Seismic shift

Lord Justice Jackson's proposed reform of civil litigation costs has a twofold objective: to increase access to justice by controlling the recoverable costs, and to find new ways to fund litigation. As the Ministry of Justice prepares a consultation on the recommendations, this article intends to deal with some of the key proposals.

First is the recommendation for a reversal of the right to recover success fees and ATE premiums from the paying party and a ten per cent increase in general damages in tort cases to offset this burden. The increase in damages is based on research, so, in theory, there should be no change in the overall financial burden on claimants or defendants. However, claimant lawyers say that CFAs would no longer be viable and defendant lawyers say that change would impose a greater overall financial burden on them.

It is likely there will be cases where the increase in general damages more or less matches the burden of success fee and premium and cases where it does not. Repeat litigators might be able to live with this, but the ordinary litigator will not usually have a basket of CFA cases over which they can spread the swings and roundabouts effect. Clients may well be reluctant to agree large success fees and many lawyers, equally, could be reluctant to push clients into agreeing large success fees. This could make things difficult; for instance, one would expect few clients to be willing to agree to a 100 per cent success fee or anything approaching this mark, but, a high success fee, often 100 per cent, is generally recognised as justified on assessment in most cases which go to trial.

The change will impose a cost on giving the client a reason to control costs, which would be a significant improvement. Unmeritorious high-risk cases should disappear, which might be welcome, but there will also be some risky but meritorious cases where access to justice will be denied.

The basic need to work will probably oblige lawyers to accept success fees at lower levels than they would like, and the need for legal representation will oblige clients to agree to success fees at higher levels than they would like. Unfortunately, success fees would then be set by market forces rather than by an objective assessment of the risks.

These recommendations will therefore have a profound effect on the CFA world. The 'litigate at no cost' culture is likely to disappear and clients will revert to selecting solicitors directly on the basis of reputation rather than through claims managers. A painful 'success fee war' may ensue, from which one would expect the survivors to be lawyers who have work from a spread of funding sources, who are proficient and have the judgment to assess risk fairly and accurately '“ as in those who were successful before April 2000.

The report goes on to propose allowing pure contingency fee arrangements. Unlike CFAs, this recommendation would allow lawyers to take an agreed percentage of the damages recovered. It is apparent that such arrangements are attractive to large commercial clients but the recommendation has potential consequences for all areas of work where large damages are claimed. Costs will be recovered from the other side on the conventional basis without reference to the contingency fee and the percentage will be payable irrespective of actual costs, so damages will be reduced by the difference between recoverable costs and the agreed percentage. This will give the client an incentive to control costs.

Lawyers will have to exercise judgment to ensure that the percentage translates into a sum that covers actual costs and rewards the risk taken. It is unlikely that these arrangements will give rise to speculative claims for damages because lawyers will incur costs themselves but will only be rewarded if successful.

Investigating privately run contingent legal aid funds (CLAFs) as a means of funding is also on the agenda. A CLAF funded claimant's lawyers will be paid by the fund and the costs will be recycled by means of a levy of some sort in successful cases, such as a percentage of damages paid back into the fund.

It is understood that there is some interest in funding but mainly in areas where the costs are relatively predictable and success rates are high, including road traffic accident claims. It is unlikely that a CLAF could succeed if success fees and ATE premiums remain recoverable from the paying party, as lower risk cases will be CFA funded and few clients would opt for a CLAF with its deduction from damages. It would require considerable work to develop the CLAF idea, to get the start-up capital and then to extend the concept to non-RTA work, but the concept must be worth pursuing if the CFA recommendations are implemented.

A successful CLAF scheme run and regulated with the benefit of hindsight gained from legal aid experience could transform the litigation landscape; for example, CLAF lawyers must be experienced in the area of work, merits vetted by independent lawyers, cost management budgets set in advance, liability for adverse costs laid off with insurers, etc. A deduction from damages gives the client reason to control costs, a feature absent from current CFA and legal aid schemes.

