abc Civil Costs: Law and Practice Dr Mark Friston, Kings Chambers

Transcription

1 abc Civil Costs: Law and Practice Dr Mark Friston, Kings Chambers The law regulating civil costs has undergone a transformation over the past 10 years following the introduction of the CPR and the abolition of legal aid for most areas of civil litigation. The result is a complex regime of primary and secondary legislation, common law and professional conduct rules. This work includes the text of relevant statutes, rules and cases, as well as references to many authorities difficult to find elsewhere. The result is a valuable reference work which provides a one-stop-shop for the law governing civil costs. Civil Costs: Law and Practice is essential reading for all civil litigators (especially costs lawyers), costs draftsmen, solicitors with management responsibilities and the judiciary. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any way or by any means, including photocopying or recording, without the written permission of the copyright holder, application for which should be addressed to the publisher. ISBN Jordan Publishing 2010 Order Details To order a copy of this book visit our website or call customer services on , or send an to [email protected] inc mainland UK p&p

2 Chapter 29 ADDITIONAL LIABILITIES This section contains an extract from Chapter 29. ATE PREMIUMS This section focuses on the relevance of after the event (ATE) insurance to the law of costs, and in particular on the assessment of ATE premiums. It may need to be read in conjunction with the discussion immediately above (on ATE formalities). Other texts must be consulted for a detailed discussion of the actuarial aspects of insurance The CPR defines an ATE premium in this way: 1 insurance premium means a sum of money paid or payable for insurance against the risk of incurring a costs liability in the proceedings, taken out after the event that is the subject matter of the claim. Thus, the premium payable for before the event (BTE) insurance will not be regarded as being a premium for the purposes of assessing costs. Jurisdiction Under the common law, ATE premiums are not recoverable between opposing parties. 2 Statute intervened on 1 April when s 29 of the Access to Justice Act 1999 ( AJA 1999 ) came into force; it reads as follows: Where in any proceedings a costs order is made in favour of any party who has taken out an insurance policy against the risk of incurring a liability in those proceedings, the costs payable to him may, subject in the case of court proceedings to rules of court, include costs in respect of the premium of the policy. (At the time of writing, proposals had recently been made to reverse the changes made by s 29.) 4 1 CPR, r 43.2(1)(m); see also CPD, art See Seaga v Harper [2009] UKPC 26 (Jamaica) for an indication of the position under the common law; transitional provisions apply. 3 Transitional provision apply; art 3 of the Access to Justice Act 1999 (Transitional Provisions) Order 2000 reads: Section 29 (Recovery of insurance premiums by way of costs) shall not apply, as regards a party to proceedings, to: (a) any proceedings in relation to which that party took out an insurance policy of the sort referred to in section 29 before 1 April 2000; or (b) any proceedings arising out of the same cause of action as any proceedings to which sub-paragraph (a) refers. 4 R Jackson Review of Civil Litigation Costs: Final Report (December 2009), chapter 9.

3 2 Civil Costs: Law and Practice Phillips MR has clarified that the phrase liability in those proceedings means liability for legal costs. 5 He has also explained that the words insurance against the risk of incurring a costs liability should be read as meaning insurance against the risk of incurring a costs liability that cannot be passed on to the opposing party. 6 This means that the costs of own costs cover are, in principle, recoverable from a paying party. This includes an element for covering the risk of being unable to recover the premium as a consequence of losing the action. 7 Costs-only proceedings The fact that the proceedings are costs-only proceedings rather than substantive proceedings does not diminish the jurisdiction to recover an ATE premium; this is for the reasons set out immediately above, and also because an ATE premium is recoverable notwithstanding the fact that it was taken out before proceedings were commenced. 8 Notice of funding and the rules of court generally The effect of AJA 1999, s 29 is subject to rules of court; there are only two rules of any note: (1) CPR, r 44.3B(1)(e) provides that a party will not be able to recover any insurance premium where he has failed to give his opponent notice of funding (see ; the principles are broadly the same as those relating to success fee). The notice requirements are set out in the footnotes. 9 There is also a requirement to serve a copy of the certificate at the time the bill of costs is served; 10 the very similar issue of failure to supply a statement of reasons in respect of the success fee has already been dealt with at and those principles are not repeated here. (2) CPR 44.12B imposes a specific restriction in publication cases (ie defamation, malicious falsehood, etc); this is discussed at The role of the common law For the reasons set out above, ATE policies are largely governed by legislation; the common law seems to have very little residual relevance. Whilst not binding, Master Hurst found that there was nothing, in principle, objectionable about the notion of the 5 Callery v Gray [2001] EWCA 1246 at [7]. 6 Callery v Gray [2001] EWCA 1246 at [59]. 7 Callery v Gray [2001] EWCA 1246 at [63]. 8 Callery v Gray [2001] EWCA Civ 1117 at [54], per Woolf CJ. 9 CPD, art 19.4(3): Where the funding arrangement is an insurance policy, the party must (a) state the name and address of the insurer, the policy number and the date of the policy and identify the claim or claims to which it relates (including Part 20 claims if any); (b) state the level of cover provided by the insurance; and (c) state whether the insurance premiums are staged and, if so, the points at which an increased premium is payable. 10 CPD, art 32.5(2): If the additional liability is an insurance premium: a copy of the insurance certificate showing whether the policy covers the receiving party s own costs; his opponents costs; or his own costs and his opponent s costs; and the maximum extent of that cover, and the amount of the premium paid or payable.

4 Additional Liabilities 3 level of a premium being linked to the damages recovered. 11 If this is correct, the law of champerty has no part to play in this area of the law. Components of the premium and the language of ATE insurance A premium may be made up of the following four elements, all of which are recoverable in principle: burning costs, risk/profit costs, administrative costs and distribution commission. 12 Burning costs Burning costs are the cost of meeting claims; it may also be called the basic pure underwriting cost. Broadly speaking there are two ways in which they may be calculated: individual rating (where the risk is assessed in each case or each category of risk and the premium set accordingly), and block rating (where a uniform premium, or series of premiums, is charged for any case which is deemed to have adequate prospects of success). 13 The term individual assessment is also often used. Risk/profit costs This will include the insurer s profit, but will not necessarily be limited to that; instead, it may include the costs of reinsurance (see ). Administrative costs These include items such as personnel, premises, issuing costs, processing costs, and claims administration. Distribution commission These cover advertising, marketing and commissions paid to brokers, underwriting agents or other intermediaries In addition, there may be monies claimed in the lump sum which may be referred to as being a premium but which cannot properly be categorised in that way. Those monies are discussed under the heading deconstruction at The court does not seek to be its own actuarial advisor. Indeed, Buxton LJ has emphasised the breadth of the discretion conferred on the costs judge by CPR, r 44.4 and that it is a discretion which cannot be exercised with mathematical nicety. 14 Unless a specific case merits expert evidence, there is (at present, at least) no need for the court to decide issues of reasonableness by reference to actuarial method. Nonetheless, there is 11 Pirie v Ayling [2003] EWHC 9006 (Costs). 12 Callery v Gray [2001] EWCA 1246 at [21] [26]; see also CPD, art Block rating is a phrase that is used to describe a portfolio or book of claims, of the same or a similar type, where it is expected that the claims will be insured on or before a particular point in time (such as before sending a letter of claim). This approach is based on the insurance principle of the many paying for the few so that there is a spread of risk within a basket of cases that are expected to be insured. This approach is adopted where there is a large number of claims, and is, therefore, particularly suitable for cases dealt with by delegated authority. 14 Sharratt v London Central Bus Company and other cases (No 2) The Accident Group Test Cases [2004] EWCA Civ 575 at [37].

5 4 Civil Costs: Law and Practice no harm in knowing the language of ATE insurance, 15 nor is there any harm in knowing the fundamentals of the concepts by which premiums are calculated. The following is only the most rudimentary of guides to these issues and (with one or two very limited exceptions) it is not intended for use as an aid to assessing the reasonableness of a premium. The reader is referred to standard actuarial textbooks for a more detailed exposition of this topic The mechanism by which a premium is set is called rating. The premium will relate to a pool of policies which will be accounted for as a group and which is called a book ; the composition of the book will be such that assumptions known as underwriting assumptions may be made about the book and about the cases within it. There are many different methods of rating, and an insurer may use more than one method to arrive at and then check a premium. The methods which are commonly used are experience rating (where historical data, known as claims experience, is taken into account) and rating based on assumed distributions (where estimates are made of the risks, and assumptions are used to calculate the way in which that risk is distributed) There are two significant concepts which are relevant to the issue of rating. The first is gross net premium income (which is usually referred to as GNPI ); it is the amount of premiums recovered before any adjustment. The second is burning cost (which is sometimes known as burn costs ), which are the basic costs of underwriting, ie the cost of paying claims (see ). The insurer will seek to balance the books in such a way as to allow GNPI to pay for the benefits and for running the business. This goal is called adequacy. In addition, insurers will seek to achieve equity (ie a fair price), not least because that is the method most likely to attract customers. 18 Once the premium has been set at a level which achieves adequacy and equity, then monies must be put to one side to cover adverse outcomes. Those monies are called reserves and the method used to calculate them is called valuation There are many methods by which an insurer may seek to balance its books. The most obvious is to set premiums that are high enough to achieve adequacy. That said, insurance is all about risk, and this means that an alternative is to manage the risk rather than merely to charge enough to cover it. An insurer may seek to limit risk by stipulating a level of cover, or he may seek to spread the risk by obtaining reinsurance. 20 Limits of cover are not necessarily limited to the limit in any given case, but where a number of policies are linked, they can be aggregate limits (ie in one claim, but no more than overall. Reinsurance is insurance that the insurer buys to provide a further layer of insurance; an example would be where an insurer wanted to insure against the risk of having to pay out more than a certain amount. Many actuarial calculations regard the cost of reinsurance as being part of the insurer s profit; whilst an oversimplification, this is on the basis that an alternative to reinsurance is simply to hold a floating fund, and if the burning cost has been calculated correctly, that floating fund would, over a very large number of claims, be left untouched. 15 A useful synopsis of this topic can be found in C Bennett Dictionary in Insurance (Prentice Hall, 2nd edn, 2004). 16 A Schwepcke Reinsurance (Verlag Versicherungswirtschaft GmbH, 2nd edn, 2004); T Mikosch Non-life insurance mathematics: an introduction with stochastic processes (Springer, 2003). 17 A Schwepcke Reinsurance (Verlag Versicherungswirtschaft GmbH, 2nd edn, 2004), p S Promislow Fundamentals of Acturial Mathematics (Wiley-Blackwell, 2005), para See MV Wüthrich Market-consistent Actuarial Valuation (Springer, 2007). 20 A Schwepcke Reinsurance (Verlag Versicherungswirtschaft GmbH, 2nd edn, 2004), section 6.

6 Additional Liabilities The methods by which the burning risks are estimated are more complex and subtle than merely taking the estimated size of the adverse costs and multiplying that by the estimated risk that an adverse costs order will be made. That, however, is the essence of an entirely acceptable actuarial method (albeit a basic one) known as the deterministic model. Greater sophistication may be achieved by applying a stochastic model, which assigns probabilities to certain categories of loss. It is by doing this that statistical methods may be brought to bear. 21 It is this method which allows different categories of risk to be identified, a relevant example being where staged ATE premiums are charged (thereby dealing separately with those cases which do not settle at an early stage) As mentioned above, two commonly used methods of estimating those two parameters are experience rating and rating based on assumed distributions. The latter is a matter of judgment whereas the former is a matter of analysing data. Experience rating uses data gleaned either during or after a period known as the observation period; that data is then used to predict what is likely to happen during the period of cover (which is known as the rating period). For experience rating to work well, three conditions must be met: first, historical data must exist; secondly, it must relate to claims which are representative of claims in the rating period; and, thirdly, any changes which have taken place between the observation period and the rating period must be such that allowances can be made. It is the process of making allowances which is where actuarial skill becomes particularly relevant. Allowances may be made for almost anything, such as inflation, changes in the law, changes in economic conditions, etc For all the reasons set out above, historical data and claims experience are both invaluable resources from an ATE insurer s point of view. This is because claims experience and experience of detailed assessment will respectively allow the twin goals of adequacy and equity to be achieved. The converse is that the absence of that type of experience means that it can be difficult to balance the books in a fledgling market. It is, perhaps, because of this that the court (to date, at least) has not shown a great willingness to examine the reasonableness of the underwriting assumptions made for the purposes of rating the premium. Types There are many different types of policy providing for many different types of premium. The following is a brief and non-exhaustive list; it has been prepared with the kind assistance of Mr Rocco Pirozzolo (a well-respected expert on the ATE market). Single premium A policy which provides for a single premium is an ordinary ATE policy which provides for a single premium payable in full regardless of the outcome of the claim. Staged premium A staged premium is a premium which is quantified by reference to the stage at which the claim concludes; it is also often called a stepped premium or a rebated premium. The amount payable increases if the litigation fails to settle before certain 21 S Promislow Fundamentals of Acturial Mathematics (Wiley-Blackwell, 2005), paras 1.4 and A Schwepcke Reinsurance (Verlag Versicherungswirtschaft GmbH, 2nd edn, 2004), p 309.

