Ministry of Justice Consultation - Regulating Damages Based Agreements
Thompsons is the most experienced trade union, employment rights and personal injury law firm with offices across the UK. On employment and industrial relations issues it acts only for trade unions and their members.
Thompsons represents the majority of UK trade unions and advises on the full range of employment rights issues through its specialist employment rights department.
Question 1 - Research suggests that the present requirements for solicitors and claims managers to provide information to consumers on costs are insufficient. What additional requirements could be included to better protect consumers?
Thompsons believes that the rules governing solicitors operating Damage Based Agreements (DBAs) need to set rigorous standards. Solicitors must provide, in plain English, transparent and detailed information about the terms of the DBA. It should be clearly explained to claimants what the solicitor’s costs will be and what percentage deduction will be made from their damages.
Solicitors should be obliged to explain that the percentage deduction will be far more than if the claimants had opted for hourly advice.
Solicitors should be obliged to find out if a claimant is a trade union member and to tell union members that they are entitled to free legal representation through their union.
All this information must be provided before the claimant signs a contingency fee agreement.
As the title of Richard Moorhead’s and Rebecca Cummings’ recent research suggests – Something for Nothing? Employment Tribunal Claimants’ perspectives on legal funding? – there is an essential issue of psychology which is at stake in funding employment tribunal claims through damages based contingency fee agreements. This is the perception that a Claimant may have her claim pursued at no financial risk to herself.
That perception applies particularly to DBAs. In the absence of support from a trade union, a Claimant will immediately and, inevitably, be attracted to such a proposition.
In fact, the psychological perception of the Claimant at the outset will inevitably be a misunderstanding. The Claimant will have to pay a charge for the cost of representation in terms of a percentage fee deducted from a future crystallised entitlement to damages. She may also, in any event, have to meet costs for additional expenditure such as disbursements.
It is against this background, and the inevitable misconception of a Claimant contemplating a DBA, that a comprehensive requirement for information to consumers on costs is required.
The current Solicitors’ Rules simply require cost information to be provided “at the outset”. They do not set rigorous standards for the content and quality of that information. They also do not require that information to be provided before a DBA is entered into.
We deal in more detail with the requirements which we believe should be imposed in our answers to subsequent questions in the consultation.
However, we believe that two principles should prevail:
(i) Cost information relating to DBAs should be clear, comprehensive and given at regular intervals. In particular it should be given whenever there is a change in the circumstances of the case that will impact on the amount of damages the claimant will keep.
(ii) The Claimant should be advised, from a specified period after the entering into of the DBA and at regular intervals, as to the amount that the adviser considers will be recoverable, and the deductions from that amount that will be made in respect of allowable charges. In particular advice should be given when there is a change in the prospects of success, in the likely total damages to be recovered or in the expenses (disbursements) to be incurred. Any change in these will change the impact of a, say, 30% deduction and so must be communicated to the claimant in plain English. The Claimant should be told, in pounds and pence, how the totality of charges will impact on the level of compensation advised by the representative.
A consistent theme of the Cummings and Moorhead report is that confusion surrounding the calculation and payment of charge was widespread, particularly in relation to Counsels’ fees, other disbursements and VAT.
We believe that stringent regulation in this area is imperative to ensure the protection of consumers and that there should be prescribed requirements for all DBAs consistent with the protection of users of conditional fee agreements. In the event that those stringent requirements are not complied with, we believe that the DBA should be unenforceable.
Question 2 - Do you agree that Claimants should be able to challenge the overall costs of the DBAs, and if so how?
Yes. Claimants should be able to challenge the overall costs under DBAs. This is consistent with other areas of litigation, where agreements such as conditional fee agreements may be in force.
There is, in such circumstances, a clear judicial mechanism for challenging costs through the assessment mechanism.
The Cummings and Moorhead report amply illustrates that DBA Claimants do not, on a widespread basis, understand the charges that will be made. Because of the lack of regulation to date, those charges may be wholly disproportionate to the amount of damage which may be recoverable.
It is unrealistic to assume that DBA Claimants will, without comprehensive explanation in plain English, understand concepts such as “disbursements”, and the circumstances in which charges may be payable. Disbursements should be described as “expenses that may be incurred on your behalf such as for expert reports”.
We believe that there should be a clear mechanism in Employment Tribunal claims, probably via application to the Employment Tribunal itself, for overall costs to be challenged.
We believe that the appropriate standard would be what is fair and reasonable in the light of the damages and other benefits recovered, taking into account the complexity of the case.
Question 3 - Do you agree that representatives should provide a clear indication of whether VAT is included or excluded from the percentage of damages to be charged in fees? How should this requirement be framed?
Yes. The Moorhead and Cummings report reveals the inconsistency amongst DBA practitioners in terms of whether VAT is included in their percentage of fees. We believe that solicitors must explain, in plain English, whether the percentage includes VAT. Ideally this would be a simple tick box format – it does/doesn’t include VAT – that the legal representative is obliged to complete.
