ENGLAND AND WALES. Graham Huntley Hogan Lovells International LLP, London WHERE ARE WE WITH JACKSON S PROPOSALS ON COSTS?

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1 CS44 [2011] 4 Env. Liability : Current Survey : England & Wales : Huntley ENGLAND AND WALES Graham Huntley Hogan Lovells International LLP, London WHERE ARE WE WITH JACKSON S PROPOSALS ON COSTS? In November 2008, Lord Justice Jackson was asked by the Master of the Rolls to consult on why civil litigation in the UK is sometimes so disproportionately expensive to the remedy being sought. He was also asked to offer suggestions to resolve the problem which were consistent, as far as possible, with increasing access to justice. Following consultation with court users, lawyers, judges and other stakeholders in the UK and overseas, Jackson LJ published his preliminary report in May 2009, identifying various factors which contributed to the high costs of civil litigation and making some provisional suggestions to improve the situation. Further consultation ensued, and in December 2009 the final report was produced. In this Jackson LJ made recommendations for reform, specifying which reforms required primary or secondary legislation and which could be implemented through improved case management by judges. He stressed that these proposals were inter-related: for them to work, he warned, they must be implemented in full, with no cherry picking by the Government of those that suited its own interests. Lord Justice Jackson subsequently accepted the Ministry of Justice s (MoJ) invitation to oversee implementation of his reforms, and said that he hoped the changes would be implemented by October In November 2010 the MoJ launched a consultation paper, seeking views on the implementation of what it saw as the priority proposals in Jackson LJ s final report. In March 2011, the Government published its response to the consultation on Jackson LJ s recommendations, stating its aim to implement most of the recommendations in full as soon as parliamentary time allows. A cynic might question the point of the consultation, given that the Government has in some cases ignored the opposition of a substantial majority to a particular proposal. Others say that the opposition was largely the consequence of organised industry opposition (being something that Jackson LJ himself was not in a position to counter publicly). Although some of the implementing legislation is currently making its way through Parliament, nevertheless this seems an opportune moment to look at the more important of the Jackson proposals and indicate the extent to which they have been or will be implemented. Recoverability of success fees and ATE premiums; QOWCS; 10 per cent increase in damages At present, if a litigant instructs a lawyer under a conditional fee agreement (CFA), the lawyer acts on the basis that, on winning the case, the litigant pays a pre-agreed uplift on the fees due (up to 100 per cent). However, if the litigant loses the lawyer is paid nothing. For this reason CFAs are often called no win, no fee agreements. In order to guard against the risk of having to pay the other side s costs (under the UK s cost-shifting rule), CFA litigants frequently take out after-the-event (ATE) insurance, for which premiums can be extremely high around 60 per cent of the potential costs bill. Under the UK s current costs rules, if the litigant wins the case, the other side must usually pay not only its own costs but also most of its adversary s (often doubled if there is a CFA uplift fee) and the ATE premium. As a result, a CFA party can litigate at no risk as to costs, with no incentive to keep its costs low, while the costs burden on its opponent is so excessive as to amount to a denial of justice. The problem, which is particularly acute for the National Health Service as a defendant in clinical negligence actions, has been exacerbated by a system of referral fees, where lawyers

2 [2011] 4 Env. Liability : Current Survey : England & Wales : Huntley CS45 pay high fees to claims management companies or insurers to buy litigation. In his final report, Jackson LJ advocated that parties who entered into CFAs or took out ATE insurance should no longer be able to recover the success fees and/or ATE premiums from the losing side. They could still agree CFAs with their lawyers, but would have to pay any success fee and/or ATE insurance premium themselves. Since these expenses usually came out of any damages awarded, he proposed that general damages awarded to individuals for personal injuries and other civil wrongs should be increased by 10 per cent. He also recommended that the maximum amount of damages that lawyers could deduct for success fees should be capped at 25 per cent of damages. In addition, in certain types of action where the individual claimant is less well-resourced than the defendant or its insurers and where ATE insurance is commonly taken out (for example personal injury and judicial review disputes), Jackson LJ proposed a new regime of qualified one way costs shifting (QOWCS). Under the QOWCS system, a losing claimant would not pay the defendant s costs, but a losing defendant would pay the claimant s costs. At first