Saturday, 13 April 2013

The Road to no more Recoverable Costs

Please note the purpose of this article is to explore and discuss the changes in personal injury law that have been suggested in recent times. This is not legal advice and must not be taken as such by anyone. If you require legal advice please contact a solicitor.  It is an exploration of a particular point that may be of the greatest importance to personal injury lawyers and the way they operate.  Personal injury lawyers are by and large passionate about working in the interests of justice  and the pursuit of their client's cases.  This article seeks to examine how some changes may directly impact on the way claimant lawyer's are paid for doing their work. I welcome wholeheartedly any comments or corrections as part of this ongoing discussion and exploration.

The speculation about a possible increase in the small claims limit for personal injury has not ceased.  The government’s consultation on the subject has closed and we await the Ministry Of Justice’s announcement which is expected in May or June.  Of course, the small claims limit for financial claims has already increased rather drastically from £5,000 to £10,000 on 1st April 2013.  To most private individuals and most businesses, a sum of between £5,000 to £10,000 is far from small and with a sizeable proportion of the population being one month’s pay away from homelessness the importance of such a claim is clear.

This applies to many personal injury claims of around this size as well.  An injury claim valued at around £5,000 will typically involve a serious and potentially long lasting injury with a prolonged period of pain and discomfort.  Claims with injuries valued at between £1,000 and £5,000 can involve serious consequences for victims of accidents including loss of earnings.

The government’s consultation on increasing the small claims personal injury limit looked at three scenarios all involving an increase from £1,000 to £5,000. The most general was an increase for all personal injury claims, the second was an increase just for road traffic accidents and the final one was restricted to just road traffic accidents involving whiplash claims.

The majority of personal injury claims are valued at below £5,000 and in addition a sizeable proportion of personal injury claims arise from road traffic accidents.  The consequences of these sorts of changes for personal injury lawyers is of course that if a claim lies in the small claims track of the County Court, normal legal costs (beyond certain types of disbursements) are not recoverable from the opponent (see Civil Procedure Rule 27).  As a result increasing the small claims personal injury limit to say £5,000 would be very serious for lawyers dealing with these sorts of cases.

The Lord Chancellor and Secretary of State for Justice, Mr Christopher Grayling, has also been reported as suggesting this limit could be increased to as much as £15,000.  Such an increase would include a very large proportion of injury claims.  For the purposes of the great majority of cases there would be no more recoverable costs.

Let us assume that the small claims personal injury limit is to be increased to say £5,000 and that this change will come into effect on 1st October 2013.  The most likely way this will be achieved is to say that all cases issued on or after that date where general damages are less than or equal to £5,000 are to be, with all the usual exceptions, allocated to the small claims track. This will be effectively retrospective as you may have been dealing with a claim for a while before 1st October 2013 in the belief that it was a fast track claim and therefore recoverable costs would apply but the change will  mean that, unless you settle prior to the 1st October 2013, this will not be the case.  Rather unfair to claimants and their lawyers admittedly but this is the way similar changes have been enacted previously.

In this situation, if you deal with a claim where general damages are less than £5,000 you will not recover costs from the Defendant and must therefore look to the client to pay your fees (unless you are prepared to act for free).  In this scenario the currently much maligned Damage Based Agreements may come into play. 

As matters stand, the maximum percentage you will be able to deduct will be 25% of client’s damages, to include VAT and disbursements.  So let us say your case is worth £3,500 for general damages plus £500 for special damages. Total is £4,000 so the amount you can deduct under the DBA is 25%, that being £1,000 leaving your client with £3,000.  Fortunately you will be entitled to recover the medical report fees from the Defendant  and rather neatly the allowable recoverable fee for a medical report was recently increased under CPR 27 from £200 to £750. This is an amount that equates to a respectable total for a single medical report (perhaps even from an orthopaedic expert rather than GP).

Under the Ontario model any amounts you recover from the Defendant (including for disbursements) has to be repaid to the client. So let us say your medical report was £500 which are you are entitled to recover from the Defendant.  So in addition to £3,000 you have to give credit for the £500 to the client so in the end the client has £3,500.

