Damages-Based Agreements Regulations 2013

Tuesday 26th February 2013 Grand Committee

Considered in Grand Committee

15:48

Moved By

[Lord McNally]

That the Grand Committee do report to the House that it has considered the Damages-Based Agreements Regulations 2013.

Relevant documents: 17th Report from the Joint Committee on Statutory Instruments.

[The Minister of State, Ministry of Justice (Lord McNally)]

My Lords, as regards the draft Conditional Fee Agreements Order 2013 and the draft Damages-Based Agreements Regulations 2013, perhaps I may remind noble Lords that conditional fee agreements, or CFAs, are means of funding litigation that are usually entered into by claimants where the lawyer agrees not to take a fee if the claim fails. If the claim is successful, the lawyer may charge an uplift known as a success fee, in addition to their fee. Under the existing regime, the success fee is recovered from the losing defendant, in addition to the base fee.

The statutory power under which the draft Conditional Fee Agreements Order 2013 is made governs the regulation of CFAs and the recoverability of success fees payable under a CFA. Under Section 44 of the Legal Aid, Sentencing and Punishment of Offenders Act 2012—the LASPO Act—the success fee payable under a CFA is no longer recoverable from the losing party, but will be payable by the successful client subject to a prescribed cap.

Lord Justice Jackson, in his report, Review of Civil Litigation Costs, argued that the current regime had led to excessive costs in civil litigation, with risk-free litigation for claimants and additional costs being paid by defendants. He therefore recommended that recoverability from the losing side should be abolished in all cases, and this has been reflected in the provisions of Section 44 of the LASPO Act.

Lord Justice Jackson also recommended that CFA success fees in personal injury cases should be limited to 25% of damages, excluding damages awarded for future care and loss. The Government accepted this recommendation and agreed that claimants who have been compensated for personal injury should have their damages protected from having too much deducted by their lawyer as a success fee.

The draft order revokes the 2000 CFA order, but replicates its provisions in Articles 2 and 3. Subject to the cap in personal injury cases, the maximum success fee that can be charged remains 100% of the solicitor’s base costs.

Article 4 makes provision for a cap on success fees in personal injury cases only. The aim of the cap is to protect claimants’ damages, specifically those relating to future care and loss, which can run into many thousands of pounds in the most catastrophic injury cases. This cap will apply similarly, although not identically, to lawyers’ fees under damages-based agreements—or DBAs—under the draft Damages-Based Agreements Regulations 2013, to which I will come later.

Article 5 sets the cap. This means that in personal injury claims, the CFA must not provide for a success fee which is greater than 25% of the damages awarded to the claimant, excluding those for future care and loss. In effect, this means that the success fee can be taken only from general damages for pain, suffering and loss of amenity, and damages for past loss.

I know that there has been concern about the 25% cap and some representatives argue that this should be against all heads of damages. However, the Government have said consistently—including on many occasions during the passage of the LASPO Act through Parliament—that there will be a cap on the amount of damages that may be taken as a success fee of 25% of the damages, excluding damages for future care and loss. This follows Lord Justice Jackson’s recommendation and, as I said, is intended to protect claimants’ damages, and specifically those relating to future care and loss.

Article 6 contains a transitional and a saving provision. Essentially, this means that the order will not apply to any CFA entered into before Section 44 of the LASPO Act comes into force on 1 April 2013.

Furthermore, the order will not apply in respect of those proceedings for which implementation of Part 2 is delayed. Those proceedings are personal injury claims in respect of diffuse mesothelioma, privacy and defamation proceedings and proceedings in respect of and relating to insolvency.

I now turn to the draft Damages-Based Agreements Regulations 2013. A damages-based agreement or DBA is a privately funded arrangement between a representative and a client whereby the representative’s agreed fee is contingent on the success of the case, and is determined as a percentage of the compensation received by the client. Until now, DBAs have not been permitted in litigation before the courts, but their use has developed in non-contentious business—that is, work that falls outside the courts, including employment matters. However, Lord Justice Jackson recommended that DBAs should be extended to all areas of civil litigation. He argued that this would provide litigants with a choice of funding methods and the freedom to choose the one that they considered most appropriate for their case.