sight, this would seem a no-win situation for the defendant, but the magic is in the word qualified if the claimant was properly funded (so there was no need to level the playing field) and/or had behaved unreasonably, the court could make a different costs order. It could also do so if the defendant had made an unbeaten Part 36 offer. Jackson LJ felt that these proposals, taken together, would usually result in a defendant being better off than under the present regime. In Jackson LJ s view, the QOWCS regime would suit personal injury, clinical negligence, judicial review and defamation claims, where individual claimants are often exposed to heavy costs orders. However, he believes that this form of costs shifting might also benefit other types of civil litigation and advocates consultation on which categories of litigation should benefit from QOWCS. The Civil Justice Council (CJC) has recently put together a working party to advise on how best to implement the Jackson reforms in the area of QOWCS, Part 36 offers, and the new test of proportionality. The papers of this working party of which the author is a member are now being discussed with the CJC and MoJ. It is not yet clear when or indeed if they will be released for general consumption. When publishing his final report, Jackson LJ made clear that the time for consultation had passed. This did not, however, prevent pressure groups and other interested parties from harnessing the media to persuade him that his plans were misguided, particularly on the issues of recoverability of CFA success fees and ATE premiums. In addition, two organisations have launched judicial review proceedings in an attempt to stop implementation of the reforms. The Spinal Injuries Association argued that the Government had failed properly to assess the way in which its proposals would affect disabled people. The High Court rejected that application but a separate application by the Public Law Project is apparently still pending. Nevertheless, the irrecoverability of success fees and ATE premiums is one of the Jackson reforms which is likely to see the light of day. The Legal Aid, Sentencing and Punishment of Offenders Bill 2011 was presented to Parliament on 21 June Despite its title, Part 2 of the bill deals with costs and litigation funding. Clauses 41 and 43 abolish the recoverability of CFA success fees and ATE premiums from a losing party in any proceedings. The issue of QOWCS is not specifically mentioned in the bill, for reasons explained below. The bill had its second reading on 29 June 2011, before going to the public bill committee stage. At the committee stage, a number of amendments were tabled to Clauses 41 and 43, none of which succeeded. The committee has now published its report, summarising what happened during this stage. This report also explains why certain reforms are not mentioned in the bill. For example, QOWCS (and the test of proportionality see below) are not covered, because the reforms can be achieved by changes to the Civil

3 CS46 [2011] 4 Env. Liability : Current Survey : England & Wales : Huntley Procedure Rules (the CPR), once the report by the CJC working party has been analysed. Another absence in the bill is a clause enabling a general increase in damages of 10 per cent. This is apparently because this change can be effected by increases in Judicial Studies Board guideline rates and in the amounts awarded by judges. Both changes will take effect at the same time as the bill becomes law. The report also makes clear that, initially, the Government intends to introduce QOWCS only in personal injury claims, although it may extend the regime if it works in this area. The bill has been debated in the House of Commons for its report stage, at which further amendments were proposed. It has now gone to the House of Lords, which may in turn propose amendments, which will then have to be considered by the Commons. It is important to note that changes introduced by the new Act will not be retrospective. Referral fees Lord Justice Jackson was unambiguous in his views that referral fees add no real value but merely increase the cost of already expensive proceedings. He recommended that they should be banned in relation to personal injury cases, and continued that, if the Government accepted this recommendation, it should seriously consider banning or capping referral fees in other areas of litigation. The Legal Services Board (LSB), which oversees the regulation of lawyers in England and Wales, then reviewed the regulation of referrals. In May 2011, it decided against banning referral fees in favour of managing them by strengthening transparency obligations. The Government initially accepted the LSB s conclusion so did nothing. However, in the face of widespread public anger about referral fees, Jack Straw MP, former Justice Secretary, began a campaign to persuade the Government to change its mind. He introduced a 10- minute rule bill (the Motor Insurance Regulation Bill) which would make it a criminal offence to seek or pay referral fees in personal injury cases. In a major about-turn, the Government then decided to support the bill. In theory, Jack Straw s bill is to be debated in January However, this