Dispute resolution | 01 September 2010

Over the past 12 months there has been much debate in the dilapidations world surrounding procedural aspects of making or defending dilapidations claims. While, to some followers of this debate, it might be unfortunate that discussions have centred around procedural rather than substantive issues, a knowledge of appropriate procedures for dilapidations is important nonetheless. Not following the correct procedures, or not understanding what they entail, can elongate the claim and be, at best, the source of professional embarrassment and, at worst, a cause for an extra costs liability for the defaulting party in question (see Business Environment Bow Lane Ltd v Deanwater Estates Ltd [2008]).

[Continue Reading]

Dispute Resolution | 01 July 2010

Anyone not involved in what might be regarded as the mainstream of the construction industry (whether as a building contractor or someone who regularly employs one) would be forgiven for thinking that a dispute resolution procedure introduced to rid the industry of some of its historical problems is of no relevance to their business. [Continue Reading]

Dispute resolution | 01 June 2010

In the current market, tenants increasingly seek to exercise break clauses of over-rented and unwanted properties, but in so doing have encountered resistance from landlords. Three recent High Court and Court of Appeal decisions underline the difficulties a tenant faces in attempting to effect a break clause in a commercial lease. This article will examine these cases and summarise some of the lessons learnt from case law, particularly in respect of service of the break notice and compliance with conditions.

What is a break clause?

A break clause is the expression used to describe a right to terminate a lease, typically on a given date (the break date), by written notice. It commonly provides for six months’ notice to be given. If such a notice is ineffective, the lease carries on beyond the break date, often to the contractual expiry of the lease.

Break clauses frequently specify conditions that must be satisfied for the break to take effect. Common examples include the tenant being obliged to pay all rent owing (and/or all other payments owing); to perform all of its covenants; to not be in breach of its repairing and/or redecoration covenants; and to give up vacant possession by the break date. Break clauses in a landlord’s favour are less common and sometimes require the landlord to establish an intention to redevelop.

It is generally held that where there are conditions attached to the operation of a break clause, they must be strictly performed within any specified time limits.

Case law indicates that tenants not only have difficulty complying with what can be onerous conditions, but also that break notices frequently fail by virtue of tenants serving the notice on the wrong party or not in the manner prescribed by the lease.

Norwich Union Life and Pensions v Linpac Mouldings Ltd & ors [2010]

In Norwich Union, break clauses were contained in licences to assign granted to a company called Linpac Mouldings Ltd (Linpac), entitling ‘the Assignee (meaning Linpac Mouldings Limited only)’ to terminate the term by notice. Linpac assigned the leases to Ecomould Ltd, who subsequently went into administration. Consent was sought from the landlord to re-assign the leases back to Linpac. The landlord refused consent on the basis that there was a risk that Linpac would then seek to exercise the personal break right.

In the High Court, Lewison J held that the landlord’s consent had been reasonably withheld, even though its fear that the break clause would ‘revive’ on the assignment was unfounded. The question was not whether the landlord’s appreciation of the legal position was right or wrong, but whether it was a reasonable view to hold.

Lewison J then held that the rights to break perished on the assignment to Ecomould and would not revive on an assignment to Linpac. The proposition that the lease could be terminated by someone who once was, but no longer is, the tenant in possession ‘makes no commercial sense at all’.

The Court of Appeal agreed. Etherton LJ said that he had ‘no hesitation’ in rejecting Linpac’s appeal. He said that the leasehold documents should, in the usual way, be interpreted so as to:

‘Give effect to the intention of the parties to be ascertained in the light of the commercial purpose and context of those documents and the factual setting known to the parties.’

A provision allowing a former tenant to bring a lease to an end at a time when the lease is not vested in them ‘would be extraordinary, even if technically possible’. If the parties had intended this, they would need to take particular care to make it unambiguously clear.

Linpac should have sublet the leases, rather than assigned them, thus preserving its right to break.

Orchard (Developments) Holdings plc v Reuters Ltd [2009]

In Orchard, the break clause provided that the tenant was entitled to terminate the lease at the end of the fifth or tenth year of the term by giving six months’ previous written notice to the landlord. The notice provision in the lease provided that a notice was valid if:

  • it was given by hand, sent by registered post or by recorded delivery and served on the landlord at its registered office; or
  • the notice was served in some other way, as long as receipt was acknowledged by the receiving party or its authorised agent.

