Scoping project on no win no fee agreements in England and Wales. Richard Moorhead, Paul Fenn and Neil Rickman

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1 Scoping project on no win no fee agreements in England and Wales Richard Moorhead, Paul Fenn and Neil Rickman Ministry of Justice Research Series 17/09 December 2009

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3 Scoping project on no win no fee agreements in England and Wales Richard Moorhead, Paul Fenn and Neil Rickman This information is also available on the Ministry of Justice website:

4 Access to Justice Policy Directorate is responsible for developing and delivering policies in relation to all of Access to Justice Group s delivery bodies; the courts, coroners and tribunals, as well as legal aid and legal services. The key aim of the directorate is to review how the Department can provide early information to people with legal problems more effectively and guide them through the most appropriate options for resolving disputes. Disclaimer The views expressed are those of the authors and are not necessarily shared by the Ministry of Justice (nor do they represent Government policy). Crown Copyright 2009 Extracts from this document may be reproduced for non-commercial purposes on condition that the source is acknowledged. First Published 2009 ISBN:

5 The authors Professor Richard Moorhead, Paul Fenn and Neil Rickman, respectively of: Cardiff Law School, Cardiff University; Nottingham University Business School, University of Nottingham; School of Economics, Surrey University. We would like to thank Rachel Cahill and Rebecca Cumming for their excellent research assistance. i

6 Contents Executive summary iii 1. Introduction: approach to the scoping study and outcomes 1 2. Background and policy context 3 3. Policy questions and the existing evidence base 9 4. Overview of research design Applying the framework to employment, personal injury and tribunal cases Conclusions: overall assessment of a potential programme of work 37 Appendix 1: List of organisations and individuals consulted, and those who have agreed to provide data 46 Appendix 2: Bibliography 47 Appendix 3: Media cases draft information schedule 56 Appendix 4: Personal injury draft information schedule 62 ii

7 Executive summary This report defines work that can be carried out in relation to no win no fee agreements in employment tribunal, personal injury and media litigation cases. The authors have established that a reasonably comprehensive study of these three areas can be conducted. The study addresses questions relating to: access to justice; the process, outcomes and costs attributable to no win no fee agreements; and public interest issues, including claimant and non-claimant experiences of the system. A study of media cases is likely to be more limited than employment and personal injury cases because of the relatively small size of the media litigation market and problems in securing claimant lawyer participation. Conversely, the level of debate generated by this area would mean that it is important and worthwhile tackling the issues that arise, even if this is on a smaller scale. The study should draw on data collected at three levels: individuals in the population; individual claims; and law firms. The study will need to address no win no fee agreements and other funding systems as comparators. The authors recommend that the Legal Services Research Centre s data on legal need are subject to further analysis. They recommend the commissioning of a bespoke survey of the general public to identify: levels of claiming in personal injury and employment cases; the experience of both claimants and non-claimants in trying to bring claims (or deciding not to bring claims); and their views on funding mechanisms they have experienced. The authors strongly advise piloting the approach to ascertain the validity of the assumptions bearing on the cost and utility of such work. They also recommend that the project includes a resource to interview media case claimants, although there is some risk that this element of the project will not be successfully completed. The authors recommend the Department for Business Enterprise and Regulatory Reform s (BERR s) 1 Survey of Employment Tribunal Applicants as the basis for claim-level data analysis in employment cases. In respect of personal injury claims, the authors recommend the collection and analysis of case-level administrative datasets from defendant insurers, legal expenses insurers and claimant organisations, supported where necessary by more detailed information from a random sample of case files. In relation to media claims, the authors assessment is that it should be possible to identify a sample of cases from defendant organisations and solicitors firms for a range of local and national media organisations, with a particular emphasis on local and national newspapers. Some data collection may be possible with some claimant lawyers, although this is likely to be more limited in nature and scope. 1 Now the Department for Business, Innovation and Skills (since June 2009) iii

