UK: Legal Costs: Another Stealth Tax?

Last Updated: 2 October 2008
Article by Andrew Parker

To understand the continuing disputes over claimants' costs in personal injury cases, you need to appreciate where the true cost will fall, argues Andrew Parker. Ultimately the premium paying public will foot the bill for any excesses. Meanwhile the drive for CFA compliance (and for transparency in dealings with the client) still needs to be heeded.

England expects...

There is another perspective on the so called "costs war" between the claimant personal injury lawyers and liability insurers. Rather like Nelson, Patrick Allen has put his telescope to the wrong eye ("Practice trends: personal injury", published 22nd April 2008). Although liability insurers did not like the inflationary effect of recoverable success fees and after the event (ATE) insurance premiums under CFAs and although, inevitably, the early scuffles centred on levels of success fees and premiums, the real problem with CFAs is the removal of any control of the costs as a whole. This much was foreseen by the House of Lords in the first appeal case considered on CFAs: Callery v Gray [2002] UKHL28, especially by Lord Bingham of Cornhill:

"5. Even if these contingencies did not occur, the new funding regime was obviously open to abuse in a number of ways. One possible abuse was that lawyers would be willing to act for claimants on a Conditional Fee basis, but would charge excessive fees for their basic costs, knowing that their client would not have to pay them and that the burden would in all probability fall on the defendant or his liability insurers"

The abuse predicted by Lord Bingham six years ago is now readily apparent: the CFA client is faced with ever-increasing charging rates (which he will not pay) and has little interest in how much work is done or money is spent on his behalf. Compare this with the paying client on the defendant side, who has for some years negotiated fixed fees and competitive rates well below those allowed by the court. This is not about discount for volume business: it is about driving efficiencies in file handling and ensuring that low value claims are handled at the right level.

Risk of abuse...

The term "abuse" is apt. The excesses go well beyond the usual arguments as to whether time has been reasonably spent. At the end of April 2008, Regional Costs Judge Duerden in Bury County Court ruled that five exaggerated costs schedules in low value PI claims could be considered in open Court, even though they were marked "without prejudice". The lawyer concerned attempted to describe those schedules as an "opening gambit" in negotiations, but the Judge rightly rejected this assertion, holding that such approach created an uneven playing field and stating that "claiming work which has not been done is dishonest".

Those cases were only brought by the defendant insurers because of the perceived dishonesty, something that should have no place in the conduct of any solicitor. The result of the ruling was that the solicitor in question immediately withdrew all the claims for costs, repaid any interim payments and agreed to pay the defendant's costs himself on an indemnity basis. Perhaps the arguments for fixed costs in low value cases have just acquired a new supporter!

This is not a "victimless crime". Additional costs paid by liability insurers translate into additional premiums for the public, in effect a form of indirect taxation. Just as spiralling fuel costs are driving inflation of diverse goods and services, so insurance premium costs affect most sectors of the economy. Lord Bingham foresaw this effect as well:

"the practical result is to transfer the entire cost of funding this litigation to the liability insurers of unsuccessful defendants... and thus indirectly, to the wider public who pay premiums to insure themselves against liability to pay compensation for causing personal injury"

The Root of the Problem

In the absence of any mechanism for client control of costs incurred on behalf of claimants, it has fallen to the courts to control costs via post event assessment, using the mechanisms provided by the Civil Procedure Rules. Lord Woolf's reforms in 1999 introduced the concept of proportionality, but at the same time took away the previous scale costs restrictions on lower value claims in the County Court (capping for example pre-trial solicitors costs at £1,315). The courts have wrestled with how to implement proportionality ever since, without apparently being able to use this as an effective control mechanism. This is a far wider problem than personal injury cases, but is most acutely felt in that field, as that is where CFAs have been most widely taken up.

A recent press quote exemplifies the problem. Amanda Ashton of Compass Costs Consultants, commenting on the recent Court of Appeal decision in Kilby v Gawith, stated that the practice of using CFAs

"...can immediately increase the annual retained profit of small to medium sized solicitor firms by between £100,000 and £500,000 depending on the mix of work, without adding to the workflow of the firm or attracting any new cases".

That is far removed from the original intention of CFAs, which was to replace legal aid for civil cases and to open up access to the courts for a wider range of litigants, not access to profit for solicitors and costs consultants.