The notices delivered by hand by a process server were put in the wrong letterbox. Further notices were sent by fax to the landlord’s office, but after the six-month period. Subsequently, the landlord’s solicitors wrote a letter to the tenant’s solicitors acknowledging the fact that the faxed notices had been received at the landlord’s office.

The High Court held that the landlord had retrospectively validated the informal notices sent by fax. The Court of Appeal disagreed, allowing the landlord’s appeal. Rix LJ held that, where the timing of the notice is part and parcel of its essence, it would be ‘odd’ if a notice that only became effective too late could nonetheless be an effective notice. If it is ineffective at the critical moment six months before the lease anniversary in question, it cannot be made effective within the six-month notice period.

Orchard highlights the view commonly held and expressed by Rix LJ that:

‘The provisions regarding a break clause option are there for the tenant to operate, and he fails to operate them correctly and timeously at his peril.’

Prudential Assurance Company Ltd v Exel UK Ltd & anor [2009]

Finally, a dispute concerning a break clause that did not reach the Court of Appeal. Prudential was decided by the High Court last year and is a salutary lesson to solicitors acting on behalf of tenants seeking to exercise a break notice.

The premises in question were let to two group companies, one trading and one dormant. The notice served stated that it was being served for, and as agents of, the trading company only. No reference was made to the other tenant, the dormant company.

The High Court held that the break notice was invalid. A mistake in a notice will not necessarily invalidate it if its meaning is still clear but, in Prudential, the notice could not ‘unambiguously have been understood to be an effective notice by a reasonable recipient’.

Lessons learnt

These cases and many others that precede them highlight the various difficulties faced by tenants in exercising break clauses. Lessons can, however, be taken from them:

Serving the notice

  • Consider all of the terms of the lease carefully.
  • Check the identity of the current tenant and current landlord (who is paying the rent and to whom, the title and the Land Registry).
  • Confirm that the notice can be served by the current tenant (and was not personal to a previous tenant).
  • Check and follow the service provisions in the lease, particularly where they are mandatory.
  • It is normally worth serving on the current registered office if the receiving party is a company (check the details with Companies House).
  • Ensure that service is expressed to be served on behalf of, and as agents for, the correct party.
  • In serving the notice, it is often advisable to adopt the wording of the break clause.
  • Service must obviously be in good time in accordance with the provisions of the break clause.
  • When the notice is sent ensure that it is signed for (if sent by recorded delivery) or, if applicable, hand delivered in good time.

Note the lesson learnt from Claire’s Accessories v Kensington High Street [2001] where the notice was served (by the landlord) in good time at the tenant’s property, but not, as provided by the lease, at the tenant’s registered office. The court held that the requirement was mandatory and the notice was held to be invalid.

Complying with conditions

  • Check exactly what conditions must be complied with for the break to operate.
  • Consider from when compliance is required – some clauses provide that compliance is required from when the notice is served up to the time that the break takes effect.
  • If the lease requires all rents to be paid, consider what sums are reserved as rent, such as service charge and insurance. Ensure that all sums are paid on time.
  • If the break clause requires vacant possession, make sure the landlord is able to occupy the property without any physical or legal impediment.
  • The obligation to yield up the premises in good repair can be a difficult condition to comply with. If compliance is to be ‘material’ this will assist, but it is still difficult. The test laid down by the Court of Appeal in Fitzroy House Epworth St (No 1) Ltd & anor v The Financial Times Ltd [2006] is that materiality must be assessed by reference to the ability of the landlord to re-let or sell the property without delay or additional expense.
  • Be careful of conditions that must be complied with no matter how trivial the breach. For example in Bairstow Eves (Security) Ltd v Ripley [1992] EGLR 47 the lease required that the property be painted in the last year. It had in fact been painted just before the beginning of the last year but the court held that the condition as to compliance had not been satisfied and the break was ineffective.
  • If at all possible, as a tenant, you are well advised to try and get the landlord ‘on board’. Ask the landlord to confirm what steps you need to take to comply with the conditions. If the landlord responds (it is not required to do so) then this can, in certain circumstances, give the tenant reassurance as to the steps it needs to take.
  • If the break date falls partway through a rent period and payment of rent in advance is a condition, should the tenant pay the entire quarter? Unless the break clause says otherwise, the safe option is to pay the entire quarter owing and then seek to reclaim the balance after the break has taken effect. However, the bad news for tenants is they are not necessarily entitled to be reimbursed.

Conclusion

The overall message in this market is clear: tenants must tread extremely carefully to ensure that their break notices are effective. If they fail, the consequence of having to pay rent on an unwanted property for several years can be very costly.