8 In terms of firm level data, in employment cases, the authors recommend an internet-based survey and a small sample of short semi-structured telephone interviews to supplement Moorhead s original practitioner survey. In personal injury and media cases, they recommend using a semi-structured telephone survey to collect firm-level data on their funding arrangements and risk assessment procedures. The authors recommend that any research team establishes stakeholder involvement in the research through a network of practitioners and stakeholders with whom they can engage throughout the life of the project. Towards the end of the project, the authors recommend the establishment of stakeholder forums. They would anticipate a series of (say) three seminars which disseminated preliminary findings early in Stakeholder comments from those sessions, and any subsequent communication, would then be considered in conducting more detailed and final data analysis and write-up. Detailed issues of timetabling and costs are addressed. Key decisions as to timing and scope need to be taken before the project can proceed to tendering. iv

9 1. Introduction: approach to the scoping study and outcomes The authors were commissioned by the Ministry of Justice (MoJ) to conduct a feasibility assessment on research into no win no fee agreements in three areas of work: personal injury; employment tribunal cases; and media litigation (in particular, defamation and privacy litigation). In the light of high predicted costs and an uncertain political environment where participation of all stakeholder communities cannot be guaranteed, the scoping study s main aims were to: examine available and potential sources of data in order to aid the Ministry of Justice in developing a detailed final project for funding; and specify the researchable issues and address implications of different methods in terms of likely quality of findings, costs and timescales. Additionally, the MoJ has indicated a preference for significant research outputs to be available in some form by early To that end the authors have spent a considerable amount of time discussing the project with a wide variety of stakeholders and potential data-sources (see Appendix 1: List of organisations and individuals consulted, and those who have agreed to provide data). The authors have analysed key data sets and literature as well as research instruments which lie behind the datasets that they recommend (where such datasets are research-based). The authors negotiations with stakeholders have been constructive and positive. Interest in the proposed study is high as is anxiety about the potential outcomes. Where the authors have encountered anxieties, or specific needs to discuss the project, they have sought to meet with relevant parties and discuss the project in detail. As things stand, they have received supportive responses from: the Law Society; the Association of British Insurers (ABI); the Association of Personal Injury Lawyers (APIL); the BERR; numerous solicitors firms; individual insurers and intermediaries; media organisations; Trades Unions; the Local Government Executive; the Legal Services Research Centre; Citizens Advice (CAB); the Civil Justice Council (CJC); and others. They are extremely grateful for the level of co-operation they have received and the assistance that has been forthcoming from all sectors. The authors discussions have led to advanced stages of negotiation for data access with many of the key participants in any future research project. They have also enabled the authors to establish relationships and levels of understanding in stakeholder communities which augur well for any future project. This work has drawn on relationships the authors have established in previous collaborative research ventures. It has also been important, in their view, to be able to point to a wide range of experience in dealing successfully with collecting, analysing and 1

10 reporting on highly sensitive and confidential information in the legal services field, as evidence that potential research participants can participate without their interests being damaged. Insurers and defendants are generally indicating high levels of willingness to co-operate. The position with claimant firms necessarily remains less clear; they are more numerous, diffuse and diverse. The authors have been able to deal with some direct and also through representative organisations (APIL and the Law Society in particular). The representative organisations are broadly supportive and the authors, individual contacts lead them to expect a willingness to participate, but actual recruitment of such firms, which would necessarily be left to any full project, remains uncertain. There are particular difficulties in relation to claimant media firms where issues of firm and client confidentiality are particularly acute. The key result of this scoping study is that the authors believe that a meaningful study of personal injury and employment tribunal claims would have good prospects of success. The characteristics of the (much smaller) market for media law and the participants in that market mean the outcome of a study in that area is likely to be more limited but worthwhile. In what follows, the authors will do the following. Define what is meant by no win no fee agreements and discuss briefly their history (Chapter 2). The authors focus, in particular, on the differences between damage-based contingency fees and conditional fees. Summarise the policy questions and consider the extent to which these are answered by existing evidence. This enables the authors to specify accurately the issues that should be and can be researched (Chapter 3). In this chapter the authors will also define the issues which have typically been raised as Conditional Fee Agreements (CFA)-related issues but which the authors understand to be, or recommend to be, out of scope of the project. Set out an overarching methodological framework for the proposed research covering the three areas (Chapter 4). This will overview the authors approach. Set out for each of the three areas their findings in relation to the availability of potential sources of data with a view to developing a detailed final project for funding by the Ministry (Chapter 5). Summarise their evaluation of feasibility, addressing implications of different methods in terms of likely quality of findings, likely costs and likely timescales (Chapter 6). Key background documents are set out in the appendices and referred to in the text. 2

