One year from the "Big Bang": Assessing the impact of the Jackson reforms – A seminar with Mr Justice Ramsey

Herbert Smith Freehills held a client event on Tuesday 6 May to discuss how the Jackson reforms have affected commercial parties to date and what the future seems likely to hold in store. We were very fortunate to be joined by Mr Justice Ramsey, who is leading for the judiciary on implementation of the reforms, and who gave his perspective on the reforms and how they are working.

The seminar was chaired by Ian Gatt QC, head of the firm's Advocacy Group, and included presentations on key aspects of the reforms by dispute resolution partners Tom Leech QC, James Farrell and Kirsten Massey.

Some points of interest from Mr Justice Ramsey's presentation include:

• It seems likely that hybrid DBAs will be permitted in the next year or so, based on recent ministerial comments.
• Qualified one-way costs shifting (QOCS) is likely to be expanded from personal injury to defamation and privacy claims, subject to means testing, and potentially other claims brought by those without means.
• Although costs budgeting is a new discipline for solicitors and the judiciary, it becomes easier over time. Agreed budgets are likely to become the norm, just as parties now agree directions.
• Although the Mitchell decision may be seen as a hard case, if it means parties will give serious consideration to rules and timetables, most lay people would say that is a good thing.
• The effect of the reforms should be a reduction in costs overall. It will however take a number of years before we know whether that is so.

More detail on each of the presentations is set out below.

Introduction by Ian Gatt QC

In his opening remarks, Ian commented that now that the first year of the reforms is behind us, it is a good time to look at how they have changed things in practice for parties to commercial litigation – which is not necessarily how might have been expected before the reforms were implemented.

Some of the reforms that attracted the least interest before the reforms came into force have turned out to be the most important in practice, in particular the amendments relating to case management and relief from sanctions, which have caused such a storm of interest and case law particularly following the Mitchell decision.

Some that were much higher profile have so far been something of a damp squib – such as the introduction of contingency fees (or damages based agreements) which have yet to get off the ground.

Case management and the impact of Mitchell – Tom Leech QC

Tom outlined the reforms relating to case management and, most importantly, the Court of Appeal's decision in Andrew Mitchell MP v News Group Newspapers Limited [2013] EWCA Civ 1537 (see post) which has generated an unseemly amount of litigation since it was handed down on 27 November last year – according to a search of LexisNexis it has generated 52 different cases in the intervening five months which, Tom said, must be something of a record. It has also introduced a new verb into the legal lexicon: to "Mitchell" someone, for which Tom volunteered the definition "to force someone to grovel to the court to forgive their procedural inadequacies", as that is what the cases are generally about.

The problems have been caused by two rule changes brought in from 1 April 2013:

1. New CPR 3.9 which provides that on an application for relief from any sanction imposed for a failure to comply with any rule, practice direction or court order “the court will consider all the circumstances of the case, so as to enable it to deal justly with the application, including the need –

(a) for litigation to be conducted efficiently and at proportionate cost; and

(b) to enforce compliance with rules, practice directions and orders”.

2. The amended “overriding objective” at CPR 1.1, which makes it clear that dealing with cases justly and at proportionate cost includes “enforcing compliance with rules, practice directions and orders”.

These changes were intended to implement Lord Justice Jackson's recommendation that the courts should be "less tolerant than hitherto of unjustified delays and breaches of orders".

Although CPR 3.9 did not say these two new factors were to be given paramount importance, it was clear which way the wind was blowing from Lord Dyson MR's speech on 22 March 2013, shortly before the reforms were implemented, in which he said "justice means something different now". In essence, he indicated that justice means serving not just the interests of the immediate parties but "the wider public interest of ensuring that other litigants can obtain justice efficiently and proportionate, and that the court enables them to do so".

In Mitchell, the Court of Appeal (Lord Dyson giving the judgment of the court) upheld a Master's decision to impose a harsh sanction for a failure to file a costs budget in time and to refuse relief from that sanction. The Court of Appeal's decision emphasised that the new factors in CPR 3.9 must be given paramount importance. That meant that relief would normally be granted where a breach was trivial and an application for relief was made promptly. Otherwise, the court would consider whether there was a good reason for the breach; if not, relief would normally be refused. The court also commented that an application to extend time before the deadline expired would normally be looked on more favourably than an application for relief after the event.

Tom referred to two "book-end" decisions of the Court of Appeal following Mitchell: at one end Durrant (see post) which embraced Mitchell and overturned a first instance decision to grant relief from sanctions; at the other end Chartwell (see post) where the Court of Appeal upheld the grant of relief and showed concerns regarding the potential for parties to seek to use Mitchell to gain tactical advantage. At first instance level, also, there have been decisions expressing concerns at the strength of the Mitchell decision, and seeking to discourage its tactical use.

In conclusion, Tom said, it may be that what we've seen to date is nothing more than a "bedding in" period, which is typical for any rule change, with parties exploring the limits of the new approach. The effect of the decisions might ultimately be to encourage parties to focus more closely on abiding by the rules. It might also be that the views the courts have expressed about tactical or cynical applications will also bear fruit.

In Tom's view, it would be foolish to assume that the courts will retreat from Mitchell; it seems likely that it is here to stay, despite how difficult it might seem in individual cases. The inevitable result is that until the culture is fully embedded, there is going to be more and more satellite litigation, including professional negligence claims against legal representatives.

The simple message for parties and practitioners is that one must have systems in place to spot early any potential problems in compliance. That will allow an early application to court and, one hopes, parties will be given some sympathy where there is good reason for needing more time. One hopes also that the courts will be less likely to impose disproportionate sanctions, given that it is now more difficult to obtain relief from those sanctions.

Costs budgeting: introduction and recent expansion – James Farrell

The introduction of costs budgeting is an important core element of the reforms, James explained, given their aