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Divide and Conquer: Dual Contracts and Legal Aid

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About The Author

Former Author (Assistant Editor)

Author is a King's College London Law graduate, currently working as a corporate paralegal for a firm based in South West England. Author is due to begin his BPTC at the University of Law in September 2015, having attained a scholarship from Middle Temple.

Grayling Image © Chris Beckett

Last week the Court of Appeal ruled that the governments proposed legal aid reform package was lawful and was able to proceed. These reforms will have a devastating impact upon the criminal justice system in the United Kingdom and will force hundreds of law firms to close in an unprecedented restructuring of the provision of legal representation.

The saga over the reforms introduced by this government began with the introduction of the Legal Aid, Punishment and Sentencing of Offenders Act 2012 (LASPO) which systematically altered the justice system in England and Wales. The removal of legal aid for civil matters, most notably family disputes involving divorce, has already been exposed for its false economies and perverse outcomes, but this article will focus on criminal legal aid. It is this element of the governments reforms that has consistently and repeatedly been challenged on several fronts, both politically and legally, with very notable successes and failures along the way.

As I noted in my latest article for Keep Calm Talk Law, lawyers are an easy target for this government to mistreat or ignore, one need only appeal to the fat catimage and the overall public consensus follows the same tired clichés. This recent judgment serves as a stark wake-up call for those both inside and outside the criminal legal aid sector. The time for meaningful and decisive action has arrived for legal aid, or the justice system which has been lauded the world over will be fundamentally undermined.

Dual Contracts

The specific reform that was analysed in the judicial review at hand was the introduction of two-tier contracts for the provision of legal aid. The government intends to split criminal legal aid work into two contracts, the first for Own Client Work (OCW) and the second for Duty Provider Work (DPW) with an individual firm applying to the Legal Aid Agency for a contract. This reform is crucially made in conjunction with a net fee reduction of 17.5%. The first fee cut of 8.75% was implemented on 20 March 2014 and the second tranche of 8.75% fee cuts is due in July 2015.

Currently an individual firm will apply for a Standard Crime Contract which gives a firm the opportunity to take instructions from new clients as well as join a duty rotawhereby solicitors are posted at police stations (and in some cases Magistrate’s courts) in order to provide legal representation to those who require it. Under the new system, firms will only be able to take on this duty role if they hold a DPW contract and these will only be issued to a very limited number of firms throughout a particular region.

The government believes that restricting contracts in this manner will produce a more efficient system where criminal legal aid providers benefit from economies of scale and being able to offset loss-making cases with those which are charged at higher rates. The recent ruling by the Court of Appeal affirmed that the number of DPW contracts will be capped at 527 and the Legal Aid Agency will award contracts based on a tendering process with each contract. The tender will consist of firms applying to the Legal Aid Agency demonstrating capability to provide duty rotations of solicitors across the designated region.

Consultation and Re-Consultation

The process of fee reduction and structural legal aid reform was first presented in a consultation on 9 April 2013. The initial consultation received several vehemently opposed responses and the consultation was subsequently reissued on 5 September 2013 with some amendments. This initial paper introduced the notion of Price Competitive Tenderingwhereby individual firms would be invited to bid for legal aid contracts based purely on price. To do so would clearly impact upon the quality of advice given to individuals, as firms would be solely focusing on their profit margins and providing only the bare essentials. It was also telling that the few firms to express an interest in PCT were G4S, Serco and Eddie Stobart Lawyers. These entities have little if any experience in the criminal legal aid sector providing legal advice. Companies such as Serco and G4S are already involved in the criminal justice system, including prisons, prisoner transport and tagging and their record is disappointing to say  the least. Serco have faced two investigations into their tagging and prisoner transport contracts relating to overcharging.

The re-issued consultation of 5 September 2013 yielded the two elements of reform that have become the subject of the most recent judicial review. The government set out that the 17.5% cut would be phased in as the two tranches of 8.75% noted above, there would be the introduction of OCW/DPW contracts, with a commitment that DPW contracts would be large enough in volume and value to be sustainable in their own right after taking into account the 17.5% reduction in fees. The proposals contained within the consultation were to be supported by two key reports. The first was a report from Otterburn Legal Consulting LLP (Otterburn Report) and the second was a financial viability study from KPMG (KPMG Report).