Section 45 of the LASPO Act therefore permits the use of DBAs in all areas of civil litigation. This section enables the Lord Chancellor to regulate their use and, in particular, to specify the maximum payment that may be made from damages under a DBA in particular proceedings. The draft regulations revoke the 2010 DBA regulations but replicate their provisions in respect of employment matters. The draft regulations prescribe the requirements with which an agreement between a client and a representative must comply in order for it to be an enforceable DBA in both civil proceedings and employment matters.

Under the existing regulations governing DBAs in employment matters, the maximum percentage of damages that a representative may take as a fee is 35%, and that continues. Lord Justice Jackson recommended that the lawyer’s fee under a DBA in personal injury proceedings should not exceed 25% of the claimant’s damages, excluding damages for future care and loss. The Government agree that claimants should have their damages protected from excessive legal fees.

As I mentioned earlier, a similar, although not identical, approach has been taken for CFAs. The Government believe that there should be a cap of 50% of the damages that may be taken as the lawyer’s fee in all cases outside of personal injury and employment matters. This is to protect claimants’ damages, and is based in part on a recommendation by the Civil Justice Council.

In order to be enforceable, a DBA in civil proceedings must meet the requirements specified in these regulations. Regulation 3 requires the DBA to specify the circumstances in which the payment from the claimant’s damages will be payable. It will be for the representative in civil proceedings to consider his likely costs before reaching agreement as regards the payment to be made from the claimant’s damages. The definition of payment excludes expenses—for example, medical reports—but specifically includes counsel’s fees, which would be paid for as a disbursement by the representative.

Regulation 4 sets the cap as I have outlined. Regulations 5, 6, 7 and 8 replicate the provisions from the 2010 regulations for employment matters. These detailed provisions in relation to information and other matters are necessary because employment matters may be undertaken by non-lawyers such as claims managers. On the other hand, civil litigation can be undertaken only by qualified legal representatives, who are subject to regulation by their professional bodies and whose conduct may be subject to challenge through those bodies. It is therefore considered that further regulation at this stage is not required.

In drafting these regulations we have borne in mind the indemnity principle. Put simply, the indemnity principle means that the losing party cannot be ordered to pay more in costs than the successful party has already agreed to pay his representative. The Civil Procedure Rules have been amended to provide that the court may not order the losing defendant to pay a claimant any costs that exceed the agreed payment, and thus breach the indemnity principle.

The claimant will need to pay his lawyer only if the costs recovered are less than the agreed payment. This means that, as well as possibly paying a sum directly from their damages, claimants might also be required to pay an additional sum to their representative to meet these expenses.

Both these instruments are important elements of our reforms.

[The Deputy Chairman of Committees]

My Lords, there is a Division in the Chamber. We will adjourn for 10 minutes.

15:59

Sitting suspended for a Division in the House.

00:00

[Lord McNally]

My Lords, both these instruments, which are important elements of our reform, come into effect on 1 April 2013. The reforms overall are intended to make civil costs more proportionate. They also include particular provisions to protect claimants and damages, as I have set out. These instruments have been subject to consultation, and we have improved the drafting as a result. I believe they are proportionate and appropriate. I therefore commend the draft instruments to the Committee.

[Lord Phillips of Sudbury]

I have only one simple point to make. It is a question to the Minister regarding the Conditional Fee Agreements Order, particularly the 25% cap, which does not apply to any future losses. In proposing this legislation, the Minister rested his case heavily on proposals made by Lord Justice Jackson in his review. Is the Minister aware of a lecture Lord Justice Jackson gave on 29 February last year? In this lecture, he made a point, which appears in the footnote, stating:

“The Personal Injuries Bar Association (PIBA) and the Bar Council have recently sent to me forceful submissions that the 25% cap should apply to ALL damages, as it did before April 2000. I can see the sense of allowing that dispensation in appropriate cases provided that the success fee is only payable by the client as it was pre-April 2000”.