may be unnecessary because the MoJ has now introduced amendments to the Legal Aid, Sentencing and Punishment of Offenders Bill 2011 to outlaw referral fees. The Lord Chancellor and Secretary of State for Justice, Kenneth Clarke, has made clear that the Government wants the enforcement of a ban on referral fees to be a matter for regulatory bodies like the Solicitors Regulation Authority, rather than the criminal courts. Contingency fees/damages-based agreements US-style contingency fee agreements, where lawyers act on the basis that they can take a prearranged percentage of the damages if their client wins the case but nothing if the client loses, are outlawed in the UK (other than in employment tribunal cases) on the precept that they encourage lawyers to take an excessive interest in their cases. However, Jackson LJ took the view that contingency fee agreements would offer another tool in the armoury of the impoverished litigant and that their pros outweighed their cons. He therefore recommended that contingency fee agreements renamed damages-based agreements (DBAs), presumably to differentiate them from CFAs should be permitted in all civil cases. However, such arrangements would not be allowed to affect the conventional recovery of costs, ie the contingent element of the fee should not be recoverable from the losing party. Jackson LJ stressed that DBAs should be properly regulated and only valid where the client had received independent advice. Damages-based agreements are covered in Clause 42 of the bill, which contemplates that the Lord Chancellor will prescribe (i) the information that a lawyer must give its client

4 [2011] 4 Env. Liability : Current Survey : England & Wales : Huntley CS47 before entering a DBA and (ii) the maximum amount that may be paid under the DBA from the claimant s damages. The requirement to obtain legal advice before entering into a DBA has been dropped, commentators having pointed out that it would only add further expense and anyway there is no such requirement before entering into more complex CFAs. However, the obligations of lawyers proposing to enter into a DBA are such that in many cases, even if clients do not themselves seek independent advice, lawyers may feel obliged to recommend that it is obtained. Third party funding Lord Justice Jackson took the view that, like DBAs, funding by independent, uninvolved entities provided another route to access to justice. However, third party funding should be properly regulated, so he suggested that funders put together a satisfactory voluntary code to which they would all subscribe. He suggested that the issue of whether a voluntary code was enough or whether regulation was needed should be revisited if and when the use of third party funding increased. To consider this issue further, the Civil Justice Council set up a working party, which produced a draft Code of Conduct for Third Party Funding. Following Jackson LJ s recommendations, the draft code was revised and consulted on. A summary of responses by consultees was published in June 2011 and a deadline of October 2011 set for publication of a final version, to be approved by ministers. Disclosure The disclosure exercise is often one of the greatest generators of costs in a large commercial case, particularly where much of the information is stored electronically. Jackson LJ s solution was that, rather than automatically having standard disclosure (where parties exchange all relevant documents which support or adversely affect their own or their opponent s case) the judge and parties should, at the first case management conference (CMC), ascertain from a menu the most appropriate and cost-effective way of conducting disclosure. It is arguable that the CPR are already flexible enough to allow for this. Civil Procedure Rule 3.1(m) allows the court to take any other step or make any other order for the purpose of managing the case and furthering the overriding objective in CPR 1.1 (of dealing with cases justly). Indeed, the Commercial Court has already moved away from automatic standard disclosure. Nevertheless, in a speech in August 2011 at the International Conference on Electronic Litigation in Singapore, Jackson LJ said that he was hoping to build the concept of the disclosure menu into an existing practice direction (CPR PD 31B, which deals with electronic disclosure) by October Witness statements Another driver of costs is the preparation of witness statements. Jackson LJ suggests that this can be alleviated in two ways. First, where it would be cost-effective, the court should hear argument at an early CMC about what matters need to be proved and by which witnesses. The judge should then give specific directions on the witness statements to be taken. Secondly, the court should be ready to sanction breaches of such directions, for example by making an adverse costs order when a party serves a statement longer than the ordered length. Both options are already open to the court under its wide case management powers under CPR 3.1(m), so no rule change is required. Having said that, the Civil Procedure Rule Committee (CPRC) is apparently going to look at this issue in time for new rules to be in place by October 2012.

