Shaking up the Civil Procedure Rules

Significant changes to the rules governing civil litigation in England and Wales come into force on 1 April 2013. Collectively known as the Jackson Reforms, they implement proposals put forward by Lord Justice Jackson in 2010, as subsequently enacted in the Legal Aid, Sentencing and Punishment of Offender's Act 2012.

The reforms are intended to address what have been viewed as the spiraling costs of civil litigation and to control the costs of the litigation process. The amendments to the Civil Procedure Rules (CPR) are therefore cost focused. The key changes deal with how litigation can be funded and how cases will be managed going forwards - with a view to keeping costs down.

The key changes that will impact on commercial cases (including claims for professional negligence) are:-

Litigation funding

Lord Justice Jackson thought the current funding arrangements had created a 'have a go' litigation culture. In the right cases, combining conditional fee agreements (CFAs) and after the event (ATE) insurance (which covers the legal costs of a winning opponent - see our first edition of Accountability) enables a claimant to litigate cost free. A claimant will pay nothing (or very little) if their claim fails. If successful, the claimant will be able to pass on the CFA success fee and ATE insurance premium to the defendant.

The funding changes will mean this can no longer happen and will ensure the winning party has some interest in the costs being incurred.

  • CFAs will still be possible; however from 1 April 2013 the success fee cannot be recovered from the losing party. Base costs can still be recovered but the success fee will be paid by the funded party itself.
  • A party will still be able to obtain ATE insurance, but after 1 April 2013 the party obtaining the insurance will have to meet the premium. It will no longer be possible to recover the cost of the premium from the losing party.

Exemption - recovery of both the success fee and insurance premium will still be permissible in insolvency, publication and privacy (including defamation) proceedings and diffuse mesothelioma claims for the time being.

  • Damages-Based Agreements (DBAs) are being introduced for all commercial claims. From 1 April 2013, lawyers and clients can enter into a form of contingency agreement (a DBA) where the lawyer's agreed fee (the 'payment') is contingent upon the success of the case and is determined as a percentage of the sums ultimately recovered by the client (rather than by reference to the time spent working on the case). If no recovery is made, no payment is due to the lawyer.

The Damages-Based Agreements Regulations 2013 (the Regulations) provide that (in non-employment matters) the payment must include counsel's fees and VAT, although other expenses (such as court fees or expert fees) can be recovered in addition. The Regulations also provide for a cap on the payment, being 50% of the damages ultimately recovered in commercial cases.

Costs will still be recoverable from the losing party, with only the balance of the DBA payment payable by the client. The losing party will not be required to pay more than the amount the successful party has agreed to pay its lawyer under the DBA; even if the costs actually incurred and ordinarily recoverable are more.

Cost management

The cost rules in the CPR will be substantially amended. New rules will govern costs management and will generally apply to all multi-track cases commenced after 1 April 2013. The cost management rules will not apply to cases issued in the Admiralty and Commercial courts, nor in the Chancery Division, the Technology and Construction Court or Mercantile Court in certain circumstances - if the sum in dispute is more than £2 million at the date of the first case management conference (CMC), or if the court orders otherwise.

Parties will have to exchange and file costs budgets at a very early stage. The budgets need to be completed on a specific form (precedent H) which will require detailed costs information for ten phases of litigation, covering pre-action through to trial and settlement. A heavy price will be paid by those who fail to file a cost budget; they will be treated as having filed a budget comprising only the applicable court fees (unless the court orders otherwise) and are unlikely to be able to recover any additional costs.

The court will be able to make a cost management order (CMO) at any time, which will record the extent to which the parties agree the budgets or record the court's approval of a budget if it hasn't been agreed. If a CMO is made, the court will control the parties' budgets in respect of recoverable costs.

When assessing costs the court will have regard to a party's last approved or agreed budget for each phase of the proceedings and will not depart from it unless there is good reason to do so. The intention is that costs budgets will substantially reduce the need for detailed assessment proceedings on conclusion of a case.


