Ministry of Justice Consultation - Part 2 of the LASPO Act: Litigation Funding and Costs
Part 2 of the LASPO Act: Litigation Funding and Costs
Response by Thompsons Solicitors
- Section 44 abolished the recoverability of Conditional Fee Agreement success fees. In your experience what have been the impacts of this reform, and the regulations made under it?
The main impact of this reform on Thompsons Solicitors and our clients have been that, on average, our clients are worse off financially and our staff have faced redundancies and other challenges.
Before April 2013, we recovered success fees from losing defendants. The success fee correctly reflected the risk of non-payment or reduced payment in conditional fee (CFA) cases.
There is no dispute that it is appropriate for a law firm to charge success fees in CFA cases. Success fees are properly payable by defendants because it was their negligence or breach of statutory duty that had caused the injury victim to incur those fees. In the same way that a medical expert’s fee or a court fee properly incurred by a claimant is recoverable from defendants in a successful case, so a success fee properly incurred by the same claimant should be recoverable from the same defendants.
In addition, the amounts of the success fees, which whilst initially disputed to a significant extent by defendants and their insurers, were substantially agreed by both sides some years before LASPO took effect in 2013. The agreement came about due to a collectively negotiated mediation process, overseen by the Civil Justice Council and agreed upon by both sides of the personal injury (PI) industry. The agreed success fees - ranging from 12.5% in road traffic cases and 25% for accident cases up to 100% for work-related stress and other complex disease case types - were then enacted in Civil Procedure Rules.
The certainty and fairness achieved in respect of recoverable success fees before the coalition government took office in 2010 was destroyed by LASPO in 2013. Claimants’ recovery entitlement was removed at a stroke. In clinical negligence, where recoverable success fees had typically been 40-75%, recoverability was also removed overnight.
As was intended by LASPO’s instigators, there has been a significant shift in money and power away from injury victims to the benefit of the already very wealthy insurance industry. It made a relationship that was already acknowledged as being asymmetric even more one-sided and in favour of the powerful insurance industry.
LASPO also had a devastating impact on the PI industry and those employed in that industry including junior lawyers, support staff, finance and IT personnel. Many firms who carried out significant amounts of PI work before 2013 have downsized, have exited the market and/or have closed entirely.
Thompsons have managed to retain a viable business but only at the cost of hundreds of jobs – we were forced to conduct the biggest redundancy exercise in our 97 year history. It also meant the replacement of experienced and highly skilled staff by more junior, less experienced case handlers, and an enforced move away from a wholly local service to concentrating much of our work in two new national units. Case intake and the number of cases we settle have reduced. We are clear that we are providing a better service than any of our competitors, but there is no doubt that the industry as a whole, and the quality of service law firms can provide, has been adversely affected by these changes.
All PI claimants recovering damages are people injured due to the fault of their employers or the negligence of others. Those victims of injury have suffered a combination of disadvantages due to section 44 of LASPO:
- Law firms have no economic choice other than to ask those clients who have signed CFAs to pay a deduction by way of a success fee (capped at or below the permissible amount) from their awards for pain/suffering/loss of amenity and from their past financial losses. The long-held principle that the function of tort law is to restore the victim, so far as possible, to the position they were in before they were injured – that “the polluter pays” - has therefore been substantially undermined. The 10% additional general damages now awarded following the recommendation of Jackson LJ goes nowhere near to compensating for this loss as it is confined to general damages only, whereas success fees apply a higher percentage to a greater amount as past loss is included.
- Law firms are unable to offer the same type of service compared to the position pre-LASPO, due to the need to make savings, cut jobs and the enforced use of less experienced, less qualified staff who are frequently now based in national units remote from the client’s home. As outlined above, we are clear that we are providing a better service than any of our competitors but the reality is that the industry as a whole, and the quality of service law firms can provide, has been affected by these changes. There is greater reliance on telephone and email contact, rather than face to face meetings. Clients have to make do with portals - a remote interface - to upload evidence and check the status of their cases rather than face to face contact or even letters/emails. This impacts on clients, especially those (typically the most vulnerable or marginalised) who do not have use of smart phones/tablets, or who are not comfortable with technology. It impacts on the legal process, as an assessment of the value of first hand evidence obtained in this way is simply not comparable to an assessment made when there is face to face contact.
From the perspective of injured people and those who represent them, the loss of recoverable success fees has had a wholly negative impact. For insurers, as intended, the impact has seen huge savings and an enormous increase in share prices, profit, dividends and executive pay.
