All change in Scottish Civil Litigation Funding?

On 1 June 2017, the Civil Litigation (Expenses and Group Proceedings) (Scotland) Bill was laid before the Scottish parliament. It was considered by the Justice Committee on 13 June. Following that meeting there was a call for evidence and it is anticipated that stakeholders and interested parties will give oral evidence to the justice committee in September or October.

If what is contained within the bill becomes law; it will be a significant departure from the principles that have so far underpinned expenses in Scottish Civil Litigation. The extent to which it would change Scottish civil litigation behaviour is unclear and that is hotly disputed by the various interested groups.

How did we get here?

The Bill marks the end stage of a journey which began as far back as 2007 when Lord Gill began his Scottish Civil Courts Review.  Lord Gill concluded that expenses were too big an issue to be absorbed into his project.

In light of that, Sheriff Principal Taylor was appointed to carry out a review of funding in civil litigation and a report was presented to the Cabinet Secretary for Justice in September 2013. The Scottish Government then consulted with key stakeholders and other interested parties. Its response was published in June 2014 and consultations on the Bill followed.

Throughout the process the stated fundamental aim has been to increase access to justice.

What does the Bill say?

The Bill broadly provides for the following:

  • success fee agreements;
  • restriction on pursuer’s liability for expenses in personal injury cases (ie Qualified one way costs shifting (QOCS));
  • payment of expenses to charity in pro bono cases;
  • disclosure in relation to third party funding of civil litigation;
  • awards of expenses against legal representatives committing ‘serious breach’ of duties to the court;
  • auditors of court being brought within Scottish Court & Tribunals Service;
  • group proceedings (ie class actions).

Success fee agreements

At present, agreements between solicitors and clients, whereby the solicitor takes a percentage of the damages are not enforceable. The rationale is, in part, that such agreements could put the solicitor’s interests in conflict with those of their client.

In practice, several firms in Scotland have created limited companies that are owned by the firm’s partners. Those claims management companies (CMCs) can enter into enforceable damages-based agreements (DBAs) with the firm’s clients.  CMCs are not regulated in Scotland (unlike in England). The Bill proposes that DBAs between solicitors and clients should be enforceable. The argument is that such a change would bring the agreements into the open where they can be regulated. It is also argued that the change would lead to greater transparency and predictability for claimants. There is however no proposal to preclude CMCs from entering into DBAs, nor is there provision to regulate CMCs.

Allowing enforcement of DBAs between solicitors and clients introduces some practical difficulties.

Cap on deduction

It was accepted by most respondents that there should be a cap on the deduction made from the damages. Some argued that market forces would, in effect, impose a natural cap. However, it transpired that some agreements involve a deduction of as much as one third of the damages and ultimately market forces were not considered a sufficient safeguard.

There is a fixed cap of 25% in England and Wales. The Bill provides that the Scottish Government is given the power to produce regulations which introduce a cap. The explanatory notes to the Bill anticipate that such a cap would be on a sliding scale; decreasing as the damages increase.

Damages for future losses

During consultation it was proposed that future damages were ring fenced from deduction. The concern was that those damages had been agreed or awarded to meet a specific need and to deduct a percentage from them may very well prevent the claimant from meeting those needs.

It was, however, argued that to do so could incentivise claimants’ solicitors to delay settlement in order that more losses were allocated to the past. It was also argued that it would be difficult to attribute a particular figure to past losses, as settlements are rarely broken down in that way.

Finally, it was argued that to remove future losses would result in failure to adequately remunerate claimant’s solicitors for the work they did. The argument was that future losses are often the most substantial, complex and important element of any claim.

What this argument appears to overlook is the availability of an additional fee or fee uplift. That is a mechanism whereby the fees received by the successful party can be increased by an (unlimited) percentage. The decision is made by agreement or by the court following argument. The uplift applied reflects the particular circumstances of the case and, it could be argued, represents a far more accurate way of remunerating solicitors for the work they have actually done in a case.

Periodical payment orders

Allowing deductions from future losses also introduces a complication in relation to periodical payment orders (PPOs). Future losses that are compensated by way of PPO are excluded from deduction. This could therefore place the claimant’s solicitor in conflict if he or she recommends a lump sum rather than a PPO; that way, the payment to the solicitor is far higher.

The Bill proposes a mechanism to avoid this conflict. Where a settlement is in excess of £1 million and the claimant does not seek a lump sum then either:

  • the claimant must consult with an actuary in the absence of the solicitor. The actuary must certify that a lump sum better serves the claimant’s needs than a PPO; or
  • where an award is made by the Court, the Court must specifically record its conclusion that a lump sum better meets the claimant’s needs than a PPO.

