Civil Justice Group weekly update. Week ending 3 February 2012

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1 Civil Justice Group weekly update Week ending 3 February 2012 Government announcements during LASPO House of Lords Committee Stage Days 5 and 6 This week the House of Lords considered amendments to Part 2 of the LASPO Bill. Part 2 of the Bill deals with changes to civil litigation funding and costs and referral fees. Full monitoring reports of proceedings during days 5 and 6 of Committee are added to this week s update as appendices. The headline announcement made by the Government during this week s Committee proceedings is that it will delay the implementation of the Jackson package until April This will mean that the Jackson package will be brought in alongside the reforms to legal aid. The Government said that the delay in implementation was necessary in order to make sure that the necessary changes to the Civil Procedure Rules are made correctly. In addition, the Government said that it is necessary for stakeholders to be given appropriate notice of when the changes will be implemented and how the details will affect them. On referral fees, the Government indicated that it may tighten up the rules from the current wording. In particular, it will consider whether further legislation is needed around the marketing of services through, for example, unsolicited phone calls or SMS text messages. The Government also clarified its position on solicitor to solicitor referral fees and ruled out exemptions for charities and trade unions. On qualified one way cost shifting, the Government confirmed that it is not persuaded of the arguments that the regime should be extended to non personal injury cases. It also resisted attempts to include QOCS within primary legislation. The Government also indicated that given the extra time now available for implementation, it will consider further consultation on the synchronisation of the introduction of the Jackson package. The Bill will have two further days of Committee in the House of Lords, on 7 and 9 February. It will then move to Report stage where amendments may be put to vote.

2 Stakeholder reaction to delay in implementing the Jackson package Post Online reports Kennedys Tracy Head as saying: Kennedys has been working with the Civil Justice Group to try and ensure that Lord Justice Jackson s recommendations are implemented as an interlocking package as intended. While we recognise that the Government may have legitimate reasons for delaying implementation in line with the introduction of reforms of legal aid, we wish to see the extra time used to get the rules and regulations correct rather than any creep away from the agreed package. Insurance Age reports that John Spencer, of Spencers Solicitors said: While I welcome the delay until April 2013, I am concerned that this will still not be adequate time for solicitors and claims management companies to make the changes necessary to restructure their businesses to be compliant with the new legislation. Post Online reports that FOIL president Don Clarke said that the news was disappointing: A six month delay is preferable to a piecemeal implementation that fails to deliver the key elements of Jackson as an interlocking package. Law Society Gazette features an opinion piece from Professional Negligence Lawyers Association president Katy Manley, who argues that the House of Lords has this week exposed the intellectual bankruptcy of LASPO Part 2. LASPO gags in the House of Lords The members of the House of Lords should be commended for the diligent, meticulous manner in which they have considered the LASPO Bill, with sessions in recent weeks often running until well into the evening. However, it s good to see that they are still able to crack a legislative joke. During the debate on Clause 45 (Recovery of insurance premiums by way of costs), Lord Beecham said: My Lords, at the risk of being accused of unqualified one way sycophancy, I must again congratulate the noble Lord, Lord Thomas, on the clarity of his presentation of this complex issue. Lord Beecham: Joker

