My Lords, I always like to be consistent and it certainly would be inconsistent of me not to begin with a complaint about the process here. These regulations come to us some five weeks before they are to take effect. The Bar Council has drawn attention to this, rightly stressing that a major change in the law, particularly in relation to DBAs, is being introduced with very little time before they come into effect for people to work out how they are going to be applied.
As the Minister has said, it has always been permissible for damages-based agreements to be implemented in non-contentious matters in tribunals. As he has also said, these were extended by regulations to employment cases. That opened the way to the revival of what used to be called “champerty” in previous times, which of course was unlawful. We are now legalising it under the new nomenclature of damages-based agreements and I can see that there is a case for doing that. Nevertheless, significant issues and questions arise from the Government’s proposal.
Reverting to the timescale, it should be pointed out that other changes affecting contentious litigation are in hand. These include changes to the Road Traffic Act portal and small claims limits in cases, including, potentially, personal injury cases. With all that happening, one might have thought that it would be sensible to bring all the changes together and to do it at a time which allows the parties and the professions to prepare adequately. I hope that the Minister will look again at the timetabling with a view to deferring implementation of whatever regulations finally emerge for six months until October of this year. I am particularly indebted to those who have briefed me, and no doubt other Members of your Lordships’ House and perhaps of this Committee, in relation to these matters, including the Association of Personal Injury Lawyers, the Bar Council, the Law Society and, especially, Professor Rachael Mulheron.
A number of issues arise and I hope that the Minister will be patient while I list them. If he is not able to reply to them all today—he may well not be—I hope that he will take these matters back and consider them. I was going to raise the question of the cap, which was raised by the noble Lord, Lord Phillips. I, too, identified the change of mind by Lord Justice Jackson, to which the noble Lord referred. It is notable of course that the 25% cap in terms of damages-based agreements applies only to personal injury cases. It is a 35% cap in employment cases, which can equally be quite substantial, although not, I guess, running into the millions of pounds of the exceptional cases of clinical evidence and the like to which the Minister referred. Nevertheless, it certainly can be comparable with many ordinary personal injury cases. In those cases, the cap is 35% including future loss, so there is a serious question about the composition of the figure against which the percentage is to be calculated.
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There is also a perverse situation, which the Minister explained by reference to the indemnity principle, where if recoverable costs—that is to say, costs which would normally be payable by the defendant—exceed the cap, the claimant and his advocate, the solicitor, cannot recover them from the defendant. That is a perverse consequence of the way the regulations are drafted. That makes damages-based agreements less attractive to the professionals who will undertake that work.
There is similarly a problem about including VAT in the cap. Of course, rates of VAT can change. The Government increased VAT by 2.5% 18 months ago. If agreements had been in place at that time, the cap
would effectively have been lower because of the increased VAT that would then have been levied on the fees above what had been originally envisaged. Rates can change and with them, in effect, the agreement will change automatically, whether or not the parties wish it to do so.
There is a similar issue—except in employment cases, interestingly—for counsel’s fees. Counsel’s fees are included in the cap for the ordinary PI case but not in employment cases. Why should that be the case? There is another issue about after-the-event insurance. It is not clear from the regulations whether the cost of after-the-event insurance is to be contained within the cap or not. The Civil Justice Council working party recommended that that matter be clarified. Perhaps the Minister could do so—again, if not today, subsequently.
In commercial cases, there is a question whether the percentage recovered includes party and party costs, or is that also to be on a non-recoverable basis? In connection with personal injury cases, again there is the issue of the inclusion of general damages and past loss. I still do not see the justification for that. As the noble Lord, Lord Phillips, and I have mentioned, Lord Justice Jackson took a different view. There is also a question about how you deal with where a global offer is made. Offers are not always split under particular headings; a composite offer can be made. How will that be dealt with for the purpose of calculating the success fee?