Despite promises made by insurers to use these savings to reduce premiums for consumers, the opposite has been the case, premiums are higher now than ever before. Ironically and cynically the insurance industry appears to be getting away with the same trick again with the Civil Liability Bill (a fresh round of attacks on injury victims estimated by the government to save insurers £1.3bn a year), by again making unenforceable promises to pass on savings by way of reduced premiums.
- Section 46 abolished the recoverability of after the event (ATE) insurance premiums (except in relation to clinical negligence expert reports). Qualified One Way Costs Shifting (QOCS) was introduced in its place in PI claims. In your experience what have been the impacts of this reform?
In relation to adverse costs orders in favour of defendants only, QOCS has to a limited extent worked reasonably well as a partial replacement for recoverable ATE insurance premiums. But it is only a partial replacement. Victims are worse off in that adverse costs orders will be made and taken from their damages where they fail to beat a Part 36 offer. This can mean wiping out all of their damages and is wholly disproportionate compared to the weak penalties on defendants where they fail to beat claimants’ Part 36 offers (see response to question 4).
In our view QOCS needs to be strengthened to provide greater protection for victims’ damages (for example by protecting some heads of damages and/or a percentage of the total) and to level the playing field.
In addition, in complex cases where proceedings may be required against multiple defendants, the Court of Appeal has recently confirmed (Cartwright v Venduct Engineering Ltd  EWCA Civ 1654) that, in principle, the costs of successful defendants can be taken from the victim’s damages recovered from other defendants and, again, that could wipe out those damages. This further demonstrates the weakness of QOCS in protecting claimants compared to the recoverability of ATE premiums.
Further, QOCS does not assist claimants with the cost of unrecovered disbursements. Claimants have simply had to bear that extra expense without the cushion of recoverable ATE. Again, that has been a straightforward transfer of benefit from victims and their representatives to the insurers acting for those who negligently caused the injury.
This has been especially significant with the unprecedented inflation in court fees since LASPO. For example, if a victim is unsuccessful in a claim for a serious injury, which would have attracted an award in excess of £200,000, they now face a liability of £10,000 for the issue fee alone. That fee, which would previously have been have been £1,275 immediately pre-LASPO would have been recoverable on ATE insurance.
There will be many other unrecovered disbursements in both successful and unsuccessful cases. These include medical records fees, expert fees, police or HSE report fees, and medical report fees. Claimants, therefore, have three choices at the start of their case, all of which will leave them worse off than pre LASPO.
The first option is to carry the risk themselves. In many cases, this will simply not be realistic as the amounts will run to many thousands, or tens of thousands, of pounds.
The second option is to take out non-recoverable ATE cover. That would mean a further reduction in damages, over and above the success fee, as the ATE premium will be payable from damages.
Thirdly, they could agree a higher success fee with their solicitors (subject to the overall cap) such that the law firm would then carry the risk of unrecovered disbursements. Again, that will mean a further reduction in the claimant’s damages.
The restoration of recoverable ATE for disbursements in successful cases, combined with a strengthening of QOCS as set out above, would be a reasonable, progressive step to allow injury victims to retain all or most of the damages they are entitled to. Injury victims can only recover compensatory damages from defendants, i.e. an amount calculated to put them back in the position they would have been without the injury. The only additional amount to mitigate against deductions is the 10% extra general damages referred to above but, as set out, that fails to compensate for non-recoverable success fees. So deductions to cover for the shortcomings of QOCS come straight from the damages. This means that the objective of compensatory damages has been defeated leaving victims worse off as a result of the injury unlawfully inflicted upon them. These weaknesses of QOCS therefore leave innocent injury victims short-changed and benefit only the insurers and the defendants they represent, who by definition have unlawfully injured the victim.
In other areas, such as actions against the police and employment-related civil litigation, the loss of recoverable success fees and ATE has formed a daunting barrier to accessing justice.
In many cases it is simply impossible to bring proceedings as the cost of non-recoverable ATE to include cover for adverse costs will frequently wipe out or exceed the damages recoverable. This means that a victim will often be left with no compensation if they win and no compensation if they lose, so in practice cases are not brought and defendants can break the law with impunity. The Civil Justice Council expressed concern about this with particular reference to actions against the police in their June 2016 Report: ‘The Scope of Qualified One-Way Costs Shifting - Further Issues for Consideration’. They concluded that:
- There are strong, if not compelling, arguments of principle - based on access to justice and on the asymmetry of the relationship between the parties - weighing in favour of extending the scope of QOCS protection (or something very similar) to claims against the police.