Corporate & Commercial | 01 June 2010

The third party rights against insurers legislation allows a claimant to make a claim against a defendant’s insurers without having to issue court proceedings (and the term ‘defendant’ is used here to describe the party pursued by a claimant, whether or not proceedings have been issued). Furthermore, the rules apply as much where a defendant is an individual as with a defendant company.

At present the defendant must be insolvent, but new legislation will remove with this requirement. [Continue Reading]

Dispute resolution | 01 May 2010

Health, safety and environmental management is increasingly at the top of the corporate agenda. With many companies putting the environment and safety at the heart of their corporate social responsibility policy, the consequences of falling foul of the law are becoming all the more significant, not just in terms of financial liabilities but, more importantly, in relation to brand reputation. While consistency of approach to sentencing remains a problem for everyone who practices in the field of health and safety, the courts are increasingly imposing penalties for offences in this area. Environmental penalties are also on the increase and a convergence of approach is beginning to develop in the principles of sentencing for health, safety and environmental offences. There are two recent developments that anyone concerned with the management, governance or brand protection of a company should be aware of. This article looks at Sentencing Guidelines Council (SGC) guidelines (the Guidelines) on corporate manslaughter, and health and safety offences causing death, specifically in relation to the Court of Appeal decision in the Environment Agency prosecution, R v Thames Water Utilities Ltd [2010].

SGC guidance

On 9 February 2010 the SGC issued its long-awaited guidelines. The mooted proposal of linking fines to turnover was not adopted. The first point to note is that the Guidelines only apply to the sentencing of organisations and do not cover individuals. The second, more significant, point is that the Guidelines apply retrospectively and will affect organisations sentenced after 15 February 2010, even if the offence for which they are sentenced was committed before the Guidelines took effect.

The Guidelines set out the factors likely to affect seriousness, and what will be considered aggravating and mitigating features of the offence. They recommend that the seriousness of the offence should ordinarily be assessed by asking the following questions.

How foreseeable was serious injury?

The more foreseeable the injury, the more serious the offence will be.

How far short of the applicable standard did the defendant fall?

This looks at the risk gap. The further below the requisite standard, the more serious the offence will be. Prosecuting authorities are increasingly referring to Heath and Safety Executive (HSE) guidance, and industry-specific publications, in demonstrating how far short of the required standard defendants have fallen.

How common is this kind of breach in this organisation?

If it was an isolated incident, the offence would be less serious than if it was indicative of a systemic failing or widespread non-compliance. It is, in effect, an invitation to the sentencing court to look at the health and safety culture of an organisation.

How far up the organisation does the breach go?

Usually, the higher up the organisation that responsibility for the breach goes, the more serious the offence will be. However, it would be wrong for companies to drive down health and safety management to a lower level. Companies should ensure that there are proper governance systems in place so that health and safety is given appropriate priority and resources, and that there is buy-in from those at the highest level of the organisation.

Aggravating features

The following factors will constitute aggravating features and will lead to a more substantial penalty being imposed:

  1. The occurrence of more than one death or grave personal injury.
  2. Failure to heed warnings or advice, whether from officials of organisations, such as the HSE, or by employees (especially health and safety representatives) or other persons, or to respond appropriately to near misses arising in similar circumstances.
  3. Cost cutting at the expense of safety.
  4. Deliberate failure to obtain or comply with relevant licences that involve some degree of control, assessment or observation by independent authorities with responsibility for health and safety.
  5. Injury to vulnerable persons.

With the exception of points 4) and 5), the aggravating features listed above reflect those identified in previous cases dealing with principles of sentencing in health and safety offences, primarily R v F Howe & Son (Engineers) Ltd [1998]. Vulnerable persons are defined as those who are susceptible to exploitation, such as young or immigrant workers.

Mitigating features

The mitigating features set out in the Guidelines are:

  1. A prompt acceptance of responsibility.
  2. A high level of co-operation with the investigation, which goes beyond that expected by the court.
  3. Genuine efforts to remedy the defect.
  4. A good health and safety record.
  5. A responsible attitude to health and safety, such as the commissioning of expert advice, or the consultation of employees or others affected by the organisation’s activities.

The mitigating and aggravating features set out above are not exhaustive, and other considerations may emerge from the facts of specific cases.

