Saturday, 24 November 2012

The new portal fees - the warm up to increasing the small claims limit?

For a long time there has been a lot of discussion about the personal injury limit for the small claims track, currently set at £1,000, being increased to £5,000.  This is a point of great importance to many personal injury claimant lawyers as the majority of claims, particularly RTAs, involve general damages of less than £5,000.  Indeed in RTAs figures are sometimes quoted of 85% of all claims falling into this bracket.

If the small claims limit for general damages were raised to £5,000, how might the proposed Damage Based Agreement system work and how would it compare to costs under the new portal fees proposed by the Ministry of Justice?  The starting point is of course that if this were to occur, cases where general damages were under £5,000 would not entitle the claimant lawyer to recover legal costs from the Defendant, apart from the small claims track's fixed costs. See the well known Dockerill case for a detailed discussion of costs in the small claims track. The main (or seemingly only) way to claim profit costs would therefore be DBAs which would take on a lot more importance.  In the small claims track, in accordance with CPR 27, you can normally only recover a fixed amount for a medical report which is currently £200 along with your court fees if you issue proceedings at the County Court.

Assume quantum is £4,000 and DBA is 25%.  At this rate, the deductible costs from damages is £1,000. In virtually ever personal injury case of this sort only the £200 fixed costs for the medical report is recoverable from the Defendant if we assume proceedings are not issued.  In reality this payment of £200 is effectively a contribution to the medical expert's fee which are normally rather a bit more.  Let's assume the expert's fee is actually £350.  Just because we can only recover £200 from the Defendant doesn't usually mean the expert will agree to reduce their fee to that level!

Let’s assume, to be generous to ourselves, that we have not bothered getting medical notes to provide to the expert and let’s also assume that in a world of Qualified One Way Costs Shifting we have not concerned ourselves with purchasing After the Event Insurance.  With these sorts of cases, some law firms have a policy of obtaining medical notes and some don’t.  I’m assuming we’re not to try and be as positive about this scenario as possible especially as on the small claims track you can't normally recover fees for medical notes. If notes are obtained, clearly the amount left for profit costs will be correspondingly lower.  Also, £350 is fairly modest for a medical report on average particularly when a medical agency adds their fee on top of the expert’s charges.  GP reports can be cheaper but, dare I say it, if they are there is then a corresponding reduction in quality.  Again a more expensive report would reduce the amount available to the claimant lawyer as costs.

As it's a DBA then the £1,000 deductible costs would reduce the damages from £4,000 to £3,000.  As we recovered the figure of £200 for the contribution to the medical report we have to give credit to the client for this so the claimant walks away with £3,200 in damages.  The £200 credit is due to the particular model of contingency fee agreements the government has chosen for DBAs based on the model used in Ontario where  the client has to be credited for costs recovered from the Defendant.

We are then left with the balance of £800 from the DBA once we have given credit to the claimant under the Ontario model plus £200 recovered from the Defendant for the fixed costs payable under CPR 27, giving a total of £1,000.  We still have to pay the medical report of £350, leaving a balance of £650.  Assuming VAT of 20% this leaves the claimant lawyer with a profit costs figure of £541.67.

Let’s consider the situation that is likely to occur after 1st April 2013 but prior to any increase on the general damages limit for the small claims track from £1,000 to £5,000.  Recoverable costs under the new portal fees currently proposed by the Ministry of Justice in this scenario would entitle the claimant lawyer to the sum of £500 plus VAT at the end of stage 2.  Applying the same details concerning disbursements would mean total recoverable costs against the Defendant would be £950 (to include VAT and the medical report of £350). So in this situation, the claimant lawyer would be better off, by the princely sum of £41.67, by being under a DBA than the new portal fees would allow.  Quantum of £4,000 is clearly towards the top end of the £1,000 to £5,000 so claims that are lower (which is most of them) would entitle the claimant lawyer to less costs under a DBA than the fixed costs under the new portal fees proposed by the MOJ.

One point in passing with this example is that here the balance between the total recoverable costs of £950 and the amount deductible under the DBA of £1,000, a balance of £50, still has to be deducted from the claimant’s damages leaving the claimant with £3,950.  So the claimant does better prior to the lifting of the limit in the small claims track of the general damages to £5,000 than after when they can only hire a lawyer under a DBA.  

This example suggests that, in a very rough and ready sort of way, the new portal fees particularly in RTA claims are taking us down to a level similar to how DBAs might work for claims in the £1,000 to £5,000 bracket.  Admittedly in EL and PL claims this conclusion is not quite as clear as the portal fees are a bit more but the theme here still seems appropriate.

My conclusion is that with most RTA, EL and PL claims less than £5,000 for general damages, both claimants and their lawyers end up with less under a DBA where the small claim limit is increased to £5,000 than they would with the new portal fees if the small claim limit is not increased. Such a move is not in injured people's interests or their lawyers.  So whose interests is it in? Guess.

The portal fees have been set at these values to get claimant lawyers used to them in the run up to the general damages limit for the small claims track being changed from £1,000 to £5,000.

At that point the only way for lawyers to claim costs is to run them under DBAs.

As further confirmation of my point consider a claim for £2,500, that is half way up to what will be the top limit for general damages on the small claims track. With a DBA at 25% the amount for costs is £625.  If we assume that by then all the costs of the medical report will be absorbed by the fixed costs on the small claims track (by for example either the amount recoverable under CPR 27 being increased or, more likely, the costs  of the report being fixed by an AMRO-style agreement to £200) then the claimant lawyer's fees are £520.83 once VAT is taken into account at 20%.  This effective parity between the legal costs in the median case under a post-small claims limit increase regime and the RTA portal fees for a case of similar size now strongly recommends to me that the portal fees have been set as a vehicle to move the claimant legal world into this regime.

You may consider the 10% increase in general damages that will apply.  Will that get lost in the scramble to keep up with all the new changes? Will insurers simply ignore it?

A 10% increase in general damages at a 25% recovery under DBAs can be explored as follows.  Imagine a claim settled for £3,500 and £3,000 of that is for general damages.  With a 10% increase in general damages this become a total of £3,800.  So instead of costs under the DBA being £729.17 (remembering to take off VAT to get the profit costs figure) they are now £791.67 – a difference of £62.50.  Stop the press. And that’s assuming the 10% increase is actually recovered in this rather idealistic way.

Of course that extra bit is supposed to pay for the lack of recoverable success fees and ATEI (if you bother to get it in the world of QOWCS).  It would take a much more substantial increase in damages awarded to claimants to take fees back up to either the predictive costs level or standard basis costs.

In addition, the new FRC proposed by the Ministry of Justice as applied to cases that come out of the portal but are not issued are, at this size of case, similar to these figures under a DBA. 

So in conclusion, part of the plan with the new portal fees and the FRC must be to warm claimant lawyers up to the now seemingly inevitable lifting of the general damages limit for the small claims track from £1,000 to £5,000 with a view that ultimately cases at this level will be dealt with by DBAs.

The implication of that of course is that let us say liability is denied on your £3,000 EL claim or you have a £1,500 Low Velocity Impact RTA case the Defendant seems keen to fight all the way.  You can issue if you want and you should recover the court fees under the small claims track rules. But you won't recover any more actual profit costs for doing so.  Your costs will be just the amount claimed from your client under the DBA, not even the restricted costs the Ministry of Justice is proposing under the FRC.

There has been discussion by the Ministry of Justice about the use of independent medical panels and when you read about this you can't help thinking that one of the main factors is simply to reduce fees payable for medical reports, presumably to bring them more into line with the fixed costs of £200 for reports recoverable under CPR 27.

The Ministry of Justice have referred to this extension of the small claims track in their recent press release about the civil litigation reforms.  It is interesting that in this press release this is referred to in a section headed up “Whiplash” but then seemingly in any reform it would refer to all personal injury claims of this size and not just RTA as the word “Whiplash” would suggest.  There can be no doubt this change is on its way and the new costs regime is part of the transition to this situation.

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