That seems reasonable and it seems doubly reasonable given that the author of these proposals, Lord Justice Jackson, himself had second thoughts which he expressed in public last year. I am wondering, therefore, why the limitation to past losses survives into this statutory instrument and whether the Minister could take this away and follow the latest thinking of Lord Justice Jackson, which is supported by the Bar Council and, I suspect, the Law Society.

[Lord Beecham]

My Lords, I always like to be consistent and it certainly would be inconsistent of me not to begin with a complaint about the process here. These regulations come to us some five weeks before they are to take effect. The Bar Council has drawn attention to this, rightly stressing that a major change in the law, particularly in relation to DBAs, is being introduced with very little time before they come into effect for people to work out how they are going to be applied.

As the Minister has said, it has always been permissible for damages-based agreements to be implemented in non-contentious matters in tribunals. As he has also said, these were extended by regulations to employment cases. That opened the way to the revival of what used to be called “champerty” in previous times, which of course was unlawful. We are now legalising it under the new nomenclature of damages-based agreements and I can see that there is a case for doing that. Nevertheless, significant issues and questions arise from the Government’s proposal.

Reverting to the timescale, it should be pointed out that other changes affecting contentious litigation are in hand. These include changes to the Road Traffic Act portal and small claims limits in cases, including, potentially, personal injury cases. With all that happening, one might have thought that it would be sensible to bring all the changes together and to do it at a time which allows the parties and the professions to prepare adequately. I hope that the Minister will look again at the timetabling with a view to deferring implementation of whatever regulations finally emerge for six months until October of this year. I am particularly indebted to those who have briefed me, and no doubt other Members of your Lordships’ House and perhaps of this Committee, in relation to these matters, including the Association of Personal Injury Lawyers, the Bar Council, the Law Society and, especially, Professor Rachael Mulheron.

A number of issues arise and I hope that the Minister will be patient while I list them. If he is not able to reply to them all today—he may well not be—I hope that he will take these matters back and consider them. I was going to raise the question of the cap, which was raised by the noble Lord, Lord Phillips. I, too, identified the change of mind by Lord Justice Jackson, to which the noble Lord referred. It is notable of course that the 25% cap in terms of damages-based agreements applies only to personal injury cases. It is a 35% cap in employment cases, which can equally be quite substantial, although not, I guess, running into the millions of pounds of the exceptional cases of clinical evidence and the like to which the Minister referred. Nevertheless, it certainly can be comparable with many ordinary personal injury cases. In those cases, the cap is 35% including future loss, so there is a serious question about the composition of the figure against which the percentage is to be calculated.

16:16

There is also a perverse situation, which the Minister explained by reference to the indemnity principle, where if recoverable costs—that is to say, costs which would normally be payable by the defendant—exceed the cap, the claimant and his advocate, the solicitor, cannot recover them from the defendant. That is a perverse consequence of the way the regulations are drafted. That makes damages-based agreements less attractive to the professionals who will undertake that work.

There is similarly a problem about including VAT in the cap. Of course, rates of VAT can change. The Government increased VAT by 2.5% 18 months ago. If agreements had been in place at that time, the cap would effectively have been lower because of the increased VAT that would then have been levied on the fees above what had been originally envisaged. Rates can change and with them, in effect, the agreement will change automatically, whether or not the parties wish it to do so.

There is a similar issue—except in employment cases, interestingly—for counsel’s fees. Counsel’s fees are included in the cap for the ordinary PI case but not in employment cases. Why should that be the case? There is another issue about after-the-event insurance. It is not clear from the regulations whether the cost of after-the-event insurance is to be contained within the cap or not. The Civil Justice Council working party recommended that that matter be clarified. Perhaps the Minister could do so—again, if not today, subsequently.