Level of fines

The new guidelines go further than previous guidance in that they suggest appropriate starting points for sentences. For corporate manslaughter, the Guidelines state that:

‘The appropriate fine will seldom be less than £500,000 and may be measured in millions of pounds.’

In health and safety offences, where the offence is shown to have caused death, the Guidelines state that:

‘The appropriate fine will seldom be less than £100,000 and may be measured in hundreds of thousands of pounds or more.’

When sentencing, the courts will have to take account of the resources of a corporate defendant and its ability to pay. Credit will also be given for guilty pleas. The Guidelines also provide that defendants ought ordinarily be ordered to pay properly incurred costs of the prosecution, subject to their ability to pay. This includes legal and investigative costs, which in major investigations can amount to hundreds of thousands of pounds, if not more.

Non-Financial Penalties

On conviction for an offence of corporate manslaughter, a court may order the publication of:

  • the fact of conviction;
  • the specified particulars of the offence;
  • the amount of any fine; and
  • the terms of any remedial order.

The Guidelines state that a publicity order:

‘Should ordinarily be imposed in a case of corporate manslaughter. The object is deterrence and punishment.’

Given the potential damage to brand reputation of the publicity surrounding a conviction, the impact of a publicity order should not be underestimated. Conversely, remedial orders that are available both for corporate manslaughter and offences under health and safety legislation are unlikely to be frequently used. Section 42 of the Health and Safety at Work etc Act 1974 requires remedial measures to be undertaken but it is a remedy that is rarely used. The reality is that appropriate remedial measures are likely to have been taken by the time an organisation comes to be sentenced and the failure to do so will have a significant adverse impact on efforts to mitigate the damage to a company.

R v Thames Water Utilities Ltd [2010]

Thames Water was a decision of the Court of Appeal on an appeal against sentence by Thames Water Utilities Ltd (TWUL). Judgment was handed down on 19 February 2010.

Background

Briefly, the facts were that sodium hypochlorite, commonly known as bleach, was being used to clean effluent tanks. Due to a failure to close the valve, 1600 litres of sodium hypochlorite was flushed out into the River Wandle and one of its tributaries. TWUL pleaded guilty to an offence of causing polluting matters to enter controlled waters contrary to s85(1) of the Water Resources Act 1991. TWUL was fined £125,000 and ordered to pay £21,335.19 towards prosecution costs in the Crown Court at Croydon. TWUL appealed the sentence before the Court of Appeal.

One of the striking features of Thames Water was the remedial measures taken by TWUL. The pollution had had a catastrophic affect on the aquatic life in the waters. However, in the aftermath of the incident TWUL pledged £500,000 in compensation to restore the river, covering local education projects, compensation for local angling clubs, the costs of restocking and an ongoing survey to assess damage to the river’s ecology. TWUL also provided core funding for the Wandle Trust, which included support for the cost of an employee responsible for raising additional project funding to deliver access and habitat improvements along the length of the river, and a restoration fund to support local projects to improve the river environment.

Court of Appeal Decision

The Court of Appeal was plainly swayed by the remedial measures undertaken by TWUL, but recognised that there could be no question of a wealthy defendant buying off an appropriate penalty. The Court went on to consider the principles that should be applied in sentencing for environmental offences. It recognised that there was ‘clearly an overlap with the sentencing principles applicable to health and safety cases’. This statement is helpful for those who have responsibility, as is increasingly the case, for both environmental and health and safety management. Significantly, the Court also recognised that:

‘Punishment, deterrence (thereby protecting the environment and the public in the future) and reparation are all particularly important purposes of sentence in this type of case.’

Many potentially aggravating features were identified, including:

  • Pollutants that are noxious, widespread or likely to have long-lasting affects.
  • Human health, animal health or flora being adversely affected, especially where protected species or a site designated for nature is affected.
  • The requirement of an extensive clean-up, site restoration or animal rehabilitation operation.
  • Other lawful activities being prevented or significantly interfered with.
  • The extent to which the defendant falls short of its duty and, as such, its degree of culpability.
  • The deliberate breach of a duty to maximise profit.
  • The omission of proper precautions to make or save money, or to gain a competitive advantage.
  • Evidence of repetition, or failure to heed advice, caution, concerns or warnings from the regulatory authorities, employees or others.
  • A poor attitude and/or response after the event.
  • Previous convictions.

Mitigating features were identified as :

  • A good record of compliance with the law.
  • A good attitude and/or response after the event, including prompt reporting of the offence, co-operation with the enforcement authorities, the taking of prompt and effective measures to rectify any failures, and the payment of compensation.
  • A timely admission of guilt and a plea of guilty at an early stage.

