Changing Face Litigation Funding and Changes in Costs

Transcription

1 Elborne Mitchell The Changing Face Litigation Funding What it means for Insurers A lecture by Matthew Clark and Nick Curling These notes are derived from a talk by Matthew Clark and Nick Curling of Elborne Mitchell, given at Lloyd's Old Library on Tuesday 18 May Where specific reference is made to the law it is to English law as at 18 May For specific advice, you should please contact Matthew Clark, Nick Curling or the partner with whom you usually deal at Elborne Mitchell. Disclaimer: These Notes are for information only and nothing in them constitutes legal or professional advice. They should not be considered a substitute for legal advice in individual cases; always consult a suitably qualified lawyer on any specific legal problem or matter. Elborne Mitchell assumes no responsibility to recipients of these Notes.

2 The Changing Face Litigation Funding What it means for Insurers Over the last twenty years the issue of costs has become an increasingly important aspect of Litigation. An ever-increasing body of case law, particularly after the introduction of the civil procedure rules, is testament to this fact. Concerns have been voiced from a number of stakeholders, from the judiciary to Insurers, Defendant and Claimant Lawyers alike that the position has been reached where there is a danger costs will spiral out of control compared to the issues at stake. Whether it is a simple slip-and-trip case right through to large cases such as BCCI and Equitable Life, a major talking point is often the costs involved. In January 2010 of this year, Lord Justice Rupert Jackson published his lengthy review of the costs regime in England and Wales and made a plethora of recommendations that have the potential to significantly change the face of litigation funding. During this lecture we will first deal briefly with the objective of the Jackson review before summarising the main features of the current costs regime. We will then move on to cover the recommendations made in the Jackson Report before discussing the implementation of such recommendations and what they may mean for Insurers. Background to Jackson Report The purpose of the Jackson Report is neatly summarised by the statement of Sir Anthony Clark, the Master of the Roles in November 2008 when he announced the review in to the cost regime. He said that the purpose was to carry out an independent review of the rules and principles governing the costs of Civil Litigation and to make recommendations in order to promote access to justice at proportionate cost. Just pausing there to highlight the phrase access to justice. The idea of promoting access to justice was central to the main funding structures that have developed over the last 20-years. The need for a review arose because there is a feeling that such funding structures have become unchecked and have resulted in the unintended consequence of disproportionate costs. Indeed, Rupert Jackson in his forward to his Report stated that in some areas of Civil Litigation costs have become disproportionate and now impede access to justice. As you can

3 see from the quote, he goes on to say that he proposes a coherent package of interlocking reforms designed to control costs and promote access to justice. By way of a recent example, one need only look at the costs claimed in the Trafigura case. This was a case involving 30,000 group litigants bringing a claim against Trafigura for alleged dumping of toxic waste off the Ivory Coast. Trafigura settled the claim with no admission of liability for 30million plus costs. Trafigura s legal costs stood at the not insubstantial 14m. This month, Leigh Day & Co, the solicitors for the group litigants submitted their claim for costs comprising 5M expert fees, 10M ATE premium 45M Base Costs and barristers fees and 45M Success Fee. A total claim for costs of 105m equivalent to 3.5 times the settlement sum. This is believed to be the highest costs claims in legal history and unsurprisingly prompted Trafigura s QC to describe the figure as staggeringly high. The Jackson Report has been heralded as the first ever, comprehensive review of the costs structure. It is a weighty tome with the final report running to over 550 pages plus appendices and which cross-references back to an earlier preliminary report, itself a lengthy document. It took Rupert Jackson, with the assistance of a group of judges and practitioners, over a year to carry out research and consultations with the legal professions and Insurers. Current Costs Regime Before coming on to the recommendations in the Jackson Report, it is necessary to have a brief run through of the existing costs structure in order to put the recommendations into context. The most basic principle is that the losing party should pay the legal costs of the victor. This is different to the position in many other jurisdictions and is often considered to be one of the main reasons why the English jurisdiction is preferred in international contracts. The proposition that the loser pays the winners costs is however only the starting point. There are various measures contained within the civil procedure rules that can see the general proposition being reversed. For instance, Part 36 Offers which are not beaten at Trial or unreasonable conduct on the part of the winning party. Further, in cases of relatively low value the costs that are recoverable from the loser are either limited or fixed. 3