5 CS48 [2011] 4 Env. Liability : Current Survey : England & Wales : Huntley Expert evidence Lord Justice Jackson s final report also addressed concerns about the high cost of expert evidence. He recommended that a party seeking permission to adduce expert evidence should show an estimate of the costs of so doing to the court. As far as we know, this proposal is not being specifically implemented. However, the courts already have the power under their general case management powers to introduce such a step, so further initiatives by the Government may not be required. Jackson LJ also explored the idea of speeding up the giving of expert evidence by allowing hot-tubbing of experts in UK courts. With hot-tubbing, both parties expert witnesses appear in court at the same time and are questioned alternately by the judge, enabling the judge to obtain a clear understanding of the points on which they agree and differ. The concept is common in Australian courts and international arbitration proceedings and Jackson LJ suggested piloting it in the English courts. Again, the Commercial Court already supports such practices when appropriate. Since June 2010, a hot-tubbing pilot has been underway in Manchester s Mercantile and Technology and Construction Courts, which has apparently been generally well-received by those involved. Collective actions Lord Justice Jackson recommended that the default position in collective (or group) personal injury actions should be QOWCS, and two-way costs shifting in other types of group action. However, at the certification stage, the judge should be able to direct that a different costs regime would operate. Jackson LJ also proposed that claimants with a viable collective action should be able to benefit from third-party funding. In its response to its consultation on Jackson LJ s recommendations, the MoJ advocated a presumption that costs would not be paid by claimants in these cases, but the defendant could ask the court to order the claimants to pay costs in situations where they were conspicuously wealthy or the defendant was uninsured. The MoJ also went further than Jackson LJ by suggesting that QOWCS should apply to personal injury cases funded by DBAs as well as CFAs. In terms of Jackson LJ s suggestion that success fees in personal injury cases should be subject to a cap of 25 per cent of the damages award, the MoJ recognises that this might not be suitable for complex claims of this type and has invited comment on alternative solutions, including whether an element of recoverability of success fees should be retained in such cases. Case management It was a recurring theme in Jackson LJ s preliminary and final reports that the judiciary s failure actively to manage cases contributes greatly to disproportionate costs. The general perception is that judges have a huge, all-encompassing range of powers and sanctions to force parties to comply with court orders, directions, and the procedural rules, but do not use these adequately. Many commentators feel that the issues are both cultural and related to judicial time and resources. Either way, the issues are of more acute importance in the area of proactive case and costs management. Lord Justice Jackson made a number of suggestions to improve such case management, for example assigning more cases to designated judges with relevant expertise, on the basis that proper case management requires greater judicial continuity. This docketing system is common and well regarded in Australia, and a pilot has now started in Leeds.

6 [2011] 4 Env. Liability : Current Survey : England & Wales : Huntley CS49 In his final report, Jackson LJ also urged judges to show less tolerance towards unjustified delays and breaches of orders by parties and their lawyers. At his speech in Singapore, he said he had made some recommendations to the CPRC to ensure that courts more robustly enforced time limits and court orders, which the committee has accepted and will have in force by October Costs management In his final report, Jackson LJ stressed the need for judges to manage costs as well as cases. His vision of costs management went thus: before the first CMC, parties would prepare and exchange detailed litigation budgets, setting out how much they were likely to spend on each step in the action. At the CMC, the judge would state the extent to which those budgets were approved, to ensure that costs did not become disproportionate. As far as possible, the court would then manage the case so that it proceeded within the approved budgets (which could, if the judge agreed, be amended as necessary during the life of the case). Clients would be shown all the budgets. At the end of the litigation, the recoverable costs of the winning party would be assessed in accordance with the approved budget. In particular, budgeted costs would prima facie be proportionate and thus not subject to challenge on that ground. Whether this approach is finally adopted remains to be seen. Lord Justice Jackson accepted that the judiciary (who by and large come from the Bar rather than the solicitors profession) were not generally familiar with how costs were amassed. However, in his view, if judges are capable of learning how to assess damages, they could also learn to assess costs. He advocated judicial training in costs management. and judges have now received some, albeit brief, training on this. Critics suggest that, short of a sea change in the judicial culture and resources for costs management, Jackson LJ s vision will probably remain something of a dream. Nonetheless, two pilots have been set up to see how costs budgeting would work in practice. One was a voluntary pilot in Birmingham s Mercantile and Technology and