- Principled arguments for not doing do not appear to have been made out.
We endorse that recommendation but other types of claim should also be considered, particularly where there is an asymmetric relationship as there is in PI cases and actions against the police. A good example is civil proceedings brought by employees against their employers. It is often forgotten that not all legal disputes between employees and their employers can be brought in the Employment Tribunals. In many cases, proceedings have to be brought through the civil courts and it is wholly unjust that recoverable ATE has been removed for employees in those circumstances and not replaced with a strengthened QOCS combined with recoverable ATE for disbursements, as we have set out above in relation to PI cases.
Although ATE remains available in these cases, it is limited to the cost of breach and causation reports. The client therefore still has to pay a non-recoverable premium which is currently at least £2,000 (plus IPT) from their damages.
Given the duration of clinical negligence cases, it is still too early to assess the full impact of loss of recoverable ATE premiums. There is a real risk that it will not be viable for ATE insurers to continue with the current rates and that the premiums will consequently have to rise or insurers will pull out of the market.
Victims of clinical negligence already worse off due to increased deductions from their damages, on top of the deductions for success fees could see further deductions if premiums have to go up and there is a possibility of market failure if insurers exit the market.
- Section 45 introduced Damages Based Agreements as a funding method for civil cases. In your experience what have been the impacts of this reform?
Thompsons do not currently use DBAs and have not done so since the DBA Regulations 2013 were introduced. We do not consider them fit for purpose -it has been widely acknowledged that DBAs are so inherently flawed as to be unworkable. Sir Rupert Jackson himself expressed his disappointment in his October 2014 Law Society speech by acknowledging that there had been barely any take-up of DBAs. Jackson LJ called for the abrogation of the indemnity principle suggesting that it no longer had any useful purpose and led only to satellite litigation. Indeed this had been a recommendation in his Final Report and one we would endorse.
Advocating the use of hybrid DBAs as a means to access to justice, Jackson LJ said that in the absence of recoverable success fees, as many alternative funding options as possible should be opened up. In November 2014, Lord Dyson, then Master of the Rolls, also indicated his dissatisfaction when the Ministry of Justice announced that hybrid DBAs were to remain unlawful.
The Ministry of Justice commissioned the Civil Justice Council to set up a working group to review the DBA Regulations 2013 and that working group reported in August 2015, making some 45 recommendations. Three years on no action has been taken on any of those recommendations.
We believe there are two main reasons why DBAs remain unworkable and impractical for use in PI cases:
- Even if a client is awarded costs against an opponent, the recoverable costs are limited to the percentage fee set out in the DBA.
- There is no provision for payment of any charges but the percentage fee set out within the agreement.
Currently under a DBA a solicitor can only recover a fee if the case is seen through to conclusion. Termination by either the solicitor or the client renders the client’s liability to pay the solicitor’s costs to nil. Equally if the client goes elsewhere due to a conflict of interests or dissatisfaction with the service, there is no provision to bill the client. A solicitor under a DBA charging a 25% fee could carry out many years’ worth of work on a high value claim, only to be undercut by another firm offering to conclude the case for a 10% fee shortly before trial; the first firm would earn nothing and both the client and the second firm would unfairly benefit.
In cases where key facts are unknown at the outset, a solicitor may not be able to advise whether a case has good prospects or be able to properly to assess the value of the claim. In a very high value matter it may be more appropriate to advise a client to enter into a CFA rather than a DBA, depending on the likely costs to damages ratio. As the Regulations stand, a solicitor cannot enter into hybrid funding arrangements, for example a private hourly rate basis, to investigate the claim followed by a DBA, or alternatively switch from a CFA to a DBA even if it is clearly in the client’s best interests to switch. As a result solicitors are typically unable to offer a DBA at the outset in such cases.
In lower value cases where defendants suspect there is a DBA between the solicitor and client, unreasonable behaviour and delay tactics may go unpunished even where an indemnity costs order is made against a defendant. That is because the indemnity principle prevents claimants from recovering more than that which is chargeable under their solicitor’s funding arrangements.
For DBAs to work there needs to be a mechanism to recover costs between the parties which reflect the costs incurred and not simply the percentage fee. That requires the abolition of the indemnity principle.
