The Ministry of Justice yesterday published its consultation entitled "Proposals for Reform of Civil Litigation Funding and Costs in England and Wales – Implementation of Lord Justice Jackson's recommendations".

As anticipated following the government's announcement to Parliament this summer (see our e-bulletin of 27 July), the consultation seeks views on Lord Justice Jackson's recommendations that:

  • conditional fee agreement (CFA) success fees and after the event (ATE) insurance premiums should cease to be recoverable from the opposing party in litigation; and
  • contingency fees or "damages-based agreements" (where the lawyer is remunerated by way of a share in the client's damages) should be permitted for court litigation.

The consultation also seeks views on proposed reforms to the Part 36 offer regime, which are likely to be of interest to commercial clients.

As noted in the consultation, the government believes that implementing the proposals should lead to significant costs savings, while still enabling those who need access to justice to obtain it. A copy of the consultation, which is open until 14 February 2011, can be found here.

The government intends to publish its response to the consultation in spring 2011. Certain of the proposals, in particular relating to CFA/ATE recoverability and the introduction of damages-based agreements, would require primary legislation. According to the government's impact assessments, it is envisaged that the proposals would be implemented in autumn 2012.

Background

Lord Justice Jackson's objective in conducting his year-long costs review was to make recommendations "in order to promote access to justice at proportionate cost". For more detail on the recommendations made in his final report published on 14 January 2010, see our e-bulletin of the same date.

The Ministerial Foreword to yesterday's consultation describes Lord Justice Jackson's report as a "turning point" in the recent history of civil litigation becoming ever more costly. It states that the consultation should be considered against the background of costs having frequently become unaffordable to many individual litigants and businesses, and highlights the complaints of some defendants that the disproportionate cost of defending claims means they are denied effective access to justice. The consultation states that the government is seeking to "rebalance" the costs of civil cases by ensuring "that necessary claims can be brought; that reasonable claims should be settled as early as possible; that unnecessary or frivolous claims are deterred; and that as a result costs overall become more proportionate".

CFAs / ATE insurance

Under the proposals, parties would still be entitled to enter into CFAs and take out ATE insurance in order to fund their litigation, but they would have to bear the additional costs of doing so. For a claimant, this might be out of any damages awarded.

The government notes that the current CFA regime has facilitated access to justice (at least for claimants) and ensured full compensation for claimants, but that this has come at a substantial cost to defendants who pick up all the costs (exacerbated by 100% success fees and ATE insurance premiums) for the claimants' ability to litigate "risk-free". It comments that an equivalent system is not seen in any other jurisdiction.

The consultation highlights the potential savings for the taxpayer if the reforms are implemented, since many claims are brought against central and local government under CFAs, stating that "with the current financial position, we are committed to achieving costs savings wherever possible".

The consultation also addresses Lord Justice Jackson's proposals that there should be new measures to assist claimants in meeting the additional costs and risks they will have to bear if recoverability is abolished, namely:

  • An increase of 10% in the level of general damages for personal injury, nuisance, defamation, and other civil wrongs to individuals. However, the government proposes to restrict such an increase to claimants on CFAs, by re-framing it as retaining a recoverable element of CFA success fees equivalent to 10% of general damages. In doing so the government seeks to avoid what might be seen as a "windfall" to non-CFA claimants and/or a departure from the compensatory principle of damages.
  • A regime of qualified one-way costs shifting (where the claimant is awarded costs if successful but will not generally have to pay the defendant's costs if it loses) for certain categories of litigation, including personal injury and defamation claims –see further below. This would aim to remove or reduce the need for ATE insurance to cover the adverse costs risk in these sorts of cases. The consultation recognises, however, that there might nonetheless be a need for ATE insurance to cover the costs of disbursements in unsuccessful claims, and consults on whether this element of an ATE premium should remain recoverable in any categories of litigation.
  • A cap on the success fees that could be deducted from damages in personal injury claims, set at 25% of damages (excluding damages for future care or future losses).
  • Enhancements to the regime for Part 36 offers – see below.

The consultation extends the proposal to abolish recoverability beyond the recommendations made by Lord Justice Jackson, to apply also to cases funded by trade unions. The consultation points out that trade unions often support legal claims brought by their members and undertake to indemnify members against any adverse costs risk. They normally self-insure against this risk rather than taking out ATE insurance, and are currently entitled to recover this self-insurance element from losing defendants in the cases they support. The government proposes that if ATE premiums are no longer recoverable, neither should be the self-insurance element currently recoverable by trade unions.

