On 29 March 2011, following a three-month consultation period, the government announced its intention to implement most of the ‘primary’ recommendations set out in Lord Justice Jackson’s report into the costs of civil litigation in England and Wales. Many of the proposals are aimed at solving perceived problems arising in the context of personal injury litigation. However, the changes will affect all types of dispute.
The changes most relevant to commercial litigation include: abolishing the recoverability of success fees payable under conditional fee agreements (CFAs) and after the event (ATE) insurance premiums; the reversal of the Court of Appeal decision in Carver v BAA plc , the introduction of a 10% increase in damages for claimants beating a Part 36 offer; and the introduction of a modified test for proportionality.
RECOVERABILITY OF SUCCESS FEES IN CFAS AND ATE INSURANCE PREMIUMS
ATE insurance provides a litigant with cover against the risk that it will be ordered to pay the other side’s costs following a defeat in litigation. Premiums are often structured in such a way that they are not payable until the conclusion of the litigation and, even then, only if the insured party is successful in the litigation. Furthermore, under the current rules, the successful party can usually recover the cost of the premium from the losing party. As a result, a party to litigation can insure against the risk of an adverse costs order at, in effect, no cost to itself.
A party to litigation may also be able to enter into a ‘no win no fee’ CFA with its own lawyers. Under this type of arrangement, if the party loses, it will not have to pay its lawyers. The quid pro quo for this is that, if it is successful, it will pay a success fee of up to 100% of the lawyers’ normal legal fees. However, under the current rules, the successful party will be able to recover its legal fees, including any success fee, from the losing party.
This means that a party can, at least in theory, litigate risk free. If it wins, the other side will meet its liabilities to its lawyers and ATE insurers. If it loses, it will not have any liabilities. In contrast, the other side faces the prospect, if it loses the litigation, of being required to pay quadruple costs consisting of:
- its own legal fees;
- the other side’s legal fees;
- a success fee of up to 100% of the other side’s costs; and
- the other side’s ATE insurance premium (which can be up to 100% of the fees incurred).
In his final report, Jackson LJ described parties with the benefit of a CFA and ATE insurance as ‘superclaimants’, and took the view that this type of arrangement places a disproportionate burden on the unsuccessful party.
Jackson LJ also identified several other problems with the recoverability of success fees and ATE insurance premiums. As they will never be liable to pay them, parties have little incentive to keep their own legal fees down or to obtain ATE insurance at the lowest possible cost. Unsuccessful defendants are left on the hook for costs they are powerless to control. Perhaps unsurprisingly, lawyers tend only to act under a CFA if the client has a strong case. This enables lawyers to use CFAs as a means of inflating their own profits at the expense of unsuccessful defendants. In his response to the government’s consultation on the proposed reforms, Jackson LJ also noted that CFAs and ATE insurance are available to parties who are capable of financing their litigation themselves and ‘have no conceivable need for such bounteous support from their adversaries’.
As a result of these findings Jackson LJ recommended that success fees and ATE premiums should cease to be recoverable from the losing party, with the result that winning claimants would have to meet those costs out of any damages they are awarded.
This recommendation provoked widespread opposition. Those in favour of preserving the status quo point to the fact that ATE insurance and CFAs were intended to promote access to justice and to fill at least part of the gap left by the decline of legal aid. The consequence of making success fees and ATE premiums payable out of damages will, they argue, be that many parties will no longer be able to afford to bring meritorious claims. The changes would also breach the principle that wronged parties should be entitled to full compensation.
Despite this opposition, the government intends to implement Jackson LJ’s proposal to abolish the recoverability of success fees and ATE premiums. However, the government is also introducing several measures designed to mitigate the effect that the abolition of the recovery of ATE premiums and success fees will have on litigants bringing personal injury claims. These include:
- an increase of 10% in non-pecuniary general damages, such as pain, suffering and loss of amenity in tort claims for all claimants;
- a cap, set at 25% of damages received (other than those for future care and loss), on success fees that may be taken in personal injury litigation; and
- a regime of ‘qualified one-way costs shifting’ (QOCS) in personal injury litigation. In broad terms, this means that unsuccessful claimants will not (except in limited prescribed circumstances) have to pay successful defendants’ costs (but the reverse will not apply).
