Calculating The Risk In Post LASPO CFA Cases
The High Court examines the requirement to assess risk when setting a post LASPO non-recoverable success fee in personal injury proceedings.
HERBERT v HH LAW LTD  EWHC 580 (QB)
The High Court examines the requirement to assess risk when setting a post LASPO non-recoverable success fee in personal injury proceedings.
HERBERT v HH LAW LTD  EWHC 580 (QB)
CFA : CONDITIONAL FEE AGREEEMENT : CPR 46.9 : RISK ASSESSMENT : SUCCESS FEE
This was an appeal by the Defendant solicitors (HH) from decisions of DJ Bellamy dated 28 April 2017 and 1 June 2017 whereby he (inter alia):
(i) on assessment of HH’s bill of costs in respect of the Claimant (Ms Herbert)’s personal injury claim reduced the success fee under the conditional fee agreement (CFA) from 100% to 15%;
Permission to appeal was granted by a combination of DJ Bellamy and Langstaff J.
Ms Herbert’s claim arose from a road traffic accident (RTA) on 15 October 2015, when the car she was driving was struck from behind by a bus. On 17 March 2016 she and HH entered a CFA.
An internal HH review note dated 26 April 2016 considered Ms Herbert’s completed accident questionnaire and under ‘prospects’ concluded that the claim ‘…enjoys reasonable prospects of success given it is a rear end shunt and liability has been admitted on the linked files. I am a little wary that the client may have slammed on rather than slowed to a stop given the earlier altercation with the Defendant driver, however I am of the opinion that she would not have done considering she had young children in the back of the vehicle‘.
The CFA set the success fee at the statutory maximum of 100%, subject to the maximum of 25% of the total amount of general damages for pain suffering loss of amenity (PSLA) and damages for past financial loss, reflecting Articles 3 and 5 of the Conditional Fee Agreements Order 2013 (the 2013 Order).
The proceedings were issued in the County Court on 23 August 2016, claiming damages for a whiplash injury and consequential loss.
On about 19 September 2016 Ms Herbert accepted an offer of £3,400, with costs to be agreed or assessed in full and final settlement. By letter dated 3 October 2016 she received the net sum of £2221.79 after deduction of HH’s costs.
Ms Herbert challenged HH’s costs, in particular contending that HH had failed to conduct a risk assessment justifying the level of success fee; and that the 100% uplift was out of step with the fixed success fee of 12.5% under the previous costs regime for RTA claims which settled before trial.
The post-LASPO CPR provisions for a solicitor-client assessment are in CPR 46.9. As far as material these provide:
(3) Subject to paragraph (2), costs are to be assessed on the indemnity basis but are to be presumed
(a) to have been reasonably incurred if they were incurred with the express or implied approval of the client;
(b) to be reasonable in amount if their amount was expressly or impliedly approved by the client;
(c) to have been unreasonably incurred if
(i) they are of an unusual nature or amount; and
(ii) the solicitor did not tell the client that as a result the costs might not be recovered from the other party.
(4) Where the court is considering a percentage increase on the application of the client, the court will have regard to all the relevant factors as they reasonably appeared to the solicitor or counsel when the conditional fee agreement was entered into or varied’.
HH explained that its pre-LASPO practice in personal injury litigation was to limit the costs payable by the client to the sums recovered from the other party. It would routinely recover costs on the standard basis and a success fee on those costs. This had been its business model which covered overheads and made profit.
This all changed with LASPO and the loss of the ability to recover success fees from the paying party. In order to continue as a business it had become necessary to restructure the charges to clients in order to cover overheads and make a profit. In consequence:
‘6. As a firm, we considered that the easiest and most transparent way was to make a solicitor own client charge, by way of a success fee which the client could pay out of damages. The success fee would be based on the basic costs that we actually recovered from the other side, thus limiting the fee.
7. We considered that clients would readily understand that method in principle, and we also thought it was fair, as the client’s interests would be protected by the statutory cap on deductions from certain categories of damages of 25%. An individual client would therefore always retain 75% (at least) of his/her damages.
8. Conversely, charging the client an increased hourly rate, or requiring the client to pay hourly rates when only fixed costs were going to be recovered in many cases, seemed to us to be more cumbersome, result in the hardest fought and most difficult cases carrying the heaviest burden of irrecoverable costs and less fair.
9. 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.
10. The success fee in this case is a contractually agreed fee, with the quantified fee of 100% (with the 25% maximum limit capping her liability) specifically agreed between the Claimant and this firm. I have no doubt that the Claimant was fully aware of the charging structure and it was expressly set out in her Conditional Fee Agreement and funding documentation. The Claimant as client was free to ask questions if there was anything she did not understand. In this case, neither at the outset of the case when funding was discussed, or at any point to its conclusion did the Claimant raise a concern, or seek to suggest that the fee was unfair.’
