Government announces important civil litigation reforms

The government yesterday announced its intention to go ahead with key proposals made by Lord Justice Jackson for the reform of civil litigation costs and funding, including:

• significant changes to the rules governing Part 36 offers to settle;
• removing the restrictions on contingency fees or "damages-based agreements" (DBAs) for civil litigation; and
• abolishing the recoverability of conditional fee agreement (CFA) success fees and after the event (ATE) insurance premiums.

The Government Response to its consultation on these issues was published on the Ministry of Justice website yesterday afternoon. The reforms to the Part 36 offer regime and the introduction of DBAs are likely to be of particular interest to commercial clients. Reforms to the CFA / ATE regime, which are given top billing in the government’s announcement, are likely to have the most dramatic impact in personal injury cases but are relevant for business generally, especially when defending claims.

The plans to implement the Jackson reforms were announced together with a new consultation on an “overhaul” of the civil justice system aimed at creating a “simpler, quicker and more proportionate system”. The new consultation focuses mainly on lower value claims. It includes proposals to increase the financial threshold for High Court claims (from £25,000 to £100,000 in non-personal injury cases), increase the use of mediation in claims below this level, and improve the enforcement of judgments. This consultation is open until 30 June.

Background

Lord Justice Jackson conducted a year-long civil litigation costs review aimed at making recommendations to “promote access to justice at proportionate cost”. His final report was published on 14 January 2010 (see post).

Between November 2010 and February 2011 the government consulted on the implementation of certain key recommendations relating to the funding of litigation (see post).  Over 600 formal responses were received to the consultation.

The government has now announced its intention to proceed with the implementation of all of the major proposals set out in the consultation. The Government Response states that changes to the CFA regime, which require primary legislation, will follow as soon as Parliamentary time allows, and that most of the reforms will be implemented together. According to the government's impact assessment, it is envisaged that the proposals will be implemented from autumn 2012.

Part 36 offers

The Government Response states that the rules governing Part 36 offers to settle will be amended “to equalise the incentives between claimants and defendants to make and accept reasonable offers”. The details are to be discussed with stakeholders in due course. However, in outline, the two changes proposed are as follows:

• It will be made clear that where a money offer is beaten at trial, by however small a margin, the costs sanctions applicable under Part 36 will apply. This will reverse the effect of the decision in Carver v BAA plc [2008] EWCA Civ 412, which established that all circumstances must be taken into account in determining whether the final outcome of a case was "more advantageous" than accepting a defendant’s Part 36 offer. Lord Justice Jackson was critical of Carver as introducing an unwelcome degree of uncertainty into the Part 36 regime.
• An additional sanction (equivalent to 10% of damages) will be imposed where a defendant rejects a claimant's offer but fails to do better at trial. Currently, the potential sanctions for failure to beat a claimant's offer are the award of indemnity costs and enhanced interest on both damages and costs at up to 10% above base rate. The government will explore an alternative sanction (linked to costs rather than damages) in non-money claims. There does not appear to be any intention to scale down the proposal for high value claims, as had been considered as part of the consultation, though this could be part of the “details” to follow.

DBAs

DBAs are a type of “no win, no fee” agreement in which the lawyer’s fee is related to the damages awarded, rather than the amount of work done. The Government Response states that the restriction on using DBAs is “no longer appropriate in a modern litigation system”, and that they “will provide a useful additional form of funding for claimants, for example in commercial claims”.

Although the lawyer’s fee under a DBA will be based on the damages awarded, a losing defendant will only have to pay costs on a conventional basis (i.e. hourly rates and disbursements). The claimant will be liable for any shortfall between the amount recovered and the lawyer’s fee. Accordingly, the costs burden on the defendant will not be increased as a result of the claimant choosing to fund its litigation under a DBA.

DBAs will be subject to a cap in personal injury cases (25% of damages excluding future care and loss) but there is no proposal to cap the percentage of damages that can be charged in other types of case. This is in contrast to the use of DBAs in employment tribunal cases, where regulations introduced last year cap the recoverable fee at 35% of damages (including VAT).