4 Once the claim has been decided either by judicial ruling or through settlement the costs will be assessed if not agreed. There are far too many facets involved to go into detail in this talk, however, the assessing judge will assess costs on either the standard basis, where any doubt as to the recoverability of an item of cost is decided in the paying parties favour, or the indemnity basis where any such questions are decided in favour of the receiving party. Costs are looked at both for reasonableness, which can involve considerations of the time spent on individual tasks and the complexities involved as a whole, and proportionality bearing in mind the sums at stake. The hourly rates claimed for the party s legal representatives will also be looked at against published guideline hourly rates. The vast majority of cases are still funded by the party paying its Solicitors costs as the case progresses. There are several other types of funding that are increasingly being used. The first one is likely to be familiar to everyone thanks to the many adverts on TV and in newspapers. Conditional Fee Agreements, in every day parlance no win, no fee have been around for over 20 years. CFA s became an important method of funding, especially for individual Claimants, as a result of Section 58A(6) of the Courts and Legal Services Act 1990 which allowed the success fee to be recoverable from the Defendant. CFA s provide that the winning party s Solicitor will be paid their costs together with percentage uplift by way of a success fee. CFAs meant that claimants who might otherwise be unable to afford to litigate genuine claims could get access to justice. CFA s have developed over time such that they can now be of a hybrid or split nature whereby the Solicitor charges a reduced hourly rate regardless of outcome. Following the case of Forde v Birmingham City Council CFA s can also be retrospective in nature, although the paying party will only be liable for the success fee from the date that notice of the existence of the CFA is given. Often going hand-in-hand with CFA s is After The Event Insurance. As the name suggests, this is taken out by a party after the event giving rise to the cause of action to protect that party from the consequences should the party lose the case. ATE Insurance pays the winning party s costs. Usually, such policies also cover the Insured disbursements and, more recently, policies have evolved so that the insurance premium itself, which is usually deferred until the conclusion of the case, is treated as a disbursement and in effect is self insured in the event of a loss such that the insured does not have to pay the premium. Importantly, the ATE insurance premium is recoverable from the other party in the event that the insured is successful in its claim. 4

5 As a result, a party who has the benefit of a CFA and an ATE insurance policy is in something of a win-win situation in that it may never have to pay any costs to pursue a claim. If it is successful, it s Solicitors costs, disbursements, success fee and ATE insurance premium are all paid by the Opposition (subject to assessment). In the event that the claim is lost, no Solicitors costs are payable under the CFA and the ATE Insurance picks up all of the other tabs. An important point to note is that there are no eligibility criteria for a party to meet before a CFA or ATE Insurance can be obtained. Both CFA and ATE Insurance were trumpeted as providing access to justice for those parties who might otherwise not be able to seek a remedy due to lack of funds. The law as it stands, however, means that multinational plc s are just as entitled to use the model with the result that a so called Super Claimant is created. Our own experience is that we know of at least one lending institution that is pursuing multi million pound professional negligence claims using this model. Another model of funding that has increased in prominence over the years is third party funding. Third party funding comes from professional third party funders who will agree to fund a claim in return for a percentage of any damage award that may be achieved. This model is generally more suited to commercial disputes than ones involving personal injury claims by individuals. Another type of funding arrangement is Contingency Fee Agreements. Like CFA s these involve the concept of no win, no fee. Under a Contingency Fee arrangement a Solicitor will take a slice of damages, the size being dependent on the risk involved and often in lieu of their traditionally hourly rates. Contingency Fee Agreements are only of limited application at present because there is a bar on Contingency Fee Agreements being used in contentious matters. In other words, they can only exist before the issue of proceedings. Two further features of the current regime also worth highlighting at this juncture, as they are part of the recommendations put forward by Jackson, which it should be remembered he stresses were a package of interlocking reforms. The first is BTE Insurance or Before the Event Insurance. These are usually bolt-ons to house or car insurance or to credit cards. They are generally aimed at individuals and will usually not be bespoke to the dispute itself unlike ATE Insurance. The prevailing view is that BTE Insurance is generally constrictive in cover and puts pressure on a Claimant to use panel firms of the BTE Insurers. Finally, a common feature, especially in Personal Injury and RTA claims is the fact that Solicitors will pay referral fees to claims management companies or BTE Insurers. Such referral fees are 5

