Legal Briefing

Jackson review: cost of litigation investigated

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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.