Qualified one-way costs shifting (or "QOCS")

A regime of QOCS would mean that a claimant would be awarded costs if successful, but would not have to pay a winning defendant's costs unless:

  • the claimant had acted unreasonably (for example, by bringing a frivolous or fraudulent claim, or in conducting the claim unreasonably or abusively); and/or  
  • the claimant was sufficiently wealthy that he/she was easily able to pay the winning defendant’s legal costs.

QOCS would not override the Part 36 offer regime, so that a claimant who had refused a Part 36 offer and then failed to beat it at trial would have to pay the defendant's costs arising after the date of the offer. Defendants could therefore retain some costs protection through utilising the Part 36 regime, even where QOCS applied.

In the consultation, the government expresses its agreement with Lord Justice Jackson's recommendation that two-way costs shifting, i.e. the normal "loser pays" rule, should continue to apply to claims made by commercial organisations and that QOCS should not generally extend beyond claims brought by individuals.

As for the types of claim to which it would apply, QOCS is proposed for claims for personal injury and (on the government's "current view") defamation and other publication proceedings brought under CFAs. However, the government expresses concerns about extending QOCS to cases funded on a traditional hourly rates basis or to judicial review claims. If QOCS were to be introduced for such claims, the government's view is that it should apply only to individual claimants, who should remain liable to pay some element of costs but restricted to an appropriate limit.

Contingency fees

The consultation also seeks views on whether lawyers should be permitted to conduct civil litigation on the basis of contingency fees or, as seems to be the preferred terminology, "damages-based agreements" (DBAs). Lord Justice Jackson's recommendation was that both solicitors and counsel should be able to do so, subject to:

  • a requirement for independent advice for the client; and
  • regulation along the lines recently introduced by the Ministry of Justice for employment tribunal proceedings, where DBAs are currently permitted.

Under the proposals, a losing defendant would only have to pay costs on a conventional basis: so far as the contingency fee exceeded what would be chargeable under a normal fee agreement, this would be borne by the claimant. Consistent with the proposals to reform the CFA / ATE regime, therefore, the costs burden on a defendant would not be increased as a result of the funding arrangement between the claimant and its lawyers in any given case.

An important question, if DBAs are permitted, is whether there should be a set maximum percentage of damages that can be taken as a contingency fee. Lord Justice Jackson recommended that there should be a maximum. However, he did not comment on what the level should be, save for personal injury claims where he recommended a cap of 25% of the claimant's damages (excluding damages referable to future costs or losses) to mirror the proposed limit for CFA success fees. Under the regulations governing DBAs in employment tribunal cases, the cap is set at 35% (including VAT).

The consultation notes that, in light of the similarity between CFAs (as reformed) and DBAs, the government is not convinced that separate regulation of DBAs would be necessary, apart from a cap on damages in personal injury cases (as for CFAs). Accordingly, the government does not propose a cap on the permitted level of contingency fee in non-personal injury cases, nor does it see a need for independent advice to be obtained.

Part 36 offers

Lord Justice Jackson made two key recommendations relating to Part 36 offers.

First, he recommended that more robust sanctions should be introduced to support claimants' Part 36 offers, in order to level the playing field as between claimants and defendants and to encourage settlement. In particular, where a defendant rejects a claimant's offer but fails to do better at trial, the claimant's damages should, unless there are good reasons not to, be enhanced by 10%. Currently, the potential sanctions for failure to beat a claimant's offer are the award of indemnity costs and enhanced interest on both damages and costs (at up to 10% above base rate).

In CFA cases, where a claimant has made a well-judged Part 36 offer, Lord Justice Jackson suggests that the enhanced recovery would help compensate for the claimant's need to pay the success fee out of damages.

The government supports Lord Justice Jackson's proposal for more robust sanctions for claimants' part 36 offers, although it notes Lord Justice Jackson's suggestion that this might have to be modified for high-value claims, as an additional 10% uplift on damages might provide too great a reward and create a perverse incentive for claimants to proceed to trial. Accordingly, the consultation seeks views not only on whether the proposal for the 10% uplift should be implemented, but also whether there should be a cut-off point or staged reduction as damages increase.