If possible, and consistent with the identified principle of clarity and comprehensiveness, we believe that the percentage deduction from damages should be expressed to be inclusive of VAT.
However, we appreciate that this may not be possible in terms of the strict requirements of VAT legislation. In that situation, the requirement should be that DBAs should state clearly whether VAT is included or excluded from the percentage fee. If VAT is not included, then the DBA should specifically provide that it will be added to any percentage charged. The DBA should also make clear whether or not VAT will also be charged on disbursements. (VAT should not be added on disbursements, of course, at the instigation of the DBA practitioner but, for example, Counsels’ fee will ordinarily attract a VAT charge).
Where a DBA provides that the percentage deduction from damages is exclusive of VAT, there should be a requirement that the DBA specifies the overall increase percentage fee with VAT added (that is the percentage exclusive of VAT, and the total percentage inclusive of VAT).
Question 4 - How should the requirement to give clear information about other charges such as disbursements be framed in the order?
We repeat the essential features of the regulation of DBAs that we made at the outset.
We think that use of the term “disbursement” should be actively discouraged. This is not a term which is used in ordinary parlance. Its use is confined to professional practitioners.
Consistent with the psychological perception we explained in our response to question 1, we believe that, in the ordinary course of events, all disbursements should be included in the percentage cost charged (and as explained in the DBA). That is consistent with received perception of the Claimant at the outset.
However, we accept that, in some cases exceptional disbursements may be required. In a disability discrimination case, for example, expert medical advice may be required. Likewise a representative (or indeed a Claimant) may wish to retain Counsel for the purpose of conducting a hearing.
If charges for disbursements over and above the percentage deduction from damages are to be permitted, there should be guidance as to the circumstances in which such additional charges should be made.
We also believe that there should be a requirement for the representative, before the agreement is signed, to identify what additional disbursements may be required. Those additional disbursements should be capable of anticipation by the representative. For example, a disability discrimination claim may well ordinarily entail obtaining a medical report.
In any event, before the agreement is signed, full details of the anticipated disbursements should be provided, and a comprehensive explanation as to how they will be charged for.
Expenses such as the cost of travel to meetings and hearings should not be capable of additional charge in any circumstances. The Moorhead and Cummings research identified that additional charges such as these are sometimes made by DBA representatives. We believe that this should be prohibited, and should be encapsulated within the percentage fee deduction from damages.
If additional charges for disbursements are to be permitted, it is essential that the difference between charges payable to the representative and charges payable to third parties (such as Counsel) are clearly differentiated. This is to enable the Claimant readily to understand her potential liabilities at the conclusion of the case.
If charges for disbursements are to be permitted, there should be a requirement that that Claimant is given a full explanation as to how such disbursements will be charged, and the anticipated amount. Specific authority from the Claimant should be required to exceed those estimates.
Question 5 - How could the requirement for representatives to inform the Claimant about alternative options of funding before accepting the case and entering the agreement be better framed in the order?
Personal injury solicitors are required to ask clients about alternative funding before entering into a conditional fee agreement with them. They have to actively investigate whether the client has, for example, Before the Event insurance attached to a domestic insurance policy.
The same requirement should apply to legal representatives operating DBAs. They should be required to explain what alternative forms of funding there are before they sign the claimant up to a DBA. They should be obliged to ask in writing if the client is a trade union member and they must receive written confirmation from the client as to whether they are a union member.
The solicitor should be under a duty to inform trade union members in writing that they have a right to free legal representation from their union before any DBA is entered into.
The Moorhead and Cummings report clearly demonstrates a lack of explanation of alternative funding mechanisms to Claimants. They found that the standards imposed by the Solicitors Code of Conduct 2007 (Rule 2.03) were routinely not complied with.
In our view, the problem is particularly acute in relation to Employment Tribunal claims where a Claimant may have access to their trade union’s legal service. Typically, a trade union legal service will provide representation to a Claimant, who is eligible for assistance, at no cost to her, and with no deduction from damages.
It is, ordinarily therefore, difficult to understand why a Claimant with access to a trade union’s legal service would choose (if she is properly advised) to enter into a DBA.
The problem is exacerbated by the findings of Moorhead and Cummings that DBA Representatives were less likely to discuss the option of trade union (or legal expenses insurance) funding for a claim than other representatives. That is not in itself surprising because of the inevitable self interest of the DBA practitioner in having the Claimant not taking up such an alternative funding option.
We do not believe that the provisions of Rule 2.03 (1) of the Solicitors Code of Conduct provide an adequate starting point. They only provide “the best information possible about the likely overall cost of the matter”, without requiring a detailed breakdown of the individual components of the charge and how, and in what circumstances, they are to be levied.
They also provide for that information only to be provided “at the outset and, when appropriate, as the matter progresses”. They do not provide that the information should be provided before the DBA is entered into. They do not provide a comprehensive requirement for the information to be updated on an ongoing basis in all matters.
