Kerry Underwood

15% SUCCESS FEE: HERBERT AND COURT OF APPEAL: WRONG IN LAW, WRONG IN PRINCIPLE AND DISTINGUISHABLE

with 4 comments


The matters dealt with in this piece are examined in great detail in my three volume, 1,300 page book Personal Injury Small Claims, Portals and Fixed Costs – price £50 and available from Underwoods Solicitors here.

Kerry Underwood offers consultancy services in relation to this and other matters and details are here.

 

I have waited a long time to write up this decision, which, apart from being distinguishable on its facts in most other cases, is wrongly decided and one of the most anti access to justice decisions, even by the current Court of Appeal, which means it was faced with some stiff opposition.

Just a reminder that this is the Court of Appeal which has brought you:

  • UNISON – upholding Employment Tribunal fees – subsequently banned 7-0 by the Supreme Court;
  • lawfulness of Johnson’s proroguing Parliament – hammered 11-0 by the Supreme Court;
  • Mitchell and relief from sanctions – had to overrule itself within months in Denton;
  • Bott & Co Solicitors Ltd v Ryanair – allowing Ryanair to respond direct to solicitors’ clients avoiding the solicitor getting paid – in clear breach of the Supreme Court’s own ruling in Gavin Edmondson – Supreme Court has given permission to appeal;
  • Swift v Carpenter [2020] EWCA Civ 165i – No Protective Costs Order.

 

Here I consider the Court of Appeal’s case:

In

Herbert v HH Law Limited [2019] EWCA Civ 527

the Court of Appeal considered the appropriate success fee a routine low value personal injury claim. The decision has been further confused by hopeless misreporting and some unfortunate comments by the successful lawyers. I understand, and support, the cab rank principle but gloating about a decision which threatens access to justice for most of the population is a different kettle of fish.

PJ Kirby QC, who appeared for the successful Ms Herbert in the Court of Appeal, quoted various headlines in a piece entitled “Herbert v HH Law: What does it mean for you?”

“Upsurge in costs challenges looms after court rules on 100% success fee … … The ruling will set alarm bells ringing in the personal injury sector, with many firms having adopted the policy of setting a 100% success fee and claiming the maximum limit of 25% of total damages.” Law Society Gazette

“Success fee ruling could open assessment “floodgates”” – Litigation Futures

“… few can doubt that life for low-value personal injury claimant solicitors has become increasingly difficult over the past decade. … Herbert v HH Law …provides no respite.” Partners in Costs

“Court of Appeal rules against blanket 100% success fee in low-value PI claims since LASPO” – Association of Costs Lawyers

“Court of Appeal holds that 100% success fee lawful provided solicitor can show informed consent … No problem if you see your client and explain” – Kerry Underwood

“Going forwards, it is likely to be an uphill struggle, when entering into new CFAs, to show that the average lay client has given informed consent to a success fee that does not fairly reflect the risks of the case.” Simon Gibbs of GWS.

 

Mis-Understanding

Adam Grant, Policy Officer at the Association of Costs Lawyers, in his Practical Law Dispute Resolution Blog of 20 May 2019 – Solicitor/client success fees and Herbert v HH Law Ltd said:

“Today the deductions of the success fee from damages are, in many cases, merely making up the shortfall in costs not recovered between the parties on successful cases, let alone the unsuccessful ones. To have this reduced significantly below the statutory cap could well leave a black hole in many a firm’s finances.”

That may in fact be what is happening, as indeed happened here, but it is entirely the wrong way of billing under the Solicitors Act 1974.

What should happen is that a final statute bill under the Solicitors Act 1974 be delivered to the client for unrecovered solicitor and own client costs.

Given that nearly all solicitors cap the total charge to the client, and not just the success fee element, at 25% of damages, the success fee very often does not come into play.

Mr Grant’s argument that those charges will be subject to scrutiny as the client does not know how much they will be, is misinformed.

That is the position in every hourly rate retainer and a Conditional Fee Agreement is an hourly rate retainer with the twist that the client does not have to pay on defeat.

Solicitors are obliged in all cases, including Conditional Fee Agreement cases, to provide the client with full costs information, estimates and regular updates.

The case did not decide that on a solicitor and own client assessment the additional liability in a simple personal injury case should never exceed 15%.

What it did decide is that if a risk assessment is not to be undertaken, then the solicitor must obtain informed consent from the client in order to satisfy CPR 46.9(3), and that would require the client’s approval after a full and fair explanation.

In this case that would have required the solicitor to tell the client that the success fee took no account of individual risks, but was charged as standard.

The fact that very many firms used the same business model of 100% success fees in all cases did not avoid this requirement.

Practical Law correctly reported the decision:

“… personal injury practices are likely to have fees reduced on assessment if they did not advise clients that success fees were not set on the basis of risk assessment”.

