The dust has settled after the publication of Lord Justice Jackson’s final report in his year-long Civil Litigation Costs Review. We focus here on six key issues considered by Jackson LJ which are of most relevance to accountants.

Part 36

Jackson LJ made two significant recommendations for reform of Part 36:

  • That the Court of Appeal decision in Carver v BAA1 (on the interpretation of “advantageous” in CPR 36.14(1)) be reversed
  • That where a defendant fails to beat a claimant’s Part 36 offer, the claimant’s recovery be enhanced by 10%

By way of reminder, the Carver decision considered the effect of the new Part 36 rules introduced in April 2007. Those rules provide that costs consequences follow when “a claimant fails to obtain a judgment more advantageous than a defendant’s Part 36 offer”. In Carver the Court of Appeal decided that money was not the only factor the court should take into account when deciding whether a judgment is “more advantageous”. Litigation is time-consuming and emotionally and financially costly. The court in Carver said that all these (not necessarily quantifiable) factors have to be taken into account. The decision has attracted much criticism for introducing uncertainty into the Part 36 process. Jackson LJ said that it put “unreasonable pressure on claimants to accept offers which are not quite high enough”.

Defendants, of course, may have found the Carver decision helpful for precisely that reason. Jackson LJ recommends that Carver is reversed either judicially (if the opportunity arises) or by rule change. The latter could happen relatively quickly – we understand that changes to be implemented by means of a rule change are likely to be introduced in the October 2010 rules update. In the meantime, this leaves defendants in an even more uncertain position as to the basis upon which the court will assess any Part 36 offers which are currently “live”, and any Part 36 offers which may be made post- Jackson, but before Carver is reversed. Defendants must assume that by the time their Part 36 offer comes to be assessed, the court may be required to consider whether or not the claimant has beaten the offer on a purely monetary basis.

Defendants also need to factor in Jackson LJ’s second proposal: that a claimant who makes a Part 36 offer which is unbeaten should be given a 10% uplift on damages recovered. The aim of this rule change is to provide a greater incentive for claimants to make reasonable offers, and for defendants to accept them. It is also seen as a way of compensating claimants in successful CFA funded cases who would now (under Jackson LJ’s other proposals) no longer recover CFA success fees from defendants.

Jackson LJ indicates that legislation will be required to implement this change. He also suggests that there should be further consultation, if this proposal is accepted in principle, on the question of whether it would be appropriate to scale down the uplift for higher value cases (say those above £500k). Defendants will see this proposal as harsh, particularly those involved in high-value commercial litigation where even a scaled down uplift could be significant.

Experts

Firms which provide forensic accounting services will be interested in the proposed reforms affecting experts. The report identifies expert evidence as one of several parts of the litigation process which sometimes increase costs unnecessarily. Jackson LJ made a number of proposals to contain the costs of expert evidence:  

  • Increased and better use of the court’s existing case management powers. In heavier cases, it may even be appropriate to hold a separate case management conference (CMC) for determining the scope of expert evidence
  • Judges should make greater use of their existing powers2 to restrict recoverable costs in relation to expert evidence
  • CPR Part 35 should be amended to require a party seeking permission to adduce expert evidence to provide an estimate of the costs of that evidence to the court
  • Greater use of costs sanctions, where the expert evidence is unnecessarily prolix or irrelevant, leading to wasted costs.

More radical is Jackson LJ’s suggested pilot of the Australian practice of “hot tubbing” (or concurrent evidence). The Preliminary Report explains how the practice operates: experts in the same discipline are sworn in at the same time and the judge chairs a discussion between them. Counsel join in the discussion and are able to put questions to the experts, as and when the judge permits. The experts can also put questions to each other. Feedback from the Australian legal profession is that the procedure is effective and saves both time and costs. Jackson LJ recommends that this practice be piloted, but only in cases where the parties, the experts, the lawyers and the judge all consent to the procedure. Professional experts need to be prepared now to embrace this option in appropriate cases.

Third Party Funding

Following the recent third party funding arrangement in the Stone & Rolls litigation3, Jackson LJ’s proposals for third party funding are of particular interest.

In his Preliminary Report, Jackson LJ touted the possibility of a statutory code to govern third party funders. However, in the intervening period between his Preliminary and Final Report, the Civil Justice Council (with the assistance of the Third Party Litigation Funders Association) published a draft voluntary code (“the draft code”) for third party funders.

It is anticipated that the draft code will become final in March 2010, and it is likely to adopt Jackson LJ’s suggested amendments which include:

  • Withdrawal of the funder: the draft code currently provides that a funder can terminate a funding agreement by giving 21 days notice, subject to paying all accrued liabilities, where it is no longer satisfied of the merits of the claim and/or proceedings are no longer viable.