Compliance with the CFA Regulations

The arguments over compliance with the CFA Regulations 2000 are symptomatic of that wider problem. It is troubling that practitioners have described compliance with the CFA Regulations as onerous and have called for Government intervention. Leaving aside the fact that Government has already intervened with the 2005 Regulations to scale down the requirements, solicitors need to remind themselves that where rules are made for the benefit of consumers, they are made to be complied with.

The Court of Appeal decision in Garrett v Halton Borough Council [2006] EWCA Civ1017 involves the simple issue of solicitors recommending an ATE insurance product and not declaring a financial benefit to the firm. Indeed, in some such cases the solicitors have gone further and declared positively that they have no such financial interest, presumably because this was the standard wording urged upon them by the ATE provider and/or referrer of work.

A similar issue arises under the terms of the Accident Line Protect Scheme. It matters not whether that scheme was approved by the Law Society; the same CFA Regulations apply. Lord Justice Dyson in Garrett deliberately focused on the effect of any breach of the Regulations on the "protection afforded to the client". It is precisely that risk of harm, rather than an enquiry whether harm has in fact been suffered, that Parliament was asking the courts to police.

Compliance in 2008

The introduction of the 2005 CFA Regulations has not in fact reduced the solicitors' obligations to protect the client and to provide the client with sufficient information about insurance products. Since 14th January 2005, a quite different legislative regime has applied to solicitors recommending insurance products to their clients, following implementation of the European Directive on Insurance Mediation, 2002/92/EC. The changes to the Solicitors' Financial Services (Conduct of Business) Rules 2001 made in consequence of the Directive require solicitors to disclose, amongst other things, whether they are contractually obliged to introduce or propose insurance only with one or more insurance undertakings. Lord Justice Dyson in Garrett was well aware of this new regime and its unambiguous content may well have influenced his decision:

"Thus, from 14th January 2005, a solicitor proposes that his client should enter into an ATE insurance policy and who recommends a particular policy because it is the only policy which, consistently with his firm's membership of a panel, he is allowed to recommend, must tell the client that he is contractually obliged to recommend a policy with that insurer...If that obligation was observed...the problem which we have had to consider in relation to the Garrett case will not have arisen.."

This obligation is arguably just as onerous as the requirements under the CFA Regulations. The difference is that solicitors found to have breached these requirements will find that the penalty for breach is more draconian; a fine or in extreme cases even imprisonment under the provisions of the Financial Services and Markets Act 2000. Compliance with the rules remains of vital importance.

Doctor knows best?

The reason for this sort of regulation is to ensure that clients are given an informed choice. The days of professional advisers "who know best" are long gone, as litigation against doctors, solicitors and other professionals has made plain. Clients can only consent to arrangements entered into on their behalf if they are given the right sort of information to make their choice.

The watchword is transparency and it is frankly distressing that so many in the profession prefer to avoid that simple requirement. If disclosure of an interest means that the client decides to seek advice elsewhere, that is precisely what was intended by the Regulations and now by the Conduct of Business Rules and the Solicitors' Code of Conduct 2007. Perhaps it will take a prosecution under the FSMA to drive the compliance message home to the profession?

The solution: a quick fix?

Satellite litigation over costs may irritate the courts, but it is a reflection of the importance placed by solicitors on recovering their costs, often seen as more important than the recovery of the client's damages. As for Government action, the sooner the Ministry of Justice announces its plans for PI reform, to include the scope of fixed costs in fast track cases, the better. In practice excessive costs in low value claims can irritate judges even more.

For some time there has been a debate about how changes to the claims process can drive more proportionate behaviour. The growing realisation is that cost control will be essential to deliver process changes: Lord Carter made a similar observation last year in his report on criminal legal aid.

The benefits will be seen not just by liability insurers but also by those claimant firms which understand that a good service can be provided without having to incur the cost of investigating every aspect of the case. As the existing regime of fixed recoverable costs in pre-litigation motor cases shows (see Part 45 of the Civil Procedure Rules), the solicitor's business model can then be based on the efficient throughput of cases: something of benefit to the consumer as well as the insurer. Fixed costs will deliver certainty – for both sides.

First published published in Solicitor's Journal

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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