Final report published today in Lord Justice Jackson's year-long costs review

The final report in Lord Justice Jackson's civil litigation costs review was published this morning. The report presents the Judge's findings and supporting evidence following his year-long review. It will now be for the Ministry of Justice to consider the report and accept or reject the various recommendations.

A full copy of the report, running to some 500 pages, is available on the Judiciary website.  We will be holding a seminar on 11 February at which we will highlight the key issues from the report, followed by a panel discussion with Herbert Smith partners and distinguished external speakers including Lord Justice Jackson.

KEY RECOMMENDATIONS

The report makes a large number of recommendations in wide-ranging areas. The most important points affecting major commercial litigation include the following:

• Conditional fee agreements (CFAs) / after the event (ATE) insurance: CFA success fees and ATE insurance premiums should cease to be recoverable from the opposing party.
• Cost shifting: Full costs shifting (i.e. the "loser pays" rule) should remain for commercial litigation, but qualified one-way cost shifting should be introduced for personal injury and defamation claims.
• Collective actions: There should be full costs shifting as a default position (save in personal injury collective actions) but the court could order that a different costs regime should operate in appropriate cases.
• Contingency fees: Contingency fees (where the lawyer is remunerated by way of a share in the client's damages) should be permitted, subject to a requirement for independent advice, but the losing party should pay costs on a conventional basis.
• Third party funding: Third party funding should be supported, subject to limitations on the funders' ability to withdraw funding in ongoing litigation and appropriate capital adequacy requirements.
• Disclosure: There should be a "menu" of disclosure options available for large commercial and similar claims.
• Witness statements and expert reports: There should be case management measures to control the content or length of statements, together with costs sanctions for breach, but otherwise no major changes are needed.
• Part 36 offers: Where a claimant obtains a more favourable result than its own Part 36 offer, the claimant's damages should be increased by 10% (possibly scaled down for higher value claims). Further, the broad interpretation of whether a judgment is "more advantageous" than a defendant's Part 36 offer (as introduced by BAA v Carver) should be reversed.
• Case management: Cases should, where possible, be assigned to a judge who has relevant expertise and remain with that judge for the life of the case.
• Costs management: Judges should have a discretion to adopt costs management procedures where beneficial for a particular case. However, no case has yet been made out for costs management in the Commercial Court.
• Alternative Dispute Resolution (ADR): ADR should be encouraged, including through better education for practitioners and the public, but should not be compulsory.
• Pre-action protocols: The general practice direction on pre-action conduct should be substantially repealed and replaced by an obligation to conduct appropriate pre-action correspondence and exchange of information, with costs sanctions to curb unreasonable behaviour.

BACKGROUND

Lord Justice Jackson was appointed by the then Master of the Rolls, Sir Anthony Clarke, to lead this fundamental review of the rules and principles governing the costs of civil litigation. His objective was to make recommendations "in order to promote access to justice at proportionate cost".

Lord Justice Jackson's review commenced in January 2009. On 8 May he published an interim report identifying numerous issues and options for consultation. Our e-bulletin sent out the same day summarised the key points on which views were sought (see post).

There followed a three-month consultation in which the Judge received over 300 separate written submissions running to several thousand pages and also conducted a series of public seminars and events. The last four months of 2009 were spent preparing the final report.

THE REPORT IN MORE DETAIL

Conditional fee agreements (CFAs) / after the event (ATE) insurance:

Lord Justice Jackson recommends that CFA success fees and ATE insurance premiums should cease to be recoverable from the opposing party in litigation. Parties would still be entitled to enter into such arrangements in order to fund their litigation, but they would have to bear the additional costs of doing so (for a claimant, this might be out of any damages awarded).

The Judge identifies a number of flaws with the current regime of recoverable success fees and ATE premiums, including the following:

• It is open to all litigants, "whether rich or poor and whether human or corporate", and therefore is not restricted to those who merit financial support with their litigation.
• The party with the benefit of the arrangement generally has little or no interest in the level of costs being incurred in its name, and therefore exerts little or no control over those costs.
• It places an excessive costs burden on opposing parties, whose costs liability may become grossly disproportionate if they contest the case to trial (possibly quite reasonably) and lose.

