Civil litigation update — success fees in Scotland

The 2020 Regulations flow from the Civil Litigation (Expenses and Group Proceedings) (Scotland) Act 2018, the primary objective of which is to reform the system of civil litigation funding in Scotland.

The 2020 Regulations relate to “success fee agreements” and the amount which a claimant can be asked to pay to their solicitor under such an agreement. The term “success fee agreements” covers all forms of speculative fee agreements and damages-based agreements, i.e. no win, no fee arrangements in place between claimants and their solicitors where payment of the solicitors’ fee is contingent on the success of the claim.

The success fee agreements covered by the Regulations can be broadly summarised as follows:

• Speculative fee agreements — if the claimant’s case is unsuccessful, the solicitor will not be able to charge a fee to the claimant, but if the claim is successful, in addition to the costs recovered from the defendants, the solicitor will be able to charge an uplift on those costs with the uplift being paid by the claimant via the damages obtained.
• Damages based agreements — the solicitor’s fee is calculated as a percentage of the damages recovered and if the claim is successful, the solicitor will receive the agreed percentage from the claimant in addition to the costs recovered from the defendants. Again, if no damages are recovered, no fee is payable by the claimant.

One of the issues addressed by the Taylor Review was: should the level of recovery from a claimant’s damages by their solicitor under a success fee agreement be subject to some form of regulated cap?

The Taylor Review recommended that there should be a cap and following on from the Scottish Government Consultation on the issue in 2019, the 2020 Regulations adopt that recommendation.

Focusing solely on personal injury claims, the Regulations propose that a claimant’s solicitor’s success fee should be capped as follows:

• in respect of the first £100,000 of damages recovered — 20%
• in respect of damages recovered over £100,000 but not exceeding £500,000 — 10%
• in respect of damages recovered of £500,000 and above — 2.5%

The Regulations are in draft form at present and are to be scrutinised by the Justice Committee at the Scottish Parliament. The Committee is due to publish its report on 29 March. Provided the Regulations are approved, they will come into force on 27 April 2020.

From the defendants’ perspective, there is no immediate impact. If one presumes that the Regulations are approved as currently drafted, there will be no change to the level of costs that can be recovered by a successful claimant from a defendant in a personal injury claim. The rules for how to quantify those costs, either pre or post-litigation, are completely separate from the Regulations and there is no crossover. The Regulations are concerned solely with the amount of money solicitors can charge claimants in successful claims as a percentage of the damages recovered from a defendant.

It is also important to emphasise that any form of success fee, or any part of the fee uplift, has never been recoverable from a defendant in a personal injury claim in Scotland and the new Regulations do not change that position.

One potential concern for insurers/defendants arising from the Regulations was identified during the consultation process. Any future losses recovered by a claimant, such as care costs, are not ring-fenced from the application of the cap. In terms of the Regulations as presently drafted, claimant solicitors will be able to take up to 2.5% of any damages recovered that exceed £500,000 as part of their success fee. It follows that there must be a material risk that the claimant will therefore not receive a sufficient amount of money to pay for their future needs. The courts will be aware of this and there is, therefore, the risk that, over time, it might influence certain sheriffs/judges to increase awards of damages to take account of the sums to be paid by claimants to their solicitors. This is only a theoretical risk at this time and judicial awards of damages will need to be monitored closely to ascertain if any pattern emerges.

Another potential concern relates to where damages exceed £1m and settlement was achieved through negotiation rather than following trial. In those circumstances, where the claimant has accepted a lump-sum payment rather than a periodical payment, an independent actuary must certify that accepting the lump sum is in the claimant’s best interests. The 2018 Act does not specify who will bear the cost of the actuary’s fee but it is likely that claimants’ solicitors will seek to pass this cost onto insurers/defendants.

Taking a step back from the new Regulations, a more pressing concern for insurers is the fact that the Discount Rate remains at -0.75% in Scotland with the result that any claim involving an Ogden Tables calculation will cost more in Scotland than in England & Wales. The rate will not be reviewed until 2024.

It is also worth highlighting that QOCS has been approved for introduction into Scotland as part of the 2018 Act, albeit we are still waiting for confirmation of the date when it will come into force (likely to be later this year).

While it is recognised that QOCS has operated in England & Wales for some time, it will represent a significant change in Scotland once it finally comes into operation, particularly as its introduction will not be accompanied by any sort of equivalent whiplash reforms to those being introduced south of the border.

One of the main issues for insurers is the circumstances in which the Scottish courts will be prepared to remove the protection provided by QOCS and allow defendants to recover costs from a claimant who has behaved unreasonably/fraudulently. The 2018 Act does not provide specific guidance in that regard and a stand-alone framework of rules is currently being drafted by the Scottish Civil Justice Council.

The key concern is that there continues to be a less sophisticated approach to issues such as fraud north of the border and there is no legislative equivalent of s.57 fundamental dishonesty. Considering that the costs regime for lower value claims in Scotland is much more lucrative than south of the border, the introduction of QOCS may well make Scotland more attractive for those involved in pursuing fraudulent claims and a spike in the number of claims and litigation rates is anticipated. As such, the need for insurers to remain vigilant and maintain robust fraud strategies is more important than ever.