Furthermore, as the only fee payable by the client is the percentage fee within the agreement counsel’s fees may present a problem if they are caught by the percentage cap. This is especially so where several barristers are involved in a case and even more so when combined with the scenarios already set out above.
- Section 55 reformed Part 36 offers to settle. The statutory change introduced by LASPO Part 2 was primarily that where defendant fails to beat a claimant’s offer, the claimant’s recovery should be enhanced by 10%. In your experience, what have been the impacts of this reform, and the regulations made under it?
The uplift on claimants’ damages is of limited impact as it affects only that tiny proportion of cases, no more than 1-2% in PI which go to trial. The effect of Part 36 remains extremely one-sided. A claimant who fails to beat a defendant’s offer at trial, or even accepts such an offer belatedly, can easily lose all of her damages as a result. A defendant in the same position will at most have to pay the difference between standard and indemnity costs plus a small uplift on damages and interest.
To make this position more symmetrical, and to protect claimants , the consequences for a defendant failing to beat a claimant’s Part 36 offer should be far more comparable to the consequences faced by injury victims. Late acceptance should result in automatic indemnity costs from the date the offer was made and if a claimant’s Part 36 offer is not beaten at trial, there should be a 100% uplift in damages.
Even the limited discipline on defendants’ behaviour which is exerted by Part 36 as it currently stands may not apply in future to the vast majority of existing PI cases. On the government’s current plans, those cases are due to be forced into the small claims track by the combination of the tariff damages introduced under the Civil Liability Bill and a two- or five-fold increase to the small claims track limit in PI. Part 36 does not apply in the small claims track.
- Sections 56-60 prohibited the payment of referral fees in PI cases. What have been the impacts of this reform?
As we have consistently said since our response to Lord Justice Jackson’s Interim Report on the Civil Litigation Costs Review  referral fees are a form of marketing expense. Their prohibition was essentially a knee-jerk reaction which, as predicted, has been a cost-neutral step and has had no overall impact.
The ban has been observed as far as we are aware but if its purpose was to protect consumers from the unacceptable practices of Claims Management Companies (CMCs) such as cold calling, pestering members of the public (whether injury victims or not) and fraud by some CMCs it has manifestly failed. Ironically, instead of dealing with the wrongdoers - the CMCs - the government chose to penalise the victims by removing recoverable success fees and ATE (with a view to making referral fees uneconomic) and then gave in to insurance industry pressure and banned referral fees. We agree with the government that the unreasonable behaviour of CMCs has to be tackled but we do not understand why the government is so reluctant to follow its own arguments to their logical conclusion and simply ban CMCs in PI. Are we being too cynical to suggest that the reason lies in the ownership of CMCs by insurers who would stand to lose out if there were a ban?
We are particularly concerned by the regulators’ laissez-faire attitude to the continuing prevalence of cold-calling in PI. There appears to be a defeatist approach that many of the CMCs operating illegally and cold calling are based overseas such that they cannot be tackled. This makes no sense. By definition, in order for their work to make money in relation to cases within the jurisdiction, solicitors in England and Wales must still be paying them for the referrals they secure by way of cold calling. Those solicitors and any CMCs within the jurisdiction working with overseas cold callers should be subject to increased investigation and sanction by the SRA, MOJ and/or FCA.
- Overall, what has been your experience of the combined impacts of the LASPO Part 2 reforms?
As set out in response to questions 1 to 5, the overall impact of these reforms has been:
- fewer PI cases brought and won
- decreased damages for those claimants who do still win
- a more remote service for many victims of injury
- a weakened position for those who represent injured people
- redundancies and job cuts for staff working in the industry
- many law firms going out of business or exiting the industry
- greatly inflated profits for insurers.
Together these changes have significantly undermined the viability of the system which was incrementally and progressively developed from the 1870s to the 2000s to allow injured people, even those of limited means, the ability to obtain redress from those who negligently harmed them.
We also note that the Post-Implementation Review has excluded from its purview the extensive changes to fixed recoverable costs for low value PI cases introduced between April and July 2013. It is wrong to exclude these important and damaging changes when they are inextricably linked with those introduced by LASPO. It simply happened to be a coincidence that they could be brought in without the need for primary legislation.