The 25% cap on success fees will not apply to commercial litigation, where the maximum success fee will remain at 100% of base costs. QOCS will also be limited to personal injury litigation (although the government has left open the possibility of extending it to other types of disputes) and the 10% uplift in non-pecuniary damages for tort claims will also be most relevant in the context of personal injury litigation.
DAMAGE-BASED AWARDS (ALSO KNOWN AS ‘DBAS’ OR CONTINGENCY FEES) WILL BE ALLOWED IN CIVIL LITIGATION.
The government intends to implement Jackson LJ’s recommendation that lawyers should be permitted to enter into a DBA with their clients for contentious business. Under a DBA, a lawyer’s fees are only payable if the client is successful in the litigation – as is the case with CFAs. The distinction between a DBA and a CFA is that, under a DBA, the amount of a lawyer’s fees are calculated by reference to the amount of damages awarded (usually a percentage of them), whereas the success fee under a CFA is calculated as a percentage uplift on lawyers’ normal hourly charge-out rates.
The government considers that the restriction on DBAs is ‘no longer appropriate in a modern litigation system’ and expressed the view that they will ‘provide a useful additional form of funding for claimants, for example in commercial claims’.
Under the proposals, a successful litigant will be able to recover its base costs (ie the amount it would have had to pay under a conventional retainer) from the losing party but it will have to fund the balance of the contingency fee itself. In personal injury claims, the contingency fee will be limited to 25% of the damages recovered (excluding damages for future care and loss), but this limit will not apply to other types of dispute.
DBAs will therefore be placed on a level playing field with CFAs. Given their general dislike of hourly charge-out rates, clients may well prefer DBAs. This will enable clients to retain a specified percentage of any damages awarded and avoid the risk of all the fruits of the litigation being taken up by lawyers’ base costs and success fees. Lawyers, on the other hand, may prefer CFAs because a successful outcome to the litigation will produce a guaranteed and predictable return for the work they have done.
PROPOSED CHANGES TO CIVIL PROCEDURE RULES (CPR) PART 36
The aim of CPR Part 36 is to encourage parties to reach an early settlement. A party who rejects a Part 36 offer, but then fails to achieve a result at trial that is more advantageous to it than the terms of the Part 36 offer, will normally be penalised in costs and interest. In his final report, Jackson LJ expressed the view that the current sanctions against a defendant who rejects a Part 36 offer are far less potent than the sanctions against a claimant. He proposed, therefore, that damages awarded to a claimant, who beats a rejected Part 36 offer, should be increased by 10%.
The government agrees with Jackson LJ’s recommendation and the majority of respondents to the government consultation were in favour of this proposal (especially if used to counterbalance the effect of changes to the recoverability of success fees). The revised sanctions are intended to provide a more level playing field between claimant and defendant, encouraging earlier settlement of cases.
Some respondents to the government’s consultation felt that retaining a link between Part 36 sanctions and costs, rather than damages, would be a better way of encouraging parties to settle claims. A particular problem arises in the context of claims for remedies other than damages (eg for an injunction or a declaration). If the 10% uplift is also applied to this type of claim it will be necessary for the court to place a monetary value on both the rejected offer and the remedy awarded at trial. This may lead to satellite litigation. Accordingly, the government has expressed a commitment to explore alternative remedies linked to costs rather than damages for non-monetary claims. However, it is not clear what these alternative remedies will be.
In Carverthe Court of Appeal held that, in damages claims, the court could consider issues other than the size of the Part 36 offer and the quantum of damages awarded at trial when deciding whether or not the outcome at trial was more advantageous to the offeree than the terms of a rejected offer. For example, issues such as delay, uncertainty and the need to incur extra irrecoverable costs could also be relevant to the question of whether a party was right or wrong to reject a Part 36 offer. This decision has been widely criticised for depressing settlement offers and creating uncertainty, making it difficult for parties to assess the risk of not accepting a Part 36 offer. Jackson LJ therefore recommended that the decision in Carvershould be reversed. This was the most heavily supported of the recommendations in the government’s consultation with 77% of respondents in favour.