The amended rules provide guidance on when costs incurred will be proportionate and introduce a new rule dealing with costs regarded as disproportionate. Only proportionate costs will be recoverable and costs that are disproportionate in amount "may be disallowed or reduced even if they were reasonably or necessarily incurred".

Costs will be regarded as proportionate if they bear a reasonable relationship to:

  • the sums in issue in the proceedings;
  • the value of any non-monetary relief in issue;
  • the complexity of the litigation;
  • any additional work generated by the conduct of the paying party; and
  • any wider factors, such as reputation or public importance.

These provisions do not apply to cases commenced (or work undertaken) before 1 April 2013, where the old proportionality rules will still apply (i.e. reasonableness and necessity will trump proportionality).


New rules will govern disclosure in multi-track cases. There will be a new menu of disclosure options, allowing each party to seek, and the court to order, the most appropriate disclosure process. The intention is that this will limit disclosure to what is needed to dispose of a case 'justly and at a proportionate cost'. The change is intended to reduce significantly the time and cost currently spent in undertaking 'standard disclosure'.


When applying for permission to adduce expert evidence parties must, from 1 April 2013, "provide an estimate of the costs of the proposed expert evidence" and identify the field in which the expert evidence is required "and the issues which the expert evidence will address". This is intended to focus the expert evidence on the issues that require it at an early stage. Estimates of the expert's costs will also have to be provided at the outset.

The court will have a new power to encourage 'hot-tubbing'. At any stage the court can order that some or all of the experts from like disciplines give their evidence concurrently. Where experts are unable to agree issues in a joint statement the court can order them to appear to address those issues and answer questions. The judge will then summarise the experts' positions on the issues in question and ask each expert to confirm or correct that summary before the process is concluded.

Witness statements

The amended rules will also give the court more scope to focus witness evidence at an early stage - by giving directions identifying or limiting the issues to be dealt with by witness evidence and the witnesses who can give it. The court will also have the ability to limit the length or format of a witness statement if considered necessary.

Part 36

Part 36 of the CPR will be amended to provide for an additional payment to be made by a defendant who fails to accept a claimant's part 36 offer and then fails to beat that offer at trial. The additional payment will be 10% of the damages awarded up to £500,000 and 5% of the damages for awards between £500,000 and £1 million, with no additional payment for awards in excess of £1 million. The payment is capped at £75,000.

This penalty is intended to encourage claimants to make appropriate part 36 offers and to reward them for doing so. Conversely, it is intended to penalise defendants who fail to accept them - and who, as a consequence, cause additional costs to be incurred.


The understanding is that the court is going to be stricter in imposing sanctions on a party for failing to comply with any rule, practice direction or court order. As a result, the amended rules will make it far more difficult for a party to obtain relief from a sanction once it has been imposed.

The current list of factors the court could consider on an application by a defaulting party is replaced by a requirement to consider all the circumstances of the case. In doing so it must have regard to the need to ensure litigation is conducted efficiently and at a proportionate cost and ensuring compliance.


The Jackson Reforms have led to what can easily be described as the biggest shake-up of the rules governing civil litigation in England and Wales since the introduction of the CPR in 1998.

Abolishing the recovery of success fees under CFAs and ATE insurance premiums from a losing party may well lead to a reduction in the number of lower value commercial claims being made. This is possible where claimants do not have the funds to bring the litigation and there is a question as to whether the damages being sought would be enough to cover the success fee or premium in question. It is unclear whether DBAs will provide a realistic funding alternative especially in cases where quantum is low, recoverability is an issue and the legal costs are likely to be high.

It is clear that the amended rules place greater emphasis on requiring costs to be proportionate. The court has also increased management powers to encourage cases to be dealt with at a proportionate cost.

It remains to be seen whether, in reality, courts will have the resources available to effectively case and cost manage all matters going forward. Parties should, however, proceed as though they will; the penalties for failing to properly consider and apply the court rules are likely to be severe.

