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Briefing for Council of Europe Meeting in Strasburg – 20-21 June 2013 on the Jackson Reforms – Civil Litigation Funding and Costs

Introduction

1. In recent years, the civil justice system had got out of balance – creating perceptions of a compensation culture - fuelled to a significant extent by the way that ‘no win no fee’ conditional fee agreements (CFAs) worked. Whilst CFAs played a role in extending access to justice, they also enabled claims to be pursued with no real financial risk to claimants and the threat of excessive costs to defendants.

2. The Government therefore reformed civil litigation funding and costs in England and Wales to restore a much needed sense of proportion and fairness to the CFA regime and by returning fair balance to the system. These reforms are in part as a result of changes in legislation (Part 2 of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 - 'the Act') which came into effect on 1 April 2013.  

3. The reforms followed a review of the civil litigation costs by a judge of the Court of Appeal, Lord Justice Jackson, who reported in January 2010. Lord Justice Jackson made recommendations about how costs in civil cases could be controlled in the light of concern that costs had become too high. The intention was that the reforms would make costs more proportionate, and discourage unnecessary or unmeritorious cases. In particular, those using ‘no win no fee’ CFAs would have an interest in controlling the costs that are incurred on their behalf.

4. The Government believes that access to justice for all parties depends on costs being proportionate and unnecessary cases being deterred. The reforms apply across civil litigation, but will have a particular impact in personal injury cases, where no win no fee CFAs are used significantly. 

Summary of key changes in Part 2 of the Act

5. Part 2 of the Act fundamentally reforms the way in which no win no fee CFAs work. CFAs remain available in civil cases, but the additional costs involved (success fee and insurance premiums) are no longer payable by the losing party (subject to the exceptions at paragraph 12 below).

6. The Act introduces damages-based agreements (DBAs) to all areas of civil litigation, which provides another form of funding cases.

7. Referral fees are banned in personal injury cases, which will help to tackle the perception of a compensation culture, as lawyers and claims management companies will no longer be able to pay for the details of potential claimants.

8. Claimant damages are protected: the fee that a successful claimant has to pay the lawyer – the lawyer’s ‘success fee’ in CFAs or ‘payment’ in DBAs – is capped at 25% of the damages recovered, excluding damages for future case and loss.

9. General damages for non-pecuniary loss such as pain, suffering and loss of amenity are increased by 10%.

10. A new regime of ‘qualified one way costs shifting’ (QOCS) is introduced in personal injury cases which caps the amount that claimants may have to pay to defendants. Claimants who lose, but whose claims are conducted in accordance with the rules, are protected from having to pay the defendants costs.

11. An additional sanction on defendants is introduced to encourage earlier settlement of claims.

Exceptions to the CFA and ATE reforms
12. The reforms apply to all civil cases from 1 April 2013. However, the reforms to CFAs and ATE insurance are delayed for the following proceedings, where the pre-April 2013 arrangements (recoverable success fee and recoverable insurance premium) continue:

“No win no fee” conditional fee agreements (CFAs)

13. CFAs are a means of funding litigation, usually entered into by claimants, where the lawyer agrees not to take a fee if the claim fails. If the claim is successful, the lawyer will charge an uplift (known as a success fee) in addition to his base costs. The maximum success fee that can be charged is 100% of base costs. CFAs have been particularly used in damages cases, such as for personal injury.

14. Before 1 April 2013, the success fee was recovered from (ie paid by) the losing side). Although it was capped at a maximum of 100% of base costs, the cap was fixed at a lower level in certain types of personal injury cases that settled before going to trial. The losing party paid the success fee, in addition to the ordinary legal costs of the winning party. This added substantially to costs for losing defendants.

15. From 1 April 2013 (section 44 of the Act) – the success fee is no longer paid by the losing side; if one is charged it will be paid by the winning party, typically out of the damages recovered. The success fee can be up to 100% of the basic fee – this has not changed from when CFAs were first introduced in the 1990s. However, in personal injury cases, the success fee that the lawyer may charge must not exceed 25% of the damages, excluding damages for future care and loss. This is designed to protect claimants’ damages in personal injury cases, and will ensure that any damages for future care and loss are protected in their entirety.

After the event (ATE) insurance

16. ATE insurance protects the claimant from having to pay certain legal costs. It is a type of insurance taken out after the actionable event has occurred. ATE insurers undertake to pay the defendant’s costs in the event that the claimant loses the case. The insurance may also cover the claimant’s disbursement costs and other expenses. The premium is typically never paid by claimants, but is recovered from defendants in cases which defendants lose.

17. Before 1 April 2013, the ATE insurance premium was payable by the losing defendant. The premium is not usually charged when a claimant loses the case, which means that premiums are higher because an element of self-insurance is built into the premium price – premiums charged on successful cases must be high enough to cover the costs that are paid in unsuccessful cases where a premium is not charged.

18. From 1 April 2013, (section 46 of the Act) – with the exception of clinical negligence expert reports, ATE insurance premiums are not recoverable if the insurance is taken out after 1 April 2013. ATE insurance remains available, and can be taken out by any litigant, and at that litigant’s expense. However, QOCS has been introduced for all personal injury claims as an alternative to ATE insurance.

19. Membership organisations, such as trade unions, which were able to recover their own self-insurance costs are no longer able to do so (section 47 of the Act).

20. In clinical negligence cases only, expert reports may be obtained through ATE insurance, the premiums for which remain payable by the defendant. This means that claimants do not have to pay upfront for the costs of reports relating to causation and liability. Such reports are important to establish whether there is a case for bringing proceedings, but they can be expensive.