In return for the success fee, HH said, the client obtained a number of valuable benefits including:
(i) the writing off of fees if the case was lost
(ii) the financing by this firm of the Claimant’s disbursements
(iii) the deferral of fees until the end of the case, whenever that might have been.
By his judgment dated 28 April 2017 the Judge agreed with HH that CPR 46.9(4) cannot be read as a ‘stand alone’ and that 46.9 must be read as a whole; and held that CPR 46.9
‘places the burden on the client to prove the charges are unreasonable. It also significantly restricts the scope of the court’s discretion to interfere with contractually agreed amounts through the mechanism of the presumptions’
‘It follows that the Claimant needs to establish good reasons why she should not be bound when challenging the success fee by the presumptions in 46.9(3)’.
As to those presumptions:
‘Where I part company with the Defendant’s submissions on this point is what constitutes unusual nature or amount. It is clear from the file of papers disclosed that the solicitors had little or no direct contact with the Claimant. The Claimant appears to have been referred to the solicitors (details unclear from the file) and the solicitors take instructions on the telephone. There is no face-to-face meeting subsequent to that discussion but there followed significant correspondence, terms and conditions, and documentation in relation to the CFA. There is no evidence on the file of any formal risk assessment, nor note of any discussion in relation to the success fee. Whilst accepting the retainer between solicitor and client is contractual in nature, the reality is that litigation funding of itself is complex, risk assessments and success fees add a further level of complication, as does the charging arrangement of the solicitors. This is an unsophisticated client dealing, by referral, with a claim for damages arising out of a road traffic incident, the circumstances of which appear from the file note relatively straightforward, it being a rear end collision with the claimant’s stationary car. It seems to me not a difficult hurdle in those circumstances for a Claimant to overcome to rebut the presumption of reasonableness in CPR 46.9(3). There is no clear evidence the Claimant approved either expressly or impliedly, with full knowledge, the cost to be incurred, and more particularly, a success fee of 100% could easily be said to be unusual both in nature and amount given the circumstances of the claim that were known to the solicitors at the time. Further, there is no risk assessment on the file that would in any event justify as being reasonable, a success fee of 100%’.
As to 46.9(4), the Judge accepted that the proper interpretation of ‘the relevant factors as they reasonably appeared to the solicitor’ imposed a ‘subjective gloss’ upon the sub-rule.
As to HH’s explanation of its approach to charging the Judge stated:
‘I do not accept as a starting point that a Defendant has to charge clients fees simply to ensure overheads and a reasonable level of profit are made. Furthermore, the relevance of each factor set out by Mr Ralph must surely depend on the circumstances of the case, the facts as given by the client, and the impression the client gives to the solicitors within their witness statement or initial instructions. I do accept that the most valuable benefit provided to the client in the circumstances of this type of case is the potential writing off of fees if the case were lost; the financing of disbursements as the case progressed (albeit in an RTA claim those disbursements would be modest and restricted to a fixed cost medical report and fixed court fees) and the provision of credit, in other words there was no request for interim costs to be paid. However, the latter is again subject to a balanced judgment by the solicitor as to the nature of the claim that is to be pursued and the length of time it is likely to conclude, particularly bearing in mind the existence of the RTA portal process.’
’15. I do not accept that any of those relevant factors are sufficient in addition to the circumstances of the case, the nature of the claim, and the evidence from the Claimant to justify an uplift of 100%. It is difficult to see in the circumstances of this case known to the solicitors at the time that the CFA was to be entered into that an uplift of much more than 12.5% could ever be justified. On the circumstances described by the client the facts of the case was straightforward, the nature of the injury was minor soft tissue damage and whiplash, there was no time off work, and it was likely this case would be settled for a modest amount in a short period of time.’
In the circumstances of the particular case, and allowing for the fact that the ‘modest’ disbursements were funded by the solicitors for a ‘fairly short’ period, the appropriate success fee was held to be 15%, namely £276 plus VAT = £331.20.
24. On behalf of HH, Mr Andrew Hogan rests the challenge on a number of points of principle concerning the interpretation of CPR 46.9.
25. First, freedom of contract. That principle was given particular expression in 46.9(3)(a) and (b) which raise presumptions that costs in their nature and/or amount have been reasonably incurred if they had the express or implied approval of the client. Prima facie that approval would be (and was in this case) satisfied by the client’s consent as embodied in the CFA. In the case of a success fee the ‘amount’ must mean the percentage, since that is the language of a success fee and its quantum will depend on the product of the percentage and the base charges.
26. Mr Hogan acknowledged that in Macdougall v. Boote Edgar Esterkin  1 Costs LR 118, a case on the similar provisions of RSC Order 62 rule 15(2), Holland J stated that approval means ‘informed approval’, adding ‘To rely on the Applicants’ approval the solicitor must satisfy me that it was secured following a full and fair exposition of the factors relevant to it so that the Applicants, lay persons as they are, can reasonably be bound by it” (para.8).
27. However he submitted that those observations must be seen in the context of its particular facts where the explanation given by the solicitor [to] the client was held to be ‘seriously misleading’ (para.10(a)). In the absence of anything misleading, the client’s agreement to the relevant costs raised a ‘strong’ presumption that they were reasonably incurred and/or reasonable in amount which would be difficult to rebut; for to do so would be to interfere with the contractual terms.
28. As to 46.9(3)(c), Mr Hogan accepted that an irrecoverable success fee could be regarded as a cost of an ‘unusual nature or amount’, but here the retainer made it clear that this could not be recovered from the other party. Accordingly this presumption did not arise.
29. In support of these contentions he also contrasted the regime which preceded LASPO, i.e. before 1 April 2013.
At that time a solicitor-client assessment was governed by CPR 48.8 and PD 48. CPR 48.8(2) contained similar presumptions to the present 46.9(3). As to CFAs, 48.8(3) provided: ‘Where the court is considering a percentage increase, whether on the application of the legal representative under rule 44.16 or on the application of the client, the court will have regard to all the relevant factors as they reasonably appeared to the solicitor or counsel when the conditional fee agreement was entered into or varied.’
30. PD 48 then provided that:
‘54.6 Where the client applies to the court to reduce the percentage increase which the solicitor has charged the client under the conditional fee agreement, the client must set out in his application notice : (a) the reasons why the percentage increase should be reduced; and (b) what the percentage increase should be.
54.7 The factors relevant to assessing the percentage increase include (a) the risk that the circumstances in which the fees or expenses would be payable might not occur; (b) the disadvantages relating to the absence of payment on account; (c) whether there is a conditional fee agreement between the solicitor and counsel; (d) the solicitor’s liability for any disbursements.
54.8 When the court is considering the factors to be taken into account, it will have regard to the circumstances as they reasonably appeared to the solicitor or counsel when the conditional fee agreement was entered into.’
31. The non-exhaustive list of relevant factors identified at PD48 para. 54.7 was not replicated in CPR 46.9(4) or any Practice Direction relating to the LASPO regime. Mr Hogan submitted that this was a deliberate and material change. Furthermore Parliament’s removal of that list of ‘relevant factors’ mirrored the changes which LASPO had made to a inter partes assessment.
32. Under the pre-LASPO regime, the maximum percentage increase was set at 100% : Conditional Fee Agreements Order 2000 (SI 2000/823) Article 4. However this was subject to an assessment of what was reasonable in the circumstances, including the degree of risk in the particular case.
33. The Conditional Fee Agreements Regulations 2000 (SI 2000/692) in turn required that a CFA must specify the reasons for setting the success fee at the stated level (Reg.3(1)(a)); and must provide that the increase ceases to be payable, unless otherwise ordered, where it is held to be unreasonable ‘in view of the facts which were or should have been known to the legal representative at the time it was set’ (Reg.3(2)). The Costs Practice Direction (PD 44) then made provision for the assessment which included : ‘11.8 In deciding whether a percentage increase is reasonable relevant factors to be take into account may include (a) the risk that the circumstances in which the costs, fee or expenses would be payable might or might not occur; (b) the legal representative’s liability for any disbursements; (c) what other methods of financing the costs were available to the receiving party’.
34. By contrast, LASPO removed any liability of the losing party to pay any part of the success fee; but provided protection for the client in the form of the maximum 100% success fee (2013 Order, Article 3), subject to a ‘cap’, in personal injury proceedings at first instance, of 25% of general damages for PSLA and past pecuniary loss (Article 5).
35. Thus under the LASPO regime the factor of risk in the individual case necessarily formed no part of the inter partes assessment; and there was equally no basis for that factor to be taken into account on the solicitor-client assessment. The client was protected by the combination of the 100% maximum and the 25% ‘cap’ and there was no need for yet further protection based on an assessment of the risk in the individual case. In this important sense the LASPO reforms must be seen as a package, with the inter partes and solicitor-client assessments proceeding in step.