7 6 Civil Costs: Law and Practice pre-defined steps. It may be calculated by way of a diminishing discount or an escalating price: the effect is broadly the same regardless of which it is. A premium is usually referred to as being staged or stepped where it is deferred (ie where there is an escalating price). The term rebated is usually reserved for premiums which have been paid at inception on the basis that it will be partially refunded if the claim settles early (ie it is a policy which provides for a diminishing discount). Deferred premium A deferred premium is a premium (which may be single or staged) which is not payable upon inception, but instead is payable either upon conclusion of the claim or upon termination of the policy, whichever occurs first. A deferred premium is often combined with own-premium cover (see below). The phrase deferred premium is often loosely used to refer to a premium which is payable only if the claim is successful; whilst it is true to say that such a premium is a deferred premium, this term is also used to describe many other types of premium, and it is therefore not a usage to be encouraged. Own-premium cover Own-premium cover will exist where the policy provides cover for non-recovery of the premium. 23 The premium may be deferred, but it may also be payable upon inception. Where it is payable on inception it would usually be covered by a disbursement funding loan which will be paid off by the insurer in the event of an adverse outcome. Own disbursements cover This is a policy which provides cover for the insured s own disbursements (either including, or excluding counsel). What is and is not a disbursement will be a matter of contractual interpretation. The word disbursement may be defined in the policy as including the ATE premium itself; this is one mechanism by which own-premium cover (above) might be provided. Both sides costs This is an extended form of the category above, but rather than the cover being limited to the insured s disbursements, it includes cover for the insured s other costs. It is an alternative to funding by way of conditional fee agreements. Mr Pirozzolo confirms that whilst it is a small market, it does exist. 24 Delegated authority Delegated authority modifies the administrative process by which a policy comes into existence. A solicitor with delegated authority is able to incept a policy without having first to obtain case-specific authority from the insurer or from an intermediary. It is often combined with block rating (see ). Delegated authority will arise out of an authorisation agreement between the insurer and the solicitor; that agreement will almost always include provisions which are intended to avoid adverse 23 Hughes LJ was obviously impressed by this type of policy as he has commented that it was remarkable : Jones v Wrexham Borough Council [2007] EWCA Civ 1356 at [75]. 24 Personal communication with Mr Rocco Pirozzolo, 25 November 2009.

8 Additional Liabilities 7 selection (see ). Mr Pirozzolo confirms that delegated authority schemes are common for personal injury and clinical negligence claims, but that they are also available for other types of claim. 25 The assessment of ATE premiums This topic is addressed in two parts: first, the issue of quantum in general and, second, deconstruction (which is a process whereby the premium is broken down into its constituent parts) It should be said at the outset that while it is possible to analyse premiums in great detail, it is rarely the case that the court will entertain a challenge beyond considering whether it was reasonable to take out the policy and checking that it is not grossly out of line with the market norm. Inception and reasonableness Whether it was reasonable to take out a policy will depend on the facts of each case, but for the reasons mentioned below, those facts may extend beyond the individual case to include the wider context of the ATE market itself. That wider context has been referred to as insurance macroeconomics. There are four topics which merit discussion: the relevance of alternative means of funding, the relevance of supposed absence of risk, adverse selection, and timing. Whilst premiums are like all costs assessed under CPR, r 44.4, the method of assessment is unique under the CPR in that costs may be allowed as being both reasonable and proportionate notwithstanding the fact that they may not have been reasonably required for the purposes of funding the case in question. Alternative means of funding If a receiving party unreasonably eschewed an alternative means of funding in favour of an ATE policy, then it would be open to the court to disallow the premium on the basis that it was a cost which had been unreasonably incurred. 26 Alternative means of funding would include before the event insurance (BTE insurance), trade union funding, legal aid, etc. The CPD specifically mentions pre-existing insurance as being a relevant factor; 27 the availability of BTE insurance is discussed in detail at The fact that an alternative means of funding was available would not necessarily mean that it would be unreasonable not to use it. This is because it might not be suitable. If, for example, the BTE cover insisted on the use of far-flung panel solicitors, then it might, in certain circumstances, be reasonable to reject that as a means of funding. Again, these issues are addressed at Absence of risk The lower the risk that an adverse costs order may be made, the less pressing the need for ATE insurance. There are examples of the court finding that the risk was so 25 Ibid. 26 See CPR, r CPD, art 11.10(2).

9 8 Civil Costs: Law and Practice low that no insurance was required at all, 28 but it would not often be the case that the level of risk would be the sole determining factor. In particular, it may be that the receiving party s solicitor is obliged to recommend a policy as a condition of his delegated authority (this is known as obligatory recommendation). Many delegated authority schemes impose an obligation of this type in an effort to avoid adverse selection. This is discussed in more detail below. Adverse selection and macroeconomics Adverse selection is cherry picking (or, more accurately, it is what is left on the tree after the best cherries have been picked). It results from the solicitor electing not to recommend insurance in those cases in which the risks are very low. If the insurer s underwriting assumptions have been based on data where there has been no adverse selection, then those assumptions will be undermined by the fact that the risk will be much greater, on average, than envisaged. This can lead to a failure to charge an adequate premium and, in extreme cases, can even lead to GNPI being less than the burning risk These considerations do not relate to the individual litigant or to the case in question, but to the insurer and its economic needs. Lord Scott has used the word macroeconomics to describe that topic. 29 There can be no doubt that it is reasonable and legitimate for an insurer to have concerns about the macroeconomic position of the insurance book in question. Indeed, Woolf CJ has even gone so far as to say that delegated authority schemes will not work unless there are safeguards against adverse selection. 30 He has explained that if a solicitor is without restraint permitted to choose which cases merit ATE insurance and which do not, then the principle that the many will pay for the few will become distorted. He went on to find that the need to avoid adverse selection might amount to reasonable justification of a decision to take an ATE policy. This would be a significant development in the law of costs because it would mean that costs could be recovered notwithstanding the fact that the case itself (taken in isolation) did not justify those costs being incurred; this is discussed further at Although Woolf CJ s judgment was not overturned on appeal, Lord Nicholls expressed doubt as to whether this would continue to be the case in the future. He commented that in a mature market where premiums had been adjusted so as to avoid underfunding, the need for obligatory recommendation in all cases is something which may need to be kept under review. 31 It was implicit in his reasoning, however, that adverse selection would be a factor to be taken into account, even if it were not determinative of the matter It is informative to note what Lord Scott had to say in his dissenting judgment; this is because it highlights the difference between the assessment of costs in isolation and in a macroeconomic context: As an illustration, see Dhanoia v Mehmi, 17 October 2007, Bristol County Court, in which a district judge found that so little was in dispute that it was unreasonable to take out ATE insurance, notwithstanding the modest size of the premium. 29 Callery v Gray [2002] UKHL 28 at [114]. 30 Callery v Gray [2001] EWCA Civ 1117 at [67]. 31 Callery v Gray [2002] UKHL 28 at [41]. 32 Callery v Gray [2002] UKHL 28 at [114].

10 Additional Liabilities 9 The question whether the paying party should be required to meet a particular item of expenditure is a case specific question. It is not a question to which the macroeconomics of the ATE insurance market has any relevance. If the expenditure was not reasonably required for the purposes of the claim, it would, in my opinion, be contrary to long-established costs recovery principles to require the paying party to pay it In other contexts costs are assessed solely on the facts of the case in hand. It is a striking departure from the customary method of assessment to assess a premium by reference to other facts (ie to facts unrelated to the claim itself). There are many instances in which costs are claimed as a result of a contractual obligation to pay for services which were required only transiently or which were believed to be required but eventually were not required; 33 it is, however, difficult to think of any other instance where an item of expenditure is allowable where there was never any need for it at all. It is, perhaps, because of this that Lord Nicholls was so careful to make it clear that the current practice (of giving weight to the need to avoid adverse selection) is something which needs to be kept under review and that it may not be a permanent state of affairs. Timing (prematurity and late application) The next issue is whether it would be appropriate to object to a premium on the basis that the policy was taken out too early (early inception) or too late (late application). It could never be the case that a policy had been taken out so prematurely that it fell beyond the jurisdiction of AJA This is because the act permits recovery of the premium even where the policy was taken out only in contemplation of proceedings and before they were commenced. 34 The issue is, therefore, not a jurisdictional one, but a question of reasonableness Woolf CJ has given the following reasons why it would be reasonable to take out ATE insurance at an early stage: 35 premiums will produce cover which would benefit defendants in the sense that there would be a means by which costs awarded in their favour would be paid; the interests of defendants could, with the assistance of the court, be preserved by restricting premiums to amounts which are reasonable having regard to overall requirements of the scheme created by AJA 1999; claimants would be able to know at the outset that a satisfactory arrangement had been made to provide cover for an adverse costs order; access to justice would be enhanced by legal representatives being about to offer claimants a service that includes all of these benefits; and there is a risk that unless a policy is taken out before it is known whether liability is going to be contested, the premium might rise substantially, or no policy might be available at all. Woolf CJ s comments were made in the context of modest road traffic accident cases; the relevance of this is that it is not necessarily the case that the same logic would apply to less quotidian types of claim. Indeed, the fact that the CPR deals with one type of 33 Examples would include booking fees and cancellation fees. 34 Callery v Gray [2001] EWCA Civ 1117 at [54], per Woolf CJ. 35 Callery v Gray [2001] EWCA Civ 1117 at [99].

11 10 Civil Costs: Law and Practice claim (publication claims) in such a way as to discourage early inception, suggests that different considerations apply to other types of claim. The details of publication claims are addressed in the footnotes At the other end of the spectrum is where it is said that the receiving party left it so late to apply for ATE insurance that he has made himself unable to obtain insurance at modest cost. Although there is no authority on the point, it would seem probable that each case must be decided on its own facts. 37 Where the deferral was for good reason (such as an attempt to limit costs until they became unavoidable), it is not likely that the court would find fault. 38 Quantum (other than deconstruction) Measure and judicial approach There are two ways in which the reasonableness of a premium may be gauged: first, it may be measured in terms of its overall reasonableness and, second, it may be broken down into its constituent parts. The latter is called deconstruction and is considered at The first point to make is that it is trite costs law that the court will not allow costs which are unreasonable; this means that the court is able to take a robust view and to reduce a premium if it is unreasonable. 39 For the reason set out below, reductions will not be common without case-specific evidence, but they are not unknown On the whole, however, reductions will be made on the basis of case-specific or macroeconomic evidence. In this regard, CPD, art gives the following guidance about the appropriate factors to be taken into account: 36 Publication claims include claims in defamation and malicious falsehood. They are notoriously expensive. Where a publication claim settles prior to the issue of proceedings, the CPR imposes significant restrictions on the recoverability of premiums. Although those restrictions are not phrased in the language of prematurity and reasonableness, it must be the case that they have a bearing on that issue because they can only be a strong disincentive to litigants taking out ATE insurance at a stage which is earlier than the expiry of the prescribed periods. Those restriction are set out in CPR, r 44.12B: (1) If in proceedings to which rule 44.12A applies it appears to the court that (a) if proceedings had been started, they would have been publication proceedings; (b) one party admitted liability and made an offer of settlement on the basis of that admission; (c) agreement was reached after that admission of liability and offer of settlement; and (d) either (i) the party making the admission of liability and offer of settlement was not provided by the other party with the information about an insurance policy as required by the Practice Direction (Pre-Action Conduct); or (ii) that party made the admission of liability and offer of settlement before, or within 42 days of, being provided by the other party with that information, no costs may be recovered by the other party in respect of the insurance premium. (2) In this rule, publication proceedings means proceedings for (a) defamation; (b) malicious falsehood; or (c) breach of confidence involving publication to the public at large. To a certain extent these provisions place the issue of his liability for premiums in the hands of the paying party. 37 The points made about macroeconomics at would not apply in these circumstances. 38 See, for example, RSA Pursuit Test Cases, Re [2005] EWHC (Costs) at [365] [374]. 39 Callery v Gray [2001] EWCA 1246 at [11]. 40 See, for example, Smith v Interlink Express Parcels Ltd [2007] EWHC (Costs).