Jackson LJ considers the provision unsatisfactory and recommends that a funder should be obliged to continue funding whatever it originally contracted to provide unless “there are proper grounds to withdraw”, but he does not explain what he considers to be proper grounds for withdrawal. We will have to await the publication of the final version of the code for clarification.

  • Capital adequacy: with the economic climate seemingly at the forefront of his mind, Jackson LJ recommends revising the capital adequacy sections of the draft code, which currently provide that a funder should have “adequate resources of cash or cash equivalent to meet its liabilities for at least the next three months”. Jackson LJ comments that this does not adequately protect a potential client, given that litigation can go on for years.

Intriguingly, Jackson LJ also suggests that third party funders, in particular their capital adequacy requirements, could be regulated by the FSA. He did not consider that this was required in the short term but should be revisited in the future. Advising third party funders on capital adequacy requirements may well be required in the future.

Jackson LJ also makes two further recommendations of interest to third party funding arrangements:

  • Reversal of the rule in Arkin v Borchard Lines Ltd4. The rule in Arkin provides that a third party funder is only responsible for an adverse cost order to the extent of the funding provided. Jackson LJ recommends that the extent of a third party funder’s liability should instead be left to a judge’s discretion.  
  • Maintain the rule on maintenance and champerty. However, provided that a third party funder complies with the system of regulation (likely to be the finalised draft code mentioned above) their funding arrangement should not be overturned on these grounds.

Contingency Fee Agreements

Currently solicitors are prohibited from entering contingency fee arrangements for contentious business. Jackson LJ recommends that this rule be abolished.

However, a number of safeguards to be introduced in secondary legislation are recommended to protect litigants considering a contingency fee agreement, including: (i) a requirement that a client obtain independent legal advice; (ii) that clear and transparent advice on costs and other expenses is given to clients; (iii) setting a maximum percentage from which costs would be recoverable from damages, anything above the prescribed amount would be met by the successful litigant; and (iv) a requirement to agree at the outset who of the solicitor or client will bear any adverse costs orders.

It is likely that, at least initially, contingency fee agreements will be seen in group litigation. A potentially ripe area would be the various tax group litigation orders such as the VAT Interest Cars Group Litigation and the Thin Cap Group Litigation.

Fixed costs

Jackson LJ recommends fixed costs for fast track cases of £12k to trial (£13.5k in London). Outside of the fast track, Jackson LJ recommends the introduction of “benchmark” costs in insolvency proceedings. A system of “benchmark” costs is already in operation for HMRC’s costs in “routine” insolvency proceedings, which Jackson LJ recommends expanding.

In more complex insolvency proceedings, Jackson LJ noted that concerns had been raised about the level of remuneration charged by office-holders for their work in connection with insolvency litigation. Jackson LJ recommends the development of cost management procedures to control such costs, including the use of cost budgets in complex insolvency proceedings, whereby a party will need to explain as the proceedings progress why an estimate has been exceeded.

Cost Management

Generally, Jackson LJ recommends that the judiciary should make better use of their existing case management powers to control costs. He also recommends some specific changes to assist cost management:

  • The introduction of a definition of “proportionality” within the CPR – the CPR require that costs are proportionate, but do not define what this means. Jackson LJ suggests that the definition of proportionality should relate to “sums in issue, the value of non-monetary relief, complexity of the litigation, conduct and any wider factors such as reputation or public importance”. Further, when assessing costs on a standard basis the court should first determine whether the costs are reasonable and then, on a global basis, decide whether costs are proportionate, with an immediate reduction if costs are deemed disproportionate.
  • Reverse the effect of existing case law5 which links proportionality to necessity. Removing the link between necessary costs and proportionate costs, will make management of low value, complex cases difficult. Costs can easily escalate in establishing necessary facts, which, if Jackson LJ’s recommendation is implemented, may no longer be considered proportionate and will therefore be irrecoverable.

Jackson LJ’s Final Report is lengthy and comprehensive. Its potential to have a lasting and wholesale impact on the litigation costs landscape cannot be underestimated. Although some of the recommendations require primary legislation (which may be lost in an election year), many recommendations are achievable through rule changes which we may see as soon as October 2010. It appears that the judiciary in particular see Jackson LJ’s recommendations as a “done deal”. As Lord Neuberger, Master of the Rolls, said at the press conference to launch the Final Report “I suggest that the time for discussion and for debate is over. It is now time for action”. Mere words? We shall see…..

If you would like to see our more general summary of Jackson LJ’s recommendations “Nothing is Sacred” – click here: http://www.rpc.co.uk/FileServer.aspx?oID=805&lID=0