11 2. Background and policy context This chapter of the report sets out background information on no win no fee agreements. In particular, it defines the principal fee types which provide the focus for this report: Conditional Fee Agreements and Damage-Based Contingency Fee Agreements (DBCFs). It then goes on to discuss, in broad terms, history and context for the three areas the authors have been asked to consider: personal injury, employment tribunal, and media (defamation and privacy) claims. The authors point out some of the key differences between the three areas and then discuss briefly the broader context. A. Defining no win no fee agreements No win, no fee arrangements are a colloquial, and potentially misleading, description for two kinds of contingent fee agreement: Conditional Fee Agreements, a contingent fee based on work done, and what the authors refer to as Damage-Based Contingency Fees, which are a contingent fee based on damages recovered. DBCFs are analogous to American-style fee agreements and sometimes referred to as contingency fees but in fact both CFAs and DBCFs are species of contingency fee because both make payment of the fee contingent upon the case outcome. CFAs have become an important part of the litigation landscape in England and Wales over the last decade. Once legal aid was withdrawn from most personal injury cases, CFAs became a mainstay of the personal injury market and, for defendants, a controversial part of the market for legal services in media cases. This report concentrates on these two areas; but they can be, and are, used in other forms of litigation. As an example, their use in relation to clinical negligence cases appear to be growing. DBCFs are not permitted in litigation 2 but have become important in non-contentious business which can include: cases dealt with prelitigation and cases dealt with through the Tribunal system. This report concentrates on their use in employment cases. It is worth noting from the outset that DBCFs were allowed to take hold in these cases, in spite of the clear policy decision not to permit them in litigation, and were largely unregulated. This is in stark contrast to the regulatory effort put into CFAs. Both CFAs and DBCFs are called no win no fee agreements because the lawyer who takes a case on this basis usually makes his/her fee contingent on achieving victory for the client. Where they win they are then able to charge for their fees. What is defined as a win can vary and so can the basis of charging, but in broad terms the typical arrangements are as follows. Conditional fee agreements usually operate on the basis that the lawyer is paid nothing by the client if he/she loses and the base costs (calculated on the lawyer s normal hourly 2 Although this prohibition can be circumvented by third-party funding. 3