12 Additional Liabilities 11 In deciding whether the cost of insurance cover is reasonable, relevant factors to be taken into account include: (1) where the insurance cover is not purchased in support of a conditional fee agreement with a success fee, how its cost compares with the likely cost of funding the case with a conditional fee agreement with a success fee and supporting insurance cover; (2) the level and extent of the cover provided; (3) the availability of any pre-existing insurance cover; (4) whether any part of the premium would be rebated in the event of early settlement; [and] (5) the amount of commission payable to the receiving party or his legal representatives or other agents. A conspicuous omission from this list is risk; this is discussed at Comparison with conditional funding A comparison with conditional funding 41 will be relevant in those cases where no success fee is claimed. The task is to compare the premium with the additional liability that would have been charged had the receiving party s solicitors had acted under a conditional fee agreement which provided for a success fee. Presumably, this means that the court should form a view about the level of success fee that would have been charged if a conditional fee agreement had been made at the time the policy was incepted Like must be compared with like and, in any event, it would be a mistake to try to deal with the comparison with any degree of mathematical nicety. 42 The level of cover The level of cover is a factor that may be taken into account. There are two ways in which it may be relevant: first, the level of cover may be said to have been excessive, and that a cheaper policy with a lower level of cover ought to have been used; and secondly, it may be said that the premium was excessive, given the level of cover (that is, that the premium was over-rated). Both of these are topics which may call for the expertise of an expert broker or an expert actuary, but this will not always be the case: where the over-rating is obvious, the court may draw upon its own knowledge and its own experience (see ) The point at which the court abjures any notion of its own actuarial competence is quickly reached, and it would generally be only in cases of gross over-rating of the premium that the court would claim the ability to intervene. Brooke LJ had the following to say: See CPD, art 11.10(1). 42 Sharratt v London Central Bus Company and other cases (No 2) The Accident Group Test Cases [2004] EWCA Civ 575 at [33] [37]. 43 Rogers v Merthyr Tydfil County Borough Council [2006] EWCA Civ 1134 at [111]; see also [117].

13 12 Civil Costs: Law and Practice [The court does not have] the expertise to judge the reasonableness of a premium except in very broad brush terms, and the viability of the ATE market will be imperilled if they regard themselves (without the assistance of expert evidence) as better qualified than the underwriter to rate the financial risk the insurer faces Whilst their limitations must at all times be borne in mind, it is helpful to know something of the relevant actuarial principles (see ); this is because a back-of-the-envelope calculation may be used as a screening test in some cases, and as a cross-check in others. Where there is no suitable factual or expert evidence, it may also be a judicial method of last resort. 44 It is possible to estimate the burning costs by looking at the level of cover and the risks in the litigation generally; once the burning costs have been estimated, an allowance may then be made for the costs of administration, etc. It is possible to arrive at a rough approximation of what the premium should be, based on the assumptions which led to the relevant figures being selected Whilst over-reliance or inappropriate reliance on back-of-the-envelope calculations will lead to error, such calculations do have a role; in particular, they can legitimately demonstrate that actuarial calculations may give rise to results which are surprising and counter-intuitive. This can be demonstrated by the following example. Suppose a paying party complains that the premium is close to or even exceeds the level of cover. Intuitively, that premium would seem to be excessive. If, however, the policy provides for own-premium cover (see ), then the premium that would otherwise have been charged would itself need to be added to the costs which comprise the burning costs. This can have the effect of nearly doubling the premium. When an allowance of, say, 50% is then added for administration, profit, reinsurance, etc, it can be seen that a premium which exceeds the level of cover is by no means unjustifiable (although, of course, it may be objectionable on other grounds, such as equity) In summary, back-of-the-envelope calculations do have a role to play, but this is usually as a screening test or as a cross-check. They may be used as a judicial method of last resort. The availability of alternative means of funding This topic is addressed at Whilst it usually goes to recoverability in principle, the availability of pre-existing insurance cover is capable of going to the issue of quantum. This is because BTE cover may have been available up to a certain limit. If the costs exceed the limit of a BTE policy and if it was not used, then it could be argued that the premium would have been lower had the BTE policy been used to fund part of the claim. Staged/rebated premiums The term staged premium will be used to refer generically to those types of premiums described at (ie premiums which increase as the claim progresses). Staged premiums are an example of the stochastic method mentioned at The underlying rationale is that riskier cases are selected by virtue of the fact that they do not settle, and that it is, therefore, appropriate to levy higher premiums in those cases to take account of the higher-than-average risk. 44 See, for example, Smith v Interlink Express Parcels Ltd [2007] EWHC (Costs).

14 Additional Liabilities Common sense dictates that the fact that a rebate was available during the early part of the proceedings would be a factor the court could take into account when assessing the reasonableness of the premium. The receiving party would argue that under a staged-premium model, the source of the GNPI had shifted from those claims which settled early to those claims which had not. This shift is between claims rather than within claims: this means that it would not be legitimate to compare final-stage with the premium (hereinafter referred to as the unrebated premium ) which would applied under a single-premium model. 45 Notwithstanding this, there are examples of the court looking at the reasonableness of the individual stages, 46 albeit with obvious reluctance There is no guidance in the CPR or elsewhere as to how stage premiums should be assessed. It can, however, be demonstrated by elementary mathematics that the final-stage premium can be surprisingly high when compared with the unrebated premium. If no adjustment is made for differential rates of failure, then where the proportion of cases which go to trial is t and where the lower premium is d of the unrebated premium, the factor by which the unrebated premium (P r ) must be increased is as follows: If, for example, the first-stage premium is 75% of the unrebated premium, and if only 5% of cases reach trial, the final-stage premium must be 5.75 times higher than the unrebated premium (and this assumes that the cases which go to trial will be no more likely to lose than the average case). If the insurer wishes to reduce the lower premium to 50% of the unrebated premium, the higher premium must rise to 10.5 times higher than the unrebated premium in order to preserve GNPI. Thus, small changes can have very large effects. The relevance of this is that it can be difficult to form a view as to the reasonableness of staged premiums One factor that may be relevant is that the risk associated with first-stage premiums will usually be very much lower than that associated with final-stage premiums. Lord Scott made the following comment about this (albeit in a dissenting judgment): 47 It is important to notice that this risk cannot arise unless litigation is commenced. This is relevant because it affords the insurer an opportunity to manage risk, that is the lower premium can be crafted so that it covers virtually no risk at all, but is still available to make up the reserves for other cases. This makes the topic even more complex, however, as it means that any rating calculation must take into account the different risks which pertain to the different premiums. It is at that point that the calculations move from being simple deterministic calculations into being stochastic ones, and that is unquestionably a topic which can be addressed only with the benefit of expert evidence. 45 Rogers v Merthyr Tydfil County Borough Council [2006] EWCA Civ 1134 at [111]. 46 See, for example, Smith v Interlink Express Parcels Ltd [2007] EWHC (Costs). 47 Callery v Gray [2002] UKHL 28 at [70].

15 14 Civil Costs: Law and Practice Commission Commission is money the insurer pays to a third party for the purposes of obtaining business. The CPD does not refer to commission in general, but only to commission payable to the receiving party or his legal representatives or other agents. 48 This type of commission is dealt with separately because, in general, it is not payable by the paying party. By way of example, if out of a premium of 450 a commission of 50 is payable to the receiving party s solicitor, the maximum indemnity that the paying party could be asked to provide would be 400, this being because the receiving party would be able to ask his solicitor to account to him for the commission of 50 (see ) Other types of commission (ie ones payable to persons other than the receiving party or his legal representatives or other agents) are probably best regarded as being part of the insurer s general overhead and therefore of no more significance than any other expenditure. 49 This does not mean that they are wholly irrelevant, however; this is because they will be part of the overall costs of the business and, as Phillips MR has explained, if an insurer incurs extravagant expenditure, its premiums are likely to be uncompetitive and not recoverable in full. 50 Risk A noticeable omission from the CPD s list of relevant factors is the risk that a claim may be made on the policy. Brooke LJ has confirmed, however, that it is a relevant factor. 51 Risk is often taken into account for the purposes of making a rough estimate of the burning costs, which is generally used as a crosscheck for confirming (or refuting) the reasonableness of the premium Where the premium is block rated, then the risk in the individual case will be an irrelevance because the premium would have been calculated without reference to that risk, but where the premium has been individually rated, it may be a relevant factor. The relevance of risk, and the many and complex ways in which it may be measured, has been addressed at It can be seen that it would be naive and occasionally plainly wrong to say that a risky case justifies a high premium. Where, however, there is evidence that it is relevant to the way in which the premium has been calculated, then it will be a factor to be taken into account The risk includes any risk which may be covered by insurance falling within the ambit of AJA 1999, s 29. In particular, there is no objection in principle to a premium being based on a risk that the insured may fail to beat a Part 36 offer and may be required to pay costs as a result CPD, art 11.10(5). 49 As an example of such a commission being allowed see Re Claims Direct Test Cases [2003] EWCA Civ 136 at [47]. 50 Callery v Gray [2001] EWCA 1246 at [13]. 51 Rogers v Merthyr Tydfil County Borough Council [2006] EWCA Civ 1134 at [108]. 52 For example, see Tyndall v Battersea Dogs Home [2005] EWHC (Costs) at [80] [98] in the context of a block rated premium and Rogers v Merthyr Tydfil County Borough Council [2006] EWCA Civ 1134 in the context of an individually rated premium. 53 Callery v Gray [2001] EWCA 1246 at [31].

16 Additional Liabilities Risk is difficult to measure, and therefore premiums based on an estimate of risk are difficult to monitor. This means that there is the potential for profiteering. That potential ought to be limited by the concept of equity (see ), but in insurance generally the ultimate moderating influence is the market. In the ATE insurance business the market is skewed by the fact that very often (if not most often) the insurer will look to a stranger for payment of his premium rather than to his own client. This potential for abuse was noted by Lord Bingham in the following terms: 54 A possible abuse [of the system of funding by way of CFAs and ATE] was that claimants, although able to obtain after the event insurance, would be able to do so only at an unreasonably high price, the after the event insurers having no incentive to moderate a premium which would be paid by the defendant or his insurers and which might be grossly disproportionate to the risk which the insurer was underwriting Brooke LJ seems to have placed greater faith in the ability of the market to regulate ATE premiums, however; he had this to say: 55 Although the claimant very often does not have to pay the premium himself, this does not mean that there are no competitive or other pressures at all in the market. As the evidence before this court shows, it is not in an insurer s interest to fix a premium at a level which will attract frequent challenges. Brooke LJ s analysis is entirely in keeping with the principle of equity (ie the professional goal of rating a premium at a level which is fair: see ). There are, however, those who say that it is hard to reconcile Brooke LJ s analysis with the following comments of Lord Nicholls: 56 ATE insurers do not compete for claimants, still less do they compete on premiums charged. They compete for solicitors who will sell or recommend their product. And they compete by offering solicitors the most profitable arrangements to enable them to attract profitable work. There is only one restraining force on the premium charged and that is how much the costs judge will allow on an assessment against the liability insurer Although the two analyses may at first appear to be directly contradictory, on closer analysis they are not. This is because Lord Nicholls was speaking about a general, theoretical concern about policies which fund themselves wholly from the monies recovered as costs. Brooke LJ, on the other hand, was giving judgment on the basis of evidence going to the state of a particular market at a particular time. Put another way, the extent to which the court can rely on the market as a moderating influence will depend on the circumstances of the market in question. Proportionality The question of whether an additional liability is proportionate must be considered separately from the question of whether base costs are proportionate. 57 This does not mean that an ATE premium will escape the test of proportionality: indeed, 54 Callery v Gray [2002] UKHL 28 at [5]. 55 Rogers v Merthyr Tydfil County Borough Council [2006] EWCA Civ 1134 at [105]. 56 Callery v Gray [2002] UKHL 28 at [43]. 57 CPD, art 11.5.