The Judge says that if his recommendation to end recoverability is implemented, there should be:

• A move to qualified one-way costs shifting (where the claimant is awarded costs if successful but does not have to pay the defendant's costs if it loses, unless the parties' conduct or financial resources merit a different order) for certain categories of litigation, including personal injury and defamation claims, to protect against the risk of adverse costs orders. Such a measure would however have no place in the context of commercial, construction or similar litigation.
• Measures to assist personal injury and other claimants in meeting success fees, including a 10% increase in the level of general damages for pain, suffering and loss of amenity, as well as for nuisance, defamation and any other tort which causes suffering to individuals.
• Enhancement to the regime for claimants' Part 36 offers (see below).

If his main recommendation is rejected, and therefore success fees / ATE premiums remain recoverable, the Judge recommends various control measures. For example, the success fee / ATE premium should be irrecoverable if liability is admitted within the protocol period, and a cap on the level of ATE premiums (at 50% of damages) should be introduced. Also, where the ATE insurer is entitled to avoid the policy (e.g. for non-disclosure), it should be required to pay out to the opponent but would then have a right of recovery against the insured.

We support the abolition of recoverable success fees and ATE premiums in commercial cases. There is no obvious reason why defendants should be liable for the additional costs of claimants choosing to litigate on a risk free basis - potentially resulting in the defendant paying a multiple of the claimant's reasonable costs. In some cases, recoverability may interfere with a defendant's access to justice in that the defendant feels undue pressure to settle for more than a case is worth.

We also welcome the Judge's recognition that, if recoverability is abolished, there are no special rules needed for commercial claims to insulate the parties in respect of CFA success fees or adverse costs orders. Where a commercial party wishes to fund its litigation via a CFA with a success fee, or to obtain insurance against adverse costs liability, it can do so at its own expense.

Cost shifting:

As noted above, Lord Justice Jackson recommends that full cost shifting should remain for commercial, construction or similar litigation, but that qualified one-way cost shifting should be introduced for certain other categories of litigation, including personal injury and defamation claims.

He recommends that there should be further consultation to determine which categories of litigant should benefit from one-way costs shifting, including whether it should be introduced for any categories of professional negligence litigation. He expresses the view that this may be difficult to justify outside clinical negligence, as most of those who employ solicitors, accountants, architects, etc could afford to take out before-the-event insurance (also known as legal expenses insurance) to cover their potential liability for legal costs if they chose to do so.

We agree with the Judge's recommendation that full cost shifting should remain for major commercial litigation. This is an important safeguard for both claimants and defendants, allowing claimants with meritorious claims to recover their reasonable legal spend in addition to damages and protecting defendants from unmeritorious claims.

Collective actions:

The report recommends that, as a default position, there should be full costs shifting in collective actions (save in personal injury collective actions, where qualified one-way costs shifting would be the default). However, the court would be able to direct at the certification stage that a different costs regime should operate.

The Judge notes that the arguments advanced during the costs review ranged between two principal positions: (i) no costs shifting, or one-way costs shifting, to promote access to justice for claimants who would otherwise be deterred by fear of adverse costs liability; and (ii) full costs shifting to deter frivolous claims.

In the research we carried out on the views of large corporates and institutions relating to class action reform, clients were unanimous in their view that the cost shifting rules must be retained as a protection against weak claims.

The Judge sees his proposal as a middle way, providing for the discipline of full costs shifting in "many (perhaps most) cases", but allowing the court flexibility where a different regime would be appropriate after considering the nature of the case, the funding arrangements and the resources of the parties.

He draws support for this recommendation from the proposal of the GC100 Group, referred to in the report, that costs shifting should remain the norm in group actions, but there should be a "reasonable amount of judicial discretion to order that costs should lie where they fall, or be capped, in appropriate, exceptional circumstances" for example where there is "genuine concern as to access to justice, unconscionable behaviour by the defendant, or overwhelming merits".

The Judge specifically comments that where a claim is weak or lacking in merit, the court would no doubt insist that two way costs shifting should prevail.

Contingency fees:

The report recommends that both solicitors and counsel should be permitted to enter into contingency fee agreements with their clients (where the lawyer is remunerated by way of a share in the client's damages). However, a losing defendant would only have to pay costs on a conventional basis: so far as the contingency fee exceeded what would be chargeable under a normal fee agreement, this would be borne by the client.