The Court of Appeal gave very significant weight to the reparation made and pledged by TWUL, and reduced the fine from £125,000 to £50,000. It is apparent from the judgment that the reparation was a very significant factor indeed. There was a recognition that it is often difficult for courts to make compensation orders and that the reparation exceeded any punishment that the Court could reasonably have imposed. Accordingly, the need for the deterrent element of the penalty was eliminated.

What should companies do to protect themselves?

All companies should have in place adequate and dynamic systems for the management of health, safety and environmental issues based on risk assessment and review. The way in which these issues are managed should reflect best governance and practice. A critical incident policy that allows a company to respond to an incident efficiently and reduce potential consequences is essential. In environmental incidents, very careful consideration should be given to putting in place appropriate restorative or remedial measures at an early stage. It should be noted that TWUL had numerous previous convictions. Where an organisation has a good record and no previous convictions, prompt and wide-ranging remedial measures might be sufficient to persuade the regulatory authorities that prosecution is not in the public interest and should be avoided. Such action is also persuasive mitigation.

Comment

Companies that have appropriate systems in place, and pro-actively manage health, safety and environmental issues, will be best placed to avoid prosecution or mitigate its consequences. Organisations that do not give sufficient priority to the management of these issues risk the substantial consequences of prosecution, in terms of penalties imposed by the court, the significant management time and disruption involved in a formal investigation, and, above all, irrevocable damage to reputation.

Dispute resolution | 01 April 2010

One of the main factors behind many settlements of civil claims is that settlement will achieve certainty for the parties. Further, the settlement of civil disputes is encouraged at every stage of the litigation (and pre-action) process. Parties to disputes have also been equipped by the Civil Procedure Rules (CPR) with powerful settlement weapons, in the shape of formal offers under Part 36 of the CPR, with which to apply pressure to their opponents to settle. There has been a series of decisions about the operation of Part 36 since its inception and, in the past 18 months, several cases concerning the validity of offers and purported acceptances have been before the court. [Continue Reading]

Dispute resolution | 01 March 2010

Lord Justice Jackson, in his recent report on litigation costs (‘Review of Civil Litigation Costs: Final Report’), lamented the under-utilisation of alternative dispute resolution (ADR) – and especially mediation – in civil litigation. Increasingly, the cost-effectiveness of mediation as a tool for dispute resolution is being recognised by the government. The added benefit of workplace mediation is its unique ability to help parties surmount stress and anxiety to regain control of their identity at work. It really is a win/win situation for employers and their staff. [Continue Reading]

Dispute resolution | 01 March 2010

Nathan Peacey (left) and Davina Watson (right) discuss Jackson LJ’s findings and his suggestions for reform to control costs, changing the civil litigation landscape to promote access to justice through new management procedures

IN 2008 AMID MOUNTING CONCERN among the judiciary at spiralling litigation costs, the Master of the Rolls commissioned Jackson LJ to undertake a root and branch review of the principles governing costs, as well as case management procedures.

On 14 January 2010 Jackson LJ published his report, ‘Civil Litigation Costs Review’ (the Review). It included some far-reaching and radical proposals that Jackson LJ claims will, if implemented, represent a ‘coherent package of interlocking reforms, designed to control costs and promote access to justice’.

The Review is notable for the range and scope of the enquiry, and also for the innovative solutions that are proposed. Access to justice comes at a price but the recommendations aim to impose a limit on that cost, and the limit will be proportionate and predictable. Judging by the reaction of some claimant personal injury lawyers, claims management companies and after the event (ATE) insurers, the changes could prove dramatic.

Our view is that the proposals will certainly control costs. However, they may or may not promote access to justice. More fundamentally, they have the potential to radically alter the approach that commerce takes to resolving disputes.

RECOMMENDATIONS

he proposals have three broad themes:

  1. changes to the way civil litigation is funded;
  2. adjustment of the rules on calculation and recovery of legal costs; and
  3. procedural improvements designed to simplify the legal process.

The key elements and the impact of each theme are highlighted below.

FUNDING CLAIMS Success fees and ATE insurance premiums should not be recoverable if success fees in conditional fee agreements (CFAs) and ATE insurance premiums are no longer recoverable from the losing party, it would effectively end the culture of ‘no win, no fee, no costs’. The intention is to restore a claimant’s financial incentive to keep costs under control. The effect of this will be to significantly reduce costs for serial defendants and/or their insurers.