17 16 Civil Costs: Law and Practice there are instances of the court reducing premiums solely on the grounds of proportionality (usually by finding that the particular choice of premium was disproportionate) The test of proportionality applies in a way which takes into account the macroeconomic factors mentioned above (see ). In simplistic terms, the court recognises as a matter of pragmatism that if, for good macroeconomic reasons, the market dictates that it will not offer less expensive policies, then it will be necessary (within the meaning of the test in Lownds v Home Office) 59 for the receiving party to take out a policy which is less than ideally priced. Brooke LJ had the following to say on the topic: 60 Necessity may be demonstrated by the application of strategic considerations which travel beyond the dictates of the particular case. Thus, it may include the unavoidable characteristics of the market in insurance of this kind. It does so because this very market is integral to the means of providing access to justice in civil disputes in what may be called the post-legal aid world In practical terms, this means that if a solicitor is tied to recommending a particular contract of insurance to all his clients with viable claims, and if the receiving party can show that that was as a result of a legitimate need to avoid adverse selection, then the premium is likely to be allowed One method of ensuring proportionality of premiums is to link them to the value of the claim. Whilst not binding, Master Hurst has found that such an approach is not, in principle, champertous. 61 A similar method is to link the premium to the level of costs generally. Again, Master Hurst has found that such a premium is untouched by the law of champerty. 62 Evidence and comparators Judicial notice and judges personal knowledge That a judge is permitted to take personal knowledge into account when assessing a premium was confirmed by Phillips MR: 63 When considering whether a premium is reasonable, the Court must have regard to such evidence as there is, or knowledge that experience has provided, of the relationship between the premium and the risk and also of the cost of alternative cover available. In view of the narrow view that the court takes of evidence of reasonableness (see below), it is likely that Phillips MR was referring to personal knowledge of the market in general rather than to knowledge of specific types of insurance. Nonetheless, there are instances of the court drawing upon its knowledge of specific types of policy in order to 58 See, for example, Baker in RSA Pursuit Test Cases, Re [2005] EWHC (Costs). This case is not binding. 59 [2002] EWCA Civ Rogers v Merthyr Tydfil County Borough Council [2006] EWCA Civ 1134 at [105]. 61 Pirie v Ayling [2003] EWHC 9006 (Costs); this case is not binding. See the discussion at See RSA Pursuit Test Cases, Re [2005] EWHC (Costs) at [283] [297] and, in particular, [260]. On the facts of that case where the premium was in the same order of magnitude as the costs, he found that for that approach to work, the costs upon which the premium is based must themselves be proportionate. This case is not binding, but is usually accepted as being highly persuasive. 63 Callery v Gray [2001] EWCA 1246 at [69].

18 Additional Liabilities 17 fill in gaps in the evidence. 64 The basis upon which the court does this is not entirely clear. It certainly cannot be said that knowledge of the ATE insurance market could fall within either of the categories of judicial notice (those being notice upon enquiry and notice of notorious and commonly known facts). That said, Lord Buckmaster has held that properly applied, and within reasonable limits the court is entitled to use its own knowledge of matters which were commonly known within the locality; 65 it is only a small step to expand this principle so that a court with a particular specialism is entitled to take into account that which is commonly known within that specialism. Even if this is wrong, it is well established that as long as the judge does not give evidence to himself which contradicts the evidence adduced, a judge is entitled to draw on specialised knowledge when evaluating evidence. 66 Comparators A paying party will often seek to challenge a premium on the basis that an apparently cheaper alternative was available at the material time. While each case will turn on its own facts and whilst global comparisons may prove persuasive from time to time, 67 such challenges tend to be fraught with difficulties. This is not only because of problems in adducing relevant and sufficiently persuasive evidence (see below), but also because the court recognises that receiving parties solicitors will not always be able to pick and choose from a variety of products and offer different policies to different clients. Brooke LJ had this to say on the point: 68 For block rating to work the insurer needs to be sure that it is receiving a full and fair selection of cases, ranging from those where liability is unlikely to be in doubt to those where it is contested. In order to avoid adverse selection it is standard practice for ATE insurers to require solicitors to insure all available cases with the ATE provider. In practice, therefore, claimants solicitors cannot simply pick and choose from a variety of products and offer different policies to different clients. This approach is, in any event, incompatible with block rating Unlike most issues concerning the assessment of costs, the court will, as a rule, insist on an exacting standard of evidence if it is to entertain a challenge to the reasonableness of an ATE premium, and whilst there are no specific exclusory rules, it is only a narrow range of evidence that the court will regard as being probative of a challenge. Market Experience or evidence of the market are factors that can be taken into account. 69 Evidence must be case-specific. This means that (unless the evidence is for a purpose such as showing the general state of the market or for making a point about 64 See Sharratt v London Central Bus Company and other cases (No 2) The Accident Group Test Cases [2004] EWCA Civ 575 at [30]. 65 See Keane v Mount Vernon Colliery Co Ltd [1933] AC 309 at 317; see also Reynolds v Llanelly Associated Tinplate Co Ltd [1948] 1 All ER 140, CA; these cases were decided under the Workmen s Compensation Acts, but the principles were confirmed to be of general applicability in Mullen v Hackney London Borough Council [1997] 1 WLR Whilst it related to criminal evidence rather than civil costs, see Wetherall v Harrison [1976] QB 773, per Widgery CJ. 67 See, for example, Sharratt v London Central Bus Company and other cases (No 2) The Accident Group Test Cases [2004] EWCA Civ 575 at [34]. 68 Rogers v Merthyr Tydfil County Borough Council [2006] EWCA Civ 1134 at [33]. 69 Callery v Gray [2001] EWCA 1246 at [13].

19 18 Civil Costs: Law and Practice macroeconomics), it must show not what was available in the market generally, but what was available to the receiving party on the facts of the particular claim in question. 70 A case-specific report would often be required, usually from an expert broker. Efficiency Evidence of extravagant expenditure may prove that a policy is uncompetitive, with the result that the premium is not recoverable in full. 71 Evidence that the insurer lost money on the transaction is irrelevant to the issue of whether the premium was reasonable. 72 Actuarial method Phillips MR has confirmed that it is open to an insurer to adduce evidence as to the reasonableness of the premium sought, but he emphasised that it was not the court s task to carry out an audit of the insurer s business. 73 Evidence in support The points made above about the need to adduce evidence in support of a challenge to the quantum of a premium do not mean that evidence must be adduced in support of an unchallenged premium; compliance with the CPD is generally regarded as being sufficient. Service of the bill of costs ought to be accompanied by a copy of the insurance certificate showing the following: 74 whether the policy covers the receiving party s own costs, his opponent s costs, or his own costs and his opponent s costs; the maximum extent of that cover; and the amount of the premium paid or payable. If a receiving party wishes to go further, however, he may; if he anticipates a challenge to the premium, it is open to him to adduce evidence as to the reasonableness of the premium sought. If he does so, and if the evidence is detailed, he would place himself at risk of impliedly accepting a deconstructive approach (see ); it is for this reason that there is often reluctance on the part of receiving parties to adduce detailed evidence Nonetheless, the receiving party may wish to prove that, after having made reasonably diligent enquiries, the policy was the most appropriate that he could find. Alternatively, he may wish to prove that extensive enquiries would have been disproportionate in the particular circumstances of the claim. Such evidence need not be elaborate, as was explained by Brooke LJ: Rogers v Merthyr Tydfil County Borough Council [2006] EWCA Civ 1134 at [108] [112], approving of RSA Pursuit Test Cases, Re [2005] EWHC (Costs) at [235]. 71 Callery v Gray [2001] EWCA 1246 at [13]. 72 Sharratt v London Central Bus Company and other cases (No 2) The Accident Group Test Cases [2004] EWCA Civ 575 at [33]. 73 Callery v Gray [2001] EWCA 1246 at [16]. 74 CPD, art 32.5(2). 75 Rogers v Merthyr Tydfil County Borough Council [2006] EWCA Civ 1134 at [117].

20 Additional Liabilities 19 [If] an issue arises about the size of a premium, it will ordinarily be sufficient for a claimant s solicitor to write a brief note for the purposes of the costs assessment explaining how he came to choose the particular ATE product for his client, and the basis upon which the premium is rated whether block rated or individually rated. Brooke LJ went on to imply that expert evidence might be required in some circumstances. It is fair to say, however, that expert evidence on detailed assessment is a considerable rarity Factual evidence is not unusual, however, but care ought to be taken not to refer to irrelevant matters. By way of example, the following would be irrelevant: 76 evidence that other forms of insurance might have been more expensive (as opposed to evidence that there were no cheaper policies available); evidence that the receiving party s solicitor secured a commercially favourable package with the insurer; and evidence that the insurers lost money on the transactions. The policy It is probably the case that the court lacks the vires to require a party to disclose its ATE policy, 77 but it can put the receiving party to his election. Indeed, in some circumstances the court may even impose a condition of disclosure during the substantive case itself. 78 Deconstruction Deconstruction is the process of dismantling a premium for the purposes of examining its constituent parts. 79 It would be possible to deconstruct a premium simply for the purposes of examining the reasonableness of each component, but that is not usually its intended purpose. Instead, deconstruction is usually carried out for the purposes of isolating and excluding monies which are not true premium monies and which are to be subtracted from the amount claimed In order to know what is to be excluded, it is necessary to know what is to be included; this means that it is necessary to have a definition of what is a premium. The following definition is generally received as being appropriate in the context of ATE insurance: 81 The consideration required of the assured in return for which the insurer undertakes his obligation under the contract of insurance. 76 Sharratt v London Central Bus Company and other cases (No 2) The Accident Group Test Cases [2004] EWCA Civ 575 at [33]. 77 Although a non-costs case, see West London Pipeline & Storage Ltd v Total UK Ltd [2008] EWHC 1296 (Comm). 78 Such as a condition for the continuance of group litigation: see Barr v Biffa Waste Services Ltd [2009] EWHC 1033 (TCC). 79 Sharratt v London Central Bus Company and other cases (No 2) The Accident Group Test Cases [2004] EWCA Civ 575 at [17]. 80 Callery v Gray [2001] EWCA 1246 at [12]. 81 This definition is taken from MacGillivray (9th edn), and was approved of in both Claims Direct litigation [2003] EWCA Civ 136 at [25] and Sharratt v London Central Bus Company and other cases (No 2) The Accident Group Test Cases [2004] EWCA Civ 575 at [17].