The paper issued by the government following the consultation process was issued in March 2014 and the 8.75% cut was introduced together with a timetable for the implementation of 525 new DPW contracts. This decision was challenged by way of judicial review as the Otterburn Report and KPMG Report were not actually issued until the consultation process had formally concluded. It was argued before Burnett J in the High Court that the Lord Chancellor could not have conceivably considered the reports in full, and the timetable of the consultation did not afford the public or the professions the opportunity to consider the data provided in the reports when submitting a response.

Burnett J handed down judgment on 19 September in which he upheld the claim to quash the decision to introduce the DPW contracts, forcing the Ministry of Justice to delay the tendering process. As summarised by Sales LJ the Lord Chancellor had acted in breach of the obligation of fairness by failing to consult. The timing of the consultation and the manner in which the reports were considered has fostered a deep mistrust of the Ministry of Justice by many members of the legal profession.

The Reports

Otterburn

The Otterburn Report emphasised that the financial position of many firms providing services under the criminal legal aid scheme is fragile, and that the supplier base is not financially robust. In that context, the Otterburn Report took achieving a 5% [profit] margin as a minimum definition of a viable practice. The Report also recommended that the fee cut be introduced after consolidation of the market (i.e. not before any new DPW contracts commenced).

KPMG

The KPMG Report made some very broad assumptions set out below which were identified as relevant to the appeal by Sales LJ in his judgment:

  1. a firm making any level of profit, however small, would be considered viable (this was variously described as the 0.1% profit assumption or the break-even assumption);
  2. successful bidders for DPW contracts could achieve a 15% improvement in capacity due to latent capacity within firms and/or reallocation of staff (the latent capacity assumption);
  3. successful bidders could achieve organic growth of 20% through recruitment (the organic growth assumption); and
  4. successful bidders would create capacity to do DPW work by reducing their OCW work by 50% (the 50% OCW assumption).

The KPMG Report plainly stated that it had serious misgivings about the ability of criminal legal aid providers to source enough investment capital to undergo a successful restructuring operation that would be required to operate the proposed DPW contract successfully. It specifically cross-referenced the Otterburn report figures that the median overdraft position of small (13-40) and large (40+) firms was -£30,000 and -£371,860 respectively.

It is fairly obvious to see from the figures presented that the KPMG report should not be taken as a basis for the modelling of DPW contract numbers as it makes many assumptions that are simply out of kilter with the reality of business. I am particularly concerned that a firm such as KPMG would see the break even assumptionto be a realistic basis for which to conduct its investigation. A firm with a profit margin less than 1% would be inherently unstable and subject to any number of adverse market conditions out of their control, such as an increase in taxation or business rates or staff shortage in a particular period due to illness. The fragility of the financial position for these firms would be further accentuated by their need to finance an extensive restructuring exercise.

It was contended by counsel for the Law Society, Dina Rose QC, that the Lord Chancellors consideration of the KPMG report was flawed to such an extent as to make his decision unlawful.

R (Law Society and ors) v Lord Chancellor

Submissions were made before Sales LJ and Elias LJ in a two day hearing on 10th and 11th March 2015. The judgment noted that the central focus of the claimants in their appeal was that the Lord Chancellor, when arriving at the figure of 527 DPW contracts, made his conclusion based on a number of unsustainable and irrational assumptions.

It was argued that the Lord Chancellors decision was unlawful on the grounds of Wednesbury unreasonableness (i.e. the decision was so unreasonable that no reasonable person given the same information could have come to the same conclusion); it could not have been rationally concluded that the stated objective of DPW contracts being sustainable in their own right was achievable based upon the information in the KPMG and Otterburn Reports.

The claimants also relied upon the ruling of Lord Diplock in Secretary of State for Education and Science v Tameside Metropolitan Borough Council [1977] AC 1014 that a decision-maker has a duty to ask himself the right question and take reasonable steps to acquaint himself with the relevant information to enable him to answer it correctly.

By way of reply, counsel for the Lord Chancellor, Martin Chamberlain QC made submissions that under the proposed timetable for the dual contract tendering, the Lord Chancellor would have a lengthy period of notice if there were insufficient bids and could make adjustments to the scheme accordingly. In this way, he was fulfilling his statutory duty to make legal aid ‘available’ under section 1 LASPO. Sales LJ noted in judgment that the Ministry of Justice internal documents made it clear that contingency options had been considered and would be kept under review as the situation developed.