Construction Courts, which lasted from 1 June 2009 to 31 May The other was obligatory and covered all defamation cases commenced in the High Court in London and Manchester on or after 1 October This pilot was intended to run until 31 March 2011, but has been extended until 30 September Two solicitors firms were chosen to monitor the hearings conducted under the defamation pilot and report back on their findings to Jackson LJ. Hogan Lovells was one of the firms chosen and two of its lawyers attended several costs budgeting hearings. They then produced an interim report for Jackson LJ on how the judges, masters and lawyers dealt with and viewed costs budgeting. In October 2011, a new, compulsory pilot was set up in all Mercantile and Technology and Construction Courts, with a revised practice direction to take account of deficiencies identified in the earlier two pilots. Once both remaining pilots have finished, a final report will be produced for the MoJ, which will then decide whether to introduce costs budgeting in specific (or conceivably all) kinds of civil litigation. Part 36 offers Under CPR Part 36, a party may make a formal offer to settle its dispute on the basis that, if the other side refuses that offer and then fails to obtain a more advantageous judgment, it will be penalised in costs. In BAA v Carver [2009] 1 WLR 113, in a very protracted dispute, the claimant was awarded damages which exceeded the Part 36 offer by only 51. The Court of Appeal held that, when deciding whether a judgment was more advantageous than a Part 36 offer, the

7 CS50 [2011] 4 Env. Liability : Current Survey : England & Wales : Huntley court should take into account all aspects of the case, including the emotional and financial cost of litigation. On this basis the court held that BAA was the true winner and that the claimant had not beaten BAA s offer. This left a cloak of uncertainty around Part 36, and in his final report, Jackson LJ proposed that the effect of BAA v Carver should be reversed. His wish has been granted. In the most recent set of amendments to the CPR (the 57th update), the meanings of more advantageous and at least as advantageous have been clarified. As from 1 October 2011, whenever a court has to determine whether a judgment betters a party s Part 36 offer in the context of a money claim, more advantageous is taken to mean better in money terms by any amount, however small. At least as advantageous is construed accordingly. The costs sanctions against a defendant for failing to beat a claimant s Part 36 offer generally amount to considerably less than the sanctions against a claimant for failing to beat a defendant s offer. There is thus relatively little incentive for claimants to make, or defendants to accept, a Part 36 offer. To remedy this, Jackson LJ proposed that a claimant should be paid, in addition to the existing penalties, enhanced damages when the defendant fails to beat a claimant s offer. This proposal has made its way into the bill. Clause 51 enables the court to order payment of an additional amount to a claimant whose Part 36 offer is not beaten. This provision will be in addition to the current sanctions available to the court under CPR Part 36 (namely the payment of punitive interest on damages and costs, and costs on an indemnity rather than a standard basis). The Lord Chancellor is tasked with setting the appropriate percentage one assumes this will be the 10 per cent envisaged by Jackson LJ. However, that is not the end of the matter as far as CPR Part 36 is concerned. As mentioned above, the CJC has been looking at how to implement the changes and the CPRC is also planning a general review of CPR 36. Already it is becoming apparent that, if a defendant s offer can result in a costs-based sanction but a claimant s offer in a sanction that is both costs and damages-based, confusion is likely to be caused in the minds of clients and lawyers alike. Many feel that this confusion will be worse because not all claims are for damages, thus necessitating non-monetary claims to be valued by the courts, in turn creating additional work for the courts. These and other problems are being addressed by the CJC Working Party and further changes are therefore possible in the future. Contingent legal aid funds and supplementary legal aid schemes In his final report, Jackson LJ considered whether the creation of a contingency legal aid fund (CLAF) or supplementary legal aid scheme (SLAS) might improve access to justice. A CLAF is a free-standing, fully self-financing fund, while a SLAS is built onto an existing publiclyfunded legal aid scheme, and administered by the relevant legal aid authority. These two selffunding schemes recycle the costs of funding by imposing a levy on successful claims, so that claims can be funded on a broadly cost-neutral basis. Jackson LJ concluded that self-funding mechanisms are an interesting option for future reform, once the Government has decided which of his other proposals on increasing access to justice to implement. On 8 October 2011, in a talk to the Professional Negligence Bar Association, he said that the time was ripe for the creation of a CLAF, now that the abolition of the recoverability of success fees had been confirmed. The MoJ has recently announced its intention to create a SLAS, under which a fixed percentage of 25 per cent of the client s damages awarded would be repaid to the fund. Jackson LJ expressed concern about the lack of flexibility in the percentage, believing it would deter early settlement. He advocated a sliding scale approach similar to that in Hong Kong s SLAS, where only 6 per cent of damages of the case is deducted if the case settles before delivery of the brief for trial.