21 20 Civil Costs: Law and Practice Thus, a premium is a sum paid to the insurer; this does not include monies paid to an intermediary (unless, of course, it is received by the intermediary on behalf of the insurer). An intermediary cannot make his fee into a premium by the mere expedient of calling it a premium The following are examples of monies which might be disallowed upon deconstruction, depending on the circumstances: money paid for the right to be included within a claims management scheme; 83 referral fees; 84 the costs of ring-fencing damages; 85 and voluntary payments made by claims management companies to an underwriter for the purposes of securing extra capacity. Monies which are not true premium monies may be irrecoverable for reasons unconnected with or additional to those mentioned above. Where, for example, a fee is an unlawful referral fee, it would become irrecoverable by reason of implied statutory prohibition against the enforceability of that fee; this would be an additional reason for its disallowance. 86 MEMBERSHIP ORGANISATIONS AND NOTIONAL PREMIUMS A notional premium 87 is an amount charged by a membership organisation as compensation for bearing the responsibility for meeting adverse costs orders made against its members. It is akin to an ATE premium, but is payable to a membership organisation instead of an insurer. This means that there is no market capable of directly exerting any moderating influence on the amount claimed. For the reasons set out below, the procedure by which such premiums are assessed creates a link with the ATE market; by creating that link, the ATE market is used by way of analogy as a measure (or, more accurately, a cap) of the allowable sums (see ). The statutory framework AJA 1999, s (as amended) makes the following provisions which create the jurisdiction under which notional premiums may be claimed: 82 Sharratt v London Central Bus Company and other cases (No 2) The Accident Group Test Cases [2004] EWCA Civ 575 at [17]; see also Re Claims Direct Test Cases [2003] EWCA Civ 136 at [35] [46]. 83 See, for example, Re Claims Direct Test Cases [2003] EWCA Civ See, for example, Sharratt v London Central Bus Company and other cases (No 2) The Accident Group Test Cases [2004] EWCA Civ 575 at [39] [42]. 85 See, for example, Re Claims Direct Test Cases [2002] All ER (D) 76 at [214], per Master Hurst; this case is not binding; the decision was affirmed on appeal (Re Claims Direct Test Cases [2003] EWCA Civ 136) but not on this specific point. 86 See, for example, Sharratt v London Central Bus Company and other cases (No 2) The Accident Group Test Cases [2004] EWCA Civ 575 at [39] [42]. 87 The term self insurance premium is also often used, but this ought not to be confused with self-insuring policies, which fund themselves by recovery of enhanced premiums payable only in the event of success. 88 Transitional provisions apply. Article 4 of the Access to Justice Act 1999 (Transitional Provisions) Order 2000 reads: Section 30 (Recovery where body undertakes to meet costs liabilities) shall not apply, as regards a party to proceedings, to: (a) any proceedings in relation to which that party gave an undertaking before 1 April 2000 which, if it had been given after that date, would have been an undertaking to which

22 Additional Liabilities 21 Recovery where body undertakes to meet costs liabilities (1) This section applies where a body of a prescribed description undertakes to meet (in accordance with arrangements satisfying prescribed conditions) liabilities which members of the body or other persons who are parties to proceedings may incur to pay the costs of other parties to the proceedings. (2) If in any of the proceedings a costs order is made in favour of any of the members or other persons, the costs payable to him may, subject to subsection (3) and (in the case of court proceedings) to rules of court, include an additional amount in respect of any provision made by or on behalf of the body in connection with the proceedings against the risk of having to meet such liabilities. (3) But the additional amount shall not exceed a sum determined in a prescribed manner; and there may, in particular, be prescribed as a manner of determination one which takes into account the likely cost to the member or other person of the premium of an insurance policy against the risk of incurring a liability to pay the costs of other parties to the proceedings. (4) In this section prescribed means prescribed by regulations made by the Lord Chancellor by statutory instrument; and a statutory instrument containing such regulations shall be subject to annulment in pursuance of a resolution of either House of Parliament. (5) Regulations under subsection (1) may, in particular, prescribe as a description of body one which is for the time being approved by the Lord Chancellor or by a prescribed person. The regulations mentioned in s 30(1) were, originally, the Access to Justice (Membership Organisations) Regulations ( the 2000 Regulations ), but the 2000 Regulations were revoked (with saving provisions) by the Access to Justice (Membership Organisation) Regulations ( the 2005 Regulations ). The saving provisions provide that the 2000 Regulations shall continue to have effect for the purposes of arrangements entered into before 1 November 2005; 91 this means that it is necessary to know about both sets of regulations The 2005 Regulations make the following provisions: Bodies of a prescribed description 3. The bodies which are prescribed for the purpose of section 30 (recovery where body undertakes to meet costs liabilities) are those bodies which are for the time being approved by the Secretary of State for that purpose. Requirements for arrangements to meet costs liabilities 4.(1) Section 30(1) applies to arrangements which satisfy the following conditions. (2) The arrangements must be in writing. section 30(1) applied; or (b) any proceedings arising out of the same cause of action as any proceedings to which sub-paragraph (a) refers. See also CPR, r 57.8(1), which makes similar provisions. 89 SI 2000/ SI 2005/ See reg 2(2) if the Access to Justice (Membership Organisation) Regulations 2005.

23 22 Civil Costs: Law and Practice (3) The arrangements must contain a statement specifying the circumstances in which the member may be liable to pay costs of the proceedings. Recovery of additional amount for insurance costs 5.(1) Where an additional amount is included in costs by virtue of section 30(2) (costs payable to a member of a body or other person party to the proceedings to include an additional amount in respect of provision made by the body against the risk of having to meet the member s or other person s liabilities to pay other parties costs), that additional amount must not exceed the following sum. (2) That sum is the likely cost to the member of the body or, as the case may be, the other person who is a party to the proceedings in which the costs order is made of the premium of an insurance policy against the risk of incurring a liability to pay the costs of other parties to the proceedings The 2000 Regulations were not dissimilar to the 2005 Regulations. 92 The main difference is that some of the more cumbersome provisions have been replaced by a simple requirement that the arrangements must be in writing and must contain a statement specifying when a member would become liable to pay the costs of the proceedings. The now old provisions (which no longer apply except under the saving provisions mentioned at ) were as follows: Requirements for arrangements to meet costs liabilities 3.(1) Section 30(1) of the Access to Justice Act 1999 applies to arrangements which satisfy the following conditions. (2) The arrangements must be in writing. (3) The arrangements must contain a statement specifying (a) (b) (c) (d) the circumstances in which the member or other party may be liable to pay costs of the proceedings, whether such a liability arises (i) if those circumstances only partly occur, (ii) irrespective of whether those circumstances occur, and (iii) on the termination of the arrangements for any reason, the basis on which the amount of the liability is calculated, and the procedure for seeking assessment of costs. (4) A copy of the part of the arrangements containing the statement must be given to the member or other party to the proceedings whose liabilities the body is undertaking to meet as soon as possible after the undertaking is given The Explanatory Memorandum to the 2005 Regulations gave the following reasons for discarding the old provisions: The Explanatory Memorandum to the 2005 Regulations says that, notwithstanding the similarities, it was thought that it would be clearer and simpler to replace the 2000 Regulations rather than to issue more complex amending regulations. Regulation 5 of the 2005 Regulations mirrors reg 4 of the 2000 Regulations, and reg 3 of the 2005 Regulations is all but identical to reg 2 of the 2000 Regulations. 93 At para 7.3 of the Explanatory Memorandum.

24 Additional Liabilities 23 The existing requirements [ie the 2000 Regulations] are designed to ensure that the client is aware of the arrangements for payment of the solicitor s costs. However, given that the membership organisation will in nearly all circumstances be indemnifying the member for any costs liability, it has been concluded that the amount of detail required by the current regulation 3 was unnecessary and cumbersome and of no real value to the member. Therefore the requirements will be simplified in the new regulation 4 to the need for a written explanation (for those rare circumstances where an indemnity would not apply). Whilst there is no authority on the point, it is possible that these comments would be of relevance if the court were to decide whether a putatively petty breach of the 2000 Regulations should be disregarded (either on the basis of materiality or on the basis of substantial compliance, or on some other basis) In any event, neither AJA 1999 nor the regulations made under s 30 of that Act state what should happen in the event of non-compliance with those regulations. It is, perhaps, for this reason that there has been little litigation on the issue of regulatory compliance. Non-compliance would probably mean that the receiving party would be precluded from recovering his notional premium, but there is no authority to support the contention that it would have any greater effect than this. Whilst there is no authority on the point, the mechanism by which the notional premium would be rendered irrecoverable would probably be on the straightforward basis that the receiving party ought not to be afforded the benefit of legislation with which he has failed to comply It is worth pausing here to say that compliance with the regulations made under AJA 1999, s 30 has nothing to do with collective conditional fee agreements. In particular, there is no requirement that only bona fide membership organisations may enter into collective conditional fee agreements. Most membership organisations tend to prefer collective conditional fee agreements, but that is a matter of administrative and commercial convenience rather than as a result of the operation of the law. Membership organisation An organisation must be approved before it can hold itself out as a membership organisation; a civil servant known as the certification officer will keep a record of those organisations which have been approved. All unions listed by the certification officer are automatically approved; in addition, about thirteen other organisations have been approved, including a number of professional organisations and cycling organisations In deciding whether to approve an organisation, the Lord Chancellor will take into account the following: 95 whether it exists to protect, defend, represent and promote the interest of its members; whether it has an exclusive range of benefits for members; 94 They are: AA Legal Service, British Cycling Federation, Defence Police Federation, Durham Colliery Overmen Deputies and Shotfirers Retired Members Group, Engineering Employers Federation, Police Federation of England and Wales, RAC Motoring Services, the Cyclist Touring Club, the London Cycling Campaign, British Triathlon Federation, the Co-operative Group, the National Union of Students and the British Association of Social Workers (personal communication with I Akhtar, Ministry of Justice, 20 July 2009). 95 Personal communication with I Akhtar, Ministry of Justice, 20 July 2009.

25 24 Civil Costs: Law and Practice whether it offers litigation funding as one of those benefits and on a discretionary basis, at no additional charge; whether it publishes annual accounts; whether it invests its membership payment within the organisation for the benefit of the members and the organisation; and whether it covers all those deemed eligible by the organisation (not only members). The fact that an organisation is a membership organisation does not preclude it from taking out ATE insurance as opposed to claiming a notional premium. Indeed, some unions prefer to do just that. 96 Notional premiums Notice must be given of an intention to claim a notional premium; 97 whilst there is no authority on the point, the principles already discussed pertaining to notice of funding in other circumstances are likely to apply (see and ). As explained above, reg 5 of the 2005 Regulations provides that the amount payable by an opponent must not exceed the likely cost of an insurance policy against the risk of incurring a liability to pay the costs of other parties to the proceedings. This means that a notional premium ought not to exceed the sum the market would bear for an ATE policy. 98 This restriction is echoed in AJA 1999 itself 99 and in the CPD. 100 The wording of these provisions suggests that the appropriate measure would be premiums for policies providing cover for only the other side s costs, rather than premiums for policies also providing cover for the member s own disbursements; it is debateable, however, whether the difference between the amounts generally charged for the two types of policy would amount to much As of 1 October 2009 CPR, r 44.3B(1)(b) has read as follows: Unless the court orders otherwise, a party may not recover as an additional liability any provision made by a membership organisation which exceeds the likely cost to that party of the premium of an insurance policy against the risk of incurring a liability to pay the costs of other parties to the proceedings. The words unless the court orders otherwise are a new addition; the way in which that amendment has been implemented gives the impression that notional premiums have been caught in the crossfire of an amendment aimed at another target (see 29.89) and that the court has not been given the vires to exercise its discretion on this point. This is because the 2005 Regulations have not been amended so as to echo the amendment to 96 This is particularly common where the union funds a large number of employers liability cases. They often do so because they believe that it is not possible to claim the costs of covering their own disbursement under a notional premium (see ). 97 See CPD, art 32.5(3), which reads: If the receiving party claims an additional amount under Section 30 of the Access of Justice Act 1999: a statement setting out the basis upon which the receiving party s liability for the additional amount is calculated. 98 Historically, ATE premiums have tended to be higher than notional premiums; this, unfortunately, can lead to somewhat circular arguments about what the appropriate measure should be. 99 AJA 1999, s 30(3) provides that the notional premium shall not exceed a sum determined in a prescribed manner and that there may, in particular, be prescribed as a manner of determination one which takes into account the likely cost to the member or other person of the premium of an insurance policy against the risk of incurring a liability to pay the costs of other parties to the proceedings. 100 CPD, arts 32.6 and

26 Additional Liabilities 25 the CPR. Although there is no authority on the point, it is likely that reg 5 of the 2005 Regulations prevails (as being the status quo) and that the mandatory cap based on the ATE market continues to exist As to the factors to be taken into account, CPD, art gives the following guidance: Where the court is considering a provision made by a membership organisation the court will, when assessing the additional liability, have regard to the factors set out in paragraph above, in addition to the factors set out in rule Thus, not only is the notional premium limited to the amount of an equivalent ATE premium, but it is also to be assessed by reference to the same criteria. The court would not have the benefit of an actual premium as to the starting point, so (unless there was evidence as to the going rate) the court, presumably, would have to draw upon its own experience of the ATE market (see ) Not all membership organisations charge notional premiums. Some take the view that it is in their interests (or those of their members) to take out ATE insurance instead. This is often on the basis that an ATE premium will allow recovery for own-disbursement cover whereas notional premiums do not (see ). Whether this is a good reason for preferring ATE insurance over a notional premium will depend on the facts. 101 BTE INSURANCE AND ALTERNATIVE MEANS OF FUNDING The following discussion addresses alternative means of funding and, in particular, before the event (BTE) insurance (otherwise known as legal expenses insurance or LEI); it does so in the context of whether the availability of suitable alternative means of funding would have a bearing on the recoverability of an additional liability. The phrase funding arrangements will be used to refer to methods of funding which provide for an additional liability ; 102 this includes conditional fee agreements, collective conditional fee agreements, ATE policies and arrangements with membership organisations. Types of alternative means of funding An alternative means of funding is, in the present context, a reference to a means of funding which is not the funding arrangement under consideration. At its broadest (and excluding other funding arrangements), it is a category which may encompass any one of the following: private funding and conditional fee agreements which do not provide for a success fees; BTE insurance; trade union funding; funding through employers; 101 Paying parties usually argue that own-disbursement cover is something that can be taken into account when setting the success fee. 102 CPR, r 43.2(k).

