On 29 March 2011 the Ministry of Justice confirmed that it is going to make significant changes to the way in which litigation is funded in England and Wales. Whilst the proposals apply to most types of civil litigation, they have particular significance in media cases where a lot of time has been spent by claimant and defendant lawyers trying to curb the problem of excessive costs.

Conditional Fee Agreements

CFAs were introduced on 23 July 1993 by the Courts and Legal Services Act 1990. Initially, they were only allowed in a handful of types of claims, but on 31 July 1998 they were extended to all types of cases except family and crime. These early CFAs allowed for a success fee, payable by the client.

In April 2000 the Access to Justice Act 1999 provided that success fees and ATE insurance premiums should be recoverable as part of the costs of the action from the losing party. The success fee can now be up to 100% of a party’s costs, effectively meaning that in some cases the losing party pays the winner “double fees”.

Reform

Media organisations have been highlighting the problems of the CFA regime since 2001. In the intervening decade there has been a significant number of Government consultations looking at litigation funding and CFAs in particular. In 2006 and 2007, the Civil Justice Council hosted mediations between media claimant and defendant lawyers to see whether agreement could be reached on the level of success fees payable and costs capping. No agreement was reached.

On 3 March 2010 the Government published proposals to fix the maximum success fee in defamation cases at 10%. This change was aborted because opposition in the House of Lords delayed its implementation and the draft secondary legislation was dropped when Parliament was dissolved.

MGN v UK – The Campbell Case

On 18 January 2011, the European Court of Human Rights ruled that UK laws allowing the recoverability of success fees in privacy cases violated a newspaper’s right to freedom of expression.

Key to the ECHR’s decision was Article 10 of the European Convention of Human Rights. Any requirement on defendants to pay costs or damages in media cases will, in theory, interfere with this right. To be lawful, any such interference must be (a) prescribed by law; (b) pursue a legitimate aim; and (c) be necessary in a democratic society. The requirements for necessity include a need for the interference to be proportionate, and to go no further than is necessary to accomplish the objective.  

The ECHR ruled in MGN v UK that “the requirement that the applicant [newspaper] pays success fees to the claimant [Campbell] was disproportionate having regard to the legitimate aims sought to be achieved and exceeded even the broad margin of appreciation accorded to the Government in such matters”. The court also stated that the “depth and nature of the flaws” in the UK’s CFA system “are such that the court can conclude that the impugned scheme exceeded even the broad range of appreciation to be accorded to the State”.

The new changes

There are seven main changes that will impact on media claims. Further changes are proposed in some other areas, such as personal injury.

  1. Success fees will no longer be recoverable from the losing side. This is a return to the position in the 1990s, where clients pay their own lawyer’s success fees rather than seeking this from their opponents. The Government says that this will give individual CFA claimants a financial interest in controlling the costs incurred on their behalf. The maximum success fee will remain at 100% in media cases.  
  2. The abolition of recoverable ATE insurance premiums. If a party now wishes to take out ATE insurance, they will need to pay the premium themselves.1  
  3. General damages, such as those awarded in defamation and privacy cases, will be increased by 10%. It is not clear how this will be achieved. The Government proposes that the increase will apply in all cases, whether or not the claimant is funded under a CFA.  
  4. Recovery of the self-insurance element by membership organisations, equivalent to the ATE insurance premium, will be abolished. These cases arise where organisations such as trade unions fund litigation for their members and charge a premium for taking on the risk of paying an opponent’s costs.  
  5. Changes to the operation on Part 362. Rules will be clarified so that it is clear that where a financial offer is beaten at trial, by however small an amount, the costs sanctions under Part 36 will apply. Further, an additional penalty will be introduced on defendants who will be required to pay 10% of the value of the claim where they do not accept a claimant’s reasonable offer that is not beaten at trial. Further details of how this aspect will work will be provided.  
  6. Contingency fees. A limited model for contingency fees will be introduced, called “damages-based agreements”. These are unlikely to be used in media cases. Under a DBA, a lawyer’s fees are calculated as a percentage of damages recovered. At the end of the case, successful claimants will recover their base costs from the defendants as usual. This will be used as part payment of contingency fees, with the claimant paying the rest from damages.  
  7. A new test of proportionality in costs assessment will be introduced. Again, full details have not yet been provided. It seems likely that the rules will be changed so that when assessing costs on a standard basis, proportionality will become the dominant test and override the reasonableness or necessity. Courts will assess the reasonableness of the work done and the amount on an item by item basis. The court will then consider the proportionality of the resulting total costs and, if the total amount is disproportionate, make a further reduction to a proportionate level.