3 Annex 1: LASPO Bill House of Lords Committee Day Five key points Top lines: Government will delay implementation of Jackson recommendations until April 2013 QOCS will not be extended beyond personal injury cases QOCS will be implemented by changes to the Civil Procedure Rules, not on face of LASPO Clause 43: Conditional fee agreements: success fees QOCS stand part of the Bill Lord Thomas opened the debate on CFAs and explained that the Government s intention in Clause 43 is to amend the current position under the Courts and Legal Services Act 1990 to provide that success fess payable to the successful claimant should no longer be payable by the unsuccessful defendant but should be paid instead by the successful claimant out of the damages he receives; all the losing defendant will pay by way of costs is the claimant s lawyer s base fees and his own costs. He said that in today s climate, he supports the Government s decision to transfer the burden of the success fee to the successful claimant. This, he said, will immediately introduce competition for clients some lawyers may even advertise that they will charge no success fees at all. Lord Thomas went on to say that Jackson recommended the introduction of qualified one way costsshifting (QOCS) and explained that the Government intend to introduce such a regime through civil procedure rules. He argued that it is essential that QOCS be on the face of the LASPO Bill. He added that he had also tabled amendments to provide clarity in defining unreasonable conduct and made provision for Part 36 offers. Extension of QOCS beyond personal injury cases Lord Beecham explained that the Opposition agrees with the Government in so far as costs in litigation are an issue and have to be dealt with. The Opposition also dislike the claims management industry and the commercial referral fees charged by companies seeking to promote litigation. He said that the Opposition would like to see QOCS for all cases and not just personal injury cases as the Bill proposes. The Opposition has concerns about ATE insurance, particularly if QOCS were to be limited, he said. He argued that the people who stand to gain are the unsuccessful defendants: they will not have to pay a success fee or the cost of insurance. The Opposition therefore argues that costs would be better controlled through better case management and proper assessment of costs, including a determination of the relevant level of success fee. In response to points raised, The Advocate General for Scotland (Lord Wallace of Tankerness), said that without Clauses 43 and 45, high and disproportionate costs in civil litigation will continue and access to justice will not become more meaningful for all parties. If amendments to Clause 43 were agreed, he argued, fundamental elements of the Government s reform package would be lost and defendants would still be liable for significant additional costs across a range of cases. To illustrate the point on the difference between claimants costs and defendants costs he gave the following example: in clinical negligence cases in the period 2005 to 2010, claimants costs paid

4 increased by 45% while the NHS Litigation Authority s legal costs declined by about 30%. This, he said, reflects Jackson s findings that claimants costs are substantially higher than defendants costs. Delay in implementation He then explained that Government said that it is conscious that stakeholders will need appropriate notice of when the changes will be implemented and how the details will affect them. For these reasons, it intends to implement the Jackson provisions in Part 2 of the LASPO Bill in April 2013 the same timeframe that has been already set out for the implementation of the legal aid provisions in Part 1. He explained that the Government has said that in personal injury cases there will be a cap on the amount of damages that may be taken as a success fee: it is important to bear in mind that the cap of 25% in personal injury cases is a maximum in order to protect claimants damages; lawyers do not have to charge a success fee of 25% of damages. He agreed with Lord Thomas that an element of competition will start to emerge. On the suggestion that success fees should be recoverable where the defendant has been unreasonable, he said that the Government does not believe this should be the case: to allow for recoverability where the defendant is alleged to have been unreasonable is a recipe for satellite litigation and even more costs being generated. In regard to changes to Part 36 of the Civil Procedure Rules Offer to Settle, he said that this will incentivise defendants to make earlier and better offers; otherwise, they will suffer increased financial penalties. On the suggestion that Jackson s recommendation (which the Government accepts) that the level of general damages in tort cases such as for pain, suffering and loss of amenity be increased by 10% become part of the Bill, he said that to do so is neither necessary nor practical. The Government believes that the level of general damages has historically been a matter for the judiciary to decide and it is of the opinion that it is appropriate for the senior judiciary to take this increase forward. On whether QOCS should be included as part of the Bill, he said that the Government considered this but decided it should be implemented by means of an amendment to the Civil Procedure Rules once the policy details on how the rules should be drafted have been finalised. The Government will, however, continue to work with stakeholders on the detail of a QOCS regime for personal injury cases. As it does so, it notes that there are difficult issues to address such as the definition of unreasonable behaviour. These important, nuanced issues are best resolved by the Civil Procedure Rules, he said. Although the Government cannot finalise a policy on the rules until the primary legislation outcome is known, the Government is of the view that there is broad agreement that it should not be a primary financial threshold in personal injury cases, although that would not necessarily apply were, at some point in the future, QOCS to be extended to other categories. In response to this, Lord Thomas explained that his concern is that this course of action amounts to a dialogue between Government and the Civil Procedure Rules committee, with no input from Parliament. He said that the amendment he had tabled was to introduce specific things for example that the word unreasonable should not be used and instead the rules should revert to

5 more familiar territory, such as frivolous, vexatious, abusive of process and fraudulent claim, thereby actually spelling out where a judge should have a discretion and where he should not. Exemptions from CFA reform Lord Beecham then introduced a number of amendments that seek exempt certain types of cases from the Government s reforms on CFAs. In response to these amendments, Lord Wallace said that these amendments stem from concerns that individuals may be unable to afford to bring certain personal injury cases. He argued that the changes the Government is bringing about will lead to costs becoming more proportionate claimants will still be able to bring necessary and meritorious claims and receive damages when they are due. He urged the House to remember that there will be a 10% increase in general damages for non pecuniary loss such as pain, suffering and loss of amenity. Further, he said, QOCS will mean that losing claimants in personal injury cases who act reasonably will not have to pay a winning defendant s costs, which in turn will reduce the need to have expensive ATE insurance products. He told the Committee that the Government intends to introduce changes to ATE insurance arrangements at the same time as the QOCS regime. Lord Bach then spoke on a group of amendments that would exclude the proposed changes to CFAs in certain proceedings such as breach of privacy or defamation. During the debate on this subject, Lord Prescott gave an account of his personal experiences. In response to these amendments, Justice Minister Lord McNally said that the right balance should be found between the freedom of the press, and the responsibility on the part of that press. He said that the Government resists all the amendments in the group as they seek to undermine the Government s reform of civil litigation funding and costs. The current arrangements, he said, with a recoverable success fee and ATE insurance allow for risk free litigation where claimants have no real interest in the legal costing incurred on their behalf. This has led to an increase into the costs of civil litigation and must be addressed. He continued to say that the Government is aware of concerns about access to justice and the ability of those with modest means to pursue claims against often powerful media companies. However, the Government does not believe it necessary to make any special provision in relation to the costs of privacy or defamation proceedings. Lord McNally then moved to the question of whether QOCS should be applied beyond personal injury cases. He explained that the Government has said that QOCS should apply in personal injury cases. Jackson suggested that QOCS might be considered for introduction in some non personal injury claims as an alternative to ATE insurance. He said that the Government is not persuaded that the case for this has been made at this stage. Personal injury cases, as a class, are different from other types of litigation, he said: they are typically run in CFAs with ATE insurance and involve claims by individuals against generally well resourced or insured bodies. Personal injury claims have a high overall success rate and the primary remedy sought is damages. The position is less clear cut in nonpersonal injury claims and rolling out QOCS to these would distort the market by imposing substantial changes on all cases in a particular category of proceedings for the benefit of a small number of claims, he said. The Government will examine the experience of QOCS in personal injury claims before considering whether it should be extended further. He said that difference considerations apply in different

6 types of case. Environmental claims, for example, typically involve more than one claimant who can contribute towards the costs. Before the event legal expenses insurance may be available in relation to the provision of goods and services. He also explained that the Government is not convinced that concerns about professional evidence claims involving negligent building surveyors, accountants or solicitors justify an exemption from the general principle of no recoverability of success fees and ATE premiums. He made it clear that the Jackson recommendations are part of a package and it is taking concern not to dismantle it by accepting amendments that would do so.

