The European Court of Human Rights ("ECHR") has ruled that the "uplift" element of the UK's no-win no-fee costs system violated a newspaper's right to freedom of expression under the European Convention for the protection of human rights. Already, the decision is being viewed as having potentially wider implications."
In 1998, having greatly reduced the availability of legal aid for civil cases, Parliament legislated to allow "conditional fee agreements" ("CFAs") for nearly all civil litigation. CFAs enable a lawyer to take on a case on the basis that, if its client loses, the client will pay nothing, but if the client wins, the lawyer is entitled to a pre-arranged percentage uplift on its base costs (a "success fee") of up to 100%. The idea behind this additional means of funding litigation was that lawyers would be able to fund less meritorious claims from the success fees obtained in cases they won.
Under the UK's current "loser pays the winner's costs" rule, not only the base costs but also the success fee is payable by the losing party. As a result, a party who loses against a party litigating under a CFA can end up paying not only its own costs but also the other side's costs (which are increased and often doubled by the success fee element, albeit always subject to review by the court).
Gradually it became clear, not least because lawyers were routinely charging 100% success fees, even for cases very likely to succeed, that the pendulum had swung too far in favour of CFA-funded litigants. The issue was particularly acute in defamation and privacy cases, with the media complaining that the very threat of facing such a massive bill often deterred them from fighting otherwise winnable cases and thus muzzled their ability to exercise their freedom of speech.
Over the years, there have been a number of consultations by the Ministry of Justice and House of Commons committees on the fairness for defendants of the success fee recoverability regime, in relation to libel cases and civil cases generally. Things finally came to a head when Lord Justice Jackson was asked to consider the issue in the course of his review of civil costs. In his final report of January 2010 he described the current system as "the most bizarre and expensive system that it is possible to devise". He identified many flaws in the system, for example: (i) the fact that anyone, rich or poor, can benefit from CFAs - there are no qualifying requirements (ii) the lack of incentive for a claimant to control fees as it would not incur any if it lost (iii) the "blackmail" effect of recoverable success fees which often forces parties to settle cases early through fear of their potential liability in costs, and (iv) the fact that lawyers could cherry pick winning cases, going against the principle that the system is designed to allow lawyers to benefit from success fees gained in successful cases to fund less meritorious cases.
Jackson LJ therefore proposed that success fees should no longer be recoverable from a losing party.
In the meantime, the "Naomi Campbell" case has been wending its way through the courts since 2001 - a case which throws into stark relief the perceived defects of the CFA regime. The model sued MGN Ltd, owners of the Daily Mirror, after it published a story and photos of her outside a drug rehabilitation clinic. The judge awarded Ms Campbell just £3,500 in damages for breach of confidence, together with her legal costs. MGN appealed and the Court of Appeal overturned the judgment. However, the House of Lords restored the High Court award.
By this time, MGN was facing a bill of well over £1 million, because Ms Campbell, despite being very wealthy, had instructed her lawyers for the House of Lords case under a CFA, which gave her solicitor and counsel success fees of 95% and 100% respectively. MGN brought a case against the UK in the ECHR, arguing that (a) the finding of the House of Lords that MGN had acted in breach of confidence and (b) the UK's rules on recoverable success fees both violated its right to "freedom of expression" in Article 10 of the European Convention on the protection of Human Rights.
Article 10 provides that, in order for the state to interfere with the right to freedom of expression, the interference must (1) be prescribed by law, (2) pursue a legitimate aim and (3) be necessary in a democratic society.
On 18 January 2011, the ECHR gave its ruling. The Court ruled against MGN on the issue of breach of confidence. However, in terms of the success fee issue, the Court ruled that the requirement to pay such success fees, as an unsuccessful defendant in breach of confidence proceedings, constituted an interference with the applicant's right to freedom of expression guaranteed by Article 10.
The ECHR went on, therefore, to decide whether such interference met the conditions in Article 10. There was no doubt that the interference was "prescribed by law" and was motivated by Parliament's "legitimate aim" of providing the greatest possible range of funding civil litigation. However, the Court went on, was this interference "necessary in a democratic society"?
The Court reiterated that EU countries have a considerable "margin of appreciation" when legislating to implement social and economic policies. The Court will respect the legislature's judgment as to what is "in the public interest" unless that judgment is manifestly without reasonable foundation. However, if such general measures produce an individual and excessive burden, the requisite balance will not be found. "Put otherwise", said the Court, "the Court may not regard as disproportionate every imbalance between the public interest and its effects on a particular individual but will do so in exceptional circumstances, when a certain 'threshold of hardship' on the individual has been crossed".
The Court concluded that, as shown by Jackson LJ, the UK's CFA system has a number of flaws. The "depth and nature of these flaws" led the court to conclude that the "impugned scheme exceeded even the broad margin of appreciation to be accorded to the State in respect of general measures pursuing social and economic interests". The UK had therefore breached Article 10 as regards the regime of law that rendered success fees payable by MGN, and any other litigant in a similar position.
The Government now has three months in which to try to agree with MGN the level of compensation it will pay for the Article 10 infringement. It is not clear whether the success fee process will be the subject of interim legislation, judicial practice direction or will be swept away in substantive legislation to implement all or any of Jackson LJ's other recommendations.
At the moment, the ECHR's ruling only bears on the recoverability of success fees in libel and other "publication proceedings". However, given that the Government has recently confirmed that it intends to adopt Jackson LJ's proposal to abolish the recoverability of success fees generally, it would seem that a final European nail has been driven into the coffin in terms of the recoverability of success fees.