In commercial cases, the question is whether the percentage recovered includes party and party costs, or is that also to be on a non-recoverable basis? In connection with personal injury cases, again there is the issue of the inclusion of general damages and past loss. I still do not see the justification for that. As the noble Lord, Lord Phillips, and I have mentioned, Lord Justice Jackson took a different view. There is also a question about how you deal with where a global offer is made. Offers are not always split under particular headings; a composite offer can be made. How will that be dealt with for the purpose of calculating the success fee?

In terms of process, the regulations and the scheme do not set out any system of regulation or, indeed, for the termination of such agreements. The Civil Justice Council working party suggested that should be embodied in the regulations; it does not appear. The Government seem content to rely on the professional codes of conduct of the Law Society and the Bar Council. Indeed, in answer to a recent parliamentary Written Question, the Minister replied that it was not the Government’s intention to regulate the industry, which leaves claims management companies outside the scope of regulation—except, as it happens, in the case of employment. That is another inconsistency between the approaches to employment cases and other cases.

Why are the Government content to rely on claims management companies, which might well get involved in these agreements, to regulate themselves? It is one thing for a profession to do that—although even that might be regarded as inadequate in certain quarters—but it is certainly another for claims management companies to do so, especially given the reputation that they have acquired over the past few years. There is not even any provision in the regulations on the information that is to be provided for clients by the providers except, again, in the case of employment law. Why is there a distinction between employment law and other cases in that respect? In short, as the Civil Justice Council effectively inquired, why is there not one set of regulations for all kinds of case? Why are there differences between the different categories?

There is also the question of potential liability for the payment of the defendant’s costs and whether these could be covered by after-the-event insurance. Another issue relates to defendants. The regulations are cast on the basis that we are concerned only with damages-based agreements for claimants, but of course, defendants have a financial interest in these matters as well. The regulations speak only about a percentage success fee in relation to the money recovered but not to money saved. If a defendant is successful and saves money, how will the fee be calculated? Is there a basis for a damages-based agreement, as it were, when a successful defendant saves money under such an agreement? It is unclear what will then happen.

It is instructive to look at some of the experience of other jurisdictions—particularly the American experience. A whole industry has grown up in this arena and I had the benefit of meeting representatives in America who are dealing with these issues. They expressed some interesting views about how the system works. Going back to the lawyer/client relationship, in practice it is not the lawyer who has control of the case in the American system with the professional disciplines that might apply. Effectively, it is the commercial organisation that is engaged in putting up the money for these cases—a kind of hedge fund for legal claims. I used that phrase when the Bill was going through. That is in marked contrast to the position of professionals with their ethical obligations, to which the Minister referred. I understand that 25 funders are already established in the UK for damages-based agreements, of which only nine have signed up to their own self-regulated Association of Litigation Funders. They are not even joining their own association, let alone being responsible to any independent and impartial organisation to oversee their work. Again, I invite the Minister to reconsider whether there should be such a system of regulation. There is apparently around £1 billion already held by organisations in the UK to fund these arrangements. Some of them, interestingly, are apparently based offshore—a sort of Starbucks of the damages-based agreement world. One can only imagine where any profits will ultimately go.

There are also questions about class actions. The organisation I met from America was essentially very concerned about the potential growth of class actions from the point of view of potential defendants. Nevertheless, there is an issue as to whether the scheme should apply to class actions. I understand that the Department for Business, Innovation and Skills is looking into this. I wonder whether the Minister can advise us on the current state of thinking in those cases.

With regard to damages-based agreements, there are, as will be seen, a great many questions that are raised by the regulations but not answered by them. Again having regard to the timescale, I urge the Minister to consider whether it would be sensible to look into all these, and other points that might be raised by other noble Lords today or in the House of Commons when the matter is debated there, and, if necessary, to defer implementation until these issues are clarified. A few months’ delay does not seem to be too much to ask in order to get things right from the beginning.

