Damages-Based Agreements Regulations 2013

Viscount Simon Excerpts

Tuesday 26th February 2013 Grand Committee

[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.