6 usually charged back to the Claimant client, albeit indirectly, via increased hourly rates, with such costs ultimately being past on to the Defendant. Jackson Report - Recommendations So much for the current costs regime. Now let us move on to see what Jackson said about the current regime and his recommendations moving forward. The two most striking recommendations by Lord Justice Jackson are that ATE Insurance premiums and success fees under CFA s should not be recoverable from the losing party. This represents a fundamental shift in the costs regime. Lord Justice Jackson s reasoning is that ATE Insurance and success fees are two of the major drivers in the creation of excess costs. The Claimant is not incentivised to control their own Solicitors costs because they know that the Opposition will be picking up the bill at the end of the day - we have all seen the adverts from claimant solicitors guaranteeing that you keep 100% of your damages. Jackson also notes that there are no eligibility criteria and so the current regime does not meet the original objective of providing access to justice. Jackson also highlights the fact that the increased costs burden puts pressure on Defendants to settle otherwise unmeritorious claims. To my mind, this perhaps overstates the case because Claimant Solicitors and ATE Insures have a vested interest in only backing claims with merit so that truly unmeritorious claims should be weeded out earlier in the process. It is worth noting that alone amongst his recommendations; Jackson urges that his recommendations on ATE Insurance premiums should not be watered down. At first glance, doing away with the recoverability of ATE Insurance premiums seems harsh on a Claimant who might otherwise be put off from bringing a claim if there is a prospect of having to meet the Defendant s costs. Jackson s answer is that there should be qualified oneway cost shifting. His proposal is that Defendants, if they were successful, would bear their own costs. In other words, the Claimant would not be expected to pay a successful Defendant s costs, which automatically does away with the need for ATE Insurance. A successful Claimant would still be able to recover its costs from an unsuccessful Defendant. There are qualifications to this general position such that a Defendant could recover its costs in the event that the Claimant s conduct was unreasonable or unjustified. The cost rules connected to CPR Part 36 would also remain in place. I should stress at this point that Lord Justice Jackson has recommended that further consultation is needed to decide upon the type 6

7 of cases where this qualified one-way cost shifting should apply. The suggestion is that it would apply to Personal Injury cases and a select group of other types of Litigation but would not apply to Commercial Disputes, where parties are more readily able to bear adverse costs or make the commercial decision to obtain ATE. There is, however, also suggestion that there might be a means tested element whereby claimants who could not meet the costs of a defendant would not be expected to pay them. Lord Justice Jackson does not rule out CFA s per se. His new costs world envisages that Claimants will enter CFA s with their Solicitors but that the success fees will not be recoverable from the other side. Claimants would then have to meet the success fee elements, but not the underlying base costs, which would remain recoverable from their own resources. In order to help protect Claimants, Jackson recommends that the measure of damages in Personal Injury, Nuisance and other cases involving civil wrongs should be increased by 10%. It should be noted that this would only apply to individuals. Jackson also recommends that any success fee is capped at 25% of any damages awarded. Although recommending that his proposals should not be watered down, Lord Justice Jackson does make alternative watered down proposals. This is perhaps in recognition of the size of the changes to the costs world that he envisages. In relation to ATE Insurance, his fall back position is that there should be an amnesty period of 42 days in which a Defendant can choose to settle a claim without being liable to pay any ATE Insurance premium. He also recommends that no ATE Insurance premium should be recovered where there are Part 36 considerations involved. In other words, he considers that a Claimant party who becomes liable to pay a Defendant s costs because they have not beaten the Defendant s Part 36 Offer should not have the possibility of recovering their premium. He also recommends that ATE premiums are capped at a certain percentage of the damages awarded. It is certainly the case that ATE Insurance is not a cheap product, in my experience a Claimant can expect to pay anywhere between a third to a half of the level of cover by way of a premium. The fall back position in relation to CFA s is that Jackson recommends a fixed percentage success fee for certain categories of Litigation (this already happens in standard RTA cases). He also recommends that no success fee should be recoverable should a claim settle within the pre-action protocol period relevant to that dispute. 7