The solicitor and client would have to agree at the outset how any liability for the defendant's costs would be met. If the solicitor agreed to take on this risk, it should be reflected in the solicitor's percentage share of the damages. Similarly, disbursements could be payable by the client or funded by the solicitors as part of the contingency arrangement, in which case this risk should also be reflected in the percentage payable on success.

The Judge comments that it is desirable that as many funding methods as possible should be available to litigants, particularly if success fees and ATE insurance premiums become irrecoverable (as he has recommended). Further, he sees particular force in the freedom of contract argument: if the client wishes to enter into a contingency fee agreement with its lawyer, it should be free to do so.

However he recommends, as a safeguard, that contingency fee agreements should not be valid unless countersigned by an independent solicitor who certifies that he or she has advised the client about its terms.

He also recommends that contingency fees should be subject to regulation along the lines of the proposals the Ministry of Justice has put forward in respect of contingency fees in tribunal proceedings (which are currently permitted). Specifically, the regulations should:

• Introduce a requirement that clear and transparent advice and information be provided on costs, other expenses and other methods of funding available.
• Provide a maximum percentage of the damages that can be recovered in fees. (The Judge does not comment on what the maximum should be, save for personal injury claims where he recommends a cap of 25% of the claimant's damages excluding damages referable to future costs or losses.)
• Control the use of unfair terms and conditions (for example regulating clauses that penalise claimants where they wish to transfer the case to another lawyer or where they refuse advice to settle a claim).

Contingency fees elicit a wide range of responses, as the Judge observes, but clearly their availability would increase the options available at a time when commercial clients are demanding more creative billing solutions from their lawyers.

Third party funding:

Lord Justice Jackson expresses the view that third party funding (where a third party funds a claim in return for, usually, a share of the proceeds) is beneficial and should be supported. It promotes access to justice and does not impose additional financial burdens on opposing parties. He notes that third party funding is likely to become even more important as a means of funding litigation if success fees under CFAs become irrecoverable.

The Judge considers whether third party funders should be regulated or should subscribe to a voluntary code. He concludes that a voluntary code would be sufficient, but that the question of full regulation by the FSA should be re-visited if and when the third party funding market expands.

The Judge notes that a draft voluntary code has been developed by the Third Party Litigation Funders Association in conjunction with the Civil Justice Council. He does not comment on the detail of the code, save to say that:

• The code should not permit a funder to withdraw from a case unless there are "proper grounds", though the Judge does not expand on what those grounds might include. He clearly does not support the current practice in which funders can reserve the right to withdraw at any time subject to paying accrued obligations.
• There need to be effective capital adequacy requirements for funders in order to protect claimants, bearing in mind that that the litigation being funded may last for a number of years.

The Judge also recommends that third party funders should be potentially liable for the full amount of adverse costs, subject to the judge's discretion. Their liability to the defendant should not (as at present) be restricted to the amount of funding they had provided to the claimant.

Disclosure:

The Judge recommends a "menu" of disclosure options for large commercial claims and other claims where the costs of standard disclosure are likely to be disproportionate to the sums in issue or the value of the rights in issue. (Large personal injury and clinical negligence cases will however be specifically excluded as, the Judge notes, standard disclosure usually works satisfactorily in those cases).

Under the proposal, the court will select the order which is most appropriate to the case and standard disclosure will no longer be the starting point. A draft rule encapsulating the menu option was prepared by a disclosure working group (which included Herbert Smith partners Ted Greeno and Gary Milner-Moore) and subsequently revised by the Judge following various consultation meetings. He sets it out in full in the report and recommends that it is taken as the starting point for a new CPR rule, but comments that it cannot be finalised until the new e-disclosure practice direction has itself been finalised (it is due to be brought into effect in April).

The options in the "menu" range from dispensing with disclosure at one end of the spectrum to full scale Peruvian Guano (the train of enquiry test) at the other. Lord Justice Jackson specifically says that it is important in his view that the train of enquiry test be included as one of the options, as this level of disclosure is sometimes appropriate in fraud cases.

We support the introduction of the "menu" approach for large cases. This has the benefit of ensuring that the court and the parties focus at an early stage on the extent of the disclosure required, which is often key to controlling the costs of the disclosure exercise. It also allows the court the flexibility to set the appropriate level of disclosure in any particular case.

Lord Justice Jackson suggested in his preliminary report that disclosure assessors might be appointed in document heavy cases to assist the judge. Views were divided on this during the subsequent consultation. He quotes for example from the client survey Herbert Smith carried out for the purposes of our submissions to him where 59% were in favour.

The Judge does not in his final report recommend any formal rule change to provide for disclosure assessors but comments that it would be possible for parties to agree in any given case, subject to the approval of the court, to engage a disclosure assessor. If this takes place on a voluntary basis and proves to be effective in saving costs then consideration could be given to providing for this as an option in the rules.

Lord Justice Jackson also recommends that solicitors, barristers and judges alike be given appropriate training on how to conduct e-disclosure efficiently. He has already had meetings with the Judicial Studies Board, the Law Society and Bar Standards Board concerning this.

Witness statements and expert reports:

Lord Justice Jackson considers that witness statements can be unnecessarily lengthy, for example where a statement contains extensive argument (which is inadmissible in any event) or repeats / refers to documents without adding to what they say. He puts forward two proposals for "curbing litigants' over-enthusiasm for prolixity".

• The first is case management - the court hearing argument at an early case management conference (CMC) about what matters need to be proved and then giving specific directions relating to witness statements, including possibly limiting their length. We do not consider that this proposal is likely to be effective. As the Judge himself comments, any CMC which goes into a case in this level of detail will be an expensive event and he does not recommend it as a matter of routine. He suggests that it be adopted in those cases where it would be cost effective, in particular in cases were the parties are proposing to spend excessive and disproportionate sums on the preparation of witness statements. We doubt it will generally be possible in advance to identify such cases. The Judge suggests it will be apparent from the costs estimates lodged which will indicate what sum will be spent on witness statements, but the problem usually emerges much later, once statements are served and the costs have already been incurred.
• The second proposal is to apply costs sanctions against parties responsible for producing prolix or irrelevant statements. Whilst we agree with this we do not believe it is likely to provide much of a deterrent in practice.

The Judge discusses in the body of his report the potential usefulness of supplementary oral evidence and differing judicial approaches to allowing such evidence. He concludes that no rule change is required but that court guides might indicate an intention to use existing powers more actively. We agree this would be helpful. However, the starting point will remain that to be sure of evidence being admitted at trial, it needs to have been dealt with in the witness statement.

With regard to expert reports, there is power in the CPR to make an order limiting the recoverability of experts' fees and expenses from the opposing party, but it is seldom exercised in practice. Lord Justice Jackson recommends that CPR Part 35 be amended to require that a party seeking permission to adduce expert evidence provide an estimate of the costs of that evidence to the court. This might encourage judges to make more use of their powers in appropriate cases. He also recommends that judges be more willing to impose costs sanctions where prolix or irrelevant expert evidence has led to wastage of costs.

"Hot tubbing" (or as it is more formally known, concurrent expert evidence) met with a mixed response in the consultation period. The Judge suggests it should be piloted in cases where the experts, the lawyers and the judge consent. If the results are positive, consideration should be given to amending CPR Part 35 for appropriate cases.

Part 36 offers:

In a recommendation foreshadowed in his preliminary report, Lord Justice Jackson suggests that the effect of the decision in Carver v BAA plc [2008] EWCA Civ 412, [2009] 1 WLR 113 should be reversed. In the Carver case the claimant beat the defendant's Part 36 offer but only by a very small margin. The court held that it could not be said that the final outcome was "more advantageous" than accepting the offer made. The Judge comments that Carver introduces an unwelcome degree of uncertainty and tends to depress the level of settlements. We agree that this decision is unhelpful and should be reversed.

A new proposal in the final report is that where a defendant rejects a claimant's offer but fails to do better at trial, the claimant's damages should, unless there are good reasons not to, be enhanced by 10%. In the case of higher value claims however, say over £500,0000, the Judge notes that there may be a case for scaling down the uplift. With regard to non-monetary claims it is suggested that the judge should make a broad assessment of the value of any non-monetary relief awarded.

The reasons behind this proposal are to make a more level playing field as between claimants and defendants and to encourage settlement. In CFA cases, Lord Justice Jackson also suggests that the claimant's enhanced recovery, where a well-judged offer has been made, will compensate for his need to pay the success fee out of damages.

Case management:

The Judge makes a number of suggestions here but the key points in the context of commercial litigation are:

• Cases should be assigned wherever possible to judges who have relevant expertise and so far as possible a case should remain with the same judge.
• Case management conferences and pre-trial reviews should only take place where they will be used as occasions for effective case management and the judge should have proper time for pre-reading.
• There is to be greater concentration on compliance with court orders and the entire timetable for the action, including the trial date or trial window, is to be drawn up as early as is practicable.
• Two lords justices should be designated for issues concerning the interpretation or application of the CPR, and at least one of them should sit on any such appeals so far as possible in order to promote consistency. Until 2006 Lord Justice Brooke was usually a member of the court in any case where interpretation of the CPR arose but there has been no such judge since that time.
• The Court of Appeal should support first instance judges who make robust but fair case management decisions.

We agree with these recommendations, in particular relating to judicial assignment and proper pre-reading time. We have consistently commented that we are in favour of case management but that it has to be informed case management. This requires a judge with the relevant expertise, sufficiently familiar with the issues, to make informed decisions.

Costs management:

Costs management entails the parties preparing and exchanging litigation budgets and the court approving such budgets. The budgets are far more detailed than the estimates currently required to be filed. There are two pilots of costs budgeting currently underway, a voluntary pilot in the Birmingham Mercantile Court and TCC (from 1 June 2009 until 31 May 2010) and a compulsory pilot in defamation proceedings in London and Manchester for 12 months commencing 1 October 2009.

The main arguments against costs management are that it generates additional costs and makes additional demands upon the limited resources of the court. Lord Justice Jackson believes however that it will save more costs than it generates and that costs management goes hand in hand with case management.

The Judge favours a gradualist approach. Training should be provided to lawyers and judges on costs management. Rules on how it would apply should be drafted, but not until the summer of 2010 once feedback from the pilots is available. Those rules will set out a standard costs management procedure which judges would have a discretion to adopt if they see fit, whether of their own motion or upon application by one of the parties. The rules would incorporate the concept of proportionality as well as reasonableness. At a later stage the question of making costs management mandatory in certain categories of litigation or certain courts should be re-considered in the light of experience.

The Judge accepts, however, that no case has been yet made out for introducing costs management into the Commercial Court.

He comments that when the rules for costs management are being drafted, it will also be necessary to amend the rules in respect of costs capping as although they are separate concepts there must be harmony between both sets of rules. In particular, in his view, the requirement  for exceptional circumstances before the court will make a costs capping order (in 23A1 of the Practice Direction to Part 44) will have to be removed.

Alternative Dispute Resolution (ADR):

Lord Justice Jackson does not recommend any rule changes in relation to ADR. Instead he emphasises the need to better educate practitioners and the public about ADR. He recommends that an authoritative ADR handbook of equivalent status to the annual publications on civil procedure be prepared by a neutral body (ideally the Civil Justice Council). This would give details of all reputable mediation providers, although no formal accreditation scheme is recommended. The handbook should be used as the standard text for training and educating judges and lawyers. In tandem, a simple and clear brochure should be prepared to better educate the public and small businesses about ADR.

We endorse the call for further education, whilst recognising that ADR processes are flexible and developing and should not be curtailed. Accordingly, in our opinion, any handbook should not constitute a blueprint that limits the flexibility of ADR processes.

The Judge emphasises his view that, despite its many benefits, parties should never be compelled to mediate. We agree with this approach. In the commercial context the parties are well able to determine whether a mediation should take place and at what stage. Nonetheless the judiciary continue to have an important role to play in promoting mediation in appropriate cases, both within and even more importantly outside the commercial context, where litigants have less experience of ADR and may need guidance.

Pre-action protocols:

Lord Justice Jackson recommends that the existing 10 pre-action protocols for specific types of litigation be retained, subject to amendments in some cases, as by and large they perform a useful function. On the other hand he concludes, rightly in our view, that the general practice direction on pre-action conduct (which applies to all litigation unless a specific pre-action protocol applies) should be substantially repealed. He points out that it often leads to delays and to pre-action costs being incurred unnecessarily, particularly in large commercial claims, because of its "one size fits all" approach.

Instead there would simply be an obligation for there to be appropriate pre-action correspondence and exchange of information, with costs sanctions used to curb unreasonable behaviour. For example, a claimant who began proceedings without giving the defendant appropriate notice and an opportunity to respond would be at risk as to costs.

We welcome these recommendations. As the Judge observes, during the consultation exercise before the general protocol was introduced, the majority of consultees were opposed to it and both court users and the judiciary continue to believe it serves no useful purpose.