"In comparison with the present Costs Review, the design and construction of the Tower of Babel seems to have been quite a harmonious and straightforward project. Whatever I may recommend at the end of this year … one thing is inevitable. My final report will generate protest from at least some directions and quite possibly from all directions."

(Review of Civil Litigation Costs - Preliminary Report, May 2009)

Introduction

It is little more than a year since the then Master of the Rolls appointed Lord Justice Jackson to "carry out an independent review of the rules and principles governing the costs of civil litigation and to make recommendations in order to promote access to justice at proportionate cost". The review has considered not just the costs rules themselves, but also a wide range of procedural rules that impact upon costs. Jackson LJ published a 660 page Preliminary Report in May 2009, which provided a basis for extensive consultation on the issues identified. Yesterday saw the publication of the Final Report.

Jackson LJ described the issues involved in the Review as "both complex and intractable", but promised to look at everything with an open mind. Full digestion and analysis of the 584 page Final Report is going to take some time, but here we highlight the key conclusions and recommendations of relevance to insurers and their insureds.

Recoverability of CFA success fees and ATE premiums

The headline-grabbing recommendation is to end the recoverability of ATE premiums and success fees, which Jackson LJ highlights as "one of the major drivers of excessive costs". He concludes that it will be "substantially cheaper" for defendants to bear their own costs than to pay ATE premiums.

To pacify claimants (and their solicitors), Jackson LJ proposes a number of measures: (i) a 10% increase in general damages for personal injury litigation and in defamation proceedings; (ii) "qualified" (one-way) cost shifting; and (iii) enhancing the position of claimants under Part 36.

CFAs remain available, but any success fee will be taken out of a claimant's damages, rather than being payable by the defendant. If any disputes subsequently arise between a solicitor and their client over apportionment of fees and damages, Jackson LJ recommends an arbitration service to resolve those disputes. This would bind the lawyer but not the client.

Cost shifting

On the issue of generally abolishing costs shifting, Jackson LJ concedes that "the arguments of policy and principle ... justify the general retention of [the costs shifting rule] in civil proceedings".

However, he recommends that qualified cost shifting should be introduced in cases where CFAs and ATE insurance are pervasive (personal injury, clinical negligence and defamation). Under qualified cost shifting, a losing claimant would not be required to pay the defendant's costs, but a court may make a different order if: (i) a party's behaviour is unreasonable or unjustified; or (ii) the financial resources available to the parties justify it. Jackson LJ recommends further consultation on additional areas where qualified costs shifting could be introduced.

Funding and access to justice

CFAs: If Jackson LJ's recommendation to abolish recoverability of success fees is not adopted, he recommends the following "back-up" measures: (i) fixed fees in areas where CFAs are common; (ii) a period (the relevant protocol period) during which the defendant can admit liability before a success fee is recoverable; (iii) removing the availability of success fees in detailed assessment proceedings; and (iv) applying a two-stage success fee for Part 36 offers, so that a receiving party is limited to the level of success fee that applies at the last date they could have accepted the offer (for example, 12.5% up until trial and 100% thereafter).

ATE insurance: Again, should the recoverability of ATE premiums survive, Jackson LJ recommends: (i) an amnesty period, during the relevant protocol period, where the defendant has the opportunity to admit liability and avoid the costs of an ATE premium; (ii) if a claimant's ATE insurance covers the risk that the claimant acts unreasonably in failing to accept a defendant's Part 36 offer, the premium applicable to that risk would be unrecoverable from the defendant; and (iii) a cap on recoverable premiums set at 50% of damages, with any shortfall being a matter for negotiation between the claimant and their insurer.

Jackson LJ also recommends that, should an insurer seek to avoid an ATE policy when a party looks to recover under their ATE policy, insurers must pay out first, and then seek to recover from the insured.