12 rate) plus a success fee (based on a percentage of the hourly fee) if he/she wins. The success fee is expected to relate to the riskiness of the case. Ordinarily the expectation is that, if the client is successful, the opponent pays the costs, with the potential for some residual liability for all or some of those costs. There are further complications in relation to recoverability, disbursements, insurance, loan finance and the like. Damage-based contingency fees usually involve lawyers being paid nothing for his/her costs if they lose and a fee based on the percentage of damages recovered or awarded for the client if they win. This is the common model of funding personal injury (and other) actions in the United States (and some other jurisdictions), where the contingency fee is usually paid from the client s damages. Under both these fee arrangements, the lawyer takes a financial stake in the outcome of the litigation, and therefore bears a financial risk from losing the case. The nature of that stake is determined by the merits of the case, the effort that is required to get a win and the way in which that fee is calculated. B. A brief history of CFAs Because CFAs operate within the court system, they must also cope with the recoverability of costs. Under the normal cost rules, a winner receives reasonable costs from the losing opponent. CFA claimants under no risk of paying their lawyers fees are still at risk of paying their opponent s costs. This risk, which even on small cases can extend to thousands of pounds, is believed to act as a major barrier to access to justice. After-the-event (ATE) insurance was developed to cover this risk. Prior to changes introduced in 2000 by the Access to Justice Act 1999 (hereafter the AJA ), neither the success fee nor the ATE premium was recoverable from the opponent. If a claimant won his/her case, the lawyer might be expected to recover base costs from the opponent, but the client would be responsible for the ATE premium and the success fee. Typically, this would be recovered from the client s damages and the Law Society recommended a voluntary cap whereby the lawyer would not deduct more than 25% of the client s damages on this basis. The AJA introduced significant changes to this position. The Government proposed to abolish legal aid for negligence-based personal injury claims. Claimant lawyers expressed concern that poorer clients who previously would have received legal aid would be deterred from bringing claims under CFAs and that deductions from damages were particularly unjust for clients whose financial situation was already weak. They lobbied vigorously against the reforms. The result was that the Government decided to make both the success fee and the ATE insurance premium recoverable items. Furthermore, packages were developed (sometimes called magic bullets ) which permitted claimants to defer the payment of their ATE premiums until they were successful. These packages may be backed by loan 4

13 agreements, again perhaps payable in the event only of a win. Disbursement costs may also be incorporated into an ATE policy, but otherwise need to be paid by the client s lawyer or by the client either directly or again on the basis of loan finance. For claimants, deferring costs in this way may make the claim almost riskless: if they win the defendant pays the ATE premium; if they lose, the claimant pays nothing. Certain costs were not recoverable, but there was (and is) at least the potential for clients to bear no costs either up front or once their case was successful depending on the charging policies of individual firms and insurers. Similarly, if they lost they would not ordinarily pay anything. The risks of this system were borne by the client lawyers (although underwritten by their success fees) and by the defendants, or their liability insurers, who eventually had to meet the costs of the claim, success fees and ATE premium for any claim that succeeded. In addition, the growth in the ATE insurance market following the introduction of recoverable CFAs saw the emergence of so-called accident intermediaries and claims management companies. The practices of some of these, plus the concerns on the part of liability insurers that clients bore no risk, and more general worries that there were no market restraints on success fees and ATE premiums, has prompted an ongoing period of satellite litigation over costs ( the costs war ). Various judicial, Civil Justice Council and Government initiatives have sought to dampen the costs war and inject predictability into, for example, road traffic accident cases. In spite of these difficulties, many the authors spoke to defended CFAs as an essential element in access to justice. Other voices have been more critical of their detailed operation. A Citizens Advice report was critical of the complexity of CFAs and ATE insurance, the poor advice received from accident intermediaries, and the apparent costs exposure of clients using no win no fee agreements. 3 The authors discussions with Citizens Advice suggest they maintain concerns. More generally, allegations are made from time to time that CFAs have led to a compensation culture or more specifically to an increase in claiming, although the evidence tends to contradict this. 4 It is also alleged that CFAs would provide poorer access to justice than was provided under legal aid. 5 Similarly, analysis suggested that CFAs would be more expensive than the old legal aid system 6 although, it is important to bear in mind that 3 Sandbach, James (2004) No win no fee, no chance. CAB evidence on the challenges facing access to injury compensation (London: Citizens Advice). 4 Morris, Annette (2007) Spiralling or Stabilising? The Compensation Culture and our Propensity to Claim Damages for Personal Injury. Modern Law Review, 70 (3) ; Lewis, Richard, Morris Annette and Oliphant Ken (2006) Tort Personal Injury Claims Statistics: Is There a Compensation Culture in the United Kingdom? Working Paper SSRN, last downloaded 25 September 2008; cfm?abstract_id=892981; Fenn Paul, Vencappa Dev, O Brien Chris, Diacon Stephen (2005) Is there a ompensation culture in the UK? Trends in employer s liability claim frequency and severity, paper presented to the Association of British Insurers, December 8, 2005: nottingham.ac.uk/business/cris/papers/ ABI_presentation_011205%20.doc last downloaded 23 September Moorhead, Richard. (2000) Conditional Fee Agreements, Legal Aid and Access to Justice (2000) 33/2 University of British Columbia Law Review 471, 490; Moorhead,Richard,(2002).CFAs: A Weightless Reform of Legal Aid? NILQ, 53 (2) (2002) ; Shapland, Joanna. (1998) Affording civil justice. Law Society Research Study 29. (London: The Law Society) 6 Moorhead (2002) cited note 5. 5

