Wednesday, 21 November 2012

Poortal fees, the FRC and DBAS - how will that work?

Earlier this week, the Ministry of Justice finally made an announcement about reduced RTA fees for personal injury claims pursued through the portal and also the fees for EL and PL claims when pursued through the portal.  In addition, a matrix of calculations were provided for how fixed costs would be determined for fast track RTA, EL and PL claims.  There has been furore from claimant practitioners ever since, particularly as evidenced by comments left on the website for the Law Society Gazette ( ).

My post yesterday examined a range of sample personal injury claims and how the costs would be calculated, both under the new portal fees and the FRC.  Another aspect of the new regime will be DBAs (Damage Based Agreements), a form of contingency fee, which will be allowable after 1st April 2013.   This article examines the role DBAs may play in the new portal fees and FRC.

DBAs will enable claimant lawyers to charge clients up to 25% of their compensation as fees for pursuing their claim.  This is on the face of it a deduction from damages upon the claim being successful and in practise many clients seem familiar with this concept presumably from American films and TV; in fact it often seems clients think this or something similar is how we work in the UK. As from 1st April 2013 this may well be the case.

There is a complication though in that the rules for DBAs state that if the claimant lawyer recovers costs, they have to give credit to their client pound for pound for the costs that are recovered.  So, if £500 is deducted from damages under the DBA and the lawyer then recovers £500 in costs (or more) from the Defendant, this £500 is repaid to the client.  In this example the client does not actually lose anything just because their case was pursued under a DBA.  This point is modelled after the version of contingency fees used in Ontario, Canada and so is known as the Ontario model.

Another point recently made is that the indemnity principle will apply to DBAs and the Ministry of Justice has stated that this means that if portal fees or FRC costs (as the case maybe) exceed those that would have been recoverable under the DBA (thinking of the amount under the DBA as pure base costs) then costs are limited to the DBA fee.  I have assumed this means base costs recoverable from the Defendant are limited to the DBA amount with VAT and disbursements on top. So if you've entered into a DBA it could bite back later.

Also, in a further dilution of the importance of DBAs for personal injury work, it has to be remembered that according to the Ministry of Justice, future losses such as future loss of earnings and future care are excluded from the calculation for the fees payable under a DBA.  The point here is that the recoverable rate of 25% against damages is, if we assume VAT of 20%, in reality 20.8% recovery for profit costs and so it only equates to anything like standard basis costs if the claim is of a substantial size.  Claims of a substantial size, including even the bigger fast track cases where DBAs might otherwise be of assistance to the claimant personal injury lawyer, often include a claim for future losses of this sort.  As a result, in precisely the sorts of cases where DBAs might help, this exclusion will reduce the number of claims where they will. I have assumed for the purposes of this article for simplicity that the figures below do not include claims for future losses, although in reality they might do.

Given that the new portal fees and the FRC have been thought of in such calamitous terms I wanted to look at how DBAs might affect this.  If the new inter partes costs are so low, what might DBAs do to them?  I will assume that all lawyers will charge DBAs at 25% (the maximum allowed – lower rates can be agreed with the client) and that VAT is at 20% (the VAT element has to be included in the amount deducted from damages).  I will also assume given that the lawyer is running the case under a DBA, they are not also going to try charging the client a success fee.

I would be very pleased to hear from anyone about any errors in my working through in the following.

RTA claim settled for £3,000 whilst inside the portal at stage 2

Recoverable Base costs = £500 (compared to £1,200 under now).

With DBA, 25% of £3,000 = £750.   This would leave the client with £2,250.
£500 can be recovered from the Defendant and so only £250 would be deducted from damages leaving the client with £2,750.  In fact, disbursements and VAT would be recovered on top of the base costs as well which would be likely to reduce the amount deducted from compensation down to nil, leaving the client with £3,000.

So in this example, as the total recovered from the Defendant including VAT and disbursements is above the amount deducted for the DBA, the base costs recovered by the claimant lawyer remain at the portal fee level of £500.  This is due to the use of the Ontario model.

So, damages for client: £3,000 and base costs for lawyer: £500

RTA claim settled whilst in the portal for £20,000 at the end of Stage 2

Recoverable Base Costs: £800 

With DBA, 25% of £20,000 = £5,000.  This would leave the client with £15,000.
The recoverable costs from the Defendant are: £800 plus VAT = £160 plus disbursements. Let’s say there are two medical reports given the size of the case and obtaining medical notes for a total disbursements of £1,200.  So total recoverable costs from the Defendant are £960+£1,200 = £2,160 in this example.