Some of the same arguments apply to conditional fee agreements—again, the issue of damages for the purposes of the calculation of a success fee, not including future loss, the question of VAT and the like. In my submission, it would also be sensible to look at these two sets of regulations together to see whether they can be improved in order to fill the quite evident gaps that exist, which cannot help the new system to bed in. The risk is that if there are problems of this kind, the Government’s purpose in promoting DBAs, or indeed the new regime of CFAs, as an alternative to legal aid will not succeed because the professions will not undertake the risks or, alternatively, it will not be the professions that run the show but commercial organisations with very little regard necessarily to the proprieties with which litigation has been, and should be, conducted in this country. I urge the Government to think again, look again at the Civil Justice Council’s recommendations and see whether changes can be made at this stage before implementation to make what is a pretty defective-looking set of regulations workable.

[Lord Phillips of Sudbury]

Before the noble Lord, Lord Beecham, sits down, does he agree that in his own extremely eloquent exposition on these two statutory instruments, and indeed in my own offering, there was a notable absence of reference to the basis upon which I suspect he, and certainly I, put forward our points—that is, access to justice? The majority sitting in this Grand Committee are lawyers, and we take it so much for granted that what we are seeking to amend in these regulations is exclusively for the benefit of improving access to justice. I invite him to concur with me that anyone reading Hansard who saw no reference to that in the course of our two offerings should know that this underpins everything that we have said.

[Lord Beecham]

I am grateful to the noble Lord for making explicit what was certainly implicit in what he and I were saying. Access to justice is certainly the core argument here. I should perhaps also have declared an interest in that from time to time as we have discussed these matters I have put in time as a now unpaid consultant with the firm of solicitors in which I was formerly a partner.

[Lord McNally]

My Lords, as a non-lawyer—perhaps the only one in the Room—I fully appreciate that the noble Lords’ interventions were about access to justice. As I have told the noble Lord, Lord Beecham, on earlier occasions, my legal qualifications rest on one of nine papers that I did for part one of my degree on English legal institutions. I remember champerty and maintenance from that paper. It came as quite a shock to me to find, in the process of the Bill, that not only was champerty not outlawed, it was now to become legal. But there we are—such is the passage of time.

16:30

The noble Lord, Lord Beecham, set me a formidable exam paper, and I will try to answer the questions he raised. If I miss any out or do not answer with sufficient clarity for those who will read our deliberations, I will write to him and put a copy in the Library of the House so that noble Lords and interested parties can be fully informed. It is of course always a dilemma for government, because if they move at one speed they are accused of moving too fast, yet at another speed they are accused of dragging their feet. I would say that there is nothing in these regulations that has not been well aired over the two-and-a-half years that I have been in this job, and they have been well discussed in the House.

I am pleased to see my old adversary, the noble Lord, Lord Bach, in his place. I hope he thinks that the young man who succeeded him is doing a—

[Lord Beecham]

He is actually an older man.

[Lord McNally]

Actually, I knew that. As Harold Wilson said when he retired and Jim Callaghan succeeded him, “I have made way for an older man”.

I take the point made by the noble Lord, Lord Phillips, but let me be blunt. I am always suspicious of Ministers who at any time rest too much on a report, no matter how learned. I do not rest the case for the 25% cap on that being Lord Justice Jackson’s original recommendation, although indeed it was. A sharp-eyed lawyer would say that the noble Lord’s quote about Lord Justice Jackson did not endorse the counterview but simply said that it had merit, which is not the same as advocating that the Government change their policy. Even if it were, this is the Government’s policy. It is the right policy because it protects the future earnings and the future cover for victims in these cases. It remains our policy on that merit, and we are willing to defend it on that basis.

I understand the point made by the noble Lord, Lord Beecham, about speed. I pointed out that very little of what we are doing is entirely new. We fully recognise that at this time there is a need for ability, nimbleness and fleetness of foot in all parts of the legal profession, if we are to take advantage of the changes that are going through. We are not persuaded that the timescales we have set are unreasonable, and we will not be deferred from the course that we have set. We have taken account of reasons for delay regarding mesothelioma and privacy, which I quoted. However, these orders will go through to take account of the fact that LASPO comes into effect on 1 April 2013.

