Keeping pace

Proposals in the legal aid bill will radically alter the nature of proceedings that can lawfully be brought under a CFA with a success fee.

The result of the bill's proposals, it seems, is that a success fee will only be recoverable from the client where the proceedings are proceedings for damages and that certain types of damages may not be available for the deduction of a success fee, and there will be a cap on the amount. Large categories of litigation currently often funded by conditional fee agreements that specify a success fee will no longer be appropriate for such.

Broadly, these are cases where the principal aim of the proceedings is other than the recovery of money. Furthermore, conditional fee agreements with success fees are now often used by defendants (particularly insurers) who wish to have an arrangement with their solicitors whereby the solicitors are paid a base (discounted) rate win, lose or draw but, subject to it being recovered, are able to charge full rates in the event of a successful defence together with a success fee on top. The current proposed amendment, contained in clause 41 of the bill, would continue to permit a discounted CFA without a success fee, but appears to rule out any success fee on a successful defence.

Clause 41 then goes on to provide that no part of a success fee can be recovered from the losing party pursuant to a costs order, as recommended by Lord Justice Jackson. It would restore the law to the position that prevailed between 1990 (when conditional fee agreements were first permitted) and 2000 when success fees became recoverable but could make the use of CFAs far less attractive in many cases (although it is worth remembering that the intention in the new regime was to allow litigants who would otherwise have legal aid for their claim to bring a claim despite the withdrawal of legal aid).

A new provision (clause 43) will, in general, make insurance premiums irrecoverable. There is no provision in the bill for any change to the potential liability of the claimant to an adverse costs order, which I understand will be dealt with by way of amendment of the CPR. Unless this is done (and done comprehensively), however, the net effect would be to leave many claimants having to choose between either putting themselves at risk of crippling orders for costs or taking out expensive after-the-event insurance with no prospect of recovering it '“ thereby diminishing any potential recovery to that extent.

Uncertainty over damages-based agreements

Clause 42 of the bill then makes radical amendments to the enforceability of 'damages-based agreements'. Since 12 November 2009, section 58AA of the Courts and Legal Services Act 1990 has regulated damages-based agreements that relate to 'employment matters'. A new section 58AA would expand the circumstances in which solicitors (and counsel) can enter into damages-based agreements to all types of cases that, currently, can be the subject of a CFA. This section, however, will not apply to circumstances (except for employment matters) currently falling under section 57 of the Solicitors Act 1974, which allows solicitors to act on a damages basis in certain non-contentious matters.

So, depending on what orders are made under the section and its final form, solicitors and counsel will be able to conduct litigation in court pursuant to damages-based agreements that potentially will entitle them to be paid up to 35 per cent of the sums recovered.

There will also be new rules on costs that may be recovered from the losing defendant in such cases. These will probably, in effect, allow the winning claimant to recover costs assessed on a standard basis (namely in accordance with the reasonable amount of time spent and reasonable hourly rates).

In its current form, the bill does not mention referral fees but the government has accepted, in principle, that they should be banned (at least in road traffic cases). Careful drafting will be needed as one of the reasons why the solicitors' rules were changed in 2004 was that it was felt that

the existing ban was unworkable and too many solicitors were circumventing the rule by making payments for 'administration' or 'casework'.

Furthermore, there will be a simpler and perfectly legal way of circumventing any ban of referral fees: alternative business structures, which will enable third party, non-lawyers, to take equity in a solicitor's firm and thus share in the profits.

Claims management companies may well take advantage of this opportunity to stay in business.

Less work, fewer players

The precise form of the amendments is yet to be determined but it is likely that the proposals will be enacted substantially as in the bill. This will lead to a reduction in the amount of conditional fee work whether on the established base fee and success fee basis or on the new damages-based agreement basis. Such work will not, however, disappear entirely. The concept of using CFAs is now quite well established and clients will expect their use to be considered.

In many cases solicitors will be content to offer discounted CFAs with no success fee especially where the client is a large provider of work. The more adventurous solicitors, in particular those who have substantial capital backing, might be tempted by damages-based agreements, particularly in large commercial actions.

And counsel? Will barristers be squeezed out as the pressure on fees increases? Almost certainly, yes. Barristers need to look more keenly at the collective provision of services, advocacy and advice at first but also (when we are able to do this) the conduct of litigation and put themselves in the position of being able to make block bids for work from the large providers, whether insurers, trade unions, local or central government, quangos, larger businesses or (dare I suggest) claims management companies. We must not be left out in the cold.

With the landscape for personal injury litigation about to undergo another upheaval, the likely outcome is that, when the dust settles, there will be less of it and fewer players. Solicitors will be more anxious than ever to retain as much profit as they can with lower success fees (if any), lower fixed fees and potentially less work.

If the Bar stands still, the amount of personal injury work will shrink dramatically. The young Bar will not get the experience needed. A few specialist sets will maintain their positions for the time being until multidisciplinary practices build up the experience needed to do advocacy in complex cases all the way to trial.

That prophesy may seem over pessimistic. I must bear in mind that since I was called to the Bar in 1978, its demise has been predicted on several occasions and we are still here. I expect in the short term things will carry on more or less as they have done, but as the new structures bed in the competition will become more and more intense. The changes that are now on foot are the most radical we have seen. A radical response is required.