June 2013 Jackson reforms to civil litigation What do commercial parties really need to know? SPEED READ The bulk of the Jackson reforms to costs in English civil litigation were implemented on 1 April 2013. The reforms are still relatively recent and this note highlights the reforms thought to be most relevant to commercial litigators: the introduction of damages-based agreements; wide-ranging changes to costs management of litigation generally and disclosure specifically; and changes to settlement offers made under Part 36 of the Civil Procedure Rules. Note: this article was originally published on 14 February 2013. It has been amended to take account of subsequent developments as at 25 June 2013. Jason Rix Senior Professional Support Lawyer Litigation London jason.rix@allenovery.com Sarah Garvey PSL Counsel Litigation London Contact Tel +44 (0)20 3088 3710 sarah.garvey@allenovery.com www.allenovery.com 1
BACKGROUND Lord Justice Jackson completed his year-long review of costs in civil litigation in January 2010, when he published his final report proposing, in his words, a coherent package of interlocking reforms, designed to control costs and promote access to justice. In March 2011, after consultation, the UK Government published its response to the recommendations for reform, agreeing to implement the vast majority of them. The legislation introducing these changes, the Legal Aid, Sentencing and Punishment of Offenders Act 2012, was passed in May 2012. Various Statutory Instruments have been made this year and most of the relevant provisions came into force on the implementation date, 1 April 2013. DAMAGES-BASED AGREEMENTS Damages-based agreements (DBAs), or what many call contingency fees, are a type of no win, no fee agreement between a client and lawyer, under which the lawyer is paid by reference to an agreed percentage of the client s damages if the case is won, but will receive nothing if the case is lost. These types of agreement have not previously been permitted in relation to English advocacy or litigation services (except in employment matters). In the right context they may provide an opportunity for parties to fund litigation by reference to damages that they anticipate winning. In commercial litigation, the amount the lawyer can recover is limited to 50% of the damages awarded. DBAs will only be available to claimants and the rules prohibit blended DBAs (ie those that are part standard-fee arrangement). Compliant DBAs will be permitted for all advocacy and litigation services relating to any sort of civil proceedings for resolving disputes (including arbitration), whether commenced or contemplated. DBAs should not be confused with conditional fee agreements (CFAs) where the success fee is calculated by reference to the lawyer s fees and not the client s damages. Under the reforms, the recoverability of success fees and after the event (ATE) premiums from opponents will be prohibited. CFAs can be used for defendants and can be combined with standard-fee arrangements. There are, at least, two principle flaws with the new regulations which prescribe the requirements for DBAs which mean that lawyers would be foolhardy to use them until the new regulations are reformed by the Ministry of Justice. First, the regulations do not permit hybrid or blended fee arrangements (ie part DBA, part standard fee arrangement). Secondly, and more fundamentally, the way that regulations are drafted appears to mean that a client can terminate the arrangement at any time and the lawyer cannot insist on being paid (for example, a lawyer could be "sacked" just after having negotiated a settlement agreement, but before it was signed, and it appears the lawyer would be unable to pursue its client for its fees). COSTS MANAGEMENT Jackson LJ s report identified the following as the essential elements of costs management: (1) The parties prepare and exchange litigation budgets or (as the case proceeds) amended budgets. (2) The court states the extent to which those budgets are approved. (3) So far as is possible, the court manages the case so that it proceeds within the approved budgets. www.allenovery.com 2
Jackson reforms to civil litigation What do commercial parties really need to know? (4) At the end of the litigation, the recoverable costs of the winning party are assessed in accordance with the approved budgets. The new rules on costs management reflecting these essential elements were intended to apply to all multi-track (in essence, complex high value) cases commenced on or after 1 April 2013 in a county court or in the Chancery or Queen s Bench Division of the High Court (except the Admiralty and Commercial Courts) unless the court otherwise orders. However in an eleventh hour intervention, on 21 February 2013, the President of the Queen's Bench Division and the Chancellor of the High Court gave notice of an important amendment to the previously published legislation. The notice states that "on further reflection" in the Chancery Division and the Queen's Bench Division (specifically the Technology and Construction Court (TCC) and Mercantile Courts within the Queen's Bench Division) the rules on costs budgeting will not apply to "to cases where at the date of the first case management conference the sums in dispute in the proceedings exceed 2,000,000, excluding interest and costs, except where the court so orders." truth. This will be based on various assumptions and contingencies (the first page of the new form, Precedent H, is set out at the end of this note). If the court makes a costs management order, which it is encouraged to do, the court will control the parties budgets in respect of recoverable costs. There will be a shift from necessity to reasonableness when considering the proportionality of costs. The new rules will provide as follows: Costs incurred are proportionate if they bear a reasonable relationship to: (a) the sums in issue in the proceedings; (b) the value of any non-monetary relief in issue in the proceedings; (c) the complexity of the litigation; (d) any additional work generated by the conduct of the paying party; and (e) any wider factors involved in the proceedings, such as reputation or public importance. It is likely to be at least a year, possibly longer, before we have any solid guidance as to what this new test means. In the interim the old rule of thumb that clients will typically recover two thirds of their costs can no longer stand. It is quite possible that clients will recover less than 50%. The Commercial Court has, from the outset, negotiated an exemption from the reforms on costs management since, in his final report, Jackson LJ readily accepted that no case had yet been made out for this. The logic perhaps being that if multinational parties are conducting litigation in various jurisdictions and are able to fund their own and the other side s costs if need be, why should the court of one jurisdiction hold otherwise? Now, it seems, all high court cases where the sums in dispute exceed 2,000,000 (except, curiously, pure Queen s Bench Division cases) are also outside of the costs management reforms. Recently the Civil Procedure Rule Committee set up a