 

After-the-Event Insurance Premium Cannot Be Challenged

The Court of Appeal also considered whether the cost of the After-the-Event insurance premium should be treated as a solicitor’s disbursement, or merely an entry in the client cash account.

It held that a disbursement qualifies as a solicitor’s disbursement if:

“(1) it is a payment which the solicitor is, as such, obliged to make whether or not to put in funds by the client, such as court fees, counsel’s fees, and witnesses’ expenses; or

(2) there is a custom of the profession that the particular disbursement is properly treated as included in the bill as a solicitors’ disbursement.”

It held that an After-the- Event insurance premium fell into neither category, being a premium on a policy of insurance by which the client was insured pursuant to a contract they entered into with insurer.

It was not a litigation cost at all and there was no evidence of a custom of including the premium within a solicitor’s bill to the client, as opposed to a between the parties’ bill.

Consequently, it need only appear in the cash account and is not susceptible to assessment, although under section 70 of the Solicitors Act 1974 the court also considers the cash account as well as the solicitor’s bill.

Practice Direction 46, paragraph 6.6(b) describes it as:

“An account that includes money received by the solicitor to the credit of the client and sums paid out of that money on behalf of the client, but excludes outgoing payments that were made in satisfaction of the bill.”

 Paragraph 6.19 of the Practice Direction states:

“After the detailed assessment hearing is concluded the court will

(a) complete the court copy of the bill so as to show the amount allowed;

(b) determine the result of the cash account.”

The purpose of the cash account is to enable the court to see the full extent of the solicitor’s financial dealings with the client, since it will show sums expended on items which have not appeared in the bill. The solicitor can only recover items which the court certifies have been reasonably charged in the bill. There is no obligation on the client to pay for anything that has not appeared in the bill.

Thus, it is essential to know what is and what is not a disbursement, since if, by accident or design, the solicitor misses a valid disbursement off the bill, it is irrecoverable from the client on a section 70 assessment.

The cash account deals with money expended by the solicitor on behalf of the client for anything which is not in the bill, or which ought not to be there and includes items which the solicitor is not bound by law or custom to pay.

 

The Success Fee Decision

Bizarrely, the original judgment – and of course on appeal it is always the original judgment, and not subsequent appeal decisions, which is under review –  was a paper assessment, by consent of the parties, with no oral hearing – see the judgment of District Judge Bellamy, 28 April 2017.

The District Judge found that there was no clear evidence that the client had given informed consent to incur the 100% success fee.

The supreme irony of this case is that in fact there was no success fee at all.

All of the costs actually charged to Ms Herbert, as compared with those recovered from the other side, could have been charged as unrecovered solicitor and own client costs.

However HH Law, presumably unaware of the law, and certainly unaware of the Underwoods Method, did not do so, but rather delivered a Solicitors Act 1974 statute bill wrongly describing the charge as a success fee and that wrongly described charge was the subject of the litigation, and ultimately the Court of Appeal decision.

HH Law Ltd submitted a witness statement from a Mr Craig Ralph dated 20 March 2017, which read, in part:

“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.”

I cannot even begin to analyze the thinking behind that statement and method, particularly the idea that it is unfair for a client with the most difficult and hard fought case to risk paying more, albeit capped at 25% of damages.

Ben Williams QC, one of the top cost lawyers in the country, commenting on Simon Gibbs’ blog said:

“There is no obligation for a success fee to reflect risk between solicitor and own client, so long as the client appreciates the basis on which it is set. Why can’t a solicitor say: “you have two options – win or lose payment, or no win-no fee payment; for no win-no fee, I require a premium of 100 per cent to act on those terms. This premium is not based on risk, it is simply the consideration I stipulate for the CFA terms which I am not otherwise willing to give”? If the client chooses the latter option, why should he be able to revisit that?”

As one would expect from Ben Williams QC, this is absolutely correct.

It is something which judges appear not to understand; that is that the alternative to a success fee model which makes a reasonable profit for the solicitor to reflect the fact that they will not be paid if they lose, is to pay the full hourly rate win or lose.

The alternative is not some cooked up, half baked, unprofitable, unworkable scheme devised by Court of Appeal judges who have not the slightest idea what it is like to practice as a solicitor in the real world and spent their legal careers earning fat fees, win or lose.

Ben Williams also makes a point that I have always made, and that is that no business model can work if it simply puts a risk-taker in the same position as they would have been had they not taken the risk; very obviously no one would ever take a risk if that was the case.

The point is that the whole model of success fees being cost neutral is an utter nonsense – as I make crystal clear in my book on the subject – No Win, No Fee, No Worries.

Furthermore, given the particular success fee model, this does not work, even on its own terms.