Court watch

Pre-action disclosure applications - not a fishing expedition

The recent case of Assetco Plc v Grant Thornton UK LLP (QBD 25 January 2013, unreported) emphasises the need for a potential claimant to ensure its claim is sufficiently particularised before heading off to make an application for pre-action disclosure.

In this case, Assetco alleged that Grant Thornton (GT) had been negligent in preparing its 2009 and 2010 financial accounts. Assetco wrote to GT providing notification of its potential claims. The letter did not properly identify the basis for its claim; it merely set out the background facts to the potential claim. Assetco then issued an application for pre-action disclosure, to which GT responded by saying the basis of Assetco's proposed claim was unclear and not understood. Assetco said it would provide draft particulars of claim, but subsequently confirmed it was unable to do so without pre-action disclosure.

The court held that draft particulars of claim were not a pre-requisite for pre-action disclosure. What was relevant was whether the documents fell within the scope of standard disclosure - determining that requires the issues in the potential case to be clear. In this case they were not.

The court also looked at whether pre-action disclosure was desirable in this case. The Professional Negligence Pre-action Protocol was particularly relevant here. It required a claimant to send a preliminary notice of claim and when the claimant decided there were grounds for a claim a detailed letter of claim should follow. Sending a letter of claim triggers an obligation to exchange information and documents.

In this case, Assetco had only sent a preliminary notice of claim by virtue of its letter to GT. If pre-action disclosure was allowed, disclosure would have to be done twice (again after the claim had been particularised). The court therefore held that granting pre-action disclosure here would mean unnecessary costs being incurred and the scope of the disclosure was disproportionate.

This case will give some comfort to professional advisers. Potential claimants cannot use applications for pre-action disclosure to go on a fishing expedition - the issues in any potential claim will need to be clearly identified, and any pre-action protocol requirements complied with, before pre-action disclosure can be considered.

Notify to be safe rather than sorry

In the recent decision of McManus Seddon Runhams (MSR) v European Risk Insurance [2013] EWHC 18 (Ch) the High Court affirmed that a blanket notification can amount to a valid notification of claims under a professional indemnity (PI) policy. This will be so even though it might not refer to the specific transactions in relation to which there is a concern, or point to any specific defects in the handling of those transactions.

This is welcome confirmation for professional services firms who often find themselves having to make blanket notifications to insurers in order to preserve the position on coverage in relation to, for example, the conduct of a predecessor practice.

A PI policy is written on a claims made basis. It provides cover in respect of claims made against the insured and notified to insurers during the policy period, or subsequent claims which arise out of circumstances notified to insurers during the policy period which (depending on the policy wording) may or are likely to give rise to such claims.

As a matter of course, however, PI policies will exclude cover for claims made against an insured which arose out of circumstances notified to a previous insurer. This can place an insured in a difficult position when he has identified negligent conduct on some files and suspects that this is indicative of a wider problem but has not been able to identify all of the affected transactions prior to renewal; and, in particular, prior to a change of insurer. The new insurer may argue that any future claims arise out of the notification made to the previous year's insurer. The previous year's insurer may argue that the notification was not broad enough to include the other unspecified claims.

The usual approach in these circumstances is to make a blanket notification to insurers prior to expiry of the policy period. This is precisely what the partners in MSR, a firm of solicitors, did. Having received numerous claims from former clients of a predecessor practice regarding its conveyancing work, they investigated several files and discovered 32 that gave rise to specific circumstances which might result in a future claim.

MSR therefore sent its insurers a letter headed "blanket notification of circumstances which may give rise to claims" in which the firm referred to the 32 files it had identified. At the same time, it also indicated that all 5,000 of the predecessor firm's files were likely to contain examples of malpractice, negligence or breach of contract. MSR notified each and every one of those files as "individually containing shortcomings on which claimants will rely for the purposes of bringing claims".