27 26 Civil Costs: Law and Practice public funding; third-party funding; altruistic funding; pro bono funding. The relevance of this list is that such a method of funding may, if available, be preferable to a funding arrangement by reason of the alternative means not giving rise to an additional liability. If the court were to find that an alternative means of funding had been unreasonably rejected, additional liability may be disallowed on the basis that it was unreasonably incurred. It is very likely that the court would find that it was unreasonable to prefer a funding arrangement over any of the last three methods, so, for present purposes, these can be disregarded. The first category (private funding) can also be disregarded; this is because a person is at liberty to enter into such an agreement notwithstanding the fact that he could afford to fund the claim privately (ie there is no means test for funding arrangements). 103 Of the remainder, BTE insurance and trade union funding are the most relevant, as they are the two which are most frequently encountered. BTE insurance Before the court will disallow an additional liability, the court must be satisfied that BTE policy existed, that it was reasonably discoverable, and that it was suitable for the purposes of funding the matter in hand. Whether a BTE policy existed will be a matter of fact to be decided on evidence. The paying party is entitled to raise CPR Part 18 Questions on the point, 104 and those are often contained in the points of dispute. Master Hurst has found that the questions which may reasonably and proportionately be asked are: first, whether the receiving party had insurance; secondly, with whom; and, thirdly, whether he had any legal expenses insurance. 105 Master Hurst s findings were in the context of a modest, unremarkable personal injury claim; they are of persuasive value only The fact that BTE insurance existed would not be determinative of the matter (even if it were suitable: see ). This is because the receiving party may say that he did not know about it, and that he could not reasonably have been expected to discover it. In order to address that point it is necessary to know the extent and nature of the enquires that a receiving party s solicitor might be expected to make (see below); in that regard, it is useful to know something about the prevalence of BTE insurance. The prevalence of BTE insurance The concept of BTE insurance originated in Continental Europe. It was initially sold by companies who specialised in legal expenses insurance, but in the early 1980s it began to be offered by other types of insurer. 106 Associations between insurers became closer, and it became common (as it still is) that it was offered as an adjunct to other financial products, such as household insurance. In the United Kingdom BTE insurance tends to be bundled with motor insurance policies, household insurance 103 Campbell v MGN Ltd (No 2) [2005] UKHL 61 at [27]. 104 See CPD, art 32.5(2). 105 Hutchings v The British Transport Police Authority [2006] EWHC (Costs) at [23]. 106 For a full historical perspective, see D Jenkins The History of Insurance (Pickering & Chatto (Publishers) Ltd, 2000).

28 Additional Liabilities 27 policies, 107 and credit card agreements. Stand-alone policies are available, and may be purchased to provide cover to families, landlords, small businesses, commercial organisations, and boat owners BTE insurance purchased as an add-on to household policies will typically afford cover for the following: 108 personal injury claims, fatal accident claims and claims for clinical negligence; contractual disputes arising out of consumer transactions; property disputes (including boundary disputes, nuisance, landlord and tenant, etc); and employment disputes, including proceedings in the Employment Tribunal. Other types of BTE insurance may differ, depending on the circumstances in which they were sold; boat-owners insurance, for example, might provide cover for marine disputes. BTE insurance, however purchased, may include cover that goes beyond providing benefits for the person who purchased the policy. Policies purchased as an adjunct to motor insurance will often provide cover not only for the driver, but also for passengers. The same may be true of insurance purchased to provide liability cover for a public service vehicle. Members of the same household may be entitled to cover, even where they are not members of the same family. The breadth of cover is probably a reflection of the fact that BTE insurers see value in persons who have viable claims, and that they may be able to charge fees for referring claims to their panel solicitors. 109 BTE inquiries Speaking extrajudicially, Jackson LJ made the following comments about the importance of BTE inquiries in the context of modern litigation: 110 The first question which any litigation solicitor should, and would, ask of a client with a claim in the categories mentioned in paragraph [29.237] above is whether the client has household insurance and, if so, what are its terms. Indeed solicitors are required, as a matter of professional conduct, to discuss with their clients at the outset whether the client s costs are covered by insurance. The extent to which a solicitor is expected to conduct speculative enquiries for the purposes of discovering suitable BTE insurance will depend on the facts and, in particular, will depend on the amount at stake. 111 Phillips MR has given guidance on this topic, but it is limited to unremarkable, modest road traffic accident cases and should not to be treated as being an inflexible code. 112 He had the following to say: Of the 25m households in the United Kingdom in 2008, between 10m and 15m have BTE insurance as an add-on to household insurance: see R Jackson Review of Civil Litigation Costs: Final Report (TSO, December 2009), para R Jackson Review of Civil Litigation Costs: Final Report (TSO, December 2009), para See the discussion of this in R Jackson Review of Civil Litigation Costs: Final Report (TSO, December 2009), chapter R Jackson Review of Civil Litigation Costs: Final Report (TSO, December 2009), para 8.5.5; the reference to professional obligations was a reference to para 2.03(1)(d)(ii) of the Solicitors Code of Conduct Sarwar v Alam [2001] EWCA Civ 1401 at [46]; while the test being addressed was itself not the same as the present test, Myatt v National Coal Board [2006] Civ 1017 at [73] [76] gives some guidance as to factors which may be relevant, such as the nature of the circumstances in which the solicitor was instructed, the nature of the claim, and the cost of the alternative (i e ATE insurance). 112 Sarwar v Alam [2001] EWCA Civ 1401 at [50]. 113 Sarwar v Alam [2001] EWCA Civ 1401 at [45].

29 28 Civil Costs: Law and Practice [P]roper modern practice dictates that a solicitor should normally invite a client to bring to the first interview any relevant motor insurance policy, any household insurance policy and any stand-alone BTE insurance policy belonging to the client and/or any spouse or partner living in the same household as the client The exact nature of the enquires would need to be adapted to suit the circumstances. Dyson LJ has explained that Phillips MR s guidance would have no application in high-volume, low-value work of the type referred by claims management companies. 114 Phillips MR himself was at pains to point out that solicitors were not obliged to conduct treasure hunts In so far as credit cards are concerned, Phillips MR gave the following advice: 116 So far as credit cards and charge cards are concerned [we] are inclined to think that the time taken by a solicitor in assisting a client to identify and pursue such cover would at present be likely to result in this course proving more expensive than an ATE premium in this class of case. Whilst he indicated that the financial landscape might, at some point, change so as to justify such enquiries, there is nothing to suggest that this has yet happened The standard of the requisite enquiries is not the same as the standard of enquiries required by reg 4 of the Conditional Fee Agreements Regulations 2000, 117 nor is it the same as the standard applicable to claims in negligence. 118 Presumably, the same applies to the professional standard. However, it is unlikely that a failure to achieve a proper professional standard would be regarded as being reasonable, so to that extent the professional standard is of some relevance. That standard is to discuss with the client whether [his] liability for another party s costs may be covered by existing insurance, 119 and it therefore does not add a great deal to an unadorned test of reasonableness Enquiries should not be curtailed or avoided merely because the person of whom they are made is also an opposing party (such as where the claimant was injured in a car being driven by the defendant). Phillips MR explained that each case must turn on its own facts: 120 Now that motor insurance often contains provision for BTE cover for a claim brought by a passenger, the solicitor should ordinarily ask the client passenger to obtain a copy of the driver s insurance policy, if reasonably practicable. Whether it is reasonably practicable to comply with the solicitor s request is likely to be fact-sensitive. 114 Myatt v National Coal Board [2006] EWCA Civ 1017 at [70]. 115 Sarwar v Alam [2001] EWCA Civ 1401 at [46]. 116 Sarwar v Alam [2001] EWCA Civ 1401 at [49]. 117 Myatt v National Coal Board [2006] EWCA Civ 1017 at [70]. 118 Sarwar v Alam [2001] EWCA Civ 1401 at [51]; this is of practical relevance because it means that a client who failed to recover his ATE premium by reason of inadequate BTE inquiries might be able to bring a claim against his solicitor. 119 Solicitors Code of Conduct 2007, para 2.03(1)(g). 120 Sarwar v Alam [2001] EWCA Civ 1401 at [47].

30 Additional Liabilities 29 Suitability The existence of a BTE policy will be relevant only if it would have been a suitable method of funding the claim in question. Whether a BTE policy was suitable would be a matter of both contractual interpretation and reasonableness. This is because there may be factual or legal restrictions on the way in which it can be used. In particular, the insurer may stipulate that a panel solicitor should have conduct of the claim rather than the solicitor who was the client s first choice. This is a subject where the facts can readily overshadow the niceties of the law (see ). In particular, the receiving party may find that, notwithstanding his rights in law, he has been unable to enforce those rights because of a lack of co-operation on the part of the BTE insurer. These issues are usually highly fact-sensitive. Restrictions on the use of BTE insurance There is a European Union Council Directive which stipulates that a person who has the benefit of BTE insurance must be able to choose the lawyer to act for him. 121 That directive is implemented by regulations made by statutory instrument. 122 Regulation 6 of those regulations (the Insurance Companies (Legal Expenses Insurance) Regulations 1990) 123 reads: 124 (1) Where under a legal expenses insurance contract recourse is had to a lawyer (or other person having such qualifications as may be necessary) to defend, represent or serve the interests of the insured in any inquiry or proceedings, the insured shall be free to choose that lawyer (or other person). (2) The insured shall also be free to choose a lawyer (or other person having such qualifications as may be necessary) to serve his interests whenever a conflict of interests arises. (3) The above rights shall be expressly recognised in the policy The European Court of Justice has confirmed the insured s right to engage a lawyer of his choice. 125 The Financial Services Ombudsman, however, has interpreted these requirements as meaning that the right to choose is triggered only when negotiations have been completed and proceedings have to be begun. 126 The effect of this is that it is lawful for a BTE insurer to refuse to fund an insured s own choice of solicitor during almost the entirety of the pre-issue phase of the proceedings, including any work covered by the relevant pre-action protocol. 127 Whether it would be reasonable to reject BTE funding on this basis would turn on the facts of each case. It may be 121 EU Council Directive 87/344/EEC. 122 See the Insurance Companies (Legal Expenses Insurance) Regulations 1990 (SI 1990/1159). 123 SI 1990/ This regulation does not apply to insurance in relation to seagoing vessels, to insurance provided as a benefit to motorists of being in organisations such as the AA or the RAC (see reg 7). 125 Eschig v UNIQA Sachversicherung AG (2009) Case C-199/08, ECJ; the court confirmed that that right exists even where a large number of insureds have also suffered a similar loss and the insurer wishes to deal with the matter in a manner comparable to group litigation. 126 See the decisions of the Insurance Ombudsman against Cornhill Insurance plc of 3 May 2002 and against DAS, of 17 June That this is the correct interpretation seems to have been impliedly confirmed by Jackson LJ (albeit speaking extrajudicially) in that he recommended that a change to the existing legislative regime should be made to allow the choice to be triggered by a letter of claim being sent (see R Jackson Review of Civil Litigation Costs: Final Report (TSO, December 2009), para

