On 14 January 2010 Lord Justice Jackson published his “Review of Civil Litigation Costs : Final Report”. The Jackson Report was the conclusion of over a year’s consultation and discussion with interested parties and contained a number of important and novel recommendations to update the current costs regime.

Subsequent to the publishing of the report, many of Lord Justice Jackson’s specific recommendations have been adopted by the government and are in the process of being implemented. Those changes requiring primary legislation were included in the Legal Aid, Sentencing and Punishment of Offenders Bill (LSPO) which passed through parliament earlier this year and received Royal Assent on 2 May 2012. LSPO will come into force in April 2013.

LSPO will make a number of very important changes to the basis on which solicitors can charge clients and that costs that can be recovered from losing parties. The principal changes affecting the civil costs regime are described in this briefing note.

Recoverability of Success Fees under CFAs

Solicitors and clients are already permitted enter into Conditional Fee Arrangements (CFAs) under which the solicitor discounts the hourly rate charged to its client in return for a “success fee” being payable if the client is successful in the litigation. The success fee is set as percentage uplift on the undiscounted hourly rate. Section 58 of the Courts and Legal Services Act 1990 currently allows a successful party to recover success fees from the losing party in litigation. It also permits a winning party to recover from its opponent premiums payable by the client under an “after the event” (ATE) insurance policy.

This was said by Lord Justice Jackson to result in Defendants, particularly in personal injury cases, bearing a disproportionate burden of the costs of proceedings. The fact that in many such cases the Defendant in question is a publicly funded body, such as the National Health Service, was a fact not lost on Lord Justice Jackson or the government.

LSPO will prevent recovery of both success fees and ATE premiums from losing parties. It will still be open to solicitors and clients to enter into agreements which involve uplifts if the litigation is successful, but it will now be for the client to pay the success fee.

Damages Based Agreements

In an attempt to increase access to justice, LSPO will permit the use of contingency fees in general civil disputes for the first time. Clients and solicitors will be able to enter into what are referred to as Damages Based Agreements (DBAs). Under a DBA, the client and the solicitor will agree that the solicitor’s fee for the litigation will be set a percentage of the damages recovered. The proportion that a solicitor will be permitted to take is limited to 25% in personal injury claims and 50% in all other cases (except for employment cases, where DBAs are already permitted and the limit is 35%).

Losing parties will still have to pay the winning party’s costs on the normal basis (based on hourly rates and hours billed) but the successful client will have to top up the amount due to the solicitor under the DBA from its damages award.

CPR Part 36: New penalties

The costs sanctions under CPR Part 36, which regulate formal settlement offers between parties, will be amended to further encourage early settlement. A penalty will be introduced requiring Defendants to pay an additional 10% of the damages or costs (in non-damages claims) awarded where a Defendant fails to accept a Claimant’s offer to settle and where the Court’s judgment in favour of a Claimant is at least as favourable as an offer previously made by the Claimant. These sanctions are to be subject to a tapering system for claims over £500,000 so that the maximum sanction is likely to be £75,000.

Other provisions

Other amendments and new provisions introduced by LSPO apply mainly to personal injury claims. One important change is the prohibition on the payment or receipt of any type of referral fees for personal injury related claims by a solicitor, claims management company and insurers who are involved in the particular claim. Lord Justice Jackson recommended that general damages for personal injuries, nuisance and all other civil wrongs to individuals be increased by 10%. This recommendation was not included in the LSPO but has been taken forward by the Courts.

Court rules will introduce the concept of “qualified one-way cost shifting”, which will prevent a successful Defendant in a personal injury claim from recovering its costs from a Claimant, where the Claimant has brought its claim “properly”.

Conclusion

The changes to the costs regime being implemented by LSPO are mainly being driven by concerns about the increase in personal injury claims and the disproportionate burden of costs in such cases falling on Defendants. However the Act will also have an impact in commercial cases.

The use of success fees is likely to reduce once those fees are no longer recoverable from the losing party. By contrast, the introduction of DBAs will significantly increase the opportunities for solicitors and clients to reach agreements as to risk sharing in commercial cases and is to be welcomed.

The ATE insurance industry, which currently uses a model in which a premium is only payable in the event of a successful outcome and which is then recoverable from the losing party, will have to substantially reconfigure its products.

Legal Aid, Sentencing and Punishment of Offenders Act 2012 : Key provisions

  • Success fees and premiums payable under ATE insurance policies will no longer be recoverable from a losing party in litigation (Sections 44 and 46)
  • Solicitors and clients may agree contingency fees - referred to as “Damages Based Agreements” - to be limited by court rules to 50% of the damages award in commercial cases (Section 45)
  • Defendants will have to pay an additional amount of 10% of the damages awarded where a Claimant equals or betters its earlier settlement offer (Section 55)
  • Payment and receipt of referral fees are prohibited in relation to personal injury claims (Section 56)