The insurer accepted the notification in respect of the 32 specifically identified files, but asserted that there had been no valid notification of the other claims. This was because MSR had not identified a specific incident, occurrence, fact, matter, act or omission on each file. The court held that in doing so, the insurer's actions were misconceived and at odds with a long line of authorities, in particular:

  • J Rothschild Assurance plc v Collyear - a case relating to the blanket notification by Independent Financial Advisers (IFAs) of future claims for pensions mis-selling in connection with the pension review. The court had rejected the suggestion that an insured could only make a notification when it had identified a possible defect in a specific case; and
  • HLB Kidsons v Lloyds Underwriters - a case involving the blanket notification by a firm of accountants of concerns relating to various tax avoidance products. The notification was upheld, in spite of the court finding it to have been written in "limited and anaemic terms".

The court in McManus found that the key point arising from each of these authorities was that: "in both cases the notifications were held to be valid in relation to later claims that arose from the circumstances notified, even though the notification had not even referred to the transaction from which the later claim arose, let alone identified a defect in relation to the handling of that particular client as likely to give rise to a claim by that client". The test was whether circumstances existed at the time the notification was made which may/were likely to give rise to a claim and, if so, the insurer had to pay out in relation to any future claim arising out of those circumstances.

The decision by the court in McManus is clearly the right one for the policyholder. Any other outcome would have put an insured in the unenviable position of not being able to secure cover in circumstances where they are faced with specific claims which may point to an endemic issue.

Freedom of policyholder to choose solicitors (but not their hourly rates)

The Court of Appeal has upheld an insured's freedom to choose a lawyer to act on their behalf in connection with a claim made under a legal expenses policy. However, it restricted that right to the hourly rates prescribed by the insurer, leaving the policyholder to make up the shortfall.

Brown-Quinn and another v Equity Syndicate Management [2012] EWCA Civ 1633 was an appeal from the first instance decision of three jointly heard cases brought by insureds, who had the benefit of identically worded before-the-event legal expense insurance policies. The policies contained the following term:  

General Condition 2.3

"If we agree to start legal proceedings and it becomes mandatory for you to be represented by a lawyer, or there is a conflict of interest, you can choose an appointed representative by sending us the suitably qualified person's name and address. We may choose not to accept the choice of representative, but only in exceptional circumstances."

The insureds had all instructed a law firm which was not on the insurer's panel and which had refused to limit its hourly rates to the insurer's prescribed rates. At first instance, the insured's were granted a declaration that insurers were not entitled to decline to accept the insured's choice of lawyer on the basis that the lawyer's hourly rates exceeded the insurer's prescribed rates. The insureds relied, in particular, on the provisions of Regulation 6 of the Insurance Companies (Legal Expenses Insurances) Regulations 1990 which states:

"1.Where under a legal expenses insurance contract recourse is had to a lawyer (or other person having such qualifications as may be necessary) to defend, represent or serve the interests of the insured in any inquiry or proceedings, the insured shall be free to choose that lawyer (or other person).

2. The insured shall also be free to choose a lawyer (or other person having such qualifications as may be necessary) to serve his interests whenever a conflict of interests arises.

3. The above rights shall be expressly recognised in the policy."

On appeal, the insurer argued that should the fees of the non-panel firm exceed their prescribed rates, no cover should be provided - not even up to the level of their prescribed rates for non-panel firms. The Court of Appeal, which was highly critical of the insurer, disagreed and accused them of "insousiance to their obligations under the ... Regulation which leaves one quite breathless". The insurer was obliged to pay the appropriate non-panel rates to their insureds, but no more than that, and was directed to amend the offending provisions in its policy wording.

In reaching its decision, the Court of Appeal left open the possibility that an insurer's prescribed rates might be so low so as to render the insured's freedom of choice meaningless. No evidence was put forward to support such an argument on the facts of this case, but if it is clear that should such a situation arise, the court may come to a different view than it did here and refuse to uphold those prescribed rates.