It was clear at the time of their introduction that the new fixed costs were much lower than the costs properly incurred and recoverable prior to their introduction. They used as their starting point the figures recommended by Jackson LJ which were already many years out of date by 2013, and, instead of uplifting them for inflation, they were unilaterally slashed following a controversial Valentine’s Day meeting between the then prime minister, David Cameron, and the insurance industry which was the subject of subsequent litigation. Injury victims, and those representing them, were excluded from that meeting and no evidential basis was put forward for rejecting the evidence-based figures that had been presented by Jackson LJ after an extensive process involving both sides and expert input.
In 2013, the coalition government chose to accept an argument from the insurers which had already been rejected by Jackson LJ - that the referral fee ban would somehow mean a reduction in solicitors’ operating expenses. As set out in response to question 5, the referral fee ban did no such thing. It was of no relevance to law firms who did not pay referral fees. For those that did, it simply banned one form of marketing expense, forcing them to transfer their PI marketing budgets to different forms of marketing.
The net result of proceeding on the basis of a private meeting with those lobbying for the powerful insurance industry instead of the evidence based approach of Jackson LJ was that recoverable costs were fixed at levels much lower than the actual costs reasonably and necessarily incurred, and much lower than the amounts properly allowed by the courts prior to LASPO.
What was clear at the time has been borne out by our experience since the introduction of fixed costs in 2013. We have conducted an analysis comparing actual costs incurred in fast track cases against the fixed costs recovered in those cases. The actual costs are based on court approved hourly rates and on recorded time. This analysis demonstrates that the fixed costs are already routinely falling a long way short of actual costs incurred.
On this detailed, evidence based analysis, we have established that the shortfall due to fixed costs is between 40% and 60% of the actual costs incurred, with an average overall shortfall of 43%. This will inevitably lead to a situation in the PI market where cases will either be turned down (reducing access to justice) or clients will be charged the excess (removing free access to justice). The result is a system rigged against claimants (who will recover less) and in favour of defendants (who pay out less).
In summary, and in the PI field especially, there has been a deluge of fundamental changes to costs recovery since 2013 which have systematically rigged the system for recovering damages in favour of the already powerful insurers and institutional defendants against the already weak injury victim. Instead of addressing the asymmetrical relationship between victims and insurers, LASPO Part 2 and the related changes introduced in 2013 have done the opposite – they have strengthened the strong and weakened the weak.
Despite this significant asymmetry, the government has now decided to press ahead with the Civil Liability Bill and related small claims changes which will further (and very significantly) undermine the position of injury victims and provide yet more savings for the insurance industry. This is all being done without any attempt by the government or senior judiciary, to first step back and analyse the consequences of the changes made in 2013 by LASPO before ploughing ahead with yet further negative change for the claimant.
It was only in response to the stinging criticism of the government’s proposals on small claims by the Commons Justice Committee, following an evidence based approach in which they called for a review of Part 2 of LASPO, that the government has now embarked on this review. But, all indications are that this is not a genuine attempt to review the fundamental changes made in 2013. In particular:
- There has been no move to suspend the progress of the Civil Liability Bill and related proposals on small claims pending the outcome of this review.
- Unlike the Jackson Review, which was used as the basis for the LASPO Part 2 changes, this process has not been led by the senior judiciary.
- There has been no attempt by the government to gather evidence and hard data to support a fully researched, evidence based review. Instead the Ministry of Justice has simply put out a short paper with a few questions for respondents.
- Despite it taking some years for the Ministry of Justice to produce the short paper referred to above, respondents have been given a matter of a few weeks to respond, over the summer holiday period.
Therefore whilst we welcome the acceptance by the government that a review of LASPO is now appropriate, we call upon the MoJ to listen to and reflect on the responses provided, and to take the following steps before pressing on with the further raft of changes currently proposed:
- Appoint a senior member of the judiciary to conduct a genuine and extensive evidence based review of the LASPO Part 2 changes, drawing on the approach of the Jackson Review.
- Ensure that the senior member of the judiciary referred to has the time and resources to gather evidence and hard data to support a fully researched and considered review, as Jackson LJ was able to.
Until that review is concluded with the publication of a detailed report by the senior judge appointed, suspend the progress of Part 1 of the Civil Liability Bill and the related proposals on small claims.
 It is proposed that the small claims track limit be increased from the current £1,000 to £2,000 in non-RTA cases and £5,000 in RTA.
 “…referral fees will always equate to/ can never be more than marketing costs. A solicitor can choose to advertise directly (or in combination with other solicitors such as InjuryLawyers4U) or to pay referral fees. No solicitor would pay a referral fee which exceeded the cost of advertising or other forms of marketing – it would make no business sense.”