In any event, Moorhead and Cummings found evidence that the requirements of the solicitors Code of Conduct were not being complied with.
We repeat again the identified principles in relation to DBAs set out in our answer to question 1.
We have already said that information about alternative options for funding should be given before a DBA is entered into, and should be provided in writing. A form of words should be provided by the MoJ which solicitors must use in order to ensure that the information given is couched in objective and impartial terms.
Furthermore, we believe that there should be some sort of cooling off period, between the individual signing the agreement and the agreement becoming enforceable.
Question 6 - Do you think a general cap should be introduced to limit the maximum level of percentage that could be deducted from the damages? If so, what should the appropriate maximum limit be?
Yes. We strongly believe that a general cap should be introduced and that a prescribed maximum cap should be set within the rules at around the level of 25 to 30%, which is in line with the mean percentage charge identified in the Moorhead and Cumming’s report.
This would go some way to protecting consumers against excessive and disproportionate charges by representatives.
The general cap should also be subject to the requirement that the total charges made should be proportionate, taking into account the particular circumstances of the claim. The factors which also should be taken into account would include the type of claim, the likely time involved, the likely level of expenses and the litigation risk.
We believe that the general cap should apply not only to the percentage deduction, but also to additional charges that may be levied on the Claimant so as to provide an overall maximum of what the Claimant may have to pay.
Question 7 - Should there be a sliding scale subject to some limits (e.g. where the case was settled prior to a hearing) to reflect the complexity of the case, the work done and likely level of damages awarded, including a proportionate reduction by case by the individual claim forms part of a large group ?
Yes. The general cap should apply to all individual Employment Tribunal claims which proceed to a hearing. There should be a percentage deduction from that maximum amount where cases are compromised before a hearing, with the amount of the deduction determined by the stage in the proceedings at which compromise is reached.
There should also be a reduction in relation to mass litigation cases. This applies particularly in the field of equal pay, where lawyers using DBAs have been able to recover approximately 30% of the compensation awarded from each of the Claimants in proceedings which often involve many hundreds of individual Claimants.
In such cases the amount of work the DBA solicitor has done is often minimal – they simply ride on the back of the mass litigation. The potential rewards for DBA representatives in these circumstances are, in our view, excessive and should be restricted.
We believe that there should be a reduction on the general maximum depending on the numbers of Claimants involved. Again, the maximum should be subject to the requirement that the charges made should be fair and reasonable, taking into account the circumstances of all of the potentially many hundreds of Claimants in the same or related proceedings.
It is important to bear in mind the comment of Elias J in his ruling in Bainbridge and Ors v Redcar & Cleveland Borough Council: “An agreement of this nature does not sit happily with the statutory provisions designed to secure settlement; indeed, it undermines them.”
Question 8 - Research shows that the use of settlement clauses should be regulated. Do you have any views about how this could be done?
We agree with the principle that settlement clauses should be regulated.
We believe that the following principles should apply:
1. the Claimant should be entitled to a second opinion, at no cost to them, on any offer that they believe is not enough. There should be a penalty on any solicitor who derives a benefit from ignoring the second opinion.
2. the DBA should make clear the circumstances in which charges would be levied, which should, in any event, be subject to the overriding requirement of being fair and reasonable in the circumstances of the case.
Question 9 - Should clients be able to challenge the charges under penalty/exit clauses and if so how?
The particular difficulty posed by exit clauses is that a Claimant may only after entering into a DBA realise that she is eligible for a form of funding which is more favourable to her. This applies particularly in relation to trade union legal funding.
We believe that enforcement of exit clauses should be dependant upon the DBA representative demonstrating that comprehensive and neutrally framed information has been previously provided to the Claimant (before the DBA was entered into) as to alternative funding options.
We also believe that any exit charges should be subject to the overriding requirement of being fair and reasonable in the light of the work actually undertaken up until to date of enforcement of the exit clause by the DBA practitioner concerned.
The amounts chargeable under exit clauses should be capable of challenge, in the same way as for other charges, as we explained in our answer to question 2.
Question 10 - Are there any other aspects of DBAs that ought to be regulated? If so, please specify what they are and why they need to be regulated, providing relevant evidence as appropriate.
The Moorhead and Cummings report showed that DBA Claimants were less likely to receive non financial benefits in the settlement of their claims. DBA practitioners should be required to explain fully in the information provided before the entering into of the DBA, that non financial benefits e.g. declaration, re-instatement/re-engagement and recommendations may be obtainable by the Claimant.
Question 11 - Do you agree with our initial view that the proposed changes will have no equality impacts? If not, please detail what the impacts are and who they would affect.
We do not have statistics to address this matter. However, in our opinion, it is likely to be low paid, often women workers who are attracted to the availability of DBA arrangements. This is particularly so in the field of equal pay, where the use of DBAs is already widespread.
We might all believe that it is likely to be the case that the proposed changes would be to the benefit of women.