In terms of process, the regulations and the scheme do not set out any system of regulation or, indeed, for the termination of such agreements. The Civil Justice Council working party suggested that should be embodied in the regulations; it does not appear. The Government seem content to rely on the professional codes of conduct of the Law Society and the Bar Council. Indeed, in answer to a recent parliamentary Written Question, the Minister replied that it was not the Government’s intention to regulate the industry, which leaves claims management companies outside the scope of regulation—except, as it happens, in the case of employment. That is another inconsistency between the approaches to employment cases and other cases.
Why are the Government content to rely on claims management companies, which might well get involved in these agreements, to regulate themselves? It is one thing for a profession to do that—although even that might be regarded as inadequate in certain quarters—but it is certainly another for claims management companies to do so, especially given the reputation that they have acquired over the past few years. There is not even any provision in the regulations on the information that is to be provided for clients by the providers except, again, in the case of employment law. Why is there a distinction between employment law and other cases in that respect? In short, as the Civil Justice Council effectively inquired, why is there not one set of regulations for all kinds of case? Why are there differences between the different categories?
There is also the question of potential liability for the payment of the defendant’s costs and whether these could be covered by after-the-event insurance.
Another issue relates to defendants. The regulations are cast on the basis that we are concerned only with damages-based agreements for claimants, but of course, defendants have a financial interest in these matters as well. The regulations speak only about a percentage success fee in relation to the money recovered but not to money saved. If a defendant is successful and saves money, how will the fee be calculated? Is there a basis for a damages-based agreement, as it were, when a successful defendant saves money under such an agreement? It is unclear what will then happen.
It is instructive to look at some of the experience of other jurisdictions—particularly the American experience. A whole industry has grown up in this arena and I had the benefit of meeting representatives in America who are dealing with these issues. They expressed some interesting views about how the system works. Going back to the lawyer/client relationship, in practice it is not the lawyer who has control of the case in the American system with the professional disciplines that might apply. Effectively, it is the commercial organisation that is engaged in putting up the money for these cases—a kind of hedge fund for legal claims. I used that phrase when the Bill was going through. That is in marked contrast to the position of professionals with their ethical obligations, to which the Minister referred. I understand that 25 funders are already established in the UK for damages-based agreements, of which only nine have signed up to their own self-regulated Association of Litigation Funders. They are not even joining their own association, let alone being responsible to any independent and impartial organisation to oversee their work. Again, I invite the Minister to reconsider whether there should be such a system of regulation. There is apparently around £1 billion already held by organisations in the UK to fund these arrangements. Some of them, interestingly, are apparently based offshore—a sort of Starbucks of the damages-based agreement world. One can only imagine where any profits will ultimately go.
There are also questions about class actions. The organisation I met from America was essentially very concerned about the potential growth of class actions from the point of view of potential defendants. Nevertheless, there is an issue as to whether the scheme should apply to class actions. I understand that the Department for Business, Enterprise and Regulatory Reform is looking into this. I wonder whether the Minister can advise us on the current state of thinking in those cases.
With regard to damages-based agreements, there are, as will be seen, a great many questions that are raised by the regulations but not answered by them. Again having regard to the timescale, I urge the Minister to consider whether it would be sensible to look into all these, and other points that might be raised by other noble Lords today or in the House of Commons when the matter is debated there, and, if necessary, to defer implementation until these issues are clarified. A few months’ delay does not seem to be too much to ask in order to get things right from the beginning.
Some of the same arguments apply to conditional fee agreements—again, the issue of damages for the purposes of the calculation of a success fee, not including
future loss, the question of VAT and the like. In my submission, it would also be sensible to look at these two sets of regulations together to see whether they can be improved in order to fill the quite evident gaps that exist, which cannot help the new system to bed in. The risk is that if there are problems of this kind, the Government’s purpose in promoting DBAs, or indeed the new regime of CFAs, as an alternative to legal aid will not succeed because the professions will not undertake the risks or, alternatively, it will not be the professions that run the show but commercial organisations with very little regard necessarily to the proprieties with which litigation has been, and should be, conducted in this country. I urge the Government to think again, look again at the Civil Justice Council’s recommendations and see whether changes can be made at this stage before implementation to make what is a pretty defective-looking set of regulations workable.