So, these costs reduce the amount deducted for the DBA.  £5,000 - £2,160 = £2,840.

Total due to client: £20,000 - £2,840 = £17,160.
Total costs recovered by lawyer: £5,000 but of this, £1,200 is for disbursements.  This leaves a balance of £3,800.  VAT is chargeable out of this at 20%, so base costs = £3,166.67.

So, damages due to client: £17,160 and base costs for lawyer : £3,166.67

Remember though that if part of the claim of £20,000 is for future losses this has to be deducted from the damages figure for the purposes of calculating the fees under the DBA.

RTA claim settled for £3,000 after issuing but before allocation

Recoverable Base Costs: £1,760

With DBA, 25% of £3,000 = £750.   This would leave the client with £2,250.
The recoverable costs from the Defendant are £1,760 just for base costs let alone VAT and disbursements, which takes us beyond the maximum £750 for the DBA.  So, the amount deducted DBA is completely offset by recoverable costs.  This leaves the client receiving all their damages and the lawyer receiving the base costs figure in accordance with the FRC, if not for the indemnity principle.
The indemnity principle means that costs have to be limited to the DBA amount, meaning that whilst the lawyer would have recovered £1,760 in base costs under the FRC as they entered into a DBA they are limited to that amount of £750 instead.

So, damages due to client: £3,000 and base costs for lawyer: £1,760  £750.

EL claim settled for £24,000 after issue before allocation

Recoverable base Costs under FRC: £7,430

With DBA, 25% = £6,000.  On the face of it, this leaves the client with £18,000.

With the Ontario model, we must then consider recoverable costs.  The base recoverable costs here are £7,430, which is beyond the amount deductible for DBA.  So, all of the deduction for DBA is offset by the FRC so the client gets all their damages and the lawyer’s costs are limited to the amount under the DBA of £6,000. As the lawyer had entered into a DBA, their costs are limited to that amount of £6,000 rather than the figure of £7,430 under the FRC.

So, damages due to client: £24,000 and base costs for lawyer: £7,430  £6,000

Remember though that if part of the claim of £24,000 is for future losses this has to be deducted from the damages figure for the purposes of calculating the fees under the DBA.

My conclusion at this point is that with high enough cases, the DBA can come to the assistance of the claimant lawyer in fees but only in certain situations.

If damages are low, the DBA is offset by the total of costs, VAT and disbursements and so does not assist.  If quantum is high and proceedings are issued, again the DBA could be offset by recoverable costs.  

If damages are at least more than a low value claim and proceedings are not issued or settled shortly after issue, the DBA might be of assistance as it would outweigh the total of costs, VAT and disbursements.  This will though entail some deduction from client’s damages. It might be more straightforward and profitable to put the client on a CFA with a success fee deductible from damages (up to a maximum 25% deduction from damages).

The operation of the indemnity principle also means that some of the time having a DBA could actually be detrimental as your recoverable costs will be limited by the amount payable by the DBA. As a result if you are confident that the case will settle early and expected quantum is a high fast track claim it might be a good idea to have a DBA. For example, a high fast track RTA that stays in the portal might be a good bet for a DBA. Otherwise, I think personal injury practitioners dealing with fast track or portal RTA, EL or PL cases can just forget about DBAs.

But what about the conflict of interests with the client? Clients don’t have to have a DBA and if all this was explained to them and they understood, they would be singularly disinclined to take one up if it meant a deduction to their damages.

Also, will the market bear any attempt by lawyers to make a deduction from damages.  For a long time, clients have been educated by advertising about the claims process into thinking they are entitled to 100% compensation.  Will they demand this? Will lawyers, out to compete more directly with each other in a non-referral environment, seek to agree less of a percentage deduction than their competitors?  Will this be a race to the bottom with lawyers simply sticking to their 100% guarantee despite the significant loss in fee income per case this will entail?  My initial view is that just as with the roughly 50% deduction in portal fees, the fees under the FRC are also about 50% less than those typically recoverable by lawyers under the predictive costs regime and the standard basis for fast track cases over a broad range of cases. This fee reduction might be even higher given that most fee earner’s case loads consist of lots of small value claims with less and less claims the higher the level of quantum. 

Clearly in this situation, lawyers will not be able to simply go on as they are without recalibrating their approach in some way.

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