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The noble Baroness made reference to the question of valuations on lump sums. The cost of FAS valuations will be broadly in line with the cost that schemes will incur if they were winding up normally, and we intend to provide lump sums in line with those that would have been available from an annuity.

The noble Baroness and the noble Lord, Lord Freud, made reference to unusual use of powers. The issue was put on the record in another place but I am happy to repeat it here. Perhaps it is appropriate that I do. It is a little complicated, but here goes:

"Section 286(1) of the Pensions Act 2004 confers wide power on the Secretary of State to make regulations to provide a financial assistance scheme. Section 286(3)(j) provides the power to apply parts 1 and 2 of the 2004 Act with modifications to the FAS. Section 161 in part 2, along with schedule 6, includes provisions in relation to transfer of assets to the board of the PPF. The draft regulations modify section 161 and schedule 6 for the purpose of the FAS to allow transfer of scheme assets to the Secretary of State".

It continues:

"The JCSI set out in its report that that may be an unusual or unexpected use of the power, because section 286(3)(c) confers an express power for regulations to provide for the transfer of property rights and liabilities to the scheme manager".

As noble Lords are all aware, the FAS scheme manager is now the PPF, not the Secretary of State.

"The report suggests that to fall within the powers in the primary legislation, assets should be transferred to the scheme itself. However, unlike the PPF there is no scheme fund in which assets are held and then used to pay assistance ... Instead, the FAS sets out who qualifies for assistance and how payments should be calculated. Funding for those payments is provided by the Secretary of State, directly out of the DWP budget. It is therefore appropriate that any funds brought in should be transferred to the Secretary of State and not the scheme manager. In practice, the funds will be transferred to the consolidated fund that the Government hold",

as I outlined a moment ago.

"We took the view that the list in section 286(3) of the 2004 Act illustrates and amplifies how the power in section 286(1) could be used and it is not intended to be restrictive. When the clause was debated"-

in relation to the 2004 Act-

The noble Lord, Lord Freud, made that point; it has evolved over a number of years.

"It was made clear then that there were a number of alternatives that would need to be considered. The clause was, therefore, widely drafted ... and subject to an affirmative resolution ... to allow additional scrutiny by Parliament when proper consideration had been given to ... the matter ... Transfer of the assets to Government was one possibility, as was making the PPF the scheme manager. The provisions made in these draft regulations

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... sit squarely within that and we consider that they clearly fall within the provisions of the 2004 Act".-[Official Report, Commons, Delegated Legislation Committee 24/3/10; col. 18.]

We therefore consider that the use of the modification power in this way could not be considered to be unusual or unexpected.

The noble Lord, Lord Freud, reminded us of a bit of the history of this with the debates that we had regarding the final destination of FAS. He is right that it was hotly contested; I was on the receiving end of some of that. However, I think we have ended up in a good place, and on that basis I am grateful for noble Lords' support for the regulations.

Motion agreed.

Damages-Based Agreements Regulations 2010

Copy of the Regulations
Copy of the Report
Copy of the Report

Motion to Approve

5.13 pm

Moved By Lord Bach

The Parliamentary Under-Secretary of State, Ministry of Justice (Lord Bach): With the leave of the House, I shall speak also to the draft Conditional Fee Agreements (Amendment) Order 2010.

The Damages-Based Agreements Regulations 2010 prescribe the regulatory requirements for these agreements in employment matters. The Conditional Fee Agreements (Amendment) Order 2010 seeks to reduce the success fee in some "publication proceedings" to 10 per cent of the base costs. Both of these seek to make changes in limited circumstances to protect the public interest. I will deal with the two instruments separately.

The Damages-Based Agreements Regulations are made under Section 58AA of the Courts and Legal Services Act 1990 and prescribe certain requirements for damages-based agreements relating to employment matters. Section 58AA was inserted by Section 154 of the Coroners and Justice Act 2009.

A damages-based agreement is a type of contingency or "no win, no fee" agreement, under which a representative agrees to act for a client in return for a percentage of any damages recovered by the client. If damages are not awarded, the representative is not paid. These agreements are of course different from conditional fee agreements, or CFAs. CFAs are typically used in court proceedings, and allow for an uplift or success fee on top of the representative's normal fee.

