In MGN Limited v the United Kingdom, the European Court of Human Rights (the Court) recently considered whether success fees under conditional fee arrangements (CFAs) breached the right to freedom of expression (Article 10 of the Convention for the Protection of Human Rights and Fundamental Freedoms (the Convention)). CFAs were the subject of criticism in Lord Justice Jackson's review of costs (full details of which were reported in our May 2010 edition of the Commercial Litigation Review View>>) and the Court's findings provide an important marker as to the likely direction to be taken by the Government post-Jackson. This article will consider the position of CFAs in light of the Court's judgment.

Conditional Fee Arrangements

The Court in MGN provides a thorough background to the introduction and evolution of CFAs and success fees. In brief, CFAs permit an uplift of up to 100% of the fees that are recoverable from the losing party. A later amendment to the system allowed after the event (ATE) insurance premiums to also be recoverable from the losing party. The practical result is that an individual can issue proceedings with their exposure on costs limited to the cost of the ATE insurance, while a defendant faces the risk of uplifted fees. CFAs were roundly criticised by Jackson LJ in his review of costs and were the subject of the Court's ruling in MGN.

MGN Limited v The United Kingdom - Summary

The case concerned an action for breach of confidence brought by the model Naomi Campbell, following an article, with accompanying photographs, published in the Daily Mirror on her treatment for drug addiction. The case reached the House of Lords (Campbell v MGN Limited [2004] UKHL 22) and the substantive issue concerned the balancing act that the court must strike between the protection of an individual's rights under Article 8 of the Convention (the right to a private life) and the newspaper's right to freedom of expression (Article 10 of the Convention). The House of Lords ruled in favour of Ms. Campbell, finding that Mirror Group Newspapers (MGN) had breached her privacy.

Ms Campbell's lawyers acted on a success fee (95% for Ms Campbell's solicitors and 100% for her Counsel). Costs were the subject of a separate set of proceedings, which also reached the House of Lords (Campbell v MGN Limited [2005] UKHL 61). Despite MGN's argument that the success fee was so disproportionate that it infringed its rights under Article 10, the House of Lords dismissed the appeal and found that success fees, as part of CFAs, were compatible with the Convention.

The MGN Limited decision resulted from an appeal from the House of Lords brought by MGN on the grounds that its rights under Article 10 were breached by the House of Lords ruling on the finding of breach of confidence and the requirement to pay Ms Campbell's costs including success fees. We will only consider the Court's ruling on costs in this article.

Criticism of CFAs

The Court began by setting out recent domestic UK criticisms of CFAs, which culminated in The Jackson Report, published in January 2010. Jackson LJ identified four flaws in the CFA regime:

  1. The system is unfocused and any party is eligible to enter into it. This leads to anomalies where defendants are exposed to an increased costs burden, even in circumstances where the claimant could afford to fund the claim itself.
  2. The system provides no encouragement for the party with a CFA to keep costs down.
  3. The high level of costs can be so excessive that they force parties to settle in a manner which is tantamount to blackmail.
  4. Claimant lawyers cherry pick cases and substantially increase their earnings, rather than use the success fees to fund less clear cut cases. This defeats the object of CFAs as a method of widening access to justice.

Jackson LJ further commented that the regime was particularly punitive in relation to defamation and related claims, where CFAs and ATE insurance were prevalent. He recommended that the system should return to the pre-1999 position where success fees and ATE premiums were not recoverable from the losing party. With respect to defamation and breach of privacy cases, He proposed that damages should be increased by 10% and qualified one-way costs shifting should be introduced, which would allow the Courts to order an unsuccessful claimant to pay a reasonable sum.

The Jackson Report preceded a number of further consultations on CFAs. A House of Commons Report in 2010 concluded that success fees should only be recoverable up to 10% of the base fee. A Ministry of Justice Consultation proposed that the maximum uplift should be reduced from 100% to 10% of the base costs in defamation and privacy cases. Legislation for amending the existing system was put before Parliament, but did not survive the change of Government in May 2010.

Further Consultation

The Ministry of Justice's Consultation Paper in November 2010, which came out prior to the MGN ruling, highlights the intention of Government to abolish the recoverability of success fees, although it proposes retaining them in certain cases, such as judicial review,  housing disrepair and complex personal injury or clinical negligence claims. Jackson LJ responded that  legal aid made sufficient provision for the first two actions and for the latter he proposed increasing damages, with success fees recoverable from those damages.

The Ruling

The Court considered the impact of success fees under four heads:

  1. Was there an interference? The Court concluded that the payment of success fees by an unsuccessful defendant constituted an interference with MGN's right to freedom of expression.
  2. Was the interference "prescribed by law"? The Court ruled that CFAs and success fees were prescribed by UK legislation and the Civil Procedure Rules.
  3. Did the interference have a "legitimate aim"? The Court conceded that CFAs and success fees had the legitimate aim of seeking to widen access to justice through private sector funding.
  4. Was the interference "necessary in a democratic society"? In assessing this head, the Court weighed up the Article 10 right to freedom of expression against the Article 6 right to access to Court. The Court concluded that the number of flaws identified were sufficient to show that the system failed to meet its stated aim of widening access to justice. Applying its reasoning to MGN, the Court found that Ms Campbell was independently wealthy and did not require a CFA; her lawyers had conceded that they did not carry out much CFA work, limiting access to justice; and the case was not unmeritorious, and had split the House of Lords. The Court considered that the proceedings were long and complex and that MGN had paid a reduced fee in respect of Ms Campbell's costs after negotiation. However, even these reduced fees reflected the high success fees of 95% and 100%. The Court found that the success fees were disproportionate.

The Court ruled that the success fees were a violation of Article 10 of the Convention.

Comment

The Court has taken a similar view to the Government by handing down a ruling that is likely to prevent the recovery of success fees, certainly in breach of privacy cases, but also in other actions. However, this is likely to be a stop-gap and legislation will need to be introduced to provide greater certainty. The broader implications of the system proposed by Jackson LJ to remedy the deficiencies in complex personal injury cases and defamation cases are not yet clear. Increased fees recovered from inflated damages is arguably a move towards contingency fees and it will be interesting to see whether this sets a trend for increased damages in a wider range of actions to allow for the limited recovery of success fees.