31 30 Civil Costs: Law and Practice relevant that (as Jackson LJ said, speaking extrajudicially) 128 it is not normally practicable for the claimant suddenly to switch lawyers ; this was a factor which caused Jackson LJ to urge a change in the regulations so that an insured client would have a free choice of lawyer during the pre-action protocol period. 129 As yet, no changes have been made, and this means that the law is not as liberal in terms of client choice as perhaps it might be. Indeed, Phillips MR made the following obiter comments about the court s attitude to choice of legal representative in small road traffic accident claims: 130 We are not persuaded by the contention that there is such a strong public interest in maintaining a client s freedom of choice of legal adviser that this should override the appropriateness of a claim as small as that with which we are concerned on this appeal being handled by a BTE insurer with or without the assistance of a panel solicitor. The philosophy contained in CPR r 1.1(2)(c), and the express provisions of CPR r 44.5, require the court to ensure that no costs are incurred which are not reasonable and proportionate. Thus a claimant who had rejected BTE funding in a small road traffic accident claim would have an uphill battle if he were to seek to recover a success fee or an ATE premium Each case will turn on its own facts, however, and the restrictions imposed by the insurer may have consequences that would make it reasonable for the receiving party to reject BTE funding, even in a modest claim. An example might be where there were no panel solicitors who were reasonably local to the receiving party. 131 One can see that the considerations at (concerning hourly rates) might well be relevant by analogy. Suitability generally Phillips MR has explained that if a claimant possesses pre-existing BTE cover which appears to be suitable, then in the ordinary course of events the claimant should be referred to the BTE insurer. He made it clear that that guidance was specifically limited to small, personal injury claims in which the value of the claim would be likely to be no more than about 5, It may be that the limit of cover is too low to fund the whole of the claim. Where this is so, it may be reasonable to set up a different form of funding entirely, but, equally, it may be reasonable to exhaust the policy first. Another option would be to combine the policy with other methods of funding. 133 Each case will turn on its own facts An issue that may arise is whether a claimant may reasonably reject funding afforded by the defendant s BTE policy. In the context of low-value, modest personal injury claims Phillips MR has said that the claimant would be expected not to reject that 128 R Jackson Review of Civil Litigation Costs: Final Report (TSO, December 2009), para R Jackson Review of Civil Litigation Costs: Final Report (TSO, December 2009), para The change he advocated was not one of his formal recommendations. 130 Sarwar v Alam [2001] EWCA Civ 1401 at [56]; see also R v Legal Aid Board ex p Duncan [2000] COD 159, which dealt with a similar issue in the context of public funding. 131 Chappell v De Bora s of Exeter (A Firm) [2004] EWHC (Costs), per HHJ Overend; despite the EWHC reference, this was a county court case and is not binding. 132 Sarwar v Alam [2001] EWCA Civ 1401 at [41]. 133 See, for example, Smith v Interlink Express Parcels Ltd [2007] EWHC (Costs), where counsel s success fee was justified on the basis that it was reasonable to use the limited BTE cover on counsel, but instead to fund counsel by way of a conditional fee agreement. This case is not binding.

32 Additional Liabilities 31 form of funding, but that if the defendant were to fail to co-operate, that would be sufficient reason to justify eschewing it. 134 Again, each case will turn on its own facts. 135 Trade union funding Trade unions and professional organisations often provide, as a benefit of membership, legal assistance for their members and families of their members. In most cases, the body concerned would both seek a notional premium under AJA 1999, s 30 and a success fee, so it is arguable that the availability of such a form of funding should make no difference to the recoverability of any additional liability. Employer funding Employers may provide legal expenses funding as a perquisite but, unless the employer is itself a firm of solicitors, that benefit is usually provided in the form of BTE insurance. The fact that the employee has to pay tax on the benefit received has made employer funding a relative rarity. 134 Sarwar v Alam [2001] EWCA Civ 1401 at [48]. 135 Sarwar v Alam [2001] EWCA Civ 1401 at [48].

33 Chapter 40 THIRD-PARTY FUNDING 40.1 This chapter has been written with the assistance of Mr Rocco Pirozzolo, solicitor and senior underwriter with the insurer QBE. A third-party funding agreement is an agreement whereby a stranger to a dispute provides funding (other than insurance) in return for a share of the proceeds. It also goes by the names of litigation financing and professional funding. Speaking extrajudicially, Jackson LJ has defined third-party funding in the following way: 1 [Third-party funding is the] funding of litigation by a party who has no pre-existing interest in the litigation, usually onthe basis that (i) the funder will be paid out of the proceeds of any amounts recovered as a consequence of the litigation, often as a percentage of the recovery sum; and (ii) the funder is not entitled to payment should the claim fail If such an arrangement were to be adjudged by the law asitstood in or before the early 1980s, then such an arrangement would be found to be champertous; prior to 1967, the creation of such an agreement may even have been a criminal offence. 2 Champerty, however, is a doctrine based on public policy, and that means that it is far from immutable, and may even be described as pliable (see ). The chronology set out below explains how public policy has come now to embrace certain types of third-party funding. Whilst the change in public policy has broadened the ambit of what may be regarded as lawful, there is a degree of legislative control, albeit limited to personal injury claims (see 40.20). Both of these issues (public policy and legislative control) are dealt with in turn; the discussion of present-day legislative control begins at PUBLIC POLICY 40.3 It is not possible to point to the authority which confirmed the legality of third-party funding, nor is it possible to point to any relevant permissive legislation. Instead, third-party funding seems to have become lawful by a piecemeal development of the law which resulted in an implied acceptance of the legality of third-party funding which was noticeably anticlimactic; rather than ruling on the legality of third-party funding, the Court of Appeal ruled on an ancillary matter without passing any adverse comment on the nature ofthe funding itself (see 40.9). As has been explained in the discussion of champerty at , up until the mid-1960s a third-party funding agreement would have been not only unenforceable, but also illegal in the criminal sense. 1 R Jackson Review of Civil Litigation Costs: Preliminary Report (2009), Vol 1, p viii. 2 See

34 1200 Civil Costs: Law and Practice The law has changed beyond recognition since those times. Speaking extrajudicially following public consultation, Jackson LJ has identified the following benefits of third-party funding: 3 third-party funding promotes access to justice by reason of it providing an additional means of funding litigation and, for some, the only means of funding; notwithstanding the fact that a successful claimant with third-party funding will be liable to the funder for a percentage of his winnings, that is a better position to be in than to recover nowinnings at all; the use of third-party funding does not impose additional financial burdens upon paying parties; and the screening process used by third-party funders tends to filter out unmeritorious cases; this being of benefit to opposing parties. Given the context in which Jackson LJ made these comments (that is, after wide public consultation) they must at least be taken as being an indicator of the path which present-day public policy is taking. It is striking, but perhaps unsurprising, that that path seems to follow in the wake of the development of the law of conditional fee agreements; in order fully to understand the relevant public policy it is convenient to look at the history of third-party funding in the context of the history of conditional fee agreements s and early 1990s 40.4 Whilst the crime of champerty had been abolished in the 1960s, it was not until the 1980s that Parliament felt able to enact legislation which relegated the unlawfulness of conditional fee agreements to history (this topic is addressed in detail at ). At that stage there was no mention of third-party funding, but the legalisation of conditional fee agreements was a significant step which heralded further developments In 1994 the House of Lords established amorenuanced approach to questions of public policy than had existed previously; their Lordships established that the question of whether an agreement claiming a stake in litigation was objectionable is whether the agreement under scrutiny has a tendency to corrupt public justice. Importantly, their Lordships determined that that is a question which turns on the facts of each case, specifically the nature and surrounding circumstances of the agreement in question; 5 this meant that a funding agreement would not be automatically struck down as a matter of law merely because it belonged to a certain class of agreement Notwithstanding the fact that the legislation mentioned above had been given Royal Assent, it had not been brought into force. That happened in 1995 by way of delegated legislation (see 9.356). With hindsight, this can be seen to have been a turning 3 R Jackson Review of Civil Litigation Costs: Final Report (2009), chapter 11, para 1.2; he also commented that third-party funding would become more important if success fees become irrecoverable between opposing parties. 4 For a full analysis of this topic, see R Mulheron Third-party funding: a changing landscape (2008) 27 CJQ 3, pp Giles v Thompson [1994] 1AC142.

35 Third-Party Funding 1201 point; it would not be unfair to say that the fact that conditional funding had been put into actual practice meant that the Rubicon had been crossed. Early 2000s 40.7 In the late 1990s and early 2000s the court repeatedly demonstrated a flexible approach to cases which previouslywould have been characterised as champertous. 6 The legal profession became entirely familiar with the use of conditional funding, which was becoming commonplace In 2003 the Court of Appeal clarified the law ofchamperty in such away as to permit persons other than solicitors to enter into agreements where payment of their fees was dependent on success; it was established that the mere fact that litigation services have been provided in return for a share of the proceeds was not by itself sufficient to justify afinding of unenforceability It was in 2005 that the anticlimax referred to above took place. This happened when the Court of Appeal heard an application for a third-party costs order in a claim which had been funded by a third-party funder. The court disposed of that application not by referring to third-party funding as being an anathema, but by pragmatically weighing the rights of all the parties involved (including the rights of the funder) to determine how much the funder should contribute to his opponent s costs. The Court of Appeal found that the funder should be potentially liable for costs up to the limit of his investment. That approach necessarily implied that third-party funding was not only lawful, but in some ways desirable. Phillips MR explained that such an approach would have the following effects: 8 professional funders would be likely to cap the funds that they provide in order to limit their exposure to a reasonable amount; this would have a salutary effect in keeping costs proportionate; and professional funders would also have to consider with even greater care whether the prospects of the litigation are sufficiently good to justify the support that they are asked to give. Mid-2000s In the mid-2000s other common law jurisdictions began to arrive at similar conclusions. In 2006, for example, the High Court of Australia endorsed third-party funding. 9 6 See, for example, Papera Traders CoLtd vhyundai (Merchant) Marine Co Ltd (No 2) [2002] 2Lloyd s Rep R(Factortame Ltd and others) vsecretary ofstate for Transport, Local Government and Regions (No 8) [2002] EWCA Civ Arkin vborchard Lines Ltd [2005] EWCA Civ This is partly asaresult of the endorsement of the Australian High Court in Campbells Cash and Carry Pty Ltd vfostif Pty Ltd (2006) HCA 41.

36 1202 Civil Costs: Law and Practice 2007 (June) In 2007 the influential Civil Justice Council spoke positively about third-party funding. 10 This reinforced the view that public policy had grown to endorse such agreements (November) Later that year the Office of Fair Trading recommended that third-party funding ought to be encouraged in private competition claims (which are notoriously difficult to fund). 11 This was felt to be of particular benefit because it is in the public interest to have such claims resolved in such a way as to prevent anti-competitive practices Speaking extrajudicially, Sir Gavin Lightman said that throwing aside the shackles of the past law on champerty and maintenance would release litigants and funders from rules which are positively damaging to the public ; 12 the Master of the Rolls made similar comments. Commentators began to discuss not the legality of the third-party funding, but why it was not being more widely adopted. 13 Other commentators noted that the recently confirmed legality of discounted conditional fee agreements 14 would be aboon to the futuredevelopment of third-party funding. 15 Thus, third-party funding had not only been accepted as lawful, but itwas becoming an accepted and, on occasion, expected part of the legal landscape In 2009 the Jackson review called for comments about whether the common law of champerty and maintenance ought to be replaced by a regulatory framework. Following consultation, a voluntary code was recommended; of more note, however, is that no serious objections were raised about the legality of third-party funding. Summary The effect of these developments is thattherehas been agradual and largelytacit acceptance of third-party funding. Although it remains an innovative concept, third-party funding is sufficiently well established for itnolonger to be capable of challenge as being inherently champertous. 10 Improved Access To Justice Funding Options and Proportionate Costs (Civil Justice Council, June 2007). 11 OFT916, Private Actions in Competition Law: Effective Redress for Consumers and Businesses. 12 Rose NNews Radical shake-up needed in funding of litigation (2008) LS Gaz 20 Mar 5(1). 13 CCiumei A more open competition (2008) 158 NLJ 7321, pp Gloucestershire CCvEvans [2008] EWCA Civ SFriel Funding Manoeuvres (2009) 159 NLJ 7369, p707.