Perhaps I might deal with a number of the specific questions that the noble Lord, Lord Beecham, raised. He was very correct to raise the issue of the American experience in DBAs. I also met the organisation that came over to present its case. I left that meeting with some of his concerns about what this might bring into our legal system. The noble Lord’s description of hedge funds for legal claims is something that we are very conscious of. What we have decided so far is to keep the matter under review. That phrase can often hide weasel words and weasel intent, but we want to see just how much this is going to become a factor in our legal system, while making sure that some of the warning signs that the noble Lord has quite legitimately raised are on the radar of Ministers as well. We will keep this matter closely under review.

The noble Lord raised the issue of VAT on the 25% cap. The 25% cap on success fees is as recommended by Lord Justice Jackson. Including VAT on the success fee on lawyers’ fees within the cap will provide further protection for the claimant’s damages and add certainty for the claimant as to the likely deduction from their damages. This approach is also consistent with the existing cap of 35%, inclusive of VAT, on payments to be made from damages in respect of DBAs in employment matters. The noble Lord also asked about the indemnity principle. DBAs are an alternative method of funding and it would be for solicitors to advise their clients on the most appropriate method of funding according to the circumstances of each case. He also mentioned there being one set of regulations. There is one set of regulations covering both civil litigation and employment cases, as recommended by the Civil Justice Council. We have listened to the concerns of the Law Society and others that there should not be too much regulation in respect of civil litigation in these instruments. This is because failure to comply with the provisions in the instruments would make the agreements unenforceable. As I have said, lawyers are properly regulated in any event.

The noble Lord asked whether the cost of ATE insurance is within or outside the 25% cap. This is an expense and is therefore outside the cap. On why DBA regulations do not contain requirements on termination for civil litigation, as in employment cases, the DBA regulations of 2010 made provisions for employment cases which can be taken forward by non-lawyers. Detailed safeguards need to be built in as a result. Civil litigation can be conducted only by lawyers, who are subject to their own professional regulations.

I think that that covers most of the issues. If not, perhaps I might say to the noble Lord that I welcome the thoroughness with which he has examined these regulations and, as I say, if I have not covered the questions in precisely the detail that I should have done I will make sure that a suitable letter is lodged in the Library of the House. I nevertheless think that the timetable that we have set, the consultation that we have undertaken and the changes that we have made after that consultation, with our having listened to the Bar Council, the Law Society and other interested parties, make the regulations fit for purpose. I therefore recommend them to the Committee.

[Lord Marks of Henley-on-Thames]

My Lords, before my noble friend the Minister sits down, I have one question on the point made by the noble Lord, Lord Beecham, about damage-based agreements for defendants. It is my understanding of the regulations that DBAs are not appropriate for defendants, whereas conditional fee agreements are and always can be available to defendants. DBAs depend upon the damages awarded to the client or monies paid by another party to the party entering into the DBA. Clarification on that from my noble friend may be helpful, but it is certainly my understanding.

[Lord McNally]

I am grateful to my noble friend for that question. I am informed that neither the Act nor the regulations enable defendants to use DBAs, not least because a DBA is enforceable only where the agreement makes provision for the payment of the fee from damages awarded. My noble friend asks an extremely pertinent question and I hope that I have given a clear answer.

[Lord Beecham]

It is a clear answer, but there does not seem to be a particular rationale for excluding defendants from this process. If they secure the retention of a sum of money claimed under the agreement, why should the DBA not be available to them? To confine it to claimants seems too narrow a concept. If the intention of the Government, as it clearly is, is to use the DBA as an alternative method of financing, it should be available to both sides because nobody is being compelled to undertake a DBA. That still requires some further thought.

[Lord McNally]

I will certainly give it further thought, but the question was whether the regulations as presently set out debar the use of DBAs by defendants. The answer is yes. I will reflect and put those further reflections in the letter.

Motion agreed.