7 Annex 2: LASPO Bill House of Lords Committee Day Six key points Top lines: Government will consider tightening up referral fee ban Government rejects call for exempt charities and trade unions from referral fee ban Government will consider regulating third party funding Government will consider consulting on synchronisation of Jackson package given additional time for implementation Clause 45: Recovery of insurance premiums by way of costs QOCS In response to an amendment that seeks to apply QOCS to environmental claims, Justice Minister Lord McNally said the proposed clause would displace any rules of court in this area and provide for the Lord Chancellor instead to have the power to make regulations to extend. The Government are aware of their obligations under the Aarhus convention (requires to ensure that parties have access to a procedure to challenge relevant environmental decisions), he said. An MOJ consultation on Cost protection for litigants in environmental judicial review claims asked for views on the Government s proposals to codify the current case law on protective costs orders (PCOs) in relation to judicial review claims which fall under the Convention on Access to Justice in Environmental Matters (the Aarhus Convention ). The consultation outlined proposal for a cost capping scheme for cases that fall within the Aarhus Convention; it has now closed and the Government will announce the way forward in due course. Lord McNally also reiterated the point he had made on QOCS in the previous Committee stage the Government needs to get the details and the rules right to ensure that they are tailored properly in respect of the category of proceedings to which they apply. In personal injury cases it may well be the case that there should not be an initial financial test but this position is likely to be different for defamation and environmental cases. Synchronisation Lord Thomas raised the issue of shifting the burden of the success fee and the ATE premium over to the successful claimant. He asked the minister whether that is going to be co ordinated and timed to come into effect at the same time as one way cost shifting. This, he said, is a key issue: if you do not have one way cost shifting you are shifting to the claimant the liability for the defendant s entire costs, if he should lose, and consequently an enormous premium. Lord Bach broadened this point to what he called the greater danger of changing current arrangements, the working of which in practice is subject to regulations of which there is no sight of at present. He called on the Government to make a statement about how it intends to implement this part of the Bill. In response, Justice Minister Lord McNally said that the Government is considering a consultation and that it has already said that its judgement is that it is better in rules rather than in the Bill. He explained that the implications of this Bill will come into force in April 2013 meaning that there is a

8 period of time for such consultations. He also said that the Government takes the point that there has to be a synchronisation in these matters. Clauses agreed Clause 53: Payment of additional amount to successful claimant Third party funding Lord Thomas had tabled an amendment after Clause 53, which would make third party litigation funding agreements unenforceable (with the exception of third party agreements that satisfy all of the conditions in the amendment). Explaining his amendment, he explained that in June 2007, the Civil Justice Council (CJC) published advice to the Lord Chancellor recommending the proper regulation of third party funding. He also explained that by third party funding, he means investment by an external party otherwise unconnected to a claim in a lawsuit in order to gain a maximum return upon its investment. The CJC formed a working party in 2008 to consider the issue and a draft code of conduct was drawn up. In 2010, the CJC held another stakeholder event to consider a revised code, following Jackson s recommendations. Jackson considered the issue in his final report and recommended that a satisfactory voluntary code to which all litigation funders would subscribe should be drawn up. He also said that the question whether there should be statutory regulation of third party funders by the FSA ought to be revisited if and when the third party funding market expands. Lord Thomas argued that the market is expanding and continues to do so. He also highlighted another of Jackson s recommendations on the subject: third party funders should be potentially liable for the full amount of adverse costs, subject to the discretion of the judge. A new code of conduct on third party funding was published in November Lord Thomas suggested that this code contains manifest weaknesses. In response to these concerns, Justice Minister Lord McNally said that third party litigation funding has developed and there is a welling up of disquiet about it. The concept of legal hedge funds being established and cases bundled up as investment opportunities is something that gives rise to rightful concern, he said. He explained that, as Lord Thomas had pointed out, the question is now whether third party funding has expanded to a point where the matter should be revisited and that the Lord Chancellor would like further time to reflect. Third party s insurance company Lord Thomas also moved amendments that would ban the practice of third party capture life insurance companies and in doing so described third party capture as a nefarious practice. Amendments 164 and 164ZA would prohibit an insurer making an unsolicited approach to potential claimants in personal injury cases if the insurer was aware that the claimant had legal representation. In response, Justice Minister Lord McNally said that third party contact does not, in itself, cause detriment to consumers and may be to their advantage as a claim can often be resolved quickly. In addition, he said, this practice can allow insurers to reduce the legal costs associated with handling a