The decision appears on the whole to have been welcomed by insurers who require the certainty of their prescribed rates in order to price premiums. As far as the insured is concerned, however, this decision is of limited application to, for example, professional indemnity (PI) insurance. In this type of insurance, insurers usually retain conduct of the defence of any claim and the policyholder does not have the benefit of the 1990 Regulations.

Even so, the outcome in Brown-Quinn does reflect a common sense approach which can often be agreed in practice between a PI insurer and its policyholder where the policyholder wishes (understandably) to exercise some influence over the lawyers defending the claim being brought against it. This is especially so where the claims being asserted are complex and more likely to be resolved in the defendant's favour, if they are able to retain those with the requisite experience and expertise.

What's in a name? The importance of ensuring a defendant is correctly identified

The case of Insight Group Limited v Kingston Smith [2012] EWHC 3644 (QB) provides some clarity as to the court's jurisdiction to substitute parties in court proceedings, when the defendant has not been correctly identified in the claim form and the relevant limitation period has expired.

Insight Group Limited (Insight) brought a claim against the accountant's firm, Kingston Smith LLP (the LLP), for negligent advice given and/or acts committed. Insight subsequently realised that almost all of the negligent acts complained of were committed by the members of the former partnership, before the LLP had even come into existence. By this time, the limitation period in respect of some of the claims, including a potentially substantial breach of contract, had expired. An order was initially granted to substitute the partnership as defendant in place of the LLP. Following an application by the partnership, the order was set aside.

Insight appealed on the ground that the LLP was named by mistake and, in the alternative, that the relevant claims could not be carried on unless the partnership was substituted as the defendant (relying on CPR 19.5(3)(b) and section 35(6)(b) of the Limitation Act 1980 respectively).

The court had to decide whether Insight:

  • had sued the LLP in the mistaken belief that the LLP had provided the services which were said to have been performed negligently - failing to recognise that the services had been provided by the former partnership and not the LLP (a mistake as to name); or
  • knew that the services had been provided by the former partnership, but mistakenly believed that the LLP was legally liable for the negligence of the earlier firm (a mistake as to identity).

The court held, having considered all of the evidence, that this was a case of a mistake as to name and exercised its discretion to substitute the name of the defendant.

The court reached this conclusion (even though the mistaken belief was said to be undoubtedly-ill-considered or, more likely, unconsidered) on the basis that the pre-action correspondence, the claim form and all subsequent correspondence, consistently demonstrated that Insight believed the LLP had provided the audit services and committed the negligent acts.

The court further said that the courts should be willing to exercise their discretion to excuse such mistakes, in the sense of permitting substitution, as opposed to in a way that amounted to punishing a party for the harmless error of its legal representatives. This was said to be the case even where the claimant had a potential remedy against its legal representatives, as such was not an adequate substitute for the loss of the original claim.

Interestingly, in support of the court's decision to exercise its discretion, it relied on the fact that the LLP's solicitors had not done anything to rectify Insight's mistaken belief. In fact, they appeared to have made the same error themselves.

While this judgment can be applauded for its pragmatic approach, the decision appears to have been heavily steered by the particular evidence in the case and, therefore, should be treated with caution. Despite the successful outcome for Insight, it should not detract from the importance, whether acting for a claimant or defendant, of always ensuring the defendant named in a claim form is in fact the right defendant.

Industry update

Consultation on the FRC's proposals for implementing the recommendations of the Sharman Panel

The Financial Reporting Council (FRC) is consulting upon implementation of recommendations issued by the Sharman Panel in June 2012, dealing with the challenges faced by directors, management and auditors where companies face going concern and liquidity risks. Guidance has been issued on 'going concern', which includes an enhanced role for the external auditor.