14 some increase in cost would be inevitable as a consequence of the removal of legal aid, and the need to induce lawyers to accept the risk and supply the market. The authors consider these opinions, and the research base for them in some detail below (see Chapter 3) but one point is worth emphasising: the research base is very limited. C. Media cases and CFAs: what is different about them? Media cases, i.e. defamation and privacy litigation where the defendant is a media outlet, provide a rather different context for understanding CFAs. Firstly, the absence of legal aid funding for defamation cases is long-standing. Access to justice concerns in this area have been a low priority in spite of repeated and occasionally successful human rights challenges. 7 Secondly, on traditional assumptions about CFAs and media litigation, these cases look like rather poor candidates for CFAs. It is assumed that CFAs work best where there are high volumes of relatively low-value cases that are relatively predictable and provide good cash flow for claimant lawyers. Conversely, it is also assumed that media cases are: riskier; 8 generally expensive; and, far fewer in number when compared with personal injury cases. The claimant population is also likely to be different: ranging from members of the general public to celebrities and the super-rich. Thirdly, compared to personal injury cases, media cases are relative newcomers to CFA funding, being first permitted in D. Damage-based contingency fees and employment tribunal cases Very little is known about the operation of DBCFs in England and Wales but it is widely thought that the jurisdiction in which they are most common is employment tribunals. 9 There are a number of key differences in employment tribunal cases which are worth emphasising. The first is that DBCFs appear to have developed without prior scrutiny by policy makers and without the regulatory machinery which is attached to CFAs. They also appear to have developed in spite of the clear rejection of DBCFs for litigation. An interpretation of what constitutes non-contentious business under the Solicitors Act 1974, has led to a practice of some solicitors providing DBCFs in tribunal cases and other circumstances. Barristers are apparently prohibited from doing this 10 Because DBCFs developed in this way, there is no clear statutory framework, or point in time, where one can say DBCFs were introduced. There is very little data on the extent of their use and no data which track this use over time Although see Steel and Morris v. The United Kingdom (Application No /01) Judgment Strasbourg, 15 February Defendants dispute the extent to which media cases are risky for claimants and their lawyers. 9 See, Moorhead and Cumming (2008) Damage-based contingency fees in Employment Cases A Survey of Practitioners, forthcoming. 10 The Bar Council states that contingency fees are forbidden. See, instructingabarrister/fees/ last downloaded 29 September The repeat Survey of Employment Tribunal Applications (SETA) being conducted for the Department for Business, Enterprise and Regulatory Reform by the British Market Research Bureau (BMRB) should begin to address this problem. 6