8 Jackson notes that third party funding is likely to become more important if his recommendations in relation to CFA success fees and ATE Insurance premiums are followed. Jackson advocates a voluntary code being desirable for third party funders but does not consider that any statutory regulation is needed at this point. He recommends that, where third party funding is involved, the funder should be fully liable for the Opponents costs in the event that the case is lost. At present, there is no automatic presumption that a third party funder will be held liable for the Opponents costs. Jackson also recommends that provided the third party funder meets any voluntary code, issues of Champerty or maintenance should be disregarded. Another major change from the current regime is that Jackson recommends that Contingency Fee Agreements should be allowed for all claims. He recommends certain safeguards to protect vulnerable Claimants. For instance, he recommends that a limit be placed on the percentage of damages that the legal advisor can take in the event of a win and that independent legal advice is required before a Contingency Fee Agreement can be considered as valid, much like the requirement for an individual to have an opportunity of taking independent legal advice before entering into a personal guarantee. Although the successful party would pay a percentage of the damages to Solicitors, Jackson recommends that the recovery of costs from the loser would be based on a traditional cost recovery basis. Finally, Jackson makes a number of other recommendations, which although perhaps falling outside the scope of the talk, are nonetheless of important. He encourages the promotion of BTE insurance. He recommends that referral fees are scrapped on the basis that they add nothing to the claim other than to increase the overall costs. He recommends that there be a full fixed cost structure put in place for fast track cases: at present there are only fixed costs for the Trial itself. He recommends repeal of large sections of the practice direction on preaction conduct for general cases that do not otherwise fall within a specific pre-action protocol, although parties will still be expected to serve claim letters and exchange information prior to the issue of proceedings. He recommends improved consequences for beating Part 36 Offers including an increase of the overall damages by 10%. At present the consequences are the award of a greater interest rate and costs on an indemnity basis. He recommends that there be a costs Council set up to act as a permanent reviewing body to control such matters as Solicitors guideline hourly rates and fixed costs. Finally, he advocates the closer judicial control on cost management, although this is not a new idea as 8

9 similar recommendations have been made by judges and legal bodies without great effect. He also recommends improvements to the Courts administration procedures including specialist training of court staff so that cases run more smoothly. Having set the scene of how things are and how things might be I will hand other to Matthew who will attempt to interpret how the new proposed regime may affect insures. What it Means for Insurers So with an extensive raft of proposed changes, is this is good or bad for Insurers. In the short to medium term, the simple answer is that the position is very much status quo. Lord Justice Jackson s Report only contains recommendations. They have no force in law and there is no timescale for implementation. Many of the more fundamental changes, such as the abolition of the recovery CFA success fees and ATE Insurance Premiums will require primary legislation. It must be doubted whether the reform of legal costs will be very high up on the new coalition government s agenda. Other reforms may only require amendments to the Civil Procedure Rules, which could be achieved quickly, although Jackson argues for the whole package to be adopted and not implemented piecemeal. There is also the need for consultation on certain recommendations, such as the categories of litigation involving qualified one-way costs shifting. There will inevitably be consultations and representations made by the various stakeholder bodies; indeed, the Law Society launched a survey only last month. Having said that, the Bar Council has greeted the Jackson Report by comparing it to the watershed report of Lord Woolf. Woolf s reforms of course led to the creation of the CPRs in 1997/98. Does this indicate that Jackson s reforms will inevitably be adopted? The answer is far from certain. There have been plenty of criticisms of various aspects of his report, notably from both sides of the litigation fence. The Law Society has said that The society is concerned about how Lord Justice Jackson s proposals may affect access to justice and the impact on solicitors business models and income streams ATE Insurers have been particularly critical. 9