Damages-based Agreements (DBAs)

21. Under a DBA, lawyers are not paid if they lose a case but may take a percentage of the damages recovered for their client as their fee if the case is successful.

22. Before 1 April 2013, DBAs could not be used in civil litigation. However, they could be used in other areas, for example in tribunals such as the employment tribunal. The Damages-Based Agreements Regulations 2010 regulated the use of DBAs in employment tribunals until 1 April 2013, which have been superseded by the Damages-Based Agreements Regulations 2013.

23. From 1 April 2013, (section 45 of the Act) – DBAs can be used in civil litigation and new regulations have come into effect incorporating the earlier provisions in respect of employment tribunals. There are different requirements in the regulations as between civil litigation and employment tribunal cases, as civil litigation can only be conducted by authorised lawyers, who act under professional rules of conduct. Employment tribunal matters can be conducted by others, including claims managers, who do not have professional rules of conduct; additional safeguards are therefore provided for these proceedings in the regulations.

24. The maximum payment that the lawyer can recover from the claimant's damages is capped – at 25% of damages (excluding damages for future care and loss) in personal injury cases (as with CFAs); at 35% of damages in employment tribunal cases (which has existed since 2010); and at 50% of damages in all other cases.

25. Successful claimants using DBAs will recover their costs (the lawyer's hourly rate fee and disbursements) from defendants in the usual way, but the claimant will be responsible for paying from their damages any shortfall between the solicitors’ costs paid by the losing defendant and the agreed DBA fee and will also be required to pay any shortfall in respect of disbursements. Lawyers acting under a DBA will be required to comply with the indemnity principle, which means that their fee would be restricted to what is due under the DBA fee: if the DBA fee is less than the solicitors’ costs would be in the absence of a DBA, a losing defendant would only be liable to pay the DBA fee.

25% cap on damages that may be taken as a lawyer’s success fee under a CFA or payment under a DBA in personal injury cases.

26. From 1 April 2013, the success fee in personal injury cases is subject to a cap of 25% of damages (subject to this amount not exceeding the maximum of 100% of base costs), excluding damages for future care and loss. This is a cap; lawyers do not have to charge a success fee, but if they do it can not be more than 25% of such damages in personal injury cases (including solicitors' success fee, any barristers' success fee and VAT).

27. The cap applies to net damages after Department of Work and Pensions (DWP) benefit recovery through the Compensation Recovery Unit (the DWP seek to recover benefits paid out where a claimant subsequently recovers damages including for loss of income).

28. The cap does not apply to appeal proceedings, where the amount of success fee will be negotiated between the lawyer and client.

29. A similar cap applies on the payment under DBAs in personal injury cases.

Referral fees

30. Referral fees are fees paid by lawyers to third parties who ‘refer’ business to them. In the past, many personal injury claims were referred to solicitors by claims management companies who advertise for claimants to come forward. However, others such as insurers or repair garages may also be involved. Referral fees had been allowed to solicitors since 2004 when the professional rules changed and the then ban was lifted by the Law Society.

31. Before 1 April 2013, referral fees may be paid by solicitors and others who may have interest in a case, to parties who hold details of possible claims (subject to data protection laws). There were no legislative controls on referral fees, which were estimated to be around 600-800 per case.

32. From 1 April 2013, sections 56 to 60 of the Act ban the payment and receipt of referral fees in personal injury cases. The relevant regulators (the Solicitors Regulation Authority, the Bar Standards Board, the Claims Management Regulator and the Financial Conduct Authority) will effectively enforce the ban.

Increased sanctions under Part 36 of the Civil Procedure Rules

33. Part 36 of the Civil Procedure Rules (offers to settle) sets out a process of sanctions and rewards for the making and acceptance of offers; this process is used particularly in personal injury damages cases. The sanctions under Part 36 have been reformed in order to encourage early settlement. This will encourage claimants to make, and defendants to accept, reasonable early offers. This will also help to reduce the time taken for cases to settle and consequently help to lower overall costs.

34. From 1 April 2013 (section 55 of the Act) – an additional amount is to be paid by a defendant who does not accept a claimant’s offer to settle where the court gives judgment for the claimant that is at least as advantageous as an offer the claimant made to settle the claim.

35. This additional amount is calculated as 10% of damages where damages are in issue, and 10% of costs for non-damages claims. In mixed (damages and non-damages) claims, the additional amount is calculated as 10% of the damages element of the claim. The additional amount is subject to a tapering system for claims over 500,000 so that the maximum sanction is around 75,000.

Increase in general damages

36. From 1 April 2013, a 10% increase in non-pecuniary general damages such as for pain, suffering and loss of amenity is applied to all tort cases, however funded. The details are set out in the Court of Appeal judgment in the case of Simmons v. Castle [2012] EWCA Civ 1288. The increase is applied to cases which settle or where judgment is given after 1 April 2013, unless there is a funding agreement such as a CFA, which pre-dates 1 April 2013.

Qualified one way costs shifting (QOCS)

37. From 1 April 2013, a new costs protection regime has come into effect for personal injury claims (including clinical negligence). This provides protection limiting the costs that a claimant might have to pay to the other side. The regime is called QOCS (qualified one way costs shifting) and affects the costs that a claimant might have to pay to the defendant. A losing defendant will remain liable for the claimant’s costs in the usual way.

38. The provisions are set out under rules 44.13 to 44.17 of the Civil Procedure Rules.