The report also contains a range of procedural changes to keep costs down. The idea here is to alter the general approach to litigation that currently prevails. In complex cases, for example, the courts would direct what issues should be covered by the factual evidence and what documents should be disclosed '“ expert evidence would be ordered only if the court is satisfied that a specific issue requiring expert evidence has been identified and defined.

In relation to boundary disputes, Jackson LJ recommends judicial encouragement of mediation at an early stage and commends the practice in the West Midlands of requiring attendance of the parties and lawyers in person at the allocation hearing with realistic estimates of past and future costs.

In chancery work, he recommends that the amount of costs deductible from a trust fund or estate should be set at a proportionate level by reference to the value of the fund and complexity of the issues at an early stage of the proceedings with the court deciding whether the balance of the costs should be paid by the party who incurred them or some other party.

Courting costs

Jackson LJ suggests various ideas for using the courts to reform costs management. One recommendation is that judges be given costs schedules by all parties showing the cost consequences of different orders and directions so that the court can make a costs-aware decision. Another recommendation is that judges should set budgets for steps in the action or the case overall at an early stage, such as a budget of £x will be set for disclosure, £y for witness statements and so on. In this way, the court will control the costs before the work is done and probably avoid the need for a detailed assessment after the event. This will require lawyers to give thought to costs at an early stage and at every stage thereafter to an extent that does not generally happen at present.

A significant change to fast-track litigation is the recommendation for an extension of the fixed costs regime to all pre-trial work done in all fast-track cases. Currently, only advocacy costs are fixed. The proposed rate is £12,000 for all preparation work in non-personal injury cases with an advocacy fee of £1,650 on top. There will be a summary assessment and the allowance will be a reasonable amount for work reasonably done not exceeding the maximum rate. This will not prevent lawyers charging their clients more than the fixed overall amounts but it is possible that clients will become less inclined to agree to pay rates in excess of the maximum recovery as general awareness grows of the fixed rates and downward pressure on costs.

The recommendations will require all practitioners, including the Bar and the bench, to acquire costs expertise. Costs management during a case will requirelitigators to temper their advice to meet the cost restrictions imposed by budgets and other cost management. The bench will need costs expertise to case manage and cost manage cases.

Judges and practitioners will have to prepare fully for CMCs to be able to make decisions about cost management, what issues are covered in witness statements, the extent of disclosure and expert evidence, for example.

Where a defendant does not beat a claimant's part 36 offer, the claimant's general damages should be increased by ten per cent, or, in non-money claims, ten per cent of the value of the non-monetary relief as assessed by the court summarily. A defendant's decision on a claimant's part 36 offer will have potential consequences in damages which as well as the usual costs consequences, making the judgment even more onerous.

Jackson LJ recommends a new proportionality test to be imposed at the end of an assessment after reasonable costs have been determined. In practical terms, the test would mean that once reasonable costs have been assessed there will be another test to decide 'what the case will stand' '“ while the time spent might be reasonable and necessary, factors such as the value or importance of the right or remedy in issue might mean that the case cannot stand a high charge-out rate for that time. Lawyers will have to reduce charge-out rates in such cases.

While the recommendations are not directly aimed at the amount of costs payable by one's own client, it is possible that a side effect over time will be to control such costs. Cost management is directed at recoverable costs but a lawyer who estimates a figure of £x to the court for certain work will have a lot of explaining to do if later a substantially higher figure is claimed from the client. Further, a climate in which recoverable costs are actively controlled is likely to cause clients to question lawyers about the unrecovered amount of costs. In this way, the recommendations could have the effect of driving down own costs to the level of recoverable costs.

If the indemnity principle is repealed as Jackson LJ recommends, there are likely to be more and more retainers where the costs payable by the client (solicitors and the Bar) are limited to the costs recovered, particularly in competitive areas of work.

The recommendations will give clients greater certainty about adverse costs liability and, in time, will control own costs. Ideas such as budgeting, or 'costs management', will limit the tactics of deep-pocket litigators and should reduce, if not avoid, the need for detailed assessments. A new litigation landscape for solicitors, Bar and bench beckons '“ a seismic shift certainly, but one which should protect future work.