You end up with the balance of £500 deducted from damages plus the £500 you recovered from the Defendant leaving you with £1,000.  You still have to pay for the medical report so after deducting the fee of £500 you are left with £500 for costs.  If VAT is 20% this means profit costs are £416.67.  For a case valued in total at £4,000. 

At this point it appears that the lawyer had been entitled to deal with the case under a proper contingency fee agreement with the client of say 25% of damages. If this had occurred, the lawyer could have recovered £1,000 for costs (inclusive of VAT) which would give the lawyer £833.33 of profit costs.  The lawyer would have recovered the £500 medical report fee from the Defendant.  As a result, a proper contingency fee agreement works better for the lawyer whilst a DBA works better for the client.

Now if liability is denied or you cannot agree quantum with the Defendant, you may seek to proceed to trial.  You issue your claim, have questionnaires and a pre-trial checklist and set down for trial. All these stages entail additional disbursements of (assuming they are not changed by the rules) of £120, £40 and £325 respectively (being £490 in total).

If you are successful you will be entitled to recover these from the Defendant. Again you have under a Damage Based Agreement to give credit to the client. If the medical report fee is still £500 this means the client walks away with £3,990 and so has almost recovered all her damages.  The lawyer ends up with the sum of £10 deducted from damages plus £990 recovered from the Defendant leaving him with the sum of £1,000. 

Remember though that the lawyer still has to account for the disbursements and so the lawyer has only £10 for costs in this scenario including VAT, leaving £8.33 for profit costs.  Effectively by taking the matter to trial all the profit costs have been swallowed up in crediting the client with disbursements recovered from the Defendant due to the Ontario model.

If legal proceedings are issued at the Court, it is not possible for a lawyer to deal with a matter under a contingency fee agreement as these are not allowed in contentious matters. Part of the definition of contentious matters is that this includes cases where proceedings have been issued at the County Court.

As a result you would have to enter into a Damage Based Agreement if you needed to issue the claim.  Doing so would be likely to seriously reduce the already low fees a lawyer ends up with for a claim of this size as we have seen.

Let’s say the small claims personal injury limit is in fact increased to £15,000.  What then? Imagine a scenario where damages are agreed at £13,000 and the DBA is 25%.  Let’s say again, perhaps less probably in this scenario, that the only disbursement is a medical report of £500 which is recoverable from the Defendant in addition to damages.  Remember that the amount you can charge the 25% does not include future special damages and is net of any deduction for CRU. We will avoid any complications for appeals.

If you settle without issuing the amount to be deducted is 25% of £13,000 or £3,250.  This leaves the client with the balance of £9,750.  You recover the sum of £500 for the medical report which has to be credited to the client.  In total the client recovers the sum of £10,250.

The lawyer’s part is £3,250 as stated.  The amount of £500 for the lawyer’s fees is therefore £2,750 after the credit to the client is accounted for and after VAT this leaves profit costs of £2,291.67. If it had been dealt with under a straight contingency fee, the client would have £500 less and the lawyer’s fees (net of VAT) would increase by £416.67.

If the claim for £13,000 had to be issued and taken to trial, the disbursements would (assuming no change in the fees) total £1,100.  Under the DBA (remembering that a straight contingency fee is not possible as it is now contentious work) these have to be credited to the client once recovered from the Defendant.  So, here the client has £9,750 plus £1,100 being in total £10,850.  The lawyer has £3,250 less £1,100 being a balance of £2,150.  After deducting VAT this leaves the lawyer with £1,791.67 for profit costs. Simply by taking a matter to trial the lawyer’s fees have been reduced despite all the increased work entailed.  In reality a claim for £13,000 might well entail more than one medical report and possibly other disbursements especially if Counsel is used for the trial and so the amount available for costs reduces further.

Increasing the small claims limit to £5,000 would in conclusion mean a lot of the work that personal injury lawyers have been doing would be simply uneconomic and this becomes only more prevalent if it is increased to say £15,000.

There is currently no definite word from the Ministry Of Justice on the date for implementation of a this increase, whether it will actually happen or if so in what way.  Quite clearly as this article shows, it would be a change of the greatest importance to the personal injury profession.

1 comment:

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