The Supreme Court has found that success fees and ATE premiums agreed prior to 1 April 2013 may be incompatible with the ECHR

On 1 April 2013, the Jackson reforms introduced significant changes to the way in which litigation is funded and abolished the recoverability of certain costs from losing parties. In a recent Supreme Court decision, the legality of recovering those costs based on agreements pre-dating April 2013 has now been brought seriously into question. This could, in due course, result in large windfalls for defendants and their insurers, plus trigger a huge raft of compensation claims against the UK Government.

Conditional Fee Agreements (CFAs) in conjunction with After the Event (ATE) insurance became the dominant method for claimants to bring claims after 1999. The then regime allowed claimants to bring claims at minimal personal risk. Losing defendants were required to pay not only damages and claimant’s ‘base costs’, but the ATE premium and a success fee (of up to 100% of base costs). In practice this frequently resulted in the defendant paying as much as three times more in claimant costs than previously. As a result of the Jackson reforms, for CFAs entered into on or after 1 April 2013, success fees and ATE premiums are no longer recoverable from the losing party but payable out of any monies received by the claimant.

In Coventry and others v Lawrence and another (No. 2)1, the Supreme Court has provisionally indicated that, in relation to pre-1 April 2013 agreements, recoverability of success fees and ATE premiums (in addition to damages and base costs) may breach a paying party’s right to a fair trial under Article 6 of the European Convention on Human Rights.

Background facts

The appellants (claimants) own a modest bungalow close to a motor-sports stadium and track occupied by the respondents (defendants). The judge at first instance upheld the appellants’ claim that noise coming from the stadium and track amounted to a nuisance. The judge’s finding, however, was reversed on appeal to the Court of Appeal. The appellants’ appealed against that decision and were successful in the Supreme Court.

The appellants’ costs at first instance consisted of base costs, a success fee and an ATE insurance premium. The respondents were ordered to pay 60% of all three elements.

The appellants’ base costs amounted to £398,000, the success fee amounted to £319,000 and the ATE premium was £350,000. Accordingly, the appellants’ total costs were £1,067,000 and the respondents were liable for around £640,000 or 60%.

The respondents argued that the requirement to pay “additional liabilities”, ie the success fee and ATE premium, under the Courts and Legal Services Act 1990, as amended by Part II of the Access to Justice Act 1999, amounted to a breach of their:

  • right to a fair trial under Article 6 of the European Convention on Human Rights; and/or
  • right to protection of property under Article 1 of the Protocol to the European Convention on Human Rights.

The preliminary ruling

The main speech was given by the President of the Supreme Court, Lord Neuberger. He found the level of the appellants’ costs to be “very disturbing” and that the figures gave “rise to grave concern”. The Court unanimously decided that the respondents’ liability for the costs may be inconsistent with their rights under Article 6 and/or Protocol 1 Article 1. It concluded, however, that the consequences might be so serious that it would be wrong for the Court to decide this point immediately, without giving the Government the opportunity to make representations.

The Court said that if the costs order had infringed the respondents’ rights to a fair trial, the proper outcome might well be to grant a declaration of incompatibility, declaring the Access to Justice Act 1999 (repealed in 2013) to have been incompatible with the UK’s obligations under the Human Rights Act 1998. The Supreme Court directed that, if the respondents wished to pursue the matter, the appeal will have to be re-listed for a further hearing once appropriate notice had been given to the Attorney General and the Secretary of State for Justice. We understand that due notice is in the course of being given and it is likely therefore that the case will be re-listed towards the end of this year or in early 2015.

Comment

A declaration of incompatibility and/or one of the several other outcomes described at paragraphs 44 and 45 of the judgment which either denies or reduces the recoverability of additional liabilities is likely to have a significant impact on many ongoing cases. Active cases in which CFAs were entered into, and ATE policies taken out, prior to 1 April 2013 could be worth significantly less. Indeed, they may already be worth less in risk terms, pending final determination of the Coventry case. Lord Neuberger recognised that a determination by a UK Court that the provisions of the Access to Justice Act infringed Article 6 could also have “very serious consequences for the government”, as litigants “could well have a claim for compensation against the government”. The level of potential compensation payments would certainly be in the range of billions of pounds. In light of this, the Government is likely to make strenuous efforts to try to persuade the Supreme Court why it should divert from its current course.

In the short term, where cases include pre-1 April 2013 CFAs and ATE insurance policies, paying parties (or parties which are at risk of a costs liability) should consider:

  • carefully monitoring the return of the Coventry case to the Supreme Court
  • where claims have settled and/or judgment has been obtained, but the costs element has not yet been resolved, making lower offers to reflect the uncertainty of the recoverability of success fees and ATE premiums
  • agreeing stays of any costs orders which include liability for success fees and/or ATE premiums and/or detailed assessment proceedings, pending the outcome of the Coventry case
  • making positive adjustments to reserves where claims can be settled for significantly lower amounts
  • whether once a final judgment is issued in due course, a more extensive review of reserves is appropriate. At that stage the potential for pursuing wider compensation claims should have been clarified.