15 Rights of audience in tribunals are not prescribed: all advisers whether or not they have professional qualifications, can conduct tribunal cases for their clients and can do so for profit. Where they are not solicitors or barristers working in private practice, the authors refer to these generically, for convenience, as claims consultants. Until recently this sector was not subject to specific regulation. Claims consultants are not prohibited from operating DBCFs. Generally speaking, there is no recoverability of costs in tribunal cases. This means that neither base costs, nor success fees are recoverable. The result is that claimants, not defendants, pay these costs out of their compensation. It is conceptually possible for CFAs to be operated in tribunal cases, and some do operate on that basis, but the authors understanding 12 is that, largely, where contingency fees are used they are DBCFs rather than CFAs. Clients are charged a proportion of their damages in the event that they win. It is in the context of equal pay cases that DBCFs have become particularly controversial. This is discussed below (see page 18, para. 2 onwards). E. CFAs and contingency fees: a wider and developing context It is important to emphasise that the research recommended by this study takes place in a wider and developing context. CFAs are not uniformly based on the model outlined above. Collective conditional fees are important (particularly via Trades Unions); hybrid CFA-Before the Event (BTE) insurance approaches are reported to be on the increase; and defendants may appear to be making increasing use of CFAs, some on a pure no win no fee basis and others utilising a discounted fee approach. Other approaches are being developed by insurers to circumvent claims handling through CFAs. 13 Partly, this scoping study recommends that this context be addressed by properly researching key comparators with CFAs and DBCFs: Trades Union funding; private funding; and BTE in particular. Qualitative work will also need to provide an adequate understanding of this context. It is also important that the research collects data on the relationships between lawyers and third parties: be they Trades Unions; claims management companies; insurers or others. This is important within the three markets but also across them. To give one pertinent example: Trades Unions are reported to require some firms to do their employment tribunal on particular terms in exchange for remunerative personal injury work. Such interrelationships complicate the incentives at work and could give rise to important effects. Again one would expect this to be important qualitative background work for any research project that will inform also quantitative analysis. 12 Moorhead and Cumming, 2008, cited note Robins, Jon. (2008) Insurers put pressure on claimants to settle for less The Observer, 17 February 2008, downloaded 10 September 2008: personalfinancenews 7

16 A further issue which a number of respondents to the scoping study have raised is the relationship between this work and the Master of the Rolls (MR s) review of costs. There is potentially significant overlap between the two projects. The authors have held informal discussions with the Chief Executive of the Civil Justice Council about the project and the MR s proposed review to explore the mutuality of interest. Moorhead is a member of the CJC and a member of its costs sub-committee and Fenn and Rickman have regularly researched issues for the Council. All three have been invited to the forthcoming Costs Forum where the review, and indeed the CJC s work strategy on costs, will be discussed. 8

17 3. Policy questions and the existing evidence base No win no fee agreements prompt strong and contradictory views. In this chapter of the report the authors identify the main policy issues raised by these views. They have identified these in two ways. One is a series of discussions with relevant stakeholders. The second is an analysis of the available research base in the field, for its insights into the issues and methods for researching them. Within this report the authors concentrate on the significance of such work for identifying policy issues. In their discussion of the evidence it is important to bear two things in mind. Firstly, much of the research hails from the United States. This must be interpreted with care, particularly given the different costs rules and the fact that this research almost always deals with DBCFs not CFAs, which are only one part of this study. The second point is that the very lack of evidence in the UK emphasises the need for a project to inform policy debate. The key policy issues the authors have identified can be organised under the following series of questions. By comparison with alternative funding mechanisms, do no win no fee agreements: increase or decrease access to justice? increase or decrease the costs of the justice system? impact on settlement behaviour and outcomes? lead to exploitation of, or misselling to, uninformed consumers? lead to broader impacts on the behaviour of litigants and/or non-litigants (externalities)? lead to other public interest issues? A. The importance of underlying costs rules Before proceeding to discuss no win no fee agreements, it is important to emphasise a point made above. Any review of research on fees needs to recognise broader institutional differences when comparing findings from different jurisdictions. In the case of CFAs and contingency fees, perhaps the most obvious of these relates to the allocation of legal costs. 14 While CFAs are prevalent in England and Wales (where costs follow the event the socalled English rule ), contingency fees are the principal means of litigation funding in the US (where generally each party bears its own costs 15 ). It is generally held that the English rule will encourage the pursuit of strong claims, 16 but also increase the level of costs likely to be incurred on such claims (which may itself dampen down inclinations to claim). For example, Hause predicts an arms race -style investment by claimants and defendants keen to improve 14 Other issues of importance in the US context included the role of juries in awarding damages in tort cases and punitive damages. 15 This is a simplification. Ordinarily, parties bear their own lawyers fees but not their other costs which can be substantial. State rules mean rules on cost shifting vary in an event and federal law has implemented oneway cost shifting (where defendants pay successful claimants but the reverse does not happen). 16 Rickman, Neil (1994) The economics of contingency fees in personal injury litigation. 10 Oxford Review of Economic Policy