Contingency fees: Jackson LJ recommends that lawyers should be able to enter into contingency fee agreements with clients for contentious business: "it is desirable that as many funding methods as possible should be available to litigants". He recommends that, where the contingency fee exceeds the normal chargeable fee, any additional amount is payable by the successful litigant. A number of safeguards are also recommended: (i) a client and their solicitor must agree at the outset how to meet adverse costs orders; and (ii) a contingency fee agreement will be invalid unless it is countersigned by an "independent solicitor".

Third Party Funding: Following the publication of the draft voluntary code produced by the Civil Justice Council (unavailable at the time of the Preliminary Report), Jackson LJ sees no reason to introduce a statutory code at the moment, but expresses concern about the draft voluntary code's capital adequacy provisions. The maintenance and champerty rules remain.

BTE insurance: Jackson LJ appears to have a 'soft spot' for BTE insurance, which was evident in his preliminary report. He comments that it is "underused in England and Wales", and advocates "positive efforts to encourage take up" for small and medium enterprises and households.

Referral Fees: Jackson LJ recommends the abolition of referral fees, barring law firms from paying claims management companies, BTE insurers and other organisations.

Procedural changes

Pre-action Protocols: Despite having described the issues surrounding the Pre-Action Protocols (PAPs) as "some of the most intractable questions in the Costs Review" in the Preliminary Report, Jackson LJ concludes that the specific protocols serve a useful purpose. He has recommended some amendments to particular protocols, which are likely to be considered by the Civil Justice Council in its planned review of PAPs during 2010.

There was a near unanimous view that the general protocol (the Practice Direction - Pre-Action Conduct, introduced only last year) serves no useful purpose. It is perceived to cause substantial delays and to generate additional costs, whilst bringing little benefit to the parties. Jackson LJ recommends that large parts of this protocol should be repealed.

Case Management: Jackson LJ accepts that judges need to take a more robust approach to case management. He makes a number of recommendations to enhance the court's role and approach to case management, including allocating cases to judges with relevant expertise; and ensuring where possible that a case remains with the same judge (referred to as "docketing").

Disclosure: Disclosure is recognised as a major cause of costs. The Report concludes that edisclosure is inevitable in most cases where the parties hold material electronically. Jackson LJ  recommends that e-disclosure should form a substantial part of the training requirements for those solicitors, barristers and judges who have to deal with e-disclosure in practice.

As for disclosure in general, Jackson LJ recommends a new 'menu' option for larger commercial claims. Parties will have to file reports at an early stage in proceedings, describing the documents they hold that are relevant to the issues and estimating the costs involved in providing standard disclosure. The court will then decide on the appropriate order for the case in question, from a menu of possible orders that provide for differing levels of disclosure.

The current standard disclosure provisions are considered to be working well for personal injury and clinical negligence claims, and so the menu provisions would not apply to these types of litigation.

Witness and expert evidence: Both witness statements and experts' reports tend to be unnecessarily long and to address irrelevant and peripheral matters. Jackson LJ concludes that the costs of witness statements can be controlled by use of the court's existing case management powers and its powers to impose costs sanctions against any party responsible for producing unnecessarily lengthy or irrelevant statements.

For experts' reports, Jackson LJ recommends that any party seeking to rely on expert evidence should be required to provide an estimate to the court of the costs of adducing that evidence. He also proposes a pilot of the Australian practice of "hot-tubbing". Under this procedure, the experts give their evidence concurrently at trial, with the judge chairing a discussion between the experts and counsel.

Part 36: As had been predicted, Jackson LJ recommends a rule change to reverse the Court of Appeal decision in Carver v BAA [2008] EWCA Civ. 412. That decision introduced considerable uncertainty into the Part 36 regime, by holding that money is not the sole governing factor in determining whether a claimant has beaten a defendant's Part 36 offer.

More of a surprise is Jackson LJ's recommendation that the Part 36 rules should be amended to further incentivise defendants to accept offers made by claimants. He recommends that, where a defendant fails to beat a claimant's Part 36 offer, the claimant's recovery should be enhanced by 10%.