I emphasise that damages-based agreements are not permitted in court proceedings or litigation and that the regulations will not change this. They are, however, commonly used by solicitors and claims managers in proceedings before the employment tribunal. The Courts and Legal Services Act 1990, as amended, controls the use of damages-based agreements to claims that are capable of being heard by the employment

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tribunal. As I say, these agreements are commonly used in employment tribunal cases. We are concerned that many claimants do not understand these fee arrangements, which sometimes include unfair terms. The Government therefore believe that it was necessary to regulate damages-based agreements in employment tribunals to ensure that claimants are protected from unfair agreements. Noble Lords will recall that Section 154 of the Coroners and Justice Act 2009 gave the Lord Chancellor the power to regulate these agreements. This is the first set of regulations made under that power.

The regulations specify for the first time certain requirements with which the agreements must comply in order to be enforceable damages-based agreements. The key emphasis is on the provision of clear and transparent information for the client before the agreement is signed. The regulations require that a-

Lord Scott of Foscote: I hope that the Minister will forgive me. Can he clarify one point? He said that these regulations were for use in employment tribunals. What happens if there is an appeal? Appeals could go to the Court of Appeal or now the Supreme Court.

Lord Bach: Perhaps I can answer the noble and learned Lord a little later.

The regulations require that a representative, usually a solicitor or a claims manager, must, first, inform the client about alternative means of resolving the case or financing the proceedings, such as legal expenses insurance or though trade union membership. Importantly, the representative must inform the client about the services offered by ACAS before the agreement is signed. Secondly, the representative must give an estimate of all costs and expenses for which the claimant may be liable. Thirdly, the representative must also explain to the claimant why he or she thinks that the percentage fee they are charging is reasonable.

The regulations also prescribe that the payment to the representative cannot be more than 35 per cent of the claimant's damages, including VAT. This will protect claimants from unscrupulous representatives who may seek to take an unjustified proportion of their damages in fees. The legislation requires us to prescribe a cap. We originally consulted on a 25 per cent cap, excluding VAT. However, we listened to concerns expressed by those responding to the consultation and increased the cap to 35 per cent. This is inclusive of VAT, but excludes expenses such as counsels' fees. Although the cap is the prescribed maximum, there is a risk that the cap could become the norm, a risk that we have seen realised in CFAs where, in some cases, 100 per cent has become the norm; I will turn to that later. The higher the cap, therefore, the greater the risk of detriment to individuals who use damages-based agreements. We therefore believe that 35 per cent sets a fair level in respect of damages-based agreements in employment tribunals.

Finally, the regulations set out some conditions to be complied with if the agreement is terminated. I should first make it clear that the provisions relating to termination are without prejudice to any right of either party under the general law of contract to

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terminate the agreement. I am aware that there have been some concerns about the conditions relating to termination; for example, the Law Society considers that the provision does not go far enough in protecting representatives. The Bar Council, on the other hand, considers that there should be no restrictions on the client's right to terminate at all. What we have attempted to do in these regulations is to take the middle ground between the two opposing views.

DBAs are different from ordinary retention agreements between lawyers and clients. The client is agreeing to pay a percentage of their damages if the claim is successful. Therefore, it is only right that the representative should be entitled to that percentage if the claim is successful.

DBAs are founded on the premise that if the representative upholds their end of the bargain and the claim is successful, he or she is entitled to receive the agreed percentage of the damages. I reiterate the point I made earlier: these provisions are without prejudice to any right of either party under the general law of contract to terminate the agreement.

We are grateful for the consideration given to these regulations by the Merits Committee. We have carefully considered the points raised in the committee's report, published on 18 March. My right honourable friend the Lord Chancellor and I discussed the committee's concerns at a meeting with the chairman, the noble Lord, Lord Rosser, and the noble and learned Lord, Lord Scott of Foscote, who is a distinguished member of the committee. We have taken on board their concerns in revising Regulation 6(5). I strongly believe that these regulations are necessary and proportionate in achieving their objective, which is to put in place specific statutory protection for claimants using these agreements in employment tribunals. As I have said, we have tried to balance carefully the views raised in consultation and believe that the regulations represent the best way forward.

The House will know very well that on 14 January Sir Rupert Jackson delivered his wide-ranging report, Review of Civil Litigation Costs. Among 109 formal recommendations, he recommends that contingency fees are permitted in civil litigation with appropriate regulation. However, I emphasise that fresh primary legislation would be required, should the Government decide to implement that recommendation. The Government are actively considering Sir Rupert's recommendations, and will set out the way forward in due course. I assure the House that any proposals on extending the use of contingency fees to litigation would be subject to full public consultation and legislative scrutiny by Parliament.

Before leaving this regulation, I will respond to the noble and learned Lord as best I can. DBAs, as I understand it and am advised, cannot be used on appeal in either employment appeal tribunals or the Court of Appeal. I understand that legal aid is available for representation on appeal.

I turn now, briefly, to the Conditional Fee Agreements Order 2010, which is made under Section 58(4) of the Courts and Legal Services Act 1990. The order amends the Conditional Fee Agreements Order 2000 to set a new maximum success fee percentage of 10 per cent

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for CFAs relating to some publication proceedings. Publication proceedings for the purposes of this order are within the meaning of Rule 44.12B of the Civil Procedure Rules 1998. The definition covers defamation, malicious falsehood or breach of confidence involving publication to the public at large. For ease, I shall refer to them as defamation proceedings.

As noble Lords know, conditional fee agreements, or CFAs, allow lawyers to take on a case on a no-win no-fee basis. If the case is lost the lawyer does not get paid. However, if the case is successful the lawyer can charge his normal base costs as well as an additional uplift or success fee. The success fee is currently recoverable in full from the losing side. The Conditional Fee Agreements Order 2000 prescribes the maximum success fee that lawyers can charge at 100 per cent in all categories of case. That 100 per cent maximum was intended to allow lawyers to cover the costs of those cases which were lost with a success fee from those which were won. However, the Government have been concerned about high legal costs in defamation cases. These high legal costs are exacerbated by 100 per cent success fees, which may have a harmful effect on freedom of expression. This affects the media, in particular those with limited budgets, such as the local media and publishers, but also scientific and academic debate. Specific concerns have been expressed to the Government by members of the scientific community and others that the current law on libel, including the high costs involved, is having a harmful effect on freedom of expression in the context of scientific and academic debate. Noble Lords will be aware of the announcement of the reform of the law of libel by my right honourable friend the Lord Chancellor on Tuesday this week. This change should be seen in that broader context.

Previous attempts to control success fees in defamation cases have proved unsuccessful, even though there is widespread and urgent concern about their impact. In January this year the Government therefore consulted on a specific proposal to reduce the success fees to 10 per cent in defamation cases. Some of the respondents to the consultation who disagreed with our specific proposal accepted that 100 per cent recoverable success fees should not continue.

Lord Martin of Springburn: Where did the figure of 10 per cent come from? Did the Lord Chancellor not consider 30 per cent or 25 per cent? Where was this 10 per cent plucked from?

Lord Bach: I will answer the noble Lord in the course of what I have to say in the next few minutes. I am grateful for his question.

Lord Woolf: While the Minister has been interrupted, I want to raise another matter which would assist me. I regret to say I do not know the answer to this, but I was under the impression that the success fee was capable of being taxed down if the taxing master thought it was excessive. Is my impression right or wrong? Because that would seem to be a solution if it is correct.

25 Mar 2010 : Column 1156

Lord Bach: If the noble and learned Lord does not know the answer to his question, I certainly do not. I will take some advice on that and come back to him.

I have mentioned the Jackson report published earlier this year. It is a remarkable and substantial report. I think we can all agree on that. He recommends complete abolition of the recoverability of success fees and after-the-event insurance in all cases where CFAs are used. As I said earlier, we are actively considering the report and will set out the way forward in due course. The Culture, Media and Sport Committee in its recent report, Press Standards, Privacy and Libel, suggests that the recoverability of success fees be limited to 10 per cent in defamation cases. The Government will respond to the Committee's report shortly.

