Pay gap

The starting point for suggesting guideline hourly rates (GHRs) have been set at too high a level is that in personal injury (PI) and clinical negligence (CN) claims the hourly rates charged by defendant solicitors are 20-35 per cent below those charged by claimant solicitors, which tend to be close to the existing GHRs. Defendants have argued that the rates charged by defendant solicitors reflect the unfettered interplay of market forces, whereas similar forces do not apply to claimants given current funding arrangements.

When the Advisory Committee on Civil Costs examined this discrepancy in March 2010, it reached several conclusions. The main one was that the differences in hourly rates could be easily explained and current GHRs were therefore appropriate.

In relation to CN cases, the committee found the following factors to be relevant in explaining the difference: the costs of case screening; cash-flow costs; and costs associated with volatile case flow.

For PI cases the factors identified as relevant were: cash-flow costs; volatile work flow; and the costs of marketing including referral fees.

Case screening

In CN cases it was accepted that the costs of 'case screening' were significant, with one firm indicating that some 85 per cent of potential cases were turned away without even reaching the stage of a CFA being entered into. The committee accepted that not all screening work is going to be covered by success fees in successful cases. It was therefore accepted that this, in part, justified higher hourly rates. This does seem to amount to a significant element of blurring of the lines between solicitors' overheads (accounted for in hourly rates) and what success fees are designed to cover. Traditionally, solicitors would always be paid for initial work investigating the merits of a claim. This would be paid either on a private basis by the client or by legal aid. The introduction of CFAs was designed to allow potential claimants to bring claims on a 'no win, no fee' basis. Entering into a CFA at the outset is permitted. To treat hourly rates as being designed to cover claims lost or abandoned, at however early a stage, confuses them with what success fees were intended for.

Delayed payment and work flow

It was accepted that defendants' solicitors tend to be paid on account, unlike claimants' solicitors in CFA cases. Allowing for the average delay in receiving payment, and allowing for notional borrowing costs, these additional costs accounted for nine to ten per cent of the gap between defendants' and claimants' rates in CN cases. In so far as this was accepted as justifying higher hourly rates, this is surprising. CFAs have always been able to contain a specific success fee element to reflect postponement of payment. Traditionally, the rules have provided that 'any proportion of the percentage increase relating to the cost to the legal representative of the postponement of the payment of his fees and expenses' is not recoverable. The rules (CPR 44.3B(1)(a)) now state that this element is not recoverable 'unless the court orders otherwise'.

Therefore, for CFA-funded cases, postponement of payment is not normally meant to be a recoverable cost. Did the committee factor in an irrecoverable element by the backdoor of enhanced hourly rates?

In relation to PI and CN claims the committee accepted that one relevant fact was claimant solicitors, unlike defendant, do not have a regular work flow, so there is more 'down time'. In these days of claimant PI firms receiving volume referrals from claims management companies (CMCs), BTE insurers and trade unions, this conclusion must be doubtful. Are there really claimant PI, or even CN, solicitors with spare time on their hands?

Marketing and referral fees

The committee found that a significant proportion of PI cases taken on by claimants' solicitors are generated by advertising or by paying referral fees to CMCs. These additional costs apparently accounted for between 20 and 40 per cent of total income generated, which would account for the entire gap in rates charged. Based on these findings alone the committee concluded the higher hourly rates charged by claimant solicitors could be justified and the GHRs were therefore not too high. This undermines the claim recently made by Patrick Allen, former president of APIL, that: 'Contrary to the spin from the Association of British Insurers, referral fees are not paid by insurers or clients and are not a recoverable item in the bill of costs of a successful claimant.' Although referral fees may not be recoverable as a specific item, those setting the GHRs have accounted for payment of these fees in setting the rates.

In light of the proposal to ban the payment of referral fees the government is already looking at adjusting downwards the fixed fees paid in low-value RTA claims and it cannot be long before serious attempts are made at also reducing hourly rates to reflect the referral fee ban.

Don't be surprised if the next revision in the GHRs is in a downwards direction or if the current GHRs freeze remains in place for several years. But arguments over the appropriate level of hourly rate are likely to become much more common.