18 their chances of shifting legal costs. 17 On balance, Snyder and Hughes empirical research finds that the English rule costs help to screen claims and encourage those that are stronger. 18 B. Increase or decrease access to justice? The appropriate level of access to justice is difficult to quantify. It depends on a number of variables which, ultimately, must be judged by policy makers. Unfortunately, it is even harder to measure when this appropriate level of access to justice has been achieved (or over/under-hit) by policy because the costs and benefits of access cannot be accurately measured. It is, therefore,common to consider questions of access to justice from the perspective of factors that appear to increase or decrease the use of litigation though one cannot necessarily judge whether an increase (say) in litigation implies a beneficial rise or fall in access to justice. Whether no win no fee agreements increase or decrease access to justice involves a series of related issues. (See below) How do no win no fee agreements impact on the number of claims brought relative to alternative funding mechanisms currently available such as private funding or legal expense insurance? Can it be established whether the introduction of no win no fee arrangements has increased or decreased the number of claims relative to the situation before their introduction? Are those claims meritorious? It is sometimes alleged that no win no fee agreements encourage weak, even spurious or fraudulent, claims. Are meritorious claims failing to be funded? It is sometimes alleged that solicitors working on a no win no fee basis select only those cases with the very strongest likelihood of success. A principal factor linking fees to access to justice is the extent to which clients are protected from legal costs which can be widely defined to include the costs of the risk associated with undertaking litigation (which may be larger in England and Wales because of the English rule). By allowing the solicitor to shoulder these costs in the event of a loss, no win no fee arrangements appear naturally to address this problem particularly when coupled with deferred ATE (see Chapter 2. page 4, para. 6). In the absence of legal aid, risk-bearing arrangements by solicitors and/or legal expense insurers would seem to be the main practical alternatives to providing access to justice for those without sufficient means to contemplate self-funding Hause. John C. (1989) Indemnity, settlement and litigation or I ll be suing you. 18 Journal of Legal Studies ; Katz, Avery (1987) Measuring the demand for litigation: Is the English rule really cheaper? 3 Journal of Law, Economics and Organisation Snyder, Edward A and Hughes, James W (1990) The English Rule for Allocating Legal Costs: Evidence Confronts Theory Journal of Law, Economics and Organization and Snyder, Edward A. and James W. Hughes, James W. (1995) Litigation and settlement under the English and American rules: Theory and Evidence. 38 Journal of Law and Economics Trades Unions and professional bodies may also bear the risk as part of a package of membership benefits; in effect, this is a form of BTE legal expenses insurance. 10

19 Evidence from US studies of damage-based contingency fees seem to support the view that such fees help to encourage the filing of claims relative to other private client mechanisms. This is partly because it is the only way some litigants can afford to litigate and, perhaps, because litigants prefer an arrangement which is simpler and shifts all the upfront risk of a case. Indeed, there is evidence from simulations that lay people will pay a significant premium for shifting this risk. 20 Helland and Tabarrok identified that fewer cases are dropped under a contingency fee arrangement than hourly rates. 21 At the same time, however, it is possible that the lawyer s inherent financial interest in the outcome of a contingency fee case could cause some claims to be rejected as too risky on the basis of insufficient prospects or damages. This could have the perverse effect of reducing access to justice for certain clients. 22 Kritzer suggests that each case is evaluated on the basis of risk and return. 23 In doing so, the lawyer makes a judgement regarding the likelihood of success and the value of that success. Kritzer s large-scale interview-based study identified an overall acceptance rate under contingency fee arrangements of 47% of which 18% of cases were dropped due to the lack of adequate damages. 24 These data suggest that otherwise meritorious cases are rejected based on poor economic return. The evidence on CFAs and claim rates is limited by a basic lack of research in the area. Simply in terms of overall claims numbers, CFAs replaced legal aid without any obvious impact on claims upwards or downwards. 25 Fenn et al. s more sophisticated analysis of employer liability claims suggested that, compared with legal aid, CFAs have had a negative impact on the number of claims. 26 Evidence on whether no win no fee promotes access to justice for some meritorious cases but not others is also patchy. In principle, because CFAs break the link between fees and damages, there should be less incentive to reject claims with low expected value. Nonetheless, there is evidence that this may happen. 27 Similarly, there is some (albeit limited) evidence that practitioners will reject high cost cases under CFAs because they impact on 20 Eyal Zamir. and Ilana, Ritov.(2008) Neither saints nor devils: a behavioural analysis of attorneys contingent fees? SSRN working paper last downloaded 25 September cfm?abstract_id= Conversely, Emons suggests that a client s preference for conditional fees exists only when the potential legal costs are low and the case is regarded as strong by the client, Winand, Emons. (2006) Playing it safe with low conditional fee versus being insured by high contingent fees. 8 American Law and Economic Review Helland, Eric and Tabarrok, Alexander (2003) Contingency fees, settlement delays and low quality litigation: Empirical evidence from two datasets. 19 Journal of Law, Economics and Organisation Arguably, it is efficient for cases to be screened for low expected returns and rejected when these fail to outweigh expected litigation costs (other than those with public interest implications). 23 Kritzer,H.M. (1997) cited note Kritzer HM. (1997) cited note Morris (2007) cited note Fenn et al. (2005) cited note Fenn et al. (2005) cited note 4. 11

20 firms working capital and are perceived as inherently more risky. 28 An additional issue under CFAs relates to the availability of ATE insurance; in principle, the insurance provider will also want to screen the case in order to set an appropriate premium. Overall, in the absence of an alternative like legal aid, it appears that no win no fee arrangements open up access to justice for those who cannot afford non-contingent fees, but may constrain the types of claims that are brought by those clients. In particular, both higher risk, more expensive and low value claims may all be affected by this. Of course, it is hard to turn this into a normative statement: whether access to justice is adversely affected depends on whether too much litigation was taking place before. It follows that the research recommended below addresses the points about the level of claiming and relative barriers to access in a positive, rather than normative, way. It is also possible to address the quality of cases turned away, somewhat indirectly, through interviews with those non-claimants. This still leaves the important issue of case-strength in the cases that are brought. Proposals about how to address this can be seen below. C. Do no win no fee agreements increase or decrease the costs of the justice system? CFAs may add to the costs of the justice system in two ways. Firstly, because success fees and ATE premiums introduce additional costs into the system. Secondly, because claimants do not bear any risk for their own costs, they fail to exercise control over their own lawyers and this leads to: higher base costs (because hourly rates and the amount of hours worked are not restrained by clients); and success fees and ATE premiums unrestrained by market forces. It is important to recognise also that the courts regulate recoverable base costs, success fees and ATE premium. The concerns can be broken down as follows. Any extra costs associated with success fees and ATE premiums are illegitimate. This was not generally seriously advanced in the authors discussion and they take it as axiomatic that some level of insurance cost and success fee is appropriate if it is related to risk. If lawyers are being asked to meet the costs of claims which fail, they clearly must have some means to fund this obligation or they would make overall losses. The success fees are routinely set by claimants at a level which is disproportionate. One sees, particularly in the context of media cases, the allegation that claimant media lawyers routinely charge 100% success fees. The authors view, from talking to claimants and defendants, is that this is not a practice which is in fact routine,although claimants may be likely to have success fees which rise to 100% should a case proceed to trial. This is consistent with the logic of CFAs, particularly with staged success fees that increase towards trial, but can put significant pressure on defendants where the costs of trial are already large. 28 Moorhead (2002) and Shapland (1999) cited note 5. 12

COST AND FEE ALLOCATION IN CIVIL PROCEDURE: Reporter: Richard Moorhead, Professor of Law, Cardiff University, Wales, UK

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