Success fee agreements: consultation on Part 1 of the Civil Litigation (Expenses and Group Proceedings) (Scotland) Act 2018

Chapter 2: Proposed caps on success fees

Introduction

10. In Scotland, civil litigation has traditionally been financed in three ways – through private funding, civil legal aid, and trade union funding. In the last 20 to 30 years this situation has changed. The accessibility of other kinds of payment arrangements with solicitors such as speculative fee arrangements, as well as claims management companies using damages based agreements, and a reduction in trade union membership, has resulted in a decline in the traditional types of funding for civil cases. Whilst third party funding by firms of litigation funders is becoming more common in relation to commercial cases, these are unknown in personal injury actions. Another evolving funding option is crowdfunding.

11. Under a speculative fee agreement, the lawyer does not generally receive a fee from the client if the case is lost. However, if the case is won, the lawyer’s costs (the ‘base costs’) are generally recoverable from the losing party. In these cases, the lawyer can charge an uplift on these base costs, known as the ‘success fee’, which is payable by the client.

12. The maximum success fee that may be charged under a speculative fee agreement is prescribed by secondary legislation (the Act of Sederunt (Fees of Solicitors in Speculative Actions) 1992). In all cases, the current maximum uplift that may be charged is 100% of the base costs.

13. Damages based agreements are a different form of success fee agreement under which a provider’s fee is calculated as a percentage of the client’s damages if the case is won. They are easy for potential litigants to understand; the service provider simply takes a percentage of damages won or agreed if the case is successful. If the case is not successful the service provider receives nothing. In personal injury actions, the 2018 Act ensures that the percentage uplift (i.e., the success fee) from damages awarded or received is the only cost to pursuers as section 6(2) provides that the service provider is liable to pay the outlays necessary to progress the case. In other words, a damages based agreement for a personal injury claim must operate on a “no win no fee” basis.

14. Commonplace in the USA, most frequently in personal injury cases but also available in commercial actions, damages based agreements cannot currently be enforced by solicitors in Scotland. Advocates are also expressly forbidden by the Faculty of Advocates from entering into damages based agreements. Claims management companies (‘CMCs’) are, however, able to offer such agreements. Unlike a solicitor, a CMC cannot raise court proceedings, cannot appear in court on behalf of a pursuer, and cannot instruct counsel. The activities of such firms have become more prominent in Scotland as they can enter into damages based agreements whilst such agreements cannot be enforced by a solicitor. Some of claims management companies in Scotland are wholly owned by solicitor firms which are regulated by the Law Society of Scotland. As mentioned, claims management companies will be regulated in Scotland by the Financial Conduct Authority under the Financial Guidance and Claims Act 2018^[5].

15. Section 2 of the 2018 Act when commenced will permit solicitors to enter into damages based agreements and so solicitors as well as claims management companies will be able to offer these.

16. There is little doubt about the popularity of damages based agreements with personal injury litigants. Sheriff Principal Taylor stated in his evidence to the Justice Committee in October 2017 that one solicitor-owned claims management company had entered into 17,600 new damages-based agreements in the last three years and 23,800 in the last five^[6]. In 2015-16, there were 8766 personal injury cases raised as court actions in Scotland, but only 114 were fully legally aided. This suggests that the vast majority of personal injury cases which are not supported by a trade union are funded by means of some kind of success fee agreement, likely a damages based agreement.

17. The option of entering into speculative fee agreements will remain, but these are more complex arrangements than damages based agreements and the Scottish Government envisages that damages based agreements will be the most prominent and popular form of success fee agreement.

18. The traditional objection to damages based agreements – that the client is not receiving 100% of the damages achieved – has limited force in the Scottish Government’s view, since potential litigants appear to like the simplicity and predictability of damages based agreements as they know that they are likely to receive a set percentage of the damages achieved. If they were unable to raise proceedings by any other means (for example, if they are ineligible for legal aid), they may receive 100% of nothing since they may be unable to litigate at all.

Levels of fee caps

19. In considering whether there should be a cap on the percentage which can be taken as a success fee (in both speculative fee agreements and damages based agreements, both of which the 2018 Act treats as ‘success fee agreements’), Sheriff Principal Taylor believed that a “proper balance must be struck between sufficient remuneration for solicitors and justice for clients awarded damages”^[7]. He went on: “[Previously], it is the market that governs the percentage cap on damages which different claims management companies charge. It has been represented to us that the market is working….however, several concerns remain. Even if the market would appear to be working at present, we cannot pretend to know the future. So, for example, it has been suggested to us that with the introduction of alternative business structures, a few 'big players' may dominate the market in personal injury work. If healthy competition is restricted in this way, the need to protect clients may become greater.”^[8]

20. Sheriff Principal Taylor did not therefore believe that market forces should be the sole determinant of what percentage can legitimately be taken forward from an award of damages in such cases. Market forces have not in any case prevented some claims management companies from charging up to 33% of damages achieved.

21. Sheriff Principal Taylor continued:

“The cap requires to be set at a level which is fair to solicitors and counsel on the one hand and the pursuer on the other. Any cap has to reflect the risk which the lawyers are taking that the case might not succeed after proof and they end up receiving nothing for their work. This may not be a great risk since only a very small number of actions raised in Scotland actually go to proof. However, what court-based statistics do not disclose is the number of cases in which the solicitor has to advise the client that, after consideration of the defences lodged, there is little prospect of success, and the client eventually instructs that the case be withdrawn on the basis that each party bears their own expenses. Consideration must also be given to the work undertaken by the solicitor in vetting those claims in which the solicitor ends up advising, before proceedings are raised, that the prospects of success are sufficiently poor that the solicitor is not prepared to commence proceedings regardless of the means of funding the litigation.

“At the same time, consideration must be given to the fact that I am not recommending a model whereby judicial expenses are used to off-set the success fee. If the solicitor is to retain judicial expenses, the pursuer must also be left with sufficient damages to warrant the trouble and anxiety which most litigants experience. I consider that balance is struck by a sliding scale.^“[9]

Sheriff Principal Taylor therefore recommended the following caps on success fees.

Type of case	Cap (all caps include VAT)
Personal injury cases	Up to 20% of the first £100,000 of damages Up to 10% for the next £400,000 Up to 2.5% of damages over £500,000
Employment Tribunal cases	Up to 35% of the monetary award recovered
Commercial and all other actions	Up to 50% of the monetary award recovered

22. Sheriff Principal Taylor stressed that these percentage caps should be maxima. There is clearly a danger that, in time, these caps may be viewed as the going rate, and not maxima. He argued, however, that from the evidence before him, that it was likely that, with members of the public becoming increasingly aware of different funding mechanisms, competition will determine the actual rates used.

23. It should be noted that since the cap is inclusive of VAT, no more than 20% is deducted from the client's first £100,000 of damages, but the solicitor receives a success fee of considerably less. So, for example, if a client is awarded £100,000, the success fee is set at 20% and VAT remains at 20%, then the client receives £80,000 in damages, the solicitor receives £16,667 and VAT is paid at £3,333. Counsel's success fee (plus VAT) and any outlays not recovered from the other side in the judicial account of expenses must be met out of the £16,667 received by the solicitor,

24. In circumstances where some claims management companies are currently taking up to 33% (of the whole damages payment, not just the first £100,000), then even a 20% cap on the first £100,000 (and 10% on the next £400,000 and 2.5% on anything above £500,000) may be viewed as a considerable improvement on the current position.

Employment tribunals

25. Sheriff Principal Taylor pointed out that there was a similarity between employment and personal injury cases in that there is usually an asymmetry between the financial standing of the parties. The claimant in an employment tribunal case, like the pursuer in a personal injury case, may very well be in a vulnerable position. He therefore recommended that the maximum success fee which can be charged in a success fee agreement in relation to an application to an employment tribunal should be capped at 35% (inclusive of VAT) of the monetary award recovered. He stated:

“If I were only to have regard to the supply side of legal services, I would set a higher cap than 35% as there are seldom awards of judicial expenses in such cases. However, I am mindful that more than a 35% deduction from damages may not serve the interests of justice with respect to individuals.”^[10]

Commercial actions

26. In England and Wales, the Civil Justice Council's Working Party recommended that there should be no cap on the percentage which can be taken from damages in commercial actions. The view was that commercial entities may not require such protection.

27. Sheriff Principal Taylor was at first minded to follow that proposal. After further consideration he concluded, however, that there could be unfortunate consequences in relation to the motivation for bringing cases:

“Nevertheless, I acknowledge that if there should be no cap on damages in commercial actions, cases may be bought from clients and pursued for the sole benefit of solicitors. I find such distasteful and it would also change the dynamic between the lawyer and the court. It has been and should remain the position that the lawyer appearing in a case is an officer of the court and owes duties to the court. If the lawyer became the only party who could benefit from a potential decision of the court, this relationship will be brought under considerable pressure. There is a need to obviate this risk.”^[11]

Sheriff Principal Taylor recommended a cap of 50% (inclusive of VAT) on the percentage which can be deducted as a success fee in commercial actions.

28. It is proposed that 50% should be the default cap for all cases in which a success fee agreement has been entered into, including commercial actions, but excluding personal injury and employment cases. The Government is concerned that if no default cap is provided then there is a danger that efforts may be made to circumvent the caps set.

29. In relation to the levels of the caps to be specified for success fees, the Scottish Government is minded to follow Sheriff Principal Taylor’s recommendations on the levels of percentage caps in making provision in regulations about the maximum amounts of success fees that may be provided for under success fee agreements. During evidence on the Bill before the Justice Committee of the Scottish Parliament, no witness challenged those levels.