10 If the aim of Jackson LJ s recommendations is to propose a regressive system that favours the wealthy, then objective achieved. The much used phrase a level playing field will have reduced application, particularly outside PI. But it is not just the claimant-orientated bodies that have voiced concerns. These are hugely controversial proposals that have very serious implications for defendants generally and for the insurance sector in particular Insurers and other businesses will be very concerned about defending a claim where there s a risk that they won t be able to recover costs when they win But, assuming that the recommendations from Lord Justice Jackson are implemented, what could they mean for insurers? The first issue is the uncertainty that inevitably leads from new rules and legislation. There will inevitable be satellite litigation on any new cost rules, just like there has been since the CPRs were first introduced. For instance, what constitutes unreasonable or unjustified conduct in the context of the qualified one-way costs shifting proposal. Would it go as far as bringing a wholly unmeritorious claim (and what would the test be for wholly unmeritorious?). There are currently acknowledged inherent uncertainties in Jackson s recommendations, for instance the categories of litigation where qualified one-way cost shifting applies. On this proposal, there is also the uncertainty surrounding the possible means tested element how wealthy must a claimant be before the Defendant might get a costs order, and how are parties going to go about evidencing this for the court to make a decision. Perhaps the most immediate concern, however, is whether the changes will be applied retrospectively. More complex pieces of litigation can take many years to reach a conclusion and cases, which commenced even before Jackson was commissioned, might not end until after his recommendations could be enacted. On the plus side, the proposals should lead to a drastic reduction in costs that defendants are expected to meet (by over half in the earlier example of Trafigura). By scrapping the recoverability of success fees and ATE insurance premiums, defendants liabilities are likely to be slashed. One caveat, at least in relation to CFA success fees, must be the risk of claimant solicitors simply increasing their hourly rates to compensate for the loss of the success fee. Jackson is not proposing to outlaw CFAs themselves indeed, he has proposed a 10

11 number of protective measures to provide balance to claimants who would be left to fund the success fee element from their damages. However, there appears nothing to stop a claimant solicitor simply dressing up their success fee in increased hourly rates. Now, such hourly rates might be kept in check by the costs assessment process at the end of a claim, however, this would partly rely on the recommended hourly rates, usually set by reference to the prevailing industry practice, being kept in check. Scrapping referral fees will also assist, in lowering costs, although only to a limited extent as such fees are not generally large. The theory underpinning some of Jackson s reasoning is also that his changes will incentive claimants into keeping better control over their own solicitors costs. This is perhaps stretching the abilities of, particularly some individual claimants, too far. Lower costs are, however, going to be offset by the potential increase of damages by 10%. At this point, the impact of the Legal Services Act 2007, and in particular the opening up of the legal market to non-lawyers, should be briefly mentioned. Although not yet fully implemented, the Act proposes that non-solicitors firms can perform certain legal services. Given the cost restrictions that will be imposed on claimant solicitors in terms of the success fee recoverability, the question is whether this will lead to more and more cases being handled by non-qualified, or at least less qualified, staff. If so, will there be a drop in the quality in the way claimants present and conduct their cases and will this result in greater costs for defendants in dealing with ill-prepared claims? One of the most fundamental changes to the principles that underpin litigation in this country, i.e. that the loser pays the winner s costs, is the qualified one-way costs shifting proposal. From an insurer s perspective, this proposal is very much a mixed bag. The prevailing school of thought by commentators is that the change will prompt defendants and their insurers to settle cases they might otherwise have defended to trial on the basis that it will be more commercial for them to do so rather than to have a pyrrhic victory at court. This may be exacerbated by the potential increase in spurious claims by claimants who see there being very little downsides to pursuing litigation; although our view is that good solicitors and barristers operating under a CFA will still only back good cases and so the risks of this are not as great as many commentators are suggesting. It may give rise to more subrogated claims by insurers where the commercial merits of pursuing such claims are increased by the removal of what might otherwise be seen as a barrier. One thing does seem certain and that is 11

12 that a defendant s Part 36 offer will become increasingly important. This is the only more or less guaranteed way of reversing the one-way cost shift back to a defendant (the other, i.e. unreasonable or unjustified conduct is, as stated above, a nebulous concept). Pitching the offer at the right level will therefore be crucial. It should be remembered that, at present at least, qualified one-way costs shifting is not going to be applied to commercial litigation cases. The impact of claimant Part 36 offers will also become more important. Jackson proposes that damages should be increased by 10% if a claimant beats their Part 36 offer at trial. This is on top of the current consequences of having costs awarded on an indemnity basis and a higher rate of interest, of up to 10% above base, awarded. It should be stressed that the proposed changes to the Part 36 rules appear to apply to all cases, including commercial ones. A 10m liability could easily become 11m plus interest. The Part 36 changes are certainly more claimant friendly than for defendants as there are no increased sanctions for a claimant failing to beat a defendants Part 36 offer. Another fundamental change, although this time more of a positive one for insurers, is allowing contingency fee agreements. In terms of costs liabilities, this will have little difference for defendant insurers because Jackson has already said that costs would be recoverable on the traditional method of assessment rather than by way of the slice of damages taken by the claimant solicitor. There are, however, two possible impacts for insurers to consider. The first is the likely inbuilt tension between solicitor and client that contingency fee agreements almost inevitably result in. Will a solicitor truly be in a position to give independent and impartial advice when they have a stake in a claims outcome? Will solicitors push for a client to go for more knowing they would receive more, or will they push for a quicker and lower settlement to get money into their hands? Following on from this is the second consideration, which is will a solicitor working under this arrangement pursue a claim more vigorously? The tacit recognition, nay approval, of third party funding is also likely to be prove more positive than negative for insurers. Third party funding is much more likely in commercial litigation cases where defendants are likely to still be able to achieve a costs order. Whilst it will assist an otherwise cash-strapped claimant pursue a claim, defendants will have the 12

13 benefit of the third party funder being on the hook for costs. Third party funders are also unlikely to back cases whose merits are not great, assisting to weed out weaker cases. The biggest loser from the Jackson Report is undoubtedly the ATE insurance market. The recommendations will see the market drastically curtailed, if not destroyed completely. The one ray of light is that ATE may still be attractive for those involved in commercial litigation. Having said this, claimants are likely to pay more scrutiny to the premium when they are not going to be able to recover it from the defendant. The winner could be the BTE market, which Jackson strongly advocates. As stated above, the BTE product is generally quite constrictive at present, but it may be that insurers will look to improve the offering, perhaps creating a BTE Plus product, with an initial premium paid for basic cover and then a second, higher premium once a dispute arises which can be tailored to the circumstances. Conclusion It is still early days following the Jackson report. Much work is still needed for the recommendations to come to fruition. What we can say with some certainty is that, as the recommendations currently stand, they are on the whole better for defendants than for claimants. It seems that what could emerge is a two-tier litigation regime which sees commercial litigation cases treated differently from the, generally, more run of the mill personal injury cases. This may not necessarily be a bad thing. In conclusion, the face of litigation funding will change in the future at present, we cannot say if we will end up with an ugly sister or prince charming. 18 May