Mr Chamberlain sought to rely upon the decision in London Borough of Newham v Khatun [2004] EWCA Civ 55 which drove a distinction between substantive and procedural review in judicial review proceedings where it is stated that it is for the decision-maker and not the court, subject to Wednesbury review, to decide upon the manner and intensity of inquiry to be undertaken into any relevant factor accepted or demonstrated as such. In accordance with this precedent, it was argued that the Lord Chancellor merely had to evidence that he had considered the investment costs associated with consolidation and then it was up to him and his department to add weight to each particular factor which impacted on the decision.

Support and consideration from Ministry of Justice

The decision of the Court of Appeal to refuse to quash the implementation of the dual contracts scheme relied heavily on the basis that the Lord Chancellor had conducted extensive negotiation and consultation with the professions through a series of formal and informal means.

There had been meetings with the Law Society on several occasions as well as no less than three formal consultation processes. A private meeting, which Sales LJ saw as crucial, was conducted on 26 March 2014 where the Lord Chancellor gave the Law Society two options which would assist criminal legal aid providers to meet the demands of the new regime. Either the government would give a grant of £9 million to be spread between providers who won DPW contracts, or to bring forward interim payments for all existing contract holders which would have otherwise been paid at a later date in order to lift the cash reserves of all providers such that they could front-load their investment in new IT and be able to bid for the new contracts.

The key problem with reliance upon these negotiationsis that the options presented to the Law Society were a choice between a quick or a slow death. There was no discussion of alternatives to the dual contract scheme, the only option on the table was whether to actually be the guillotine that severed the heads of thousands of law firms up and down the United Kingdom, or take the role as the passive bystander.

At this point in time, there was a ground swell of opinion within the professions, from both the Bar and solicitors alike, that direct action was yielding results. There had recently been a ‘Day of Action’ which was covered by Keep Calm Talk Law, and there is a clear link between the intensity of negotiation between the government and representative bodies and the direct action. However, the leadership of the Law Society and Criminal Bar Association determined that there was simply no changing the mind of the government, and it was better to be that passive bystander, allowing the profession to walk into a sustained period of hardship rather than fight on.

The contention that the government was listening and responding to the concerns of the Law Society and other representative bodies was identified inadvertently by an internal memorandum issued in September 2014 to the Lord Chancellor. It clearly identifies that the objectives of the Ministry of Justice were purely to pursue their aims of consolidation, rather than to actually secure the long-term viability of criminal legal aid provision. The memorandum stated that the initial payments should be paid out for the following reason:

It will greatly strengthen our argument that the market will be able to withstand this gap between the fee cut and consolidation if interim payments are in place, effectively giving a cash flow boost to providers through that critical time. It will also play into our analysis and assessment that we have said we will undertake in December/January before confirming that the second fee cut should proceed.

Language such as provided in this memorandum shows a clear conceited attempt to spin the factual circumstances so that they favour the intentions of the Lord Chancellor, rather than actually engaging in meaningful and constructive dialogue with the professions.

Ultimately though, the Court of Appeal determined that the Lord Chancellor had satisfied his duties to consult and taken appropriate measures to assess the capability of the legal aid market to absorb the proposed reforms. As a result, the appeal was dismissed.

The Fallout

Almost immediately after judgment was handed down, the Vice Chair of the Criminal Law SolicitorsAssociation, Robin Murray issued a statement affirming the desire to continue the appeal process against the dual contract regime. The claimants are currently applying for leave to appeal and a further stay to the tendering process. It is unclear on what grounds that the claimants will seek to argue their case in the Supreme Court, but the practical timetable for the implementation of the scheme has now been pushed to the forefront.

As the interim injunction lapsed on the date of the judgment by the Court of Appeal, the government are free to continue the DPW tender process. It was announced on the same day of the judgment that the tender process for the 527 new DPW contracts would re-commence on 27 March and will close at midday on 5 May. The tendering process would be implemented such that the contracts would start on 11 January 2016, almost a full two years after they were first timetabled by the Ministry of Justice.

In response to this announcement, Shadow Justice Secretary Sadiq Khan said it would be breathtakingly arrogantfor ministers to restart the tendering process just a matter of hours before the [election] purdah period kicks in.

This statement is crucial in understanding the future of the dual contract scheme, as Labour have promised to reverse the scheme were they elected into power on May 8th. Promises have been broken by many during this protracted saga over the reform of legal aid, and with the upcoming election only likely to yield a coalition, it is not difficult to see this promise being sacrificed in the pursuit of being transported into Number 10 Downing Street.

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Tagged: Criminal Law, Legal Aid

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