CFAs / ATE insurance

The Ministerial Foreword to the Government Response states that CFAs “have played an important role in extending access to justice but they also enable claims to be pursued with no real risk to claimants and the threat of excessive costs to defendants”. Accordingly, the government will abolish the recoverability of CFA success fees and ATE insurance premiums (with an exception for ATE premiums covering the cost of expert reports in clinical negligence claims).

Parties will still be able to enter into CFAs and take out ATE insurance to fund their litigation, but will have to bear the additional costs of doing so. The Government Response states that “crucially” this will give CFA claimants a financial interest in controlling the costs incurred.

The maximum success fee that can be agreed under a CFA will remain at 100% (so that the lawyer could in effect double his normal charges). However, as for DBAs, in personal injury cases this will be subject to a cap of 25% of damages (excluding for future care and loss). There is no proposal for a cap on the percentage of damages chargeable in non-personal injury cases.

To assist claimants in meeting the additional costs and risks resulting from an end to recoverability:

• There will be increase of 10% in the level of non-pecuniary general damages such as pain, suffering and loss of amenity in all tort cases.
• A regime of qualified one-way costs shifting (QOCS) will be introduced, where the claimant is awarded costs if successful but will not have to pay the defendant's costs if it loses, unless on grounds of unreasonable behaviour or its financial means. QOCS will (at least initially) be limited to personal injury cases, including clinical negligence. The government will continue to discuss with stakeholders how the rule should be drafted. However, it seems that QOCS would not override the Part 36 offer regime, so that a claimant who had refused a Part 36 offer and then failed to beat it at trial would have to pay the defendant's costs arising after the date of the offer. Defendants could therefore retain some costs protection under the Part 36 regime, even where QOCS applied.
• The enhancements to the costs sanctions in support of claimant Part 36 offers (equivalent to 10% of damages), as referred to above, will also assist some claimants to meet the additional costs.

Other issues

Two other reforms proposed in the consultation will also be introduced:

• A new test of proportionality of costs, which could restrict the amount recoverable even where costs were reasonably and necessarily incurred. Under the current test, costs are deemed proportionate so long as they are reasonable and necessary. The government envisages that the new test would act as a long stop to control costs that were clearly disproportionate to the value, complexity and importance of the claim.
• An increase to the prescribed rate recoverable by litigants in person from £9.25 per hour, in line with the increase in average earnings since the rate was set in 1995.

Comment

The Government Response summarises the responses received to the consultation paper. It shows that:

• There was majority support for the proposals relating to Part 36 offers, with 77% in favour of the effect of Carver being reversed and 67% in favour of an additional sanction for claimants’ offers equivalent to 10% of damages.
• Views on the introduction of DBAs were pretty much split down the middle, with 48% in favour and 52% against and no clear division between claimant and defendant representatives.
• On the proposals to end recoverability of CFA success fees and ATE insurance premiums, there was (rather unsurprisingly) a general split between defendant representatives, who tended to support the proposals, and claimant representatives / ATE insurers who opposed them.

It was always clear that any proposals to implement Lord Justice Jackson’s recommendations would be controversial. As he commented in his final report: “The stakeholders are deeply divided on all major issues. Whether the present review lasts for one year or for many years, I could never hope to achieve agreement or common ground between the myriad stakeholders upon the main topics.” It seems that these divisions have not narrowed to any significant extent in the 14 months since publication of Lord Justice Jackson’s conclusions.

Most of the key reforms (including reform of the CFA / ATE regime, introduction of contingency fees and enhancement of claimants’ Part 36 offers) will require primary legislation. The government intends to introduce such legislation as soon as Parliamentary time permits, and it is anticipated that the changes will be implemented by autumn 2012. The government envisages that reversal of the effect of Carver can be brought about more swiftly.

We will be monitoring progress towards implementation of the reforms and will report on significant developments.