It remains to be seen whether this will result in lower insurance premiums. We suspect not, particularly in the fi eld of personal injury and clinical negligence claims, where insurers will point to the soft market, the proposed 10% increase in general damages and the impact of one-way costs shifting (OWCS) (see next column).

Contingency fees should be permitted

Under this type of agreement, the lawyer would only get paid if the claim is successful, normally receiving a percentage of the settlement sum or damages award. Claimants would still recover base costs from the losing opponent to offset against the contingency fee.

Third-party funding (TPF) should continue to be available as a funding option.

Legal expenses insurance should be more widely promoted This is the equivalent of health insurance for legal expenses. This funding option is currently under-utilised. The Review suggests that it could be of particular benefi t to small- and medium-sized enterprises (SMEs). Many, including some before the event (BTE) insurers, question whether the UK BTE insurance industry has the capacity to off er suitable cover at an aff ordable price. It almost certainly does not have the capacity for big businesses. If BTE cannot plug the ATE gap for SMEs either, this could be bad news for SMEs faced with fi nancial muscle-fl exing by big businesses in David versus Goliath disputes.

RECOVERY OF LEGAL COSTS

Costs shifting

In certain cases, such as in personal injury litigation, a qualified OWCS rule should be introduced to preserve access to justice. If the claimant is unsuccessful, they would not be made to pay the legal costs of the defendant (as long as they have behaved reasonably). However, if the claimant wins, the defendant will still have to pay the costs of the claimant. Jackson LJ wants this to be extended to judicial review and defamation proceedings, which is a suggestion that will be resisted by many.

Controlling Legal Costs

The Review comments that fees paid by lawyers to ‘claims management companies’, in return for being referred cases, have ‘grossly distorted the costs of personal injury litigation’. Few disagree although many question whether a ban on the fees could be enforced.

An unintended impact will be to further restrict the BTE market as most insurers currently rely heavily on referral fees to subsidise premiums.

Hourly charge rate under scrutiny The report concludes that the guideline hourly rates (GHR) are too high. A new costs council will attempt to restore the balance between lawyers and litigants. This is likely to result in lower GHR and probably diff erent rates for diff erent categories of claim. This will reduce inter partes costs awards. Solicitor and own client costs remain a matter for commercial negotiation.

Imposing proportionality on costs

Jackson LJ’s mantra could be said to be ‘proportionality, proportionality, proportionality’. He is particularly scathing of instances where, at the end of a case, the costs have exceeded the monetary value of the claim to the parties involved. Jackson LJ proposes repealing the ‘necessary’ test introduced by Home Office v Lownds [2002].

For example if it costs £500,000 in fees to resolve a £100,000 dispute, you are likely to be out of pocket even if you win, as you will not get all your costs back. This will encourage a more thoughtful approach to whether a claim should be brought, even a particularly meritorious one. It should lead to more alternative dispute resolution (ADR).

Fixed costs in fast-track litigation

A matrix of fi xed costs should be introduced right across the fast track (the track is currently restricted to claims under £25,000). In the short term, the introduction of fi xed costs would be confi ned to personal injury and housing claims. This will bring costs certainty and proportionality. Fixed costs may encourage some claimants, as exposure on costs is capped, but may deter others where costs recovery is capped at a level far below the costs likely to be incurred.

PROCEDURAL IMPROVEMENTS

There are several changes to procedure that are proposed, which if eff ectively implemented will make for a better litigation landscape. These include:

  • the abolition of the general pre-action protocol;
  • the introduction of costs management conferences;
  • controlling costs through case management;
  • restoring clarity to Part 36 off ers to settle (reversing the ruling in Carver v BAA plc [2008]);
  • the endorsement of ADR; and
  • Mercantile and Commercial Courts will introduce streamlined procedures for claims up to £100,000.

Will costs be reduced>

A new concept emerges from the Review that suggests that fair access to justice applies to defendants and claimants alike. A clear theme running through the Review is that defendants should not be unduly penalised for defending issues that they legitimately contest but happen to lose.

The Review concludes that the recovery of success fees and ATE premiums from losing opponents has imposed an excessive fi nancial burden on the government, the NHS, insurers that underwrite much of the UK’s tort law compensatory system and on defendants of libel actions. Costs will most certainly be reduced in personal injury litigation. The fact that losing defendants will not have to pay success fees on claimants’ costs or ATE insurance premiums will have a signifi cant impact. Similarly, the overall level of base costs will be reduced for the majority of personal injury claims that fall within the fast-track limit because of the implementation of a fi xed-fee regime. The likely reduction in GHR and the approach to proportionality also means that multi-track cases will cost less. The eff ect of this will be off set to a degree by the increase in general damages and the introduction of OWCS, which will mean that successful defendants will not recover their costs in successful cases.

Equally, a proposal that if a claimant’s Part 36 off er is bettered by the claimant at trial they will get a 10% uplift in damages will (in the minority of cases that go to trial) mean an increase in claims costs. Some insurers may prefer to ‘over settle’ to avoid this risk. In non-personal injury routine litigation the benefi ts are even greater for defendants because the increase in general damages will rarely have any signifi cant impact. Furthermore, in successful cases, the defendant will be able to recover fi xed costs from the unsuccessful claimant. In high-value disputes the removal of ATE and success fee recoverability will also have a signifi cant impact. The defendant in an important case faced with a £1.25m costs bill under the current system could fi nd that reduced to £500,000 when a £250,000 ATE premium is removed and a 100% success fee on £500,000 base costs is removed. Whether costs for in-house counsel will alter in relation to their own lawyers will of course continue to be a matter for commercial negotiation and further wrestling with the hourly rate conundrum. Jackson LJ’s suggestion of a menu of options for disclosure in larger commercial cases whereby there is greater focus on the issues, rather than a simple and standard blanket disclosure, does have the potential to reduce costs. However, it could also increase satellite costs around arguments over what should and should not be in a disclosure.

On balance there is clear scope both at the level of low-value routine litigation and in complex high-value cases for inter partes costs liabilities to be reduced.

Impact on funding

Commercial clients will still be able to instruct lawyers on a CFA basis. However, any agreed success fee will be payable by the client and will not be recoverable from the opponent. Similarly you can still cap liability for opponent’s costs by purchasing ATE cover. Again this will be irrecoverable. There will be a greater cost when bringing a claim that will need to be factored into the cost-benefit analysis.

Some commentators suggest ATE premiums will increase prohibitively as a result of the loss of turnover for insurers from premiums in routine personal injury cases. We are not convinced. Competition based on premium levels will increase as litigants now have a fi nancial interest in the level of the premium. Moreover, not all ATE providers currently rely on the personal injury market for turnover so their model will not be affected.

The irrecoverability of ATE premiums may impact on TPF. Will investors’ appetites be diminished given the proposal to make their liability for opponents’ costs unlimited? Some third-party funders argue it will, as investors seek less risky environments. Again, we are not convinced. For example, potential liability for third-party costs can still be hedged by purchase of ATE cover. The funded party will either pay the premium or, alternatively, the third-party funder will take the risk of an adverse costs order or pay the premium in return for a greater share of the damages recovered to refl ect the increased risk being taken. In other words it simply alters the cost-benefi t analysis and that will feed into the commercial negotiations between the claimant and the funder as to the return on investment. In marginal cases this shift in the risk equation may mean that cases are not pursued as they would have been in the past, but overall, the legitimacy given to this method of funding by Jackson LJ will outweigh that.

Will in-house counsel have the appetite for contingent fee funding? Will lawyers? Maybe the more imaginative ones will. The traditional arguments around conflicts of interest will deter some but this has, by and large, been managed in CFA-funded cases and can be controlled under contingency fees. Contingency fees do shift the point of perceived confl ict. The argument is that under a CFA the lawyer is best served by a case continuing for as long as possible to ensure that a success fee uplift is applied to as large a base costs bill as possible. Under a contingency fee arrangement the lawyer gets a greater return on their investment by resolving a dispute earlier. Concerns about under-settlement can be reduced, for example by the use of independent counsel for second opinions and by having stepped contingency fees (the higher the value of settlement, the greater the percentage take for the lawyer).

It will be worth watching to see how diff erent organisations wrestle with the confl icting concerns given that they present a gilt-edged opportunity to address the age-old hourly rate conundrum. It will also be interesting to see whether lawyers step in to fi ll a gap between traditional funding and the TPF market by using contingency fee arrangements. More radical fi rms may even consider seeking external fi nancing to compete with third-party funders.