Lord Scott of Foscote: I hope the Minister will forgive me for interrupting again. My understanding is that that recommendation did not limit the success fee; it simply suggested that that was the maximum that could be recovered from the other side. Any balance that was agreed, assuming taxation on the costs would allow it, would come from the opposing party. That is my understanding of what the committee said.

Lord Bach: Again, if the noble and learned Lord will forgive me, I will find out and come back with an answer to his point.

There is a substantial body of opinion that 100 per cent recoverable success fees should not continue in defamation cases. Reducing the maximum success fee to 10 per cent through this order is an interim measure so that the specific concerns around high costs in defamation cases can be addressed urgently while the Government consider other options for longer-term reform. Of course, I am aware of the concerns raised by the Merits Committee.

Defamation-related proceedings form a discrete category of case where special considerations apply. They are relatively few in number and of relatively high cost compared with other types of civil proceedings. We regret that, despite several consultations by the department, an investigation by a parliamentary committee, and widespread public debate on this subject over the past five years, comprehensive data were not forthcoming. It is true that certain respondents provided some data against the 10 per cent proposal, but we believe that was partial and did not undermine the case for reform. Based on the available evidence, including that presented during the consultation on this order, it was judged that a maximum success fee of 10 per cent is appropriate. We believe it provides an effective interim solution to an urgent problem.

Regarding the questions that I have been asked-as to the 10 per cent, our consultation paper referred to the data presented to Sir Rupert. The 10 per cent proposal was made against the background of the sample used in the Jackson review. The sample was of 154 cases, none of which was won by the defendant. Although CFAs can be and are used by defendants, this rarely happens. The evidence suggests that few defendants win cases, and that increases the risks for defendant lawyers when taking on a defendant CFA.

25 Mar 2010 : Column 1157

On the question of the noble and learned Lord, Lord Woolf, success fees certainly can be taxed down on assessment, but the process of doing that is costly and extremely time-consuming. The noble and learned Lord, Lord Scott, asked-

5.30 pm

Lord Thomas of Gresford: My Lords-

Lord Bach: Perhaps I may first answer the question of the noble and learned Lord, Lord Scott, and then of course I will take an intervention.

Why cannot we implement the recommendation of the Culture, Media and Sport Committee's recommendation on limiting recoverability of success fees to 10 per cent? The committee's report acknowledges that significant problems with costs in libel cases need to be addressed. The committee agrees that 100 per cent success fees under CFAs are unjustified in defamation cases. It recommends capping recoverability of success fees, which would require changes to the civil procedure rule. These changes would require more time. The Conditional Fee Agreements (Amendment) Order provides an interim solution to deal with the high cost in defamation cases while we consider the Jackson recommendations and the committee's proposals, both of which deal with the issue of recoverability.

If the noble Lord, Lord Thomas, will forgive me, I shall try to answer any question that he has later.

The noble Lord, Lord Martin of Springburn, has tabled an amendment to the Motion expressing regret that the Conditional Fee Agreements (Amendment) Order 2010 has been laid,

I of course look forward to hearing the noble Lord speak to his amendment. I mention two points at this stage. First, we have consulted, as we are required to by statute, with the senior judiciary, the Law Society, the Bar Council and others. We have consulted them on the policy as well as on the detail of the order. We have taken careful consideration of the responses received. More than half of those were from lawyers, their representatives and the judiciary. In addition, there have been previous consultations on this issue-the Jackson review and the investigation by the Select Committee that I have referred to.

The second point to make at this stage is that we are of course mindful of the benefits of conditional fee agreements for access to justice, but we have to consider the disbenefits, too. CFAs will remain available for defamation cases; thereby, lawyers will still be able to use them in deserving cases. We are considering the way forward for the longer term in the light of the Jackson report.

That is all that I would like to say at this stage. I beg to move.

Lord Martin of Springburn: My Lords, I am speaking to the amendment which is still to be moved. I thank the Table Office for its help. Also, the Government Whips Office has been very helpful and kind to me as a new Member here in the Lords.

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I stress that I have not lobbied any Member of this House prior to this debate. I put down my Motion of regret because I feel very strongly indeed about the 10 per cent. If there had been a reduction to 50 per cent, I would not have lodged a regret Motion; 50 per cent would be more realistic and I would not be complaining.

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