37 Third-Party Funding 1203 FUTURE DEVELOPMENTS Regulation Commentators have noted that there is an absence of regulation of third-party funding. 16 Of particular concern, it is said, is the absence of any solvency requirements. 17 This is in marked contrast to insurers, who have to satisfy the Financial Services Authority as to their solvency. Speaking extrajudicially, Jackson LJ has recommended avoluntary code. 18 Professor Mulheron (an academic at Queen Mary College, London) has suggested that soft regulation (ie self-regulation) may be appropriate. Her suggestion is that any such code should include the following provisions: 19 a solvency requirement; a requirement that the desire to make the claim comes from the client; a requirement that the funder is subject to independent checks and balances throughout the litigation; a requirement that the funder does not have the capacity improperly to monopolise the claim; a requirement that there is no conflict of interest between the funder and the client; an assurance that the funder is willing and able to meet any adverse costs order should the claim fail; arequirement restricting the funder s fee to alevel which is not inordinately high ; and arequirement that the agreement does not otherwise have any tendency to corrupt the legal process Following calls for comments by Jackson LJ in his preliminary report, the Civil Justice Council and others have submitted draft voluntary codes of conduct. An extract is reproduced in the footnotes. 20 Jackson LJ has commented that that draft code does 16 See, for example, RPirozzolo Opinion: Funder the cosh, The Lawyer, 11August Ibid; see also RJackson Review of Civil Litigation Costs: Final Report (2009), Chapter RJackson Review of Civil Litigation Costs: Final Report (2009), chapter 11, para 6.1. This is an issue which has been considered by the Civil Justice Council. 19 RMulheron Third-party funding: achanging landscape (2008) 27 CJQ 3, p AMember complies with the capital adequacy requirements under this Code, ifthe Member (a)(i) is able to pay all its debts as and when they become due and payable; (ii) has total assets that exceed total liabilities as shown in the most recent balance sheet of the Member; (iii) has no reason to believe that its total assets would not exceed its total liabilities on acurrent balance sheet; (iv) reasonably expects that itwill have adequate resources of cash or cash equivalent (when needed) to meet its liabilities for atleast the next three months (including any additional liabilities it might incur during that period), taking into account all commercial contingencies for which the Member should reasonably plan; and (v) has ensured that a responsible officer of the Member has documented that the officer has the reasonable expectation for atleast the following three month period together with the reasons for forming that expectation, the contingencies for which the Member considers it is reasonable toplan, the assumptions made concerning the contingencies and the basis for selecting those assumptions; or (b) the Member is covered byanagreement for the current calendar year by virtue of which the Member s (ultimate) parent company shall compensate any annual net loss incurred by the Member during the term of the agreement to the extent that such loss is not compensated by withdrawing amounts from the profit reserves which were transferred to such reserves during the term ofthe agreement and the (ultimate) parent company isaregulated insurance company that iscovered by EU capital adequacy requirements or is otherwise the holder of a financial services license issued by a national regulator approved by the Association.

38 1204 Civil Costs: Law and Practice not go far enough in terms of consumer protection. In particular, he has recommended that third-party funders should potentially beliable for the full amount of adverse costs, subject to the court making some other order. 21 Blurring of the boundaries Some commentators have noticed thatthe boundary between third-party funding and ATE insurance has become blurred in the sense that many funders now limit their funding to adverse costs, and some insurers are prepared to agree to provide an indemnity for the costs of security for costs applications. 22 It is certainly possible that the roles will become less distinct in the coming years. Alternative business structures With the introduction of alternative business structures under the Legal Services Act 2007, it is possible that risk may be more widely spread in the future (at least amongst lawyers); this will do nothing to stifle innovation. PRESENT LEGISLATIVE CONTROL: THE SOLICITORS CODE OF CONDUCT Not all forms of third-party funding are lawful. Paragraph 9.01 of the Solicitors Code of Conduct 2007 provides as follows: (4) You must not, in respect of any claim arising as a result of death or personal injury, either: (a) (b) enter into an arrangement for the referral of clients with; or act in association with, any person whose business, orany part of whose business, istomake, support or prosecute (whether by action or otherwise, and whether by a solicitor or agent or otherwise) claims arising as a result of death or personal injury, and who, in the course of such business, solicits or receives contingency fees in respect of such claims. (5) The prohibition in 9.01(4) shall not apply toanarrangement or association with a person who solicits or receives contingency fees only in respect of proceedings in a country outside England and Wales, to the extent that a local lawyer would be permitted to receive a contingency fee in respect of such proceedings. (6) In 9.01(4) and (5) contingency fee means any sum (whether fixed, or calculated either as a percentage of the proceeds or otherwise howsoever) payable only in the event of success in the prosecution or defence of any action, suit or other contentious proceedings. If an arrangement is made in contravention of these provisions, then it would almost certainly be unenforceable by reason of it being in breach of an implied statutory prohibition. 23 Persons who are not solicitors are not bound by these rules, but it could 21 RJackson Review of Civil Litigation Costs: Final Report (2009), chapter 11, para MAmey Litigation Funding (2009) 61 Litigation Funding, June, p The notion of implied statutory prohibition is discussed at length at ; see, inparticular, Swain v The Law Society [1983] 1AC598.

39 Third-Party Funding 1205 be argued that they apply by analogy in the sense that they are a reflection of public policy; there is, however, no authority on that point. In an appropriate case, third-party funding should be considered and discussed as one of the funding options that may be available to a litigation client pursuant to rule 2.03 of the Solicitors Code of Conduct It needs to be acknowledged, however, that its availability is restricted (see ) when compared with other funding options, such as ATE insurance. AVAILABILITY AND PRACTICE Those involved in third-party funding are trading in a nascent market: as of January 2009, less than 100 claims in England and Wales were being funded by third-party funders. 24 Whilst an oversimplification, third-party funding is available only in the following circumstances: where the claim is large (six or seven figures: see 40.22); where the prospects of success are very good (usually at least 70% likely to succeed: see 40.23); and where the risks can be shared with both an ATE insurer and the client s lawyers (see 40.23). In the same way that ATE insurers work on the basis of the actuarial principles of adequacy and equity (see ), third-party funders look to achieving an appropriate return on their investment; the quantification of that return is known as gearing. That is, third-party funders seek to invest in claims which, if successful, will repay their investment together with areward which will be about three times its value. 25 This remuneration is usually calculated as a percentage of the damages or debt which is the subject matter of the claim (see 40.24). The focus on gearing means that, as a rule, third-party funders will be interested in only monetary claims of high value (see 40.22). To date, the claims that have been funded have been predominantly insolvency claims, professional negligence claims and tax disputes. The following paragraphs ( ) set out the factors which may be relevant to whether a case is suitable for third-party funding. Each funder will, however, have his own selection criteria. Minimum values Most third-party funders have athreshold for the value of the claim below which they will not offer funding; in early 2010, a selection of minimum values was as follows: 26 Claims Funding International 27 25,000,000 1st Class Legal 150,000 Allianz Litigation Funding 500,000 IM Litigation Funding 500,000 Harbour Litigation Funding 2,000, Personal communication, RPirozzolo, 25November RPirozzolo Opinion: Funder the cosh, The Lawyer, 1December RJackson Review of Civil Litigation Costs: Preliminary Report (2009), Vol1, p This funder is no longer active in this country.

40 1206 Civil Costs: Law and Practice Trade publications exist which give up-to-date information about the state of the market. 28 Acceptance of cases The purpose of commercial funding is to cover costs and make a profit, so it is a condition of funding that the case in question has good prospects of success. Funders will take care in choosing their cases, often electing to carry out their own risk assessments. Some will accept only about 10% of referrals. Most will invest only if there is at least a70% chance of success. 29 Most will also require the client s solicitor to demonstrate his faith in the strength of the case by agreeing to expose himself to the same risks that the funder faces; thus, a solicitor would normally be expected to enter into a discounted conditional fee agreement where at least 30% of his fees were at risk (see 9.12). Remuneration Remuneration is typically between 10% and 40% of the value of the claim, but may be higher. The market is made up of two types of funder: established professional funders (whose core business is funding) and hedge-fund funders (who usually commit a smaller percentage of their capital assets to funding than established funders). Because a higher proportion of their capital is committed to funding (and therefore at risk), established funders are typically less willing to take risks than hedge-fund funders. It is for this reason that established funders will generally abide by fixed actuarial methods; hedge-fund funders,onthe other hand, will often be morewilling to negotiate abespoke package, and which may involve accepting agreater degree of risk. 30 ATE insurance A funder is potentially liable for costs, at least to the extent that he has funded the claim; 31 thus, itisnow almost always acondition precedent for funding that ATE insurance is taken out. 32 The premium may ormay not be recoverable, depending on the facts. 33 It is worth pausing here tonote that ATE insurers and third-party funders are usually able to co-exist in peaceful accord; this is not only because they will often have mutual clients (see above), but also because the two businesses operate inmarkets which are sufficiently dissimilar to avoid direct competition. In particular, whilst third-party funders seek clients with claims which have at least a 70% chance of success (see 40.23), ATEinsurers prefer amarket where the risks are marginally higher Atable of third-party funders and their products can often be found in atable in the Litigation Funding magazine. 29 Arkin vborchard Lines Ltd [2005] EWCA Civ 655 at [161]. 30 JDelaney Litigation insurance and funding (2008) 19 Cons Law 6, p Arkin vborchard Lines Ltd [2005] EWCA Civ 655 at [41]; the court explained that the restriction on the funder s liability will not apply ifthe agreement falls foul of the policy considerations that render an agreement champertous. Inthese circumstances, the funder may haveanunlimited liability. 32 RJackson Review of Civil Litigation Costs: Preliminary Report (2009), Vol1, p161; exceptions do exist, however: see, for example, Stone & Rolls Ltd (In Liquidation) vmoore Stephens (A Firm) [2009] UKHL 39, HL, which was funded without ATEinsurance. 33 Where both ATE insurance and third-party funding is required, and where the former is purchased at the behest of the latter, itisamoot point whether the premium would be recoverable from apaying party; it has been suggested that the premium ought not to be recoverable asthe expenditure could be categorised as being part of the funder s business overheads (see GLangdon-Down Litigation Funding: Place your bets (2009) Law Society Gazette, 21May, p11). 34 RPirozzolo Opinion: Funder the cosh, The Lawyer, 1December 2008.

41 Third-Party Funding 1207 Independent legal advice Experience from the USA suggests that in appropriate cases clients should be advised to take independent legal advice about the proposed method of funding. 35 Control of litigation Funders generally do not take any significant control over litigation; this is often because they are concerned about the possibility of allegations of champerty. 36 Contractual provisions Third-party funding agreements ought to be drafted by funding specialists, but the following general points can be made. Precedence condition It is sensible to include a contractual link to the retainers and the ATE policies, including a provision which stipulates which document will take precedence in the event of a conflict; the overall effect of the contracts must not prevent the client s solicitor from discharging his duties pursuant to Code 9ofthe Solicitors Code of Conduct Reporting provision It is wise to include a reporting provision which is sufficiently wide to allow the third-party funder to manage its business and to know the risks that it faces, but which is not so wide as to encourage allegations of wanton intermeddling and champerty. Priorities provision There ought to be a record of an agreement dealing with priorities (ie an agreement which will deal with who is to be paid what if the sums recovered in the litigation are insufficient to satisfy all of the parties contractual entitlements). Adverse event provision Unless the entirerisk is borne by the ATEinsurer,therealso ought to be arecord of an agreement dealing with contingencies (such as who would be responsible for adverse costs orders, who would pay for top-up insurance, etc). 35 JWheeler Welcome to the Party (2008) 158 NLJ 7342, pp RJackson Review of Civil Litigation Costs: Preliminary Report (2009), Vol1, p163.