McDonnell: No cap on deduction of profit costs
Law firms need a “new mindset” if they are to make money from the fixed recoverable costs (FRC) regime coming into force next month, a leading costs lawyer has said.
Nick McDonnell, a director of Kain Knight, said firms should view FRCs as “merely a contribution to your costs”.
Speaking at the PI Futures conference in Leeds yesterday, Mr McDonnell said: “There is nothing wrong with charging your client, it’s about being clear and transparent.
“It is important to understand that, just because recoverable costs are being reduce, it does not mean you are not entitled to charge for them. Firms are going to have to charge costs that are not capable of being recovered.”
Mr McDonnell said that after FRCs were imposed on cases worth up to £100,000 on 1 October, costs would have to come from clients’ damages.
Although there was a legislative cap of 25% of the success fee that could be taken from damages, there was no cap on profit costs.
The mindset firms needed to adopt was that fixed costs were “merely a contribution to your costs”. He went on: “Clients don’t care about hourly rates, they want to know what damages they will be left with at the end of the case.”
One approach would be to say that all the costs put together would not exceed 40% of damages, so the client would get at least 60%.
There was “nothing wrong” in law firms trying to “make money and run a business”, provided the groundwork was done and it was a done in a clear and transparent way.
“Don’t feel bad or guilty about deducting fees from damages. You need to make a living. Just make sure you’ve explained it clearly to the client.”
Clint Milnes, chief information officer at the Winn Group, said there was “no reason why the larger or smaller law firm should not be able to deliver a quality service within the constraints of fixed fees”.
He said one of the tactics used by the Winn Group was to bring people in-house, whether it was advocacy teams or costs lawyers.
Another was agreeing bespoke protocols with leading insurers. He showed one anonymous example that saw an insurer save 25% or £5m in costs by settling cases this way.
“What brought them to the table was providing them with accurate data they did not have,” he said.
Mr Milnes said some motor insurers could make savings of up to 50% per claim by opting for “fast and fair settlements without litigation”.
Law firms had “no excuse” for not using available technology, such as Microsoft 365, and “cross-selling and upselling” services. They could also develop specialisms in costs or certain bands of FRC work.
Mr Milnes warned that “everyone” was trying to issue proceedings in cases worth up to £100,000 before 1 October, which could lead to more delays in the civil courts.
Matthew Maxwell Scott, executive director of the Association of Consumer Support Organisations (ACSO), predicted that the reforms would go ahead on 1 October, despite the Association of Personal Injury Lawyers’ judicial review.
However, he argued it was “egregious that we still don’t know what the world of seven working days hence will look like, other than what we’ve long described as a ‘Wild West’.”
He said the “embarrassment” of having to tidy up the FRC regime next April – the consultation on which closed recently – “would be considerably outweighed by the much-greater humiliation of another full-scale delay”.
In its response to the consultation, the Association of Costs Lawyers argued that the Ministry of Justice (MoJ) was acting unreasonably in already proposing piecemeal reform of the new FRC regime.
It argued that it needed to update the costs provisions of the Solicitors Act 1974 first – describing them as “significantly out of date and arguably not fit for purpose in modern litigation” – as the new FRCs would inevitably lead to a rise in costs challenges as parties tested the new regime.
It also objected to the six-month hiatus between the new FRC regime going live and the changes as it would result in a basket of cases where a different set of rules applied, saying the regime should come into force in April 2024 “at the very earliest”.
The ACL also described the ‘one size fits all’ approach of a condensed assessment procedure for disputes arising from the FRC as inappropriate.
“A significant number of initial challenges are likely to be focused solely on the interpretation of the rules and will, in turn, be seeking judicial guidance.
“We strongly reject the notion that such work, requiring a very high level of experience and expertise, can be correctly served by a condensed assessment procedure and where the proposed costs [£500] are nominal at best.”
A survey of ACL members said £500 was “significantly below what would be reasonable for the amount of work that is likely to be required in the average FRC dispute, let alone the significant shortfall that there would be in more complex disputes”.
The ACL argued instead for an escalating and significantly higher cap on costs depending on the value of the claim.
Finally, the Bar Council and Personal Injury Bar Association have confirmed that they sent the MoJ a letter before action in June about counsel’s fees under the FRC, to which they received a response at the end of August.
The Bar’s key issues are uprating the trial advocacy fees for inflation and providing for recovery of advocacy fees in cases which are settled late or vacated.
The response said that, in cases where a fast-track or intermediate track case settled or was otherwise vacated up to 24 hours before trial, the wronged party should be able to recover the whole of the fee incurred in engaging a trial advocate who has prepared the case, advised on its merits and enabled the settlement. It suggested 75% recovery where vacated up to 48 hours beforehand.
It continued that, since 2019, PIBA members in particular have reported “a huge problem with courts adjourning fast-track trials at short notice due to lack of judicial resource”.
The Bar Council met with the MoJ abut this last week. Vice-chair Sam Townend KC told Legal Futures: “The discussions with government officials were open and constructive. No commitments were made at the meeting, but this was not surprising given that the meeting came just after the deadline for responses to the latest consultation.
“Our arguments for more realistic inflationary indexation of the cap on recovery and for recovery of part of a brief fee in the event of late vacation of trials are strong and fit with the government’s policy encouraging high quality representation and settlement to take cases out of the heavily congested court system.
“We await the government’s decision following the consultation and will then take action accordingly.”
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