Will the Consequences of the Government’s Extension to Fixed Recoverable Costs be the straw that breaks the camel’s back for many in the legal industry?
Costs Lawyer, Nick McDonnell, Kain Knight, shares his thoughts on the government’s consultation that closes on 30th September 2022.
The Government’s latest plan to implement Fixed Recoverable Costs (FRC) to all civil cases in the Fast Track (i.e. generally those claims with a value up to £25,000 and simpler ‘intermediate’ claims up to £100,000) will further, and profoundly, increase the burden on the consumer at a time when the cost-of-living crises is already bending the public to almost breaking point.
The only beneficiaries of such a drastic change will be the insurance industry and government departments, so what can costs lawyers share with each other to bring a collective strength to their responses? Costs Lawyer, Nick McDonnell reveals his thoughts on the government’s consultation that closes on 30th September 2022.
The Civil Justice Council published its Costs Working Group Consultation Paper in June 2022 with a deadline of 30 September 2022 ( https://bit.ly/3R0JldB ). The consultation invites answers to questions concerning four areas:
- Costs Budgeting;
- Guideline Hourly Rates;
- Costs under pre-action protocols/portals and the digital justice system;
- Consequences of the Extension of FRC;
However, this media release focuses on the latter; the ‘Consequences of the Extension of FRC.’
In 2021 the Government accepted the recommendations to extend fixed recoverable costs made in Sir Rupert Jackson’s 2017 FRC report for certain cases up to £100,000 in value. Despite the implementation of these changes being well underway (expected implementation is April 2023) surprisingly this latest consultation only now seeks to look at the consequences of implementation. One would have thought the sensible course of action would be to consider the consequences before proceeding with their implementation, but there you have it.
But, there always seems to be some key features of FRC that are overlooked when such regimes are considered.
First, the ‘indemnity principle’ generally still operates in relation to claims for costs in civil cases (this is the common law principle by which a paying party cannot be ordered to pay a successful receiving party more, by way of costs, than the successful receiving party is him/herself liable to pay).
Second, the general principle that an unsuccessful party will be ordered to pay the costs of a successful party also operates in relation to claims for costs made in civil claims (see CPR.r.44.2(2)(a)).
Third, a costs liability between a solicitor and his client (a solicitor/client costs liability) is a liability on the indemnity basis (CPR.r.46.9(3)) and between a successful solicitor’s client and his unsuccessful opponent (a between-the-parties costs liability) is a liability generally on the standard basis (save where, for example, conduct or CPR.r.36 engages the indemnity basis).
Accordingly, costs agreed/assessed between-the-parties are almost always less than costs agreed/assessed between solicitor/client.
The practical effect of this is that:
- Between-the-parties costs are generally only ever, and are no more than, a contribution towards a successful Claimant’s solicitor/client costs; and
- A successful Claimant will usually be liable to his solicitor for, and be required to pay to his solicitor, the shortfall/difference between the agreed/assessed solicitor/client costs and the agreed/assessed between-the-parties costs (the solicitor/client shortfall).
The solicitor/client shortfall became a much more common event with the abolition of the between-the-parties recoverability of additional liabilities (success fees and after-the-event insurance premiums) save in limited circumstances, with the implementation of LASPO on 1 April 2013.
Post 1 April 2013, solicitors continued to charge success fees, but upon them not being payable between-the-parties, their clients paid (and still pay) them on a solicitor/client basis.
In Chapter 10, paragraph 5.3 of Sir Rupert Jackson’s 2017 ‘Review of Civil Litigation Costs: Final Report’, Sir Rupert concluded that:
“in order to assist personal injury claimants in meeting the success fees out of damages…[the] level of general damages for pain, suffering and the loss of amenity be increased by 10% across the board… the amount of success fee which lawyers may deduct be capped at 25% of damages…[and]…the reward for making a successful claimant’s offer under CPR Part 36 … be enhanced”).
Subsequently, the Court of Appeal handed down its judgment in Simmons v Castle [2012] EWCA Civ 1039 (26 July 2012) announcing that, with effect from 1 April 2013, general damages in tort cases would be increased by 10% from the then current levels.
The solicitor/client shortfall became even more stark with the implementation of FRC in road traffic accidents (RTAs), employers’ liability (EL) and public liability (PL) claims in 2013 (see the Pre-Action Protocols for RTA, EL and PL claims and their interplay with CPR.r.45 Sections III and IIIA). This is because solicitors have continued to charge their clients ‘conventional costs’ (‘conventional costs is the term the Court of Appeal gave to costs calculated on a time spent/hourly rate basis in Ho v Adelekun [2019] EWCA Civ 1988 (19 November 2019) [1]) and the between-the-parties contribution to those costs has been at a much lower FRC level thereby creating a much greater solicitor/client shortfall.
This is profoundly apparent from the significant increase in solicitor/client detailed assessments proceedings brought pursuant to the Solicitors Act 1974 (one only needs to consider cases such as Herbert v H H Law Ltd [2019] EWCA Civ 527 (03 April 2019) & Cam Legal Services v Belsner (CA-2021-000398) and Edwards & Raubenheimer v Slater And Gordon UK Ltd [2022] EWHC 1091 (QB) (11 May 2022) to support this proposition and it is even acknowledged in ‘Belsner’ that there are well over a thousand litigated Solicitors Act 1974 detailed assessment proceedings stayed pending its outcome with many more not yet litigated) and the creation of law firms to specifically encourage former clients to challenge solicitor/client shortfalls such as Checkmylegalfees.com and JG Solicitors.