8 [2011] 4 Env. Liability : Current Survey : England & Wales : Huntley CS51 Jackson LJ believes it really ought to be possible to set up one or more viable CLAFs, although at least for now any CLAF would have to operate on a small scale and possibly in a closely defined area (clinical negligence has been mooted). New definition of proportionate costs As mentioned above, Jackson LJ found that, apart from heavy and complex commercial cases, in too many cases costs recovered were disproportionate. He was tasked with ways of finding a mechanism for simultaneously ensuring that costs are proportionate and do not outweigh the remedy being sought. He has recommended that proportionate costs be defined in the CPR by reference to sums in issue, the value of any non-monetary relief, the complexity of litigation, conduct, and wider factors like reputation or public importance. However, in practical if not conceptual terms many practitioners feel that this does not involve such a radical change from the existing concept of reasonableness (as defined) when assessing costs. Jackson LJ s real proposal for change is therefore to change the use of proportionality when assessing costs. The idea is that, rather than identifying whether costs claimed at the outset are proportionate or disproportionate on that simple binary basis, and then applying the test of reasonableness or necessity to each item of costs claimed depending on whether the costs are found to be proportionate or not, costs should instead always be assessed on the basis of a reasonableness test. The issue of proportionality would be universally addressed at a second stage to ensure that whatever costs are found to be reasonable, they may be further adjusted if they are nonetheless disproportionate in total. Already concerns are being expressed by a number of people that this might not produce the desired result. Having found that costs are reasonable, it may well be difficult for courts then to make significant further changes on the basis of proportionality, however it is defined. Further, any such second stage adjustment for proportionality would have to be the subject of a reasoned decision which may well prove burdensome for many courts and, as senior Costs Judge Master Howarth has commented, a recipe for satellite litigation. This is one of the topics being addressed by the CJC Working Party and it is difficult at this stage to predict what the outcome may be. One thing is clear: whatever proposals are introduced will have as their express purpose the intention to ensure more proportionate costs in all areas of civil litigation. It should be noted that in some areas, including road traffic accident cases, a fixed costs regime is already being introduced to ensure proportionality is achieved. Improved IT systems at the courts Court users and staff have been bemoaning the lack of adequate funding of court infrastructures and information technology for many years. Jackson LJ echoed these complaints in his final report and pleaded for more money to be injected into the system. Given the parlous state of the UK s finances, it is unlikely that these hopes will be met in the foreseeable future; there is certainly no mention of increased funding or better IT across courts as a whole in the bill. The one exception, where we have seen change, is the new Rolls Building close to the Royal Courts of Justice in London, which now brings the Chancery Division, the Admiralty and Commercial Court, and the Technology and Construction Court together in a brand new and purpose-built building. This has court facilities for parties to use their own IT, including electronic presentation of evidence and cabled broadband, in-court video conferencing facilities, and full WiFi connectivity throughout the building.

9 CS52 [2011] 4 Env. Liability : Current Survey : England & Wales : Huntley Legal aid On 15 November 2010, the MoJ published a paper entitled Proposals for the Reform of Legal Aid in England and Wales. This recommends an unprecedented cutting back of legal aid. If these proposals are implemented, only very limited categories of case will in the future be funded by the public purse, namely disputes about domestic violence, discrimination, abuse by public authorities, protection of children, vulnerable adults, and the environment and access to housing. Jackson LJ has been very clear both in his report and since that legal aid per se is not within his remit and that he does not necessarily share the Government s views. However, this has not stopped commentators criticising him for the impending retrenchment of legal aid, as though this formed part of the Jackson report. As already mentioned, the Government s proposals on legal aid are included in the new bill, and are likely to be the subject of a great deal of debate in Parliament. Conclusion Given that the bill contains highly contentious provisions on the retraction of legal aid, it is likely to be months before it becomes law. Nevertheless, with Jackson LJ overseeing implementation of his reforms, which are rapidly gaining momentum, it is clear that nobody can write these off as just another of those Government proposals that never see the light of day.

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