The maximum success fee is 100%, and that is assumed to be appropriate if the risk is 50% – that is win one, lose one and you break even because you get a 100% success fee on the winner.

Let us assume that the charge in each case is £10,000.

If you charged, win or lose, the traditional business model, then by winning one case and losing one case you get paid £20,000.

On a no-win, no-win fee basis you get the following:

                                                     £

–  lost case                                 0

–  won case                               10,000

–  100% success fee                  10,000

Total                                         20,000

Thus the solicitor breaks even on that model, but gets no reward for taking the risk.

However, as Ben points out – and I set out his comment below – how does that work if the chances of winning are 40%? On the theoretical model the success fee would have to be over 100% for the solicitor to break even as compared with charging the full rate, win or lose.

However, the maximum success fee in any type of case is 100%.

I set out Ben Williams QC’s comments in full:

“(1) The whole notion that a success fee should only reflect the pure “burning cost” of risk, and should therefore be cost neutral across a solicitor’s book of cases, was always dubious, and should never have been accepted without challenge. It’s all very well to say that a solicitor who takes on 100 CFA cases on a 100% success fee will break even so long as she wins 50, which she will do on average (assuming 50/50 risk, else adjust figures as appropriate). But suppose he wins only 40? That is obviously a real possibility, as risk assessment is inherently uncertain. If this happens, she will not be able to pay her staff, and she goes bankrupt. That’s a risk that a solicitor who refuses CFA terms would not face. The solicitor taking on the CFA work ought to be able to charge a *premium* for this sort of risk. It is not enough to break even on a theoretical basis.

(2) A lot of solicitors will now be regretting the standard Law Soc CFA that says “this is not a contentious business agreement”. If the CFA was a contentious business agreement, the ability of client’s to attack success fees retrospectively would now be reduced. Compare the HH case to the failure of the challenge to the success fee under a non-contentious business agreement in Bolt Burdon v Tariq.

(3) The confirmation that an ATE premium is not a solicitor’s disbursement re-ignites an issue that the courts have always ducked: on what basis does the court purport to adjust the methodology of a policy if the substituted methodology could never have been obtained by the receiving party or her solicitor in the market? The court has no power to alter the policy itself. The court can only act if the client and solicitor took out an unreasonable policy. But how can the policy be unreasonable if there was not a better alternative that actually existed in the market?”

What the Court of Appeal in fact does, but in a clumsy and unhelpful way, is to make clear that to get any sort of workable success fee, the client must be seen, and a full explanation given.

PJ Kirby QC, who appeared for the successful Ms Herbert, said:

“It is possible to have 100% success fee the question is whether the client has given informed consent to the same. It is unlikely that a court would be satisfied that informed consent had been given unless there had been a face to face meeting with the client where the fees had been explained and where it had been made clear that the success fee that was being charged was not based on the risk involved in their particular case. It would probably also be necessary to explain that success fees had previously always been calculated by reference to risk and that a risk related success fee would be much lower. It may also be necessary to explain that other solicitors may charge a success fee by reference to the risk involved and that they would therefore deduct a smaller amount from the recovered damages.

Here is my write up of the original appeal decision of the Queen’s Bench Division of the High Court in

Herbert v HH Law Ltd [2018] EWHC 580 (QB).

 

Success Fee and Risk

In

Herbert v HH Law Limited [2018] EWHC 580 (QB)

the Queen’s Bench Division of the High Court upheld the decision of DJ Bellamy whereby he reduced the success fee in a road traffic accident case from 100% to 15% on a solicitor and own client assessment.

The court also upheld a finding that an After-the-Event insurance premium was a solicitor’s disbursement.

The Court of Appeal has now given leave to appeal against the High Court’s findings.

The District Judge accepted the defendant’s submission 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.”

The District Judge took into account that the solicitors never met the client and “had little or no direct contact with the client.”

Paragraph 20 of the judgment quoting paragraph 12 of the District Judge’s judgment:

“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%’.”

The High Court held that approval required informed consent by the client and that “the simple refrain of freedom of contract establishes neither the presumptions nor the reasonableness of the success fee in the particular case.”

The High Court also held that risk was likely to be the primary factor in fixing the success fee (Paragraph 44).

The key paragraphs are 46 and 47:

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.”

This leaves open the question of whether a solicitor who has met the client and explained everything in the manner recommended in

Vilvarajah v West London Law Ltd [2017] EWHC B23 (Costs) 

is safe from attack on the success fee. 

 

Comment

This decision is all over the place, but it is not clear here what the basis of the charge to the client was.

The actual costs charged to the client was £691 plus VAT, being 25% of the damages.

The claim was an ex-portal RTA claim which settled for £3,400 after proceedings had been issued and, although it is not clear from the judgment, I am assuming that post-issue pre-listing fixed costs applied and if that is the case the recoverable costs are £1,840 being 20% of the damages plus £1,160 as per CPR 45.29 Table 6 B.

Here the solicitor and own client basis of charging was £118 an hour with 22 hours work done giving a total £2,596.

Thus the unrecovered solicitor and own client costs are as follows:

                                                               £

  • solicitor and own client costs      2,596
  • less recovered costs                    1,840

         Total                                             756

These are costs net of VAT, and as we have seen the actual charge to the client was £691 plus VAT.

Consequently, unless I am missing something, there was in fact no success fee at all in this case as all of the charge to the client fell within the unrecovered element of solicitor and own client costs.

Clearly £118 per hour is a very modest rate and appears not to have been challenged.

In those circumstances, the decision appears to be obiter, in the sense that the court did not need to rule on the success fee as in law no actual success fee was charged.

It is well established law that academic claims cannot be brought; in other words the client cannot bring a Solicitors Act 1974 challenge in relation to a bill never delivered, even if the retainer contained challengeable provisions.

If I am correct, and this decision is obiter, then of course it is not binding.

As far as I am aware there has been no successful challenge in any court in the country to the Underwoods Method, and contrary to some ill-informed comment, this decision supports, rather than challenges the Underwoods Method.

What solicitors may now well start to do, particularly given the increase in the small claims limit in personal injury matters, is to reserve the right to charge the full element of the unrecovered solicitor and own client costs, either completely uncapped, or possibly capped at say 40% of damages, and then charge a 15% success fee as well.

Obviously, this means that the client will receive far less of their damages than at present.

Whether that was clear to the Court of Appeal or not, I do not know, but it is blindingly obvious to anyone who actually considers these matters and has experience of them.

This is as Pyrrhic a victory as it gets – instead of all solicitors routinely capping the total charges to the client, be that unrecovered solicitor and own client costs and/or the success fee, at 25% of damages, solicitors will now be forced to adopt a different model.

The Underwoods Method avoids these challenges, and I have always advised capping the total charge to the client at 25% of damages.

However, as such reasonableness and generosity on the part of solicitors has been treated with complete contempt by the Court of Appeal, I see no reason why solicitors should continue to be so generous to their clients.

My advice now is to cap the total charge to the client at 40%, not 25%, but to charge the full unrecovered solicitor and own client costs at the full normal private rate.

  

Written by kerryunderwood

February 27, 2020 at 10:11 am

Posted in Uncategorized

4 Responses

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  1. Hi Kerry, I can’t work out this comment from Ben Williams QC. Was the CFA in BB v T a NC or C Agreement. ? I assume it was NC in HH case.
    2) A lot of solicitors will now be regretting the standard Law Soc CFA that says “this is not a contentious business agreement”. If the CFA was a contentious business agreement, the ability of client’s to attack success fees retrospectively would now be reduced. Compare the HH case to the failure of the challenge to the success fee under a non-contentious business agreement in Bolt Burdon v Tariq.

    dominicmoss

    October 13, 2020 at 4:27 pm

    • Dominic

      The agreement in

      Bolt Burdon Solicitors v Tariq & Ors [2016] EWHC 811 (QB)

      was not a conditional fee agreement, but rather was a Contingency Fee Agreement, and I do not think that it was disputed that it was a Contentious Business Agreement.

      As a matter of fact, any Conditional Fee Agreement is almost always going to be a contentious business agreement, whatever the parties actually state, and I have written extensively on this and there has been considerable case law.

      On what basis do you say that a contentious business agreement limits the client’s ability to attack the success fee?

      Section 61(2)(a) requires the court to find that the agreement was fair and reasonable, and the issue in Herbert – and other cases – was whether the agreement was fair, and specifically whether there was informed consent.

      Section 61(2)(b) allows the court, if it finds that it is not fair and reasonable, to “set it aside and order the costs covered by it to be assessed as if it had never been made.”

      True it is that section 61(4B) appears to exclude a challenge to the hourly rate, as compared with the number of hours worked, but that does not, in my view, exclude a challenge to the level of the success fee in percentage terms.

      The other point about a Contentious Business Agreement is that a solicitor cannot simply sue on it, but has to get an order under the Solicitors Act 1974 if the client does not pay.

      Kerry

      kerryunderwood

      October 15, 2020 at 10:07 am

      • On what basis do you say that a contentious business agreement limits the client’s ability to attack the success fee?

        That was my query. I didn’t say it , it’s quoted in your article from the QC. It doesn’t make sense to me

        dominicmoss

        October 15, 2020 at 12:58 pm

  2. There are QCs and then there is me………….

    kerryunderwood

    October 31, 2020 at 5:27 pm


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