The government also notes a concern that if the proposed 10% uplift applied regardless of when the claimant's offer was made, this might not sufficiently encourage early offers, as opposed to offers made later in the litigation process (such as when a claim is listed for trial). The consultation therefore seeks views on how the proposal might be adapted to incentivise early offers

Lord Justice Jackson's other recommendation relating to Part 36 offers is that the effect of the widely criticised decision in Carver v BAA plc [2008] EWCA Civ 412 should be reversed. In Carver the claimant beat the defendant's Part 36 offer but only by a very small margin. The court held that it could not be said that the final outcome was "more advantageous" than accepting the offer made, bearing in mind factors such as the emotional toll of the litigation on the claimant. Lord Justice Jackson commented that Carver introduces an unwelcome degree of uncertainty and tends to depress the level of settlements.

In a judgment handed down this summer (in LG Blower Specialist Bricklayer Limited v Reeves [2010] EWCA Civ 726 – see our e-bulletin of 29 June 2010) the Court of Appeal limited the effect of the Carver decision, finding that although Carver is binding authority that other factors need to be taken into account: "In most cases obtaining judgment for an amount greater than the offer is likely to outweigh all other factors." However, the judgment leaves open the risk that where an offeree beats an opponent's offer by a relatively small margin, other factors might be seen to outweigh this success.

In the consultation the government expresses concern at the idea of reversing the effect of Carver as, it says, this might be seen as endorsing the principle that parties are entitled to press on to trial - using expensive judicial resources and increasing legal costs - where there is only a small amount between them. The government seeks views on an alternative approach which would aim to introduce certainty as to when the Part 36 sanctions would apply, but also discourage the parties from wasting resources in unreasonably pursuing claims to trial. The proposal, based on a model prepared by the Forum of Insurance Lawyers which is referred to in Lord Justice Jackson's preliminary report, would trigger costs sanctions if the claimant failed to beat the defendant's offer by a defined margin (say 10%).

Other issues

The consultation also puts forward proposals for:

  • more rigorous control over the level of success fees / ATE premiums that can be recovered (if the primary recommendation to abolish recoverability altogether is not implemented);
  • a new test of proportionality of costs, which would mean that costs could be found to be disproportionate even if they were reasonably and necessarily incurred (under the current test, costs are proportionate so long as they are reasonable and necessary);
  • increasing the prescribed rate recoverable by litigants in person who cannot prove financial loss for the time spent working on the claim (eg. in loss of earnings) from the current fixed rate of £9.25 per hour to £20 per hour.  

The government is not convinced by Lord Justice Jackson's recommendation that the indemnity principle should be abrogated, and does not propose to take this forward. The consultation also does not cover the proposals for fixed recoverable fast track costs or referral fees, which the government is said to be still considering.

The consultation also refers to a range of judiciary-led costs and case management work that has been continuing since Lord Justice Jackson's report was published in January. For example:

  • pilots of "more robust" costs management in defamation cases and in mercantile, technology and construction cases;
  • a pilot of provisional costs assessment for bills of costs under £25,000 in various county courts; and
  • a pilot to speed up and reduce the costs of expert evidence (through concurrent evidence, or "hot tubbing") in mercantile, technology and construction cases in Manchester.  

It notes that a Judicial Steering Group is considering the priorities for further implementation of the recommendations on costs and case management.

It also refers to the Civil Justice Council's consultation on a revised draft voluntary code of conduct for third party funders, to address Lord Justice Jackson's recommendations. The consultation has been extended to 3 December.

Comment

Herbert Smith will be submitting a response to the consultation before the deadline of 14 February. To ensure that our response is informed by clients' views, in the next few weeks we will be publishing a survey to collect feedback on the main proposals that are relevant to commercial clients.

Although the proposed reforms to the CFA / ATE regime are likely to have the most dramatic impact in personal injury cases, they are relevant for business generally, especially when defending claims. For commercial claims, as we have previously said, there would seem to be no obvious reason why defendants should be liable for the additional costs of claimants choosing to litigate on a risk-free basis.

The proposals relating to contingency fees are of potential relevance to all litigation, including commercial litigation. This issue is likely to be controversial among commercial clients. Last time we canvassed views on this issue, opinions were divided. It is clear, however, that the ability to offer contingency fees would increase the options available for clients seeking more creative fee arrangements in commercial litigation.

The proposed reforms to the Part 36 regime are also significant for all litigants, though the proposed enhancement to claimants' offers will have less impact for major commercial litigation if it is subject to a cut-off or phased reduction for high-value claims.