36. CPR 46.9(4) provided a residual discretion where a client had been actively misled or if obviously irrelevant or irrational factors had been taken into account. As an example of the latter, he cited a differential percentage based on ethnicity.
37. Turning to Mr Ralph’s witness statement, this set out the relevant factors as they reasonably appeared to him. He had not taken account of any irrelevant or irrational factors and accordingly there was no basis to interfere.
38. Turning to the judgment, the District Judge had gone into error in paragraph 12 when he had twice referred to the absence of a risk assessment. This wrongly involved a presumption that there should be a risk assessment in each individual case. The Judge had rightly referred to the ‘subjective gloss’ in CPR 46.9(4), but then had wrongly rejected the factors which Mr Ralph had taken account in setting the success fee at 100%. In paragraph 15 he had reverted to the ‘pure error’ of criticism based on the absence of an individual risk assessment.
39. Mr Hogan accepted that, if he was wrong on this central point, his criticism of the decision must fall away. The Judge’s assessment of the risk at 15%, in this rear end collision case, was ‘in the ballpark’ and not itself open to challenge.
40. For the reasons largely elaborated by Mr Simpson, I do not accept these contentions.
41. Dealing first with the presumptions in CPR 46.9(3)(a) and (b),
I do not accept that the ‘approval’ of the client is satisfied by the mere fact of the client’s consent to the relevant type or amount of cost to be incurred. The language of ‘approval’ evidently requires something more.
I respectfully agree with Holland J in Macdougall that approval requires an informed consent. It follows that the simple refrain of freedom of contract establishes neither the presumptions nor the reasonableness of the success fee in the particular case.
I do not accept that the requirement of approval is directed only at cases where the client has been misled by the solicitor.
That happened to be the circumstance in Macdougall, but there is nothing in the language of CPR 46.9 which so restricts its reach, nor is there any principled reason why it should do so.
43. Thirdly, I do not accept that the LASPO changes had the effect of removing risk assessment as a relevant factor when considering the success fee percentage increase on a solicitor-client assessment.
Whilst LASPO excluded the success fee from the inter partes assessment, CPR 46.9(4) demonstrates that it did not do so for the purpose of a solicitor-client assessment. The terms of that sub-rule are the same as the former CPR 48.8(3), save for the necessary exclusion of an application by the solicitor.
44. When the costs judge is faced with the client’s application under 46.9(4) for a reduction of the percentage increase,
I can see no good reason for the risk in the individual case to be excluded as a relevant factor. On the contrary it is likely to be the primary factor. This reflects the fact that the assessment is concerned with the circumstances of the particular retainer. By that retainer, and the fiduciary obligations to which it gives rise, the exclusive focus of the solicitor is on the best interests of the client: see also the SRA Code of Conduct 2011, Introduction and Outcome 1.6.
45. Accordingly and in any event
I do not accept that the removal of the PD 48 list of relevant factors had the effect of excluding the assessment as a relevant factor under the successor to CPR 48.8(3), namely 46.9(4); nor as a matter relevant to approval for the purpose of the presumptions under 46.9(3).
46. Like the Judge, I accept that 46.9(4) is not free-standing and that CPR 46.9 must be read as a whole. Thus if a client applies for a reduction in the success fee, he may be met by evidence that he gave his informed approval to the percentage identified in the CFA. If so, the presumption in 46.9(3)(a) and/or (b) is likely to be satisfied and will be difficult to dislodge. Alternatively, if the presumption is not established, the costs judge will proceed to the assessment and hence the reasonableness of the success fee percentage.
47. Putting the point another way, if and insofar as HH took no account of the risk in the individual case and provided for a 100% uplift (subject to the 25% cap) in all cases by reason of its particular post-LASPO business model, I consider that informed approval would require this to be clearly explained to the client before she entered the agreement.
48. In any event the suggested irrelevance of a risk assessment is at odds with HH’s own documents relating to this case. Thus its ‘Insurance Information Fact Sheet’ stated that ATE insurance was appropriate because of a list of factors which included that ‘The premium reflects the category of risk’: see also its internal review note of 25.4.16 which assessed the prospects of success.
49. In the absence of any such informed approval by Ms Herbert I see no basis for the application of either presumption (a) or (b). I do not consider that presumption (c) arises, since Ms Herbert was advised that the uplift would not be recoverable from the other party.
50. The presumptions not arising, it was for the Judge to assess the reasonableness of the success fee in the particular case. He rightly held that the risk in the individual case was a relevant factor and rejected the arguments based on HH’s business model. There being rightly no challenge to his assessment of the risk factor at 15%, this ground of appeal must be dismissed.