subcommittee to advise on the the desirability of retaining both the Commericial Court s blanket exemption and the valuebased exemption for the TCC, Chancery Division and the Mercantile Courts. Judges are expected to be much more proactive in the project management of cases and in seeking to ensure efficiency. The intention is that a judge will be allocated to a case and so will be familiar with the issues. Parties will have to do much more at the early stages of litigation, including setting budgets of costs verified by a statement of As Jackson LJ said in his report: The policy which underlies the proposed new rule is that cost benefit analysis has a part to play, even in the realm of civil justice. If parties wish to pursue claims or defences at disproportionate cost, they must do so, at least in part, at their own expense. In other words the fact that a party needs to do something will not be enough if they want to recover the costs of so doing; it will need to be proportionate to do so given the claims at issue. On 28 January 2013, the Court of Appeal gave a ruling on costs budgeting under a pilot scheme. The case, Henry v NGN, related to an application by a social worker involved in the Baby P case to recover nearly 300,000 the amount by which the budget had overrun in costs from a successful libel claim against The Sun newspaper. The Court of Appeal held that that there was good reason to depart from the courtapproved costs budget. Some commentators have described this as thwarting the purpose of Jackson LJ s reforms. However, it is difficult to make that extrapolation from one case, particularly since the relevant practice direction under the pilot scheme recognised that there may be good reason to depart www.allenovery.com 3
from a budget and the court was unwilling to set down general guidelines on what is meant by good reason. Moreover, the court also recognised that, going forward, with the introduction of the new rules from April 2013 which in the words of the court differ in some important respects from the practice direction with which this appeal is concerned it was likely to be more difficult to persuade the court to depart from a budget of costs than was the case with this specific practice direction. On 18 April 2013, costs budgeting came before Lord Justice Moore-Bick in Troy Foods v Manton (as part of an application for permission to appeal). In granting permission he held, "In [Henry v NGN] I expressed the view that an approved budget was not to be taken as a licence to conduct litigation in an unnecessarily expensive DISCLOSURE way. It follows that I do not accept that the costs judges should or will treat the court's approval of a budget at demonstrating, without further consideration, that the costs incurred by the receiving party are reasonable or proportionate simply because they fall within the scope of the approved budget". This would appear to run contrary to one of the aims of the Jackson reforms: dispensing with a detailed assessment where there is an agreed, or court approved, budget. It is particularly interesting since Moore-Bick LJ was so heavily involved in the Jackson reforms himself. The case was subsequently settled so we will have to wait for further guidance from the Court of Appeal. The standard test for disclosure of documents in English litigation requires parties to disclose documents that help or hinder their or the other side s case. Essentially, there are three main elements to the reforms relating to disclosure: (1) The electronic documents questionnaire will still apply to the disclosure of electronic documents as it currently does. It is not mandatory but as a firm we recommend its use. (The relevant practice direction within which the questionnaire is contained that deals with electronic documents is unaffected.) (2) At the first case management conference, parties may agree to or the court can dispense with or limit standard disclosure. In some circumstances (perhaps, for example, in patent litigation), there may be no disclosure at all; alternatively there may be disclosure by issue, and there may even be the very wide disclosure that is sometimes required in a fraud case. Parties will need to think about disclosure early and, if at all possible, agree the approach with each other. In order to do this they will need a good understanding of their documents (especially electronic documents) and what disclosure might involve as well as what documents the other side might have. (3) Parties will have to file and serve a report which estimates the broad range of costs that could be involved in giving standard disclosure in the case, including the costs of searching for and disclosing any electronically stored documents. The current exemption from costs management where the sums in dispute exceed 2,000,000 does not apply to the disclosure reforms so the majority of parties will have to address these. Likewise, the Commercial Court is subject to the Jackson reforms on disclosure. www.allenovery.com
Jackson reforms to civil litigation What do commercial parties really need to know? PART 36 Part 36 of the Civil Procedure Rules is a mechanism to encourage parties to settle by using costs as a sanction. If one party makes an offer to settle, in a prescribed form, and the other party does not accept the offer and then fails to beat the offer at trial, the party that declined the offer has to pay the other side s costs from the date of expiry of the offer and interest on those costs. The key reforms to Part 36 which the UK Government backed were: (1) To make it clear that, where a money offer is beaten at trial (by whatever amount), the Part 36 costs sanctions will apply (this is sometimes referred to as reversing the decision in Carver v BAA). This has been implemented, since October 2011, by virtue of new CPR 36.14(1A). (2) To introduce an extra sanction (equivalent to 10% of the amount awarded) payable by defendants who do not accept a claimant s reasonable offer where that offer is not beaten at trial. Provisions implementing this sanction mean that in wholly- or part-monetary claims it will be calculated by reference to the damages awarded and in claims which are non-monetary only by reference to the costs. The percentage starts at 10% for amounts up to 500,000 and on a sliding scale after that (with a cap of 75,000 in the case of non-monetary claims). The reforms to Part 36 apply to all civil proceedings including the Commercial Court. CONCLUSION It is difficult to predict the lasting impact the Jackson reforms will have on commercial litigation. Much will depend on the reaction of the judiciary and whether they seize the opportunity actively to manage their cases including the costs of those cases. In relation to cost budgeting, the attitude of the Court of Appeal seems slightly add odds with some intentions behind the Jackson reforms. We are also still in a state of flux with adjustments to the reforms themselves in relation to the courts in which cost budgeting applies and the DBA regulations currently expected, in October 2013. www.allenovery.com
PRECEDENT H COSTS BUDGET www.allenovery.com 6
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