Implementing further, and wider, FRC regimes will significantly increase the number of situations whereby solicitors will be forced to charge their clients the solicitor/client shortfall between the solicitor/client conventional costs and the between-the-parties FRC contribution.
The FRC regimes were never intended to regulate costs between solicitor and client. Sir Rupert Jackson himself made this clear. In his ‘Review of Civil Litigation Costs: Supplemental Report 2017’ at Chapter 1, paragraph 1.4 he said:
“Given the multifarious kinds of litigation it is not feasible to preordain how much clients must pay to their lawyers in every individual case. Also, that would be an unacceptable interference with freedom of contract. The best that we can do is to restrict the recoverable costs”
Accordingly, FRC will rarely, if ever, reflect the actual costs needed to be incurred by solicitors to carry out the work they are instructed to do, nor was it ever intended to.
It would appear that, for firms of solicitors, who are businesses, to remain profitable, they must continue to charge their client costs on a conventional basis and with success fees (to cover the costs of those cases that lose). Furthermore, the costs of operating a law firm (along with the operation of most businesses) have increased due to the pressures on the economy. Therefore, it is expected that solicitors’ charges to their client’s on the conventional basis will continue to increase, thereby driving up further the solicitor/client shortfall.
But with the proposed extension to FRC, the between-the-parties contribution will be much lower than any conventional costs contribution and so naturally this will increase the solicitor/client shortfall even further which, will usually be paid by way of a deduction from the client’s compensation.
Given this likely increase, it is not unreasonable to expect that it will become necessary for clients to have to pay up to, if not more than, 50% of any compensation they receive to cover the solicitor/client shortfall in respect of unrecovered profit costs and the irrecoverable success fee. Indeed that is not just our view, similar views have been given, most recently by Matthew Maxwell Scott, director of ACSO (the Association of Consumer Support Organisations) where he was quoted as saying:
“…many predict a substantial increase in damages deductions for solicitors’ own client costs, possibly up to 40 or 50%, in order to make ends meet” ( https://bit.ly/3QHzHg1)
The question is then raised as to whether general damages in tort cases should be increased further in order to assist personal injury claimants in meeting the shortfall in legal fees out of damages? But then, aren’t we in ‘robbing Peter to pay Paul’ territory with the reduction to between-the-parties costs by way of FRC being neutralised by the increase in damages?
Witness evidence filed in Cam Legal Ltd v Belsner demonstrates that the sums being deducted from Claimant’s damages by their solicitors has increased, and continues to increase, beyond 25%.
In the types of claims which are the subject of the proposed FRC extension, justice should mean that a successful Claimant receives a substantial (if not all) of their damages which is, after all, to compensate them for losses. To ‘lose’ substantial amounts of that compensation (due to the necessary dynamic and interplay between solicitor/client conventional costs and the between-the-parties FRC contribution) is arguably unjust (albeit necessary), particularly where those benefiting from the savings made by FRC are the insurance industry and government departments who find themselves often the true paying third-parties in most claims of this nature.
The access to justice issue becomes even more glaring where claims are made for remedies where no financial damages are awarded. A common example of this is in housing disrepair claims (an area that falls within the focus of the proposed FRC regime extension) where claims can be complex and where the remedy sought by a tenant from a landlord is for specific performance to complete, for example, repairs to a rented property.
Such issues have already been recognised in the government’s September 2021 ‘Response to the ‘Extending Fixed Recoverable Costs in Civil Cases’ consultation. At Chapters 4.11 to 4.15, Respondents have said that “…the value of housing claims can be low, but they can be complex and of profound importance to the client, many of whom are highly vulnerable, especially when a claim may result in a client losing their home.”
Introducing FRC in housing claims, where there are no (or very little) damages for solicitors to ensure the solicitor/client shortfall is paid and therefore the true costs of running such cases are paid, is likely to result in solicitors leaving the market, vulnerable individuals left exposed and housing associations escaping justice being done for their tenants.
It is understood from a note following the CJC’s conference on costs which took place on 13 July 2022 in London, to discuss the June 2022 consultation, that ‘access to justice’ is front and central of any reform for the CJC and CPRC, and so any submissions that relate to access to justice issues with be seriously considered. If that is truly the case, then the CJC must surely consider that the consequences of the proposed extension to the FRC regimes currently go to the core of reducing access to justice:
- In claims where financial damages are sought – Claimants are likely to lose significantly greater proportions of their compensation thereby severely impacting the justice of succeeding in such claims; and
- In claims where no financial damages are sought – solicitors will struggle to make such businesses workable financially by being unable to recover the solicitor/client shortfall forcing them to potentially leave the market thereby negatively impacting those proposed Claimants’ access to justice.
The government must consider this profound consequential impact of its current proposed regime change on the public and reflect on whether now is the right time to implement it, or indeed whether it is the right thing to implement at all.
We would suggest any firm, business or individual operating in the areas caught by the next round of FRC regime changes make their appropriate submissions by the deadline on Friday 30 September 2022 at 12pm. Responses can be filed at:
