Significant changes to civil litigation funding in England and Wales are due to take effect from April 2013, implementing Lord Justice Jackson’s recommendations aimed at reducing costs and promoting access to justice.  The extensive package of reforms includes contingency fees for commercial litigation, non-recoverability of additional liabilities and compulsory costs budgeting.

The landscape for civil litigation is changing significantly. With only 2 months to go before implementation, the position is not yet clear as certain key elements of the reform package are not yet published.

Contingency Fees

Additional liabilities such as Conditional Fee Agreement (CFA)  success fees and after the event insurance (ATE) premiums will cease to be recoverable from the opposing party from 1 April 2013, except for agreements entered into and in respect of which services have been provided prior to this date.

Damages Based Agreements (DBAs) will be allowed in most civil claims for the first time under section 45 of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO).  Subject to Parliamentary approval, the recently published draft DBA Regulations 2013 (the Regulations) will come into force on 1 April.

DBAs are a form of contingency fee arrangement which allow legal representatives to claim a percentage of damages obtained by clients in successful proceedings.  This type of fee arrangement was previously unavailable in civil litigation with the exception of employment claims.

The Regulations state that a DBA must specify the claim to which the agreement relates; the circumstances in which the representative’s payment, expenses and costs, or part of them, are payable; and the reason for setting the amount of the payment at the level agreed.  There is no obligation to notify the opposing party that a DBA has been entered into.  The permissible DBA fee for commercial claims will be limited to 50% of the sums ultimately recovered by the client, 35% in employment disputes and 25% in claims for personal injury.

The detailed provisions with regard to payment under a DBA appear somewhat ambiguous and contrary to expectations.  Section 4 of the Regulations provides that in any claim other than an employment matter to which the Regulations apply, a DBA must not require an amount to be paid by the client other than: (1) the agreed DBA fee from damages payable by another party, or (2) expenses incurred by the representative, as defined.  The mandatory wording at section 4 appears to have the effect that “hybrid” DBAs  are not permitted under the new regime, despite the Civil Justice Council (CJC) Report on DBAs having acknowledged, and raised no objection to, the possibility of blended fee arrangements analogous to “no win, lower fee” CFAs.

The damages percentage DBA agreed with the client must include Counsel fees. Also and most importantly, it acts as a cap on the combined costs payable to the solicitor and Counsel, irrespective of the time they have incurred on the dispute.

Part 36 Offers

To incentivise claimant offers, Jackson LJ suggested an additional sanction of an amount equivalent to 10% of monetary damages if a defendant refused a claimant’s offer and subsequently failed to beat it.  Through enabling LASPO provisions and changes to Civil Procedure Rules (CPR) Part 36, a tapering effect will be implemented with increased claimant recoveries of 10% of monetary awards (or costs for non-monetary awards) up to £500,000, plus 5% of any additional damages up to £1million.  For awards in excess of £1million, a 7.5% increase will apply to the first £1million and 0.001% of the amount over this figure.

Costs Budgets             

Compulsory costs budgeting is due to be introduced for all claims from 15 April 2013, extending the Technology & Construction Court pilot scheme.  The changes are aimed at ensuring greater proportionality in relation to costs of disclosure and expert evidence in particular, and transparency with regard to potential costs liability at the end of the litigation.

Costs budgets in Form HB will be exchanged in advance of the Case Management Conference (CMC) confirming the parties’ estimate of costs for each stage of proceedings.  Signed statements will be required at the CMC stage confirming proposals on disclosure under changes to CPR Part 31, and courts will be expected to actively manage the issue, choosing from a menu of disclosure options as appropriate to control associated costs.  Budgets should include a summary of assumptions and contingencies upon which the estimate is based, allowing scope to potentially revise estimates at a later stage if justifiable by reference to unforeseen developments in the litigation.

The Commercial Court will be excluded from compulsory costs budgeting procedures, taking into account the difficulty of providing an accurate overall estimate of costs at an early stage in relation to complex high value litigation.  The court will retain discretion to require costs budgets to be exchanged in appropriate cases.

Personal Injury Claims

Following the Court of Appeal decision in Simmons v Castle [2012] EWCA 1039, a 10% increase will apply to general damages for pain, suffering and loss of amenity in personal injury and other tort claims from 1 April.

In relation to personal injury claims only, qualified one-way cost shifting (QOCS) is expected to be introduced as part of new costs rules replacing CPR Parts 44 – 48, with the effect that losing claimants do not generally have to pay adverse costs.  On the basis of guidance issued by the Ministry of Justice in July 2012, QOCS will mean that unsuccessful claimants will not have to contribute towards the defendant’s costs except in cases where: (i) the claim is found to be fraudulent on the balance of probabilities; (ii) the claimant has failed to beat a defendant’s Part 36 offer to settle; or (iii) the case has been struck out as disclosing no reasonable cause of action.

The principles set out in CPR Part 36 override QOCS, but only up to the level of damages recovered by the claimant.  QOCS protection would apply to claims discontinued during proceedings (subject to (i) above) and would be allowed for all appeal proceedings.

Referral fees will be banned in relation to personal injury claims from 1 April and the Solicitors Regulation Authority will regulate referral payments in other forms of civil litigation.

Comment

It is impossible to assess the full impact of the reforms until the revisions to the CPR are published as they will give the much needed insight into the likely practical effect on day to day handling of claims and costs recoveries.

The legislation published in respect of DBAs appears to suggest that they will not be the replacement for CFAs that everyone hoped.  The capping of costs to the percentage agreed damages recovery for a solicitor and Counsel combined is unlikely to cover their costs in most claims. The apparent preclusion of hybrid DBAs under the Regulations is surprising, as these contingency fees were expected to allow greater flexibility with regard to creative billing solutions for clients.

We are left with a situation where most solicitors will be driven back to traditional hourly rate client retainers and access to justice may well be removed for privately paying parties other than the most wealthy.

For further information, please contact Georgina Squire or the Partner with whom you usually deal.