9 claim and this in turn reduces costs for all policyholders. He explained that the FSA undertook a review of third party contact during and did not find any conclusive evidence that unrepresented third parties could have achieved higher compensation had they obtained independent legal representation. Following the review, the ABI published a code of practice that limits unsolicited contact. He said that FSA rules require that insurers fully inform third party claimants of their legal rights, including to independent legal advice and of alternatives to settling directly with the insurer. Clause 54: Rules against referral fees Lord Beecham opened the debate on referral fees by explaining that the amendments he and other Lords had tabled seek to improve the wording on the Bill. None of the amendments, he said, seek to detract from the thrust of the Bill s proposals but tailor them to the realities of the issues that the Bill seeks to address and make better sense of what is in principle a sound proposal that the Opposition support. Charities and trade unions A number of peers spoke on the subject though much of the thrust of the debate was on charities and trade unions, with the suggestion that they should not be subject to the ban on grounds of fundraising. Having heard a number of peers speak on the subject, Justice Minister Lord McNally said that in their reports, Lord Justice Jackson and Lord Young supported the ban on referral fees. He explained that the Government believe that the current arrangements under which lawyers and others are able to pay and receive fees for referring personal injury claims have led to higher costs and the growth of an industry that pursues claims for profit. He went on to say that the prohibition will be enforced by the appropriate regulators the Solicitors Regulation Authority for the Law Society, the Bar Council, the FSA or that claims management regulator. The Government believes that requiring regulators to enforce the ban is the most effective and proportionate response. Lord McNally said that it is not healthy for a charity or any other body to have a dependency relationship with lawyers. However, he said that on the powerful case for aid for charity he does not see why wealthy solicitors firms could not make donations to a charity as long as there was no link for a search for work. He added that it is worrying to have a charity that is dependent on making referral fees to certain solicitors and in a way, the same applies to trade unions. Solicitor to solicitor referral fees Lord Pannick tabled an amendment (166ZA) that would exempt solicitor to solicitor referral fees from statutory prohibition. He argued that there is a public interest in solicitors having an incentive to transfer a case to another solicitor, if one has greater expertise, for example. He added that such referral fees are regulated by the SRA which has ample powers to impose sanctions on either of the solicitors if there were any abuse of proper professional standards to the detriment of the consumer.

10 In response, Lord McNally said that the Government s view is that this logic is sensible and if a solicitor decides that a piece of business needs to be transferred, it would be perfectly reasonable to see a transfer and when the transfer is made, the solicitor concerned should be able to claim a reasonable amount of money for the work dispersed before the transfer was made. It is the Government s view that reasonable payments of this type are not captured by the ban as long as they only cover the work undertaken by a firm in respect of a claim prior to it being transferred to a new firm. If there is a referral fee element to the payment, this would be subject to the referral fee prohibition and is a matter best dealt with by the regulator rather than by legislation. Marketing services Lord Clement Jones tabled amendments that would ban the provision of marketing services by unsolicited SMS text messages, telephone calls or marketing in a hospital or other primary treatment centre. During this portion of the debate, Lord Bach asked if the Government intends to move in Report stage the contents of Jack Straw s Private Member s Bill. Lord McNally responded to the amendments by first noting that the intention seems to be to make the ban more effective and harder to evade. He said the Government believes the referral fee clauses as drafted should cover the concerns the amendments seek to address. He did say, however, that although there is existing legislation on unsolicited calls, the Government will need to consider whether further legislation is needed it will therefore consider the amendment further. In response to Lord Bach, he said that the Government does not intend to move Jack Straw s Bill on Report. Clause 55: Effect of the rules against referral fees Amendments 167 and 168 not moved. Clause 55 agreed. Clause 56: Regulation by the FSA Amendments 169 to 171 not moved. Clause 56 agreed.

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