE DEFENDANT
________________________
Introduction
1. This is the Skeleton Argument of the Defendant drafted to assist the court with costs management issues, to be determined at a case management conference and costs budgeting hearing listed for 18th December 2013. The directions have been agreed between the parties. What are not agreed are the Costs Budgets.
The law
2. Costs budgeting is a relatively new phenomena, and so this Skeleton sets out the approach that the court should adopt.
3. This is a multi-track case and per rule 3.12 the provisions of the Civil Procedure Rules relating to costs management apply.
4. Per rule 3.12(2) the purpose of costs management is that the court should manage both the steps to be taken and the costs to be incurred by the parties to any proceedings so as to further the overriding objective.
5. The parties have complied with rule 3.13 in that the parties have filed and served costs budgets. No question of a sanction under rule 3.14 arises.
6. Pursuant to rule 3.15 the court has a wide discretion to make a costs management order, or not:
3.15
(1) In addition to exercising its other powers, the court may manage the costs to be incurred by any party in any proceedings.
(2) The court may at any time make a ‘costs management order’. By such order the court will –
(a) record the extent to which the budgets are agreed between the parties;
(b) in respect of budgets or parts of budgets which are not agreed, record the court’s approval after making appropriate revisions.
(3) If a costs management order has been made, the court will thereafter control the parties’ budgets in respect of recoverable costs.
The Practice Direction 3E provides no guidance whatsoever, on when or in what circumstances it should be appropriate to make a costs management order.
7. However in the 16th Implementation Lecture, at paragraph 19, Ramsey J stated:
However, subject to particular cases where it might not be appropriate to make a costs management order or where the timing of the costs management order might be deferred, the courts are likely to make costs management orders both in the cases which are defined in CPR 3.12(1) and in other proceedings outside the defined class. As costs management is a necessary adjunct to proper case management and to the furtherance of the overriding objective35 there will, in most cases, be a presumption in favour of making a costs management order.
8. If a costs management order is made, then the following approach is dictated by Practice Direction 3E:
2.3 If the budgets or parts of the budgets are agreed between all parties, the court will record the extent of such agreement. In so far as the budgets are not agreed, the court will review them and, after making any appropriate revisions, record its approval of those budgets. The court’s approval will relate only to the total figures for each phase of the proceedings, although in the course of its review the court may have regard to the constituent elements of each total figure. When reviewing budgets, the court will not undertake a detailed assessment in advance, but rather will consider whether the budgeted costs fall within the range of reasonable and proportionate costs.
2.4 As part of the costs management process the court may not approve costs incurred before the date of any budget. The court may, however, record its comments on those costs and should take those costs into account when considering the reasonableness and proportionality of all subsequent costs.
2.5 The court may set a timetable or give other directions for future reviews of budgets.
2.6 Each party shall revise its budget in respect of future costs upwards or downwards, if significant developments in the litigation warrant such revisions.
Such amended budgets shall be submitted to the other parties for agreement. In default of agreement, the amended budgets shall be submitted to the court, together with a note of (a) the changes made and the reasons for those changes and (b) the objections of any other party. The court may approve, vary or disapprove the revisions, having regard to any significant developments which have occurred since the date when the previous budget was approved or agreed.
2.7 After its budget has been approved, each party shall re-file and re-serve the budget in the form approved with re-cast figures, annexed to the order approving it.
9. A number of points can be drawn from the Practice Direction:
(i) A costs management order will usually be made: it should first ascertain the measure of agreement of the budgets. Where these are agreed, there is no scope for the court to unpick the agreement.
(ii) Where there is disagreement, the court does not conduct a mini-detailed assessment.
(iii) The court looks at the total for each phase, not individual items.
(iv) The court is not concerned to elect upon a figure for each phase, but rather to see if the figure is within a reasonable range.
(v) The touchstone is proportionality: do the costs envisaged bear a “reasonable relationship” to the value of the claim.
10. The 16th Implementation Lecture delivered by Mr Justice Ramsey, notes that this is “light touch” budgeting:
21. The primary focus will be both on the total costs and the overall costs for each stage of the proceedings. Whilst the court will consider the underlying time estimate and applicable rate in reviewing the overall cost of a stage, the court is not embarking on a detailed assessment in advance. In this way there is discouragement of a detailed nitpicking approach which can lead, in itself, to increased costs and satellite issues. Rather there is encouragement for a lighter approach which considers whether the total budgeted costs of each stage fall within the range of reasonable and proportionate costs for a given case.
The background
11. The starting point is to consider what the issues are in the case, thrown up by the statements of case, and also to consider the costs advanced in the budget, by reference to the case management order.
12. This is a claim for a tripping accident. It happen at a hotel on an island in the Caribbean, but the law is not complicated, as per the Particulars of Claim. The depths of private international law, are not being plumbed in this case.
13. The claim for special damages is limited to £8335.50. In addition to a claim for general damages, principally a spiral fracture of the right distal tibia. The value of the claim is well within the Fast Track limit and the Claim Form is limited to £25,000.
14. So the figure to which it should be a reasonable relationship, can be put generously, at £20,000.
15. It is most unlikely that oral expert evidence will be required at trial or indeed any further expert evidence.
The Defendant’s costs
16. The Defendant has submitted a Costs Budget, which has been drawn up to provide the court with anticipated costs to the conclusion of the trial. The budget is far more modest, and more realistic. With that in mind, the court is asked to direct the Claimant’s Costs Budget to be amended as follows.
| Box on Precedent H | Claimant’s budget | Defendant’s budget | What Claimant’s budget should be |
| Pre-action costs | £6619.05 | £750 | £6619.05 |
| Statements of case | £3488.50 | £2000 | £2000 |
| CMC | £3875.50 | £900 | £2000 |
| Disclosure | £1580.10 | £600 | £600 |
| Witness statements | £2540.70 | £700 | £700 |
| Expert reports | £845.60 | £200 | £845.60 |
| PTR | £4322.90 | £700 | £700 |
| Trial preparation | £5814.10 | £600 | £2000 |
| Trial | £5326.40 | £2500 | £3000 |
| ADR | Nil | £200 | |
| Total | £38,013.25 | £8950 | £18,644.45 |
ANDREW HOGAN
24, The Ropewalk,
Nottingham,
NG1 5EF
15th December 2013