Costs management: Jackson LJ concludes that case management and costs management go hand in hand. He acknowledges that few solicitors or barristers, and even fewer judges, possess the requisite skills to carry out costs management effectively, but concludes that, if done properly, it will save costs. His recommendations include training for solicitors, barristers and judges in costs budgeting and costs management; and the introduction of new rules providing for a standard costs management procedure, which judges would have a discretion to adopt when appropriate.

ADR: The Report recognises the importance of ADR as a tool to reduce costs, but concludes that it is currently under-used, particularly in personal injury and clinical negligence cases. ADR will not be compulsory, and no rule changes are recommended to promote it. Jackson LJ proposes instead a campaign to educate lawyers, judges, the public and small businesses as to the benefits of ADR and the production of a standard handbook on ADR procedures and mediation providers.

Large commercial claims: The Report considers some specific types of litigation. There is insufficient space to look at all of these here, but the comments on large commercial claims are worth a mention. The Commercial Court is known to attract international cases to London precisely because of its "Rolls Royce" service and extensive disclosure regime. There was concern that reform affecting the Commercial Court could render London unattractive to foreign commercial litigants. In addition, the latest Commercial Court Guide ('the Guide') has recently given effect to many reforms recommended made by the Long Trials Working Party.

Jackson LJ notes that a high degree of satisfaction is expressed with the Commercial Court and that it is "not the function of this Costs Review to tinker with parts of the civil justice system which are working well". He therefore recommends only that the new requirement for the production of a judicially settled List of Issues, to operate as the keystone for management of Commercial Court cases, should be reviewed after it has operated for 18 months. In addition, the Guide should be amended to provide for more frequent allocation of appropriate cases to designated judges.  

Fixed costs: The fixed costs proposed by Lord Woolf at the onset of the CPR should be adopted in the fast track. All personal injury litigation in the fast track should be subject to fixed costs, with a dual system for non-personal injury claims. In the dual system, there would be an overall limit on recoverable costs up to trial of £12k (£13.5k in London) and matrices of costs for specific categories of fast track case. Fixed costs outside the fast track are recommended for routine bankruptcy and insolvency cases, via the introduction of benchmark costs.

Assessment of costs: A number of recommendations feed into his proposals for the costs assessment procedure:

Proportionality: a feature of the CPR is that costs should be proportionate – but what does this mean? Jackson LJ proposes a definition of proportionality to be adopted in the CPR by reference to five factors. He wants to see proportionality at the centre of a judge's cost considerations: proportionality should prevail over the reasonableness of costs. The fact that costs were necessarily incurred should not make them proportionate.

The Indemnity Principle, which prevents a party recovering more by way of costs from an opponent than it is obliged to pay its own lawyers, should be abolished.

The costs assessment procedure: the general recommendation is that judges should be far more pro-active in assessing costs. If an order is made for costs to be assessed, a substantial interim payment should also be ordered on account of costs, unless there is good reason not to do so. For detailed assessment, the bill of costs should be radically changed; a paying party should be required to make an offer when serving its points of dispute; and Part 36 should be extended to apply to the detailed assessment procedure.

Alexandra Anderson, Partner comments: "From docketing to hot-tubs, reform of Part 36 and the abolition of referral fees, Jackson LJ's Final Report into the civil litigation costs regime is the most extensive review since Woolf itself, commenting on almost every issue that impacts on costs. For insurers and insureds involved in commercial and construction claims, the report is good news, because, if Jackson's recommendations are adopted, they will no longer have to pay out for success fees and ATE premia. On the other hand, those involved in claims to which the qualified costs shifting proposals apply will be considerably less happy. Whilst they too will no longer have to pay these uplifted costs, the commercial realities of defending a claim to trial with no certainty of recovering their costs even if they win means that they will be forced to settle unmeritorious claims. And the proposed changes to Part 36, effectively giving courts the ability to award punitive damages where defendants fail to accept a well-pitched Part 36 offer, will put further pressure on defendants to any type of claim to settle early.

It is important to remember that, for the vast majority of Jackson's recommendations to become a reality, Parliament will have to act. Whether these reforms find space in the legislative schedule of whoever may be in government during the course of this year remains to be seen."