The guidance sets out that the overarching purpose of the going concern assessment is to ensure the identification and management of risks that would threaten the company's survival. It also discusses when a company should be judged to be a going concern, in the context of the Code and the Listing Rules. Both solvency and liquidity should be considered; and the Guidance is clear that going concern is a matter of judgment not fact.

The guidance makes clear that responsibility for going concern reporting remains with the board. It provides that the board should identify strategy and principal risks, as well as provide examples of issues it has addressed in its going concern assessment. It also provides that the board should consider this reporting when making the statement that the annual report is fair, balanced and reasonable.

Auditors will be required to communicate to the audit committee their views on the robustness of the director's going concern assessment. Auditors will also be required to read the annual report in the light of knowledge acquired during the audit, and consider whether there might be information they are unaware of which may contradict the going concern reporting in the annual report.

The FRC has also proposed changes to ISAs 570 and 700, to make it clear that the auditor has a responsibility to determine whether there is anything it should add or emphasise in the annual report regarding the directors' going concern assessment and outcome.

Responses to the consultation are invited by 28 April 2013.

FRC consults on proposals to 'improve' auditors' reports

Following the changes it made to board and auditor reporting last September, the FRC has issued a separate Consultation Paper: Revision to ISA (UK and Ireland) 700 which further proposes that auditors' reports should:

  1. describe any risks of material misstatement that were identified and assessed by the auditor;
  2. explain how the auditor applied the concept of materiality; and
  3. summarise the audit scope, in particular how the scope responded to a) and b) above.

The proposals have been made in response to criticism that auditors' reports are uninformative to 'users', a broad category which includes investors and other third parties. If implemented, the changes should "close the circle" according to Nick Land, chairman of the FRC's audit and assurance council.

Last month, the ICAEW commented on the proposals, saying that what is needed is "a simple, unambiguous auditor opinion". ICAEW also highlighted the importance of coordinating the FRC's efforts with international work in order to ensure consistent standards across countries.

The FRC's consultation period on the new proposals ends on 30 April 2013.

HMRC settlement opportunity

HMRC has published terms for its fifth scheme under which a settlement opportunity is available; the latest terms are relevant to companies who have taken part in UK GAAP corporate schemes to write off expenditure, or the value of assets, to create losses.

Broadly, HMRC will restrict relief so that expenditure which is not part of the real economic cost borne by participants of the scheme will be excluded when calculating losses or capital allowances.

The terms of settlement can be summarised as follows:

  • Loss relief against other income will be allowed in an amount equivalent to the participant's contribution as a company contributed as the cash contribution, less any element expended on allowable fees (unallowable fees are those spent on tax advice or circular funding arrangements).
  • The balance of the loss claim will not be allowable.
  • Any share of income attributable to the cash element of expenditure will be taxable in full.
  • Any share of income attributable to the loan financed element will only be taxable in so far as it represents investment income over and above the return of the initial capital.

HMRC has written to participants in specific partnerships, companies and individual sole trader arrangements which it believes are eligible to take part in the settlement opportunity. Anyone who requires more information should visit HMRC's information page.

European Commission publishes anti-money laundering proposals

On 5 February 2013, the European Commission announced two new proposals to strengthen current anti-money laundering regulations. The proposals provide for a more targeted, risk-based approach. The first proposal is a directive which prevents the use of the financial system for the purpose of money laundering and terrorist financing. The second is a regulation which seeks the 'due traceability' of transfers via information accompanying the transfer.

The proposals take into account the latest recommendations of the Financial Action Task Force, the world anti-money laundering body, and in fact they go further than those recommendations in some aspects. The Commission said that the regulations are also intended to cover new threats (for example, they cover the 'gambling sector' rather than merely casinos).

The regulations apply to anyone dealing in goods or providing services for cash payment of €7,500 or more, reduced from the current threshold of €15,000.

The proposals have been welcomed by the ICAEW who has advised that the changes, if implemented, will help to ensure that anti-money laundering laws are "consistently stronger across the whole of the EU".