In Gibbon v Manchester City Council , decided after the publication of Jackson LJ’s final report in January 2010, the Court of Appeal has already gone some way towards reducing the effect of Carver. In Gibbon, the Court of Appeal said that, in most cases, obtaining judgment for an amount greater than the offer is likely to outweigh all other factors when the court is considering whether a party has achieved an outcome that is more advantageous than the terms of a rejected Part 36 offer. However, the Court of Appeal is bound by its own previous decisions and so it was not possible to overturn the decision in Carver. The government proposes to go one stage further and reverse Carver.
The government intends to modify the test of proportionality in costs assessments to better reflect the value, complexity and importance of the claim. The existing test for proportionality is (as set out in Home Office v Lownds ) that costs are deemed to be proportionate so long as the party incurring them can show that they were both reasonable and necessary.
Under the proposed new test, items of expenditure would be considered individually to test whether they were reasonably incurred and reasonable in amount. In relation to the items that pass this test, the court would then consider whether the total amount spent was proportionate to the value, complexity and importance of the dispute. If not, the court would reduce the amount of recoverable costs to a sum that was proportionate. This new test essentially acts as a long-stop against costs that are clearly disproportionate to the issues in dispute. As a result, it will not be possible to recover disproportionate costs just because it was necessary to incur them.
There is some concern that this will render some claims uneconomical to pursue where the costs of complying with basic procedure are high in proportion to the amounts claimed. This concern is heightened by the lack of guidance from the government as to how proportionality will be assessed in practice. For example, will costs be assessed as a percentage of the sum claimed or will the concept be left to develop through case law? Critics of the new approach insist that the existing rules on costs and case management are sufficient and simply require stricter enforcement.
These changes are unlikely to be implemented in the short term. The government’s official response says that changes to the CFA regime requiring primary legislation will follow ‘as soon as Parliamentary time allows’. The other changes, other than the reversal of Carver, will be implemented at the same time. An updated impact assessment published alongside the official response suggests that this will not be before autumn 2012.
REFORMING THE COUNTY COURTS
At the same time as announcing its intention to implement Jackson LJ’s reforms, the government also published a consultation paper setting out several proposals, which, if implemented, are likely to have a significant effect on the way in which all types of low-value disputes (including commercial disputes) are litigated. The proposals include the following:
- Increasing the financial limit below which claims may not be commenced in the High Court from £25,000 to £100,000.
- Introducing mandatory preaction directions for disputes up to £100,000, which would place the emphasis on the parties to resolve their dispute without resorting to court proceedings. The consultation paper suggests, by way of example, that the process could consist of the following four stages (with fixed costs applying at each stage):
- triage – the parties consider the various options available for resolving the dispute;
- evidence gathering – the parties comply with the timetable and directions set out in a ‘dispute management process’ with a view to resolving the dispute between themselves;
- negotiation/settlement – the parties try to resolve the dispute via mediation or other form of alternative dispute resolution; and
- trial – the parties produce joint evidence packs and apply to the court for a final hearing.
- Increasing the financial limit on the equity (chancery) jurisdiction of the county courts from £30,000 to £350,000.
- The introduction of ‘compulsory mediation information sessions’, intended to inform litigants about the benefits of mediation, for all disputes up to a value of £100,000.
- Extending the power to grant freezing orders to the county courts.
The changes discussed in this article will have the greatest effect on personal injury litigation and are intended to tackle what the government perceives to be a ‘growing compensation culture’. However, they will also affect other types of dispute, including large-scale commercial litigation. Most of the proposals are expressed in general terms only and further consideration will need to be given to the detail.
It should also be noted that the government is only purporting to implement Jackson LJ’s ‘primary’ proposals. While these changes have grabbed the most headlines, they represent only a small proportion of the recommendations set out in Jackson LJ’s final report. Many of these changes can be, and are being, implemented without government intervention. For example, costs management schemes (which require parties to prepare detailed litigation budgets at the outset of a dispute so that the case can be managed in accordance with those budgets) are being piloted in many different courts. The ‘hot tubbing’ of experts (putting both sides’ experts in the witness box at the same time) is being piloted in Manchester. The extent to which these and other reforms will be adopted on a permanent and uniform basis remains to be seen but it seems likely that the process of implementing Jackson LJ’s recommendations has only just begun.