This all seems a little clunky and could add delay to settlements. The alternative is that a claimant seeks the advice at the outset of the claim but without an offer or decision upon which to rely it is difficult to envisage the means by which any such advice could be given.

There are also practical considerations. It is unclear who would select, instruct and pay the actuary. In order for the advice to be given independently it is difficult to envisage that this could be arranged by the claimant’s solicitors. It is unlikely that the claimant or his solicitor would accept an independent expert chosen and instructed by the defender. It may be that the only feasible approach is for the actuary to be selected and instructed by the Court.

At present PPOs are incredibly rare in Scotland. However, the recent change to the discount rate and the anticipated changes to that system may result in PPOs being made more frequently.

Qualified one way costs shifting

This isn’t the description given in the Bill but the system proposed is, in effect, a replication of QOCS as applied in England and Wales.

QOCS is proposed with the intention of removing the ‘asymmetry of litigation funding. It is intended that claimants can litigate without the fear of being found liable for the defendant’s expenses. It was noted during consultation that it is only in 0.1% of English cases that the defendant seeks payment of costs from a claimant. No statistics were available for Scottish cases.

It was argued that for that reason the change will have very little effect on defendants but will very much increase access to justice for claimants. It is difficult to understand how that could be. If the effect of increasing access to justice is to increase claims, then that will have an effect on defendants. Although an increase in genuine claims is not a reason to avoid the measure, it is not accurate to say that there will be little effect on defendants.

More importantly, what is missed by that analysis is the effect of contra awards. Not only on the final bill for a defendant but also on the behaviour of a claimant.  It is possible that the removal of this sanction will encourage a cavalier approach to litigation. There will be a new asymmetry because failure in a procedural process will have different consequences for each party. As a result, where defenders may become reluctant to oppose motions or to make their own, claimants can do so in the knowledge that there is unlikely to be any consequence in expenses for them, even where they are unsuccessful.

The restriction on the claimant’s liability for expenses is, of course, qualified. The Bill provides that a claimant could be found liable in costs in three circumstances:

  1. He makes a fraudulent misrepresentation.
  2. He commits an abuse of process
  3. His behaviour falls below the standard reasonably expected of a party to litigation.

The behaviour is to be judged on the balance of probabilities. The three conditions as set out in the Bill are potentially very wide. Indeed, the wording of ‘fraudulent misrepresentation seems much broader and potentially easier to satisfy that the English test of ‘fundamentally dishonest. It is possible therefore that we might find the Scottish Courts more willing than their English counterparts or indeed, than they themselves, have been in the past, to find that a claim is fraudulent. The current wording also appears to allow for a circumstance where there has been a discrete misrepresentation, ie the entire claim need not be fraudulent.

Perhaps more troublesome is the final condition. It seems unlikely that a party’s behaviour could dip below the reasonably expected standard where he is adequately represented. Far more often the failures come about at the hands of the solicitor representing the claimant.

The bill does make specific provision for this eventuality. It provides, which is no more than a reiteration of the current law, that a solicitor can be found directly liable in costs where he or she commits a serious breach of their duties to the court. Lord Gill recommended this reiteration because consumer groups expressed concern at lawyers’ behaviour during consultation. It was noted that the power was rarely used and it was hoped that the restatement of the law would encourage courts to use the power more widely.

What is not included in this section is the situation where a claimant has third party funding. Later in the Bill it is provided that if a claimant has third party funding, then they must advise the court that they do, and identify the funder. At the conclusion of the case the nature of the funding must also be disclosed. Significantly it is provided that awards of expenses can be made against the funder. It is not explicitly stated that such an award would be made in ordinary circumstances and would thus avoid costs shifting but that meaning could be implied. This is something that should be clarified during the response to the Bill.

On any view, if the provisions remain as they are when the Bill is passed then it seems inevitable that there will be further argument around all of these issues when claims come to Court.

A separate and fundamental difficulty with the Bill is the failure to include provision for the regulation of claims management companies and referral fees. Without such controls CMCs can trade unhindered by the regulation and scrutiny directed towards law firms and solicitors. If QOCS is to be introduced then the risks to CMCs in raising doubtful actions could well be outweighed by the potential benefits. Such a system has potential to induce less scrupulous CMCs and to encourage fraudulent claims north of the border.

What next?

Written submissions must be made to the Scottish Justice Committee before 18 August. The Forum of Insurance Lawyers is preparing its response. It is anticipated that there will also be submissions on behalf of the ABI and other groups representing insurers and large compensators. At present is unclear the extent to which MSPs have an appetite to change the Bill.

Meantime, an editorial in the Greens Civil Practice Bulletin has called upon practitioners to review, ‘their practices and business models to capitalise on the new opportunities this will present’. Which might say something about the way in which claimants’ representatives view the Bill.

Kate Donachie is an associate in the insurance and risk team at Brodies LLP