Behavioural Change

Will we see an increase in disputes? There may actually be a slight decrease in personal injury cases. Some lawyers will continue to charge clients success fees that will come from damages. This may deter some claimants who have now taken ‘no win, no fee, no costs’ to be the norm. However, larger claimant firms will take cases on a straight ‘no win, no fee’ basis and will streamline their processes to make acceptable profits within the confines of the costs recovery that they will make under the fixed-costs regime. Freed of paying referral fees of up to £850 a case, this may be easier than it might first appear. OWCS may encourage ‘have-a-go’ litigants in person, which may offset any reduction in claims brought by lawyers.

If we are right that BTE will not fi ll a gap, as Jackson LJ hopes, then there may be a reduction in low-value commercial disputes. SMEs may be deterred by the exposure to adverse costs when bringing a fast-track dispute (absent from the protection of self-insured ATE premiums). There will, however, be some comfort as inter partes costs will be fi xed, bringing a degree of certainty to the cost-benefi t analysis. The challenge will be to extend this certainty to their own solicitor costs.

Commercial clients bringing high-value disputes will have a range of new options, to which we fi nd the response impossible to predict. This is largely because there is already a vastly diff ering appetite for getting involved in disputes and for how they are funded.

What is clear is that previously enlightened in-house counsel are considering the cultural shifts that the Review accelerates by seeking greater costs certainty and risk sharing with their lawyers. This involves discussions about fi xed fees, CFAs, contingency models, and hedging though ATE and TPF, all of which are now available in the right circumstances.

Significant increases in mediations and other forms of ADR are not expected in high-value disputes. Although mediation is given greater encouragement by Jackson LJ it is not made mandatory and his comments are aimed at the personal injury market, where it has traditionally been resisted, and at SMEs who are less aware of its advantages than sophisticated in-house counsel.

2) Responding to a claim

Will commerce and/or insurers fight more low-value cases, and be encouraged to flex financial muscle by the fact that the claimant can only recover fixed costs and there are no success fee, or ATEs to factor into the cost-benefit analysis?

This is doubtful. There will be little or no costs recovery so there would be few benefi ts, unless there is a signifi cant point principle, or it concerns brand protection or reputation. If a claimant is uninsured, what the value of the costs order in any event? However, in-house counsel or risk teams may fi nd it useful to revisit claims philosophies to test whether the approach to classes of personal injury claims or consumer claims are aff ected by the altered cost-benefi t analysis. For example there may be classes or values of claim that are not routinely fought because the additional liabilities make it prohibitive. There may now be an appetite to fi ght cases knowing that no additional liabilities are recoverable to test the opponent’s resolve or send a signal to the other claimants.

In terms of larger cases, the approach is not likely to be signifi cantly altered except in those cases where defendants have historically been pressurised into settlements they might not otherwise make by the prospect of large success fees and ATE liabilities altering the cost-benefi t analysis.

3) Lawyers

Fixed fees will drive efficiencies and these will eventually translate up to those conducting high-value cases.

Lawyers will need to face the cultural challenge of whether they feel comfortable off ering contingency fees, which will no doubt bring much wringing of hands and soul searching. We are looking forward to the creative arguments that will be put forward by lawyers seeking to preserve the status quo !

WINNERS AND LOSERS

Our initial analysis is that the winners will be:

  • defendants generally;
  • liability insurers;
  • BTE insurers;
  • the state, ie NHS and local authorities;
  • mediators;
  • large businesses; and
  • the media.

The losers will be:

  • ATE insurers;
  • claimant personal injury lawyers;
  • costs negotiators;
  • claims managers;
  • trade unions;
  • the Bar; and
  • SMEs as claimants.

IMPLEMENTATION

All very interesting, but is it going to happen?

Many changes will require primary legislation (for example reversing recoverability of additional liabilities and allowing contingency fees). Others can be implemented relatively quickly by amendments to the Civil Procedure Rules and pre-action protocols, for example the fi xed fee. The election will delay the detailed consideration required but may be a catalyst for manifesto promises (the Conservative Party will, for example, be encouraged by the political capital made from saving the NHS millions of pounds, while enjoying kicking the unions below the belt when they cut off their referral fee income). Someone may then mention the irrecoverable VAT and insurance premium tax paid by insurers on claimant’s costs and ATE premiums, which will force politicians into an uncomfortable cost-benefi t analysis of their own.

The current mood is that the proposals are sound and should be implemented in due course. For commercial enterprises, Jackson LJ’s pragmatic approach, one that increases the range of funding options and imposes controls on legal costs, is likely to bring about good results.

Cultural change will be required, whether that be in relation to how low-value disputes are approached or in relation to contingency fees. The time lag in implementing these reforms should be used to prepare for the changing landscape.