Success fees cap: conflict of interest?

The ability of solicitors to charge a success fee on their fees creates limited scope for conflict of interest with their clients’ interests because the success fee will usually be limited to the amount recovered from the other side. This may change after April 2013 when success fees cease to become recoverable between the parties for conditional fee agreements entered into after that date. This conflict may go beyond the obvious one that solicitors would wish to maximise the success fee agreed while the client would wish to minimise it.

To protect consumer interests the government has announced, in line with Lord Justice Jackson’s recommendations, that the success fee in personal injury cases will be subject to a cap of 25 per cent of damages, excluding damages for future care and loss. Further, the lawyer will be required to provide clear information to the claimant on how the success fee has been calculated including showing the breakdown between solicitor and barrister (if appropriate), and the type of damages that the cap applies to (excluding future care and loss).

Superficially this appears straightforward and uncontroversial. The difficulty, as with all these things, is in terms of the practical implementation. A high proportion of personal injury claims that include claims for both general and special damages settle on a global basis. How is the maximum success fee to be calculated in such cases?

Although it would clearly be open to a claimant’s solicitor to request a breakdown of any offer made by a defendant it is doubtful that there would be any absolute obligation on a defendant to provide this, beyond the obvious duty to clarify the offer under CPR 36.8. This is particularly the case given that in future, defendants will have no direct interest in the level of any success fee. This will become an entirely solicitor or own client issue.

The potential conflict of interest between solicitor and client arises where there is a global offer. The solicitor has an interest in maximising the amount attributable to general damages and past losses so as to create the largest “pie” from which to take the 25 per cent slice. Conversely, the client’s interest is best served by minimising that element.

It is possible to see the potential for defendants to engage in mischief making by maximising this conflict.

Let us take, for example, a case where objectively viewed, general damages and past losses are worth £20,000 and future losses are worth £20,000, a total of £40,000. If the claim settled on that basis the solicitor would be able to charge a success fee of up to £5,000 (25 per cent of the £20,000 figure for general damages and past losses). The claimant would be left with a balance of £35,000. Suppose then, that a defendant makes a part 36 offer of £30,000. The defendant states that the offer is a global one but to assist in consideration of the same the defendant has valued general damages and past losses at £25,000. Settlement on that basis would give the solicitor a potential success fee of £6,250 (25 per cent of £25,000). The claimant ?would be left with a balance of £23,750. In this case the solicitor’s success fee, payable by the client, is enhanced at the direct expense of the client in terms of the total damages recovered.

If it seems fanciful that solicitors would allow the level of costs they can recover to influence their advice on assessment valuation it is worth considering the findings of Professor Fenn’s report into the operation of the RTA portal. This showed a reduction in the level of damages being agreed, compared to claims settling before the portal was introduced, with the modest fixed fees recoverable under the portal being identified as the likely cause.

Of course, one strong disincentive to undersettling claims will be the knowledge there will be plenty of other claimant solicitors out there looking to bring professional negligence claims where such undersettlement has occurred. No doubt such claims will be run on the basis of conditional fee agreement with a success fee being charged. Strangely, it appears these agreements will not, in turn, be subject to a cap on the success fee.