Where are we now and what can we do to minimise the impact of conditional fee agreements prior to the anticipated reform?

What reforms can we expect?

Kenneth Clarke has famously said “It cannot be right that regardless of the extreme weakness of the claim, the sensible thing for the defendant to do is to settle, and get out before the legal costs start running up. This is precisely what has happened and it is one of the worst instances of this country’s compensation culture.”

This is hardly surprising given the result of the Jackson Review, in which an unidentified general liability insurer informed the Government that:

  • In 1999 claimant solicitors’ costs amounted to 56 per cent of damages awarded or agreed.
  • By 2004, the average claimant’s costs were 103 per cent of damages.
  • By 2010, the average claimant’s costs represented 142 per cent of the sums received by injured victims.
  • Since 1999, the average damages paid have increased since by 33 per cent, but the average claimant’s costs (including disbursements and
  • ATE (after the event) premiums) have increased by 234 per cent!

The Ministry of Justice has therefore proposed the following main changes in response:

  • CFAs will still be available but success fees and ATEI premiums will not recoverable from the losing party (with the exception of premiums to cover the cost of expert reports in clinical negligence cases).
  • The introduction of a package of “associated measures” which will include:
  • one way costs shifting in personal injury and clinical negligence claims;
  • a 10 per cent increase in general damages (this only applies to personal injury claims);
  • a 10 per cent increase in damages awarded to claimants who beat their own Part 36 offers (in addition to the usual costs advantage);
  • contingency fee agreements (Damages Based Agreements or ‘DBAs’) will be allowed in civil litigation;
  • a new test of proportionality in costs assessments; and
  • increased rates for successful litigants in person.

Such changes will require both primary and secondary legislation, and the timing is uncertain – we consider it to be highly unlikely to go through before the year end in July.

Strategy in the meantime

The pendulum has now started a decisive swing back towards the benefit of the paying party, particularly following the Jackson Review and the recent cases of Yao Essaie Motto and Other v Trafigura Ltd, Pankhurst v Lee White Motors Insurance Bureau and Redwing Construction v Charles Wishart. It is also the case that after 1 October 2009, a party failing to notify the existence of a CFA will not be entitled to claim the success fee (whether pre or post issue). Paying parties should therefore be strategically planning how to minimise the impact of CFAs on the claim strategy itself, rather than waiting until the claim is settled and the issue of costs falls to be dealt with.

We recommend the strategies below for dealing with claims to recover success fees and ATE premiums.

Success fees

  • Admit liability and/or settle the claim at the earliest possible stage. This may support an argument that the success fee in the CFA was too high and did not accurately reflect the risk involved. At the same time as making an admission, ask the claimant’s solicitors to review any success fee downwards to reflect the reduction in risk.
  • Ask to see the risk assessment where the success fee looks too high eg, where CFA entered into after liability admitted. In C v W the court scrutinised this closely before knocking down the success fee from 98 per cent to 20 per cent.
  • Requesting sight of the funding costs calculation – this part is not recoverable and should be identified by the claimant as a distinct part of the success fee.
  • Where quantum is the only matter in dispute, write to the claimant early, noting that you will be requesting the assessment calculation and challenging it if appropriate, with the aim of putting them on notice that costs will be in issue, encouraging earlier settlement and/or frugality.
  • If you are dealing with a discounted fee CFA, you may be able to challenge the reasonableness of the success fee if the risk to the solicitor has not adequately been taken into account.
  • A failure on the part of the claimant’s solicitors to make adequate checks about other available methods of funding such as legal aid and BTE (before the event) insurance may indicate that recovery of a success fee and/or ATE premium is unreasonable. Request details.
  • Check that the notice of funding was given properly and whether the CFA is backdated or retrospective. We have seen claims where the CFA was taken out as long as a year ago – the success fee can only be claim from the date notice was given.  

ATE premiums

  • Defendants should admit liability at the earliest possible stage in order to justify a refusal to pay for the premium.
  • Check the date at which the insurance was taken out - could it be argued that there was no justification for obtaining the insurance because the defendant had already admitted liability?
  • Request as much information as possible from the claimant about other funding options and what investigations they made at the time.
  • Where ATE insurance is not accompanied by a CFA, perform the comparison of the two methods of funding carefully, especially where it covers both sides’ costs. Although this is required by the Costs Practice Directive, in practice it does not appear to be happening.
  • Check whether the premium is disproportionate to the risk when compared with other insurance products. Is the proportion of the premium representing a particular risk too large? Is the cover unnecessarily large?  

Summary

CFAs with recoverable success fees are with us for a while. Paying parties can use the above decisions and recommended strategies at the outset of a claim, making it clear to the party with a CFA that we will not be afraid to challenge the success fee/premium, hopefully preventing the racking up of costs and disproportionate damages/costs scenarios that we have all seen over the last few years.