Most of the Lord Justice Jackson’s reforms of civil litigation funding and costs were implemented yesterday. These reforms have been cited as the largest review of the litigation regime in the UK in more than ten years. To access our recent Law-Nows, which provide a more detailed discussion of these reforms, please click here and here.

Jackson’s reforms implemented yesterday

There are five key areas to these reforms:

  1. New costs management rules have been introduced, giving the court an increasingly active role. In particular, there is a requirement to exchange detailed costs budgets before the first case management conference. However, these reforms will not apply to cases held in the Admiralty or Commercial Courts, or automatically apply to cases exceeding £2 million in value in the Technology and Construction Court, the Mercantile Court or the Chancery Division.
  2. Success fees under CFAs and ATE insurance premiums are no longer recoverable from the other side (unless entered into before 1 April 2013). Damages Based Agreements (DBAs) have also been introduced meaning that the client agrees to pay the solicitor a contingency fee, which is calculated by reference to the sums ultimately recovered.
  3. New case management reforms are intended to ensure that litigation is conducted efficiently and at a proportionate cost. The courts are less likely to tolerate unjustified delays and breaches of rules.
  4. Disclosure will be more controlled so that the cost of the exercise is proportionate to the issues in dispute. The presumption in favour of standard disclosure has been replaced by a menu of disclosure options in multi-track cases.
  5. The Civil Procedure Rules have been amended to allow for an additional amount to be paid to a successful claimant who obtains judgment equal to or better than its own Part 36 offer. This amount is effectively capped at £75,000.

The likely effect on insurers

Funding

For liability insurers, the abolition of the recoverability of success fees and ATE insurance premiums will be welcome. It removes the ‘double or quits’ element of claimants’ costs recoveries and insurers are more likely to be able to absorb the additional amount potentially available to claimants under Part 36. Therefore, defendant insurers will be less exposed to unmeritorious claims, particularly smaller claims such as personal injury where the cost of litigation can be greater than the value of the claim.

The new DBAs are unlikely to act as an alternative to CFAs. If the money available to a claimant is not enough to fund a success fee or ATE premium, the case is unlikely to be one that will attract a lawyer to take it on under a DBA. Having said that, DBAs may be more attractive for larger commercial claims, in which the merits of the case are often unclear at the start of proceedings. In these circumstances, arguably, the possibility of a contingency fee reflects better the risk that a lawyer takes on as opposed to the maximum CFA uplift of 100% of normal costs.

Litigation funders and ATE providers will, no doubt, diversify their products with a view to finding alternative solutions.

Costs management

The reforms place obligations on solicitors to focus on costs at the outset of proceedings and throughout. It is unlikely that this will have as significant an impact on insurers, compared to other litigants, because they already budget for costs in the form of costs reserves (although the costs reserve may need to cover different items to the budget provided to the court). Insurers will need to be actively involved in the budgeting process at an early stage, which will impact positively on reserving and the prospects for settlement. A tension may arise between the insured, who might want every stone turned in their defence, and insurers, who may not be able to recover these costs if the claimant successfully argues that they are not proportionate. These reforms will also result in more transparency regarding the other side’s costs, which is likely to become more of a factor in whether a claim fights or settles.

Conduct of litigation

Defendant insurers will be under more pressure to accept reasonable Part 36 offers because of the additional amount available to successful claimants. The claimant may recover an additional amount in addition to the award (subject to an effective cap of £75,000). If the amount is up to £500,000, the sanction will be an additional 10%; for amounts between £500,000 and £1 million, it will be 10% of the first £500,000 and 5% of any amount above that figure; and where the amount is above £1 million, the sanction will be 7.5% for the first £1 million and 0.001% of the amount above that figure. These additional sanctions may increase the number of offers made by claimants.

Conclusion

It is likely that insurers defending high value commercial claims will be affected positively by most of the above reforms, particularly the abolition of recoverability to success fees and ATE premiums. The reforms target the areas perceived to be flawed (particularly personal injury litigation) but also impact significantly on “middle market” litigation. Insurers need to be mindful that Judges will be more interventionist because they are now required to ensure that litigation is conducted efficiently and at a proportionate cost regardless of the size of a claim. This ought to have a positive effect on insurers by reducing the number of unmeritorious claims.