Claimant law firms rethink models as CFA regime comes crashing down
04 April 2011 | By Katy Dowell
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Claimant firms have been left pondering how to make their models profitable after the Ministry of Justice (MoJ) last week pulled the plug on lucrative conditional fee arrangements (CFAs).
Justice Secretary Kenneth Clarke signalled the end of an era that began with 1999’s Woolf reforms, when he said in a statement: “With no major reform for 15 years, the civil justice system has got out of kilter.
“Businesses and other people who have been sued can find that spiralling legal costs, slow court processes, unnecessary litigation and ’no-win, no-fee’ structures, which mean greater payments to lawyers than to claimants, are setting them back millions of pounds each year.”
When Lord Woolf overhauled the Civil Procedure Rules (CPR) in 1999 he spawned the growth of litigation as a commoditised industry. Frontloading of costs became common practice and claimant lawyers were lured into taking on riskier cases with the promise that they would be able to claw back an uplifted fee from the opposing side should they lose.
More than a decade later the former Master of the Rolls Sir Anthony Clarke, concerned about the unrelenting rise in litigation fees, commissioned Lord Justice Jackson to review the civil litigation model.
That review culminated with the MoJ announcing that contingency fees would replace CFAs and success fees would be capped at 25 per cent.
The move has cut off a lifeline for many firms that have grown up around the CFA system, encouraging wronged litigants to enter the court system at little or no risk to themselves.
According to leading claimant firms, the MoJ has effectively blocked access to justice for an entire section of society.
“This is a bleak day for access to justice in Britain and a double whammy for the consumer,” argues Irwin Mitchell head of personal injury Andrew Tucker. “The Government’s proposals
will force consumers, irrespective of their means, to pay some of their legal fees even if they win and will deter them from bringing perfectly legitimate claims.”
Collins Solicitors partner Des Collins, who successfully represented victims of a toxic waste spillage in their negligence case against Corby Borough Council, believes the case would never have reached the court steps were it not for the CFA funding it received.
Collins Solicitors partner Danielle Holliday agrees. “When you take on battles against large opponents like Corby or Buncefield, they’ll do everything to drive up costs,” she says. “Because of this larger opponents will be able to buy their way out of litigation and force claimants into a position where they won’t want to carry on.”
Defendant lawyers see the reforms as an effective way of rebalancing the litigation system, which they believe has swung too far in favour of the claimant, with little drive for efficiency.
Beachcroft partner Andrew Parker, who sat as one of Jackson’s assessors in the original review, says the reforms will force claimant firms to maintain a reasonable and proportionate profitability.
“It drives into those models the efficiencies we’ve found it necessary to introduce on the defence side,” Parker states. “None of this comes as a major surprise. An efficient firm will do okay and thrive. They’ll have to learn to be efficient.”
However, claimant firms are tight-lipped about what such a model might look like and whether it may need a capital injection from a non-legal entity.
Russell Jones & Walker chief executive Neil Kinsella, whose firm is built around the CFA model, is uncharacteristically terse on the topic.
“It’s about adapting the business and giving the best value for clients with deserving claims,” he says.
Another RJW insider is less discreet. “Now it becomes about survival of the fittest - other sectors have had to adjust and we’ll have to do the same,” he says.
Collins simply states: “We won’t be able to carry on with what we do.”
One such way of adjusting, suggests Parker, is to work within the confines of the Legal Services Act (LSA) when it is implemented in October.
“It’s entirely possible that this will create space in the market for businesspeople to come into the profession and create business-like systems,” he suggests.
For claims management companies, accepting non-legal investment could become a necessity.
“It will leave a big hole in the market and opens up several options for ABSs [alternative business structures],” one lawyer says.
Despite the claimant outcry, it is unlikely that there will be any challenge to the MoJ plans through judicial review or any other means. The only option on the table is a model change and this is likely to bring the profitability boom to an end.
The reforms include:
- Success fees and after-the-event (ATE) insurance premiums will no longer be recoverable, with an exception for ATE premiums covering the cost of expert reports in clinical negligence claims.
- A rise of 10 per cent in general damages for the claimant.
- The introduction of damages-based agreements, otherwise known as contingency fees, to allow lawyers to
take a proportion of the settlement for work completed.
#Part 36 offers to settle will be amended “to equalise the incentives between claimants and defendants to make and accept reasonable offers”.