Lord Justice Jackson published a report in January 2010 setting out his recommendations for reducing the costs of litigation. The majority of his proposals are being implemented from 1 April 2013. The key changes are summarised below.
Conditional Fee Agreements (CFA)
A CFA allows a client to pay no fee, or a reduced fee, during the course of litigation. If the client loses, it will usually pay nothing further. For example, if a law firm's standard hourly rate is £200, it might agree to charge £100 an hour during the case and nothing more if the client loses. However, if the client wins, the law firm can charge an additional success fee of up to 100% of normal costs. A solicitor's hourly rate could, therefore, be charged at £400 in the above example. The success fee (in addition to the standard hourly rate) is currently recoverable from the losing party, as is any after the event insurance (ATE) premium which the client has paid to cover its potential liability for the other side's costs.
Under the reforms, it will no longer be possible to recover the success fee and insurance premium from the other side in respect of any CFAs or ATE policies entered into on or after 1 April 2013. The client will have to pay these instead. Plainly this makes CFAs less attractive. Jackson LJ's rationale for removing recoverability was that most personal injury litigation is currently funded by "no win no fee" CFAs. Since the winning party's solicitors will recover their costs and uplift from the other side, the client has no real interest in the size of those legal fees.
It has been confirmed that these reforms will not immediately apply to insolvency or defamation/privacy cases.
Damages Based Agreements (DBAs)
DBAs (a type of contingency fee) will be available from 1 April 2013. DBAs differ from CFAs in that solicitors will recover a percentage of the damages recovered by their clients rather than an uplift on hourly rates. A solicitor cannot recover more than 50% of the client's damages (25% for personal injury claims). Recovery of costs from the losing party is limited to the solicitor's normal costs - any excess due to the solicitor under the DBA must be deducted from the damages.
By way of example: A law firm and a client enter into a 50% DBA. At the end of proceedings the client is awarded £200,000 in compensation and £15,000 in costs from the defendant. The law firm can recover a maximum of 50% of the damages from the client (i.e. £100,000). The £15,000 legal costs are paid directly by the losing party to the law firm and therefore the client will only have to pay £85,000 out of the compensation, with the client receiving a total of £115,000 in compensation.
The regulation setting up DBAs is somewhat opaque and it is not clear, for example, whether "partial" DBAs are allowed (i.e. a reduced fee during the course of litigation coupled with a percentage of the damages if the client wins. Until the courts have clarified some of the inconsistencies in the regulation, DBAs will be unattractive.
Cost Management Orders
Cost management orders will also be introduced from 1 April 2013. Parties will be required to file detailed costs budgets prior to the first case management hearing. The court will then record the extent to which those budgets are agreed between the parties or, if not agreed, the court will consider, amend and approve them. When the court is assessing costs at the end of the litigation, it will not allow the parties to recover more than the budgeted costs, absent good reason. Essentially therefore the budget will act as a cap on recoverable costs.
Cost management orders will apply to all multi track cases issued on or after 1 April. However, they will not apply in the Commercial Court or to cases which exceed £2million in value in the Chancery Division, Technology & Construction Court and Mercantile Courts.
The key phrase for the overhaul of the costs management system is proportionality: cases should be dealt with justly and at proportionate cost. What is "proportionate" has not been specifically defined but a court is unlikely to consider that costs which substantially exceed the value of the claim can be proportionate.
Settlement Offers
At present, if a claimant is successful at trial, it will recover its reasonable costs. However, if the defendant had made a formal settlement offer under the Civil Procedure Rules (CPR) (a Part 36 offer) prior to trial which was not accepted by the claimant and the amount recovered by the claimant at trial is less than this Part 36 offer, the court can order the claimant to pay the defendant's costs from the date of the Part 36 offer, with the claimant also being liable for its own costs for the same period. Clearly this puts pressure on a claimant to settle.
A claimant can also offer to settle at a sum less than the amount it is seeking in its claim form. If that Part 36 offer is not accepted by the defendant and the claimant is successful at trial, the claimant will receive the judgment sum, enhanced interest, and costs on a more favourable basis than would normally be awarded.
The Jackson reforms impose an additional sanction in relation to a claimant's Part 36 offer to further encourage settlement - an increase in damages. For claims up to £500,000 the sanction will be calculated at 10%; for claims between £500,000 and £1,000,000 this will be calculated at 5%. This will be subject to a £75,000 cap. This could amount to a considerable sum and therefore a claimant would be advised to make a tactical Part 36 offer at an early stage. The defendants will under pressure to accept the offer because of the adverse costs consequences if it rejects it and fails to beat it at trial. Jackson LJ hopes that this will mean more cases settling earlier.
Disclosure
Disclosure is the process by which parties provide the other with copies of the documents they have in their control which are material to the issues of the claim: both supporting documents and those which adversely affect their case.
The reforms provide that parties will now be required to produce reports prior to disclosure, verified by statements of truth, summarising the documents which they have including the number of items; and where, and how, they are held. An estimate for the costs of the disclosure exercise also needs to be provided as well as confirmation of which type of disclosure will be sought (from the prescribed "menu" in the Civil Procedure Rules). These options include standard disclosure (as at present i.e. documents on which the party relies and those which adversely affect its case) but also options ranging from no disclosure at all, through to all documents that may trigger lines of inquiry and everything in between. The requirement to file such detailed information at the outset may increase rather than decrease costs.
Case management
The sanctions for failure to comply with court orders have been tightened up meaning parties will have fewer excuses for failing to comply with, for example, court deadlines. The limit for the small claims court has been raised from £5,000 to £10,000 – this court is meant to provide a swift, informal method of justice with no costs recoverability. The government has also expressed an intention to increase the financial threshold of the fast track – this track is subject to limited fixed costs and time scales – the aim is to reduce the time and cost of litigation.
Personal Injury
The reforms were originally aimed at personal injury claims although their effects are far more wide ranging. The end of CFA success fee recoverability will, however, have a considerable impact on personal injury claims. To compensate claimants for having to pay their lawyers' success fees out of their damages, general damages (e.g. for pain and suffering) have been increased by 10%. Further, "qualified one-way costs shifting" (QOCS) has been introduced meaning that claimants in personal injury claims will no longer have to pay defendants' costs if they lose, absent good reason, such as failure to beat a settlement offer or where claimants have behaved fraudulently.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
