Background

The case in question, Coventry and others v Lawrence and another (No 2) concerned a nuisance by noise claim brought by two homeowners against the current and previous landlords of a neighbouring motorcar racing stadium. 

The Claimants were ultimately successful and the Supreme Court was asked to consider whether the level of costs ordered to be paid by the Defendants was contrary to Article 6 of the European Convention on Human Rights (“ECHR”), which protects the right to a fair hearing, and/or article 1 of the first protocol to the ECHR, which protects the right to peaceful enjoyment of one’s possessions. 

The Claimant homeowners had funded their action on a conditional fee (no win no fee) basis and had paid an ATE insurance premium in order to underwrite their potential liability to pay the Defendants’ costs if the Defendants won the case. The Claimants’ costs therefore fell into three categories:

  1. base costs (i.e. what their lawyers charged based on an hourly rate and disbursements);
  2. success fee (or uplift) to which the lawyers were entitled because they were providing their services on a no win no fee basis; and
  3. an ATE premium.

The Access to Justice Act 1999 (“1999 Act”) permits the recoverability of success fees and ATE premiums entered into before 1 April 2013. The Defendants were aggrieved that, in accordance with the 1999 Act, they were ordered to pay the Claimants’ base costs, the 100% success fee and the ATE insurance premium. They argued that their human rights would be infringed if they had to pay the additional liabilities above the base costs, which accounted for more than half of the total costs bill.

Previous judgments

An earlier House of Lords ruling in Callery v Gray held that the recovery of success fees and ATE premiums was lawful, but in his initial judgment in the Coventry case Lord Neuberger indicated that recent case law developments in Strasbourg meant that the Supreme Court could reconsider the question of whether the 1999 Act costs regime was incompatible with the ECHR. 

Recognizing that there was a prospect that the appropriate remedy may be a declaration of incompatibility of the 1999 Act with the ECHR, Lord Neuberger stated that it would be wrong for the Supreme Court to decide the issue without first giving an opportunity to the Government to address the court on the issue. He acknowledged that a determination of incompatibility by a UK court could have very serious consequences for the Government, as litigants who had paid out additional liabilities under the 1999 Act could have a claim for compensation against the Government for infringement of their Article 6 rights. 

Accordingly, Lord Neuberger adjourned the appeal on this particular issue until appropriate notice had been given to, and submissions made by, the Attorney General and Secretary of State for Justice (and any other intervener sanctioned by the court).

The Supreme Court’s ruling

The dissenting Lord Justices referred to Lord Neuberger’s concern that the amount of the base costs in this case was dwarfed by the total potentially recoverable costs, which were nearly three times as much, and to the principle that just as a claimant is entitled to a fair trial, so too is a defendant. The two dissenting Lord Justices considered that the system imposed by the 1999 Act was disproportionate and unfairly discriminatory against some classes of defendant by comparison with others, as it had the effect of imposing a costs burden on parties which is excessive and which in some cases amounted to a denial of justice. It concluded that the 1999 Act did infringe the Defendants’ ECHR rights. 

Whilst the majority of five Lord Justices acknowledged that there is no perfect solution to the problem of how best to enhance access to justice following the withdrawal of legal aid for most civil cases, the relevant question in this case was not whether the system imposed by the 1999 Act was unfair or had flaws, but whether it was a disproportionate way of achieving a legitimate aim. 

In order to answer this question, the Supreme Court considered the rationale behind the 1999 Act. It had been brought into effect following the Government’s conclusion that wider use of CFAs and legal expense insurance would promote access to justice, and that allowing the recovery of such costs from the losing party would make CFAs and ATE insurance more attractive and fairer for those claimants with meritorious claims. 

Under the applicable Civil Procedure Rules, a success fee and ATE premium would only be recoverable to the extent that they were reasonably incurred and were reasonable in amount, having regard to various factors including the conduct of the parties; the amount in dispute; the importance of the matter to the parties; and the complexity of the case. They also had to be proportionate. 

The case of Home Office v Lownds applied a two-stage test to determine whether costs were proportionate, as follows:

  1. Decide whether the total sum claimed was disproportionate in particular by reference to the factors contained in the Civil Procedure Rules mentioned above; and
  2. If such sum did on the face of it appear to be disproportionate, decide whether work in relation to each item was necessary. If so, the costs of each item were deemed to be reasonable and therefore recoverable.

CFAs and ATE insurance were held to be integral to the fundamental objective of achieving access to justice. Adopting the above approach, a success fee and/or premium that was reasonable in amount (having regard to the litigation risk) was necessary and, therefore, held to be proportionate, even though such sums may be disproportionately high when compared with the amount of damages reasonably claimed. Whilst this may put certain defendants in an unfortunate position, the Supreme Court noted that the financial position of the paying party has never been a relevant factor in determining the assessment of reasonable and proportionate costs. 

In considering the question of whether the 1999 Act was incompatible with the ECHR, the Supreme Court noted that the European Court of Human Rights recognizes that a legislative or regulatory scheme may in some circumstances be compatible with the ECHR even if it operates harshly in individual cases. In its view, the 1999 Act was not incompatible because it was a general measure which was:

  1. Justified by the need to widen access to justice to litigants following the withdrawal of legal aid;
  2. Made following wide consultation; and
  3. Fell within the wide area of discretionary judgment of the legislature and rule-makers.

The scheme imposed by the 1999 Act was, as a whole, a rational and coherent way to provide access to justice for those to whom it would probably otherwise have been denied. The Supreme Court was satisfied that it was not incompatible with the ECHR.

Comment

It is of little surprise, given the potential implications, that the Supreme Court has decided against any incompatibility with the ECHR. It has thereby avoided the floodgates opening on claims from defendants who have been obliged to pay large sums of money over and above the winners’ base costs to successful claimants. 

Notwithstanding this ruling, the Government has already recognized that the pre-2013 system had several shortcomings, not least those cited by the Defendants in this case, being:

  1. A lack of focus and a lack of any qualifying requirements for claimants being allowed to enter into CFAs;
  2. The absence of any incentive for claimants to control the incurring of legal costs and the fact that judges only assessed costs at the end of the case when it was too late to control costs that had already been spent;
  3. The “blackmail” effect of driving parties to settle early despite good prospects for fear of having to pay the claimant significant sums in respect of costs; and
  4. The fact that the regime gave the opportunity for “cherry picking” winning cases to conduct on a CFA basis.

In light of these, the rules relating to costs and to the recoverability of ATE premiums and CFA success fees were overhauled in April 2013. ATE premiums and success fees are in most cases no longer recoverable from the losing party. However, the Supreme Court’s ruling will be welcomed by many parties and practitioners who are actively fighting ‘legacy’ cases on a pre-April 2013 CFA backed by ATE insurance. 

Further reading: 

Latest judgment: 

Coventry and others v Lawrence and another (No 2) [2015] UKSC 50 

Related caselaw: 

Callery v Gray [2002] UKHL 28 

Home Office v Lownds [2002] 1 WLR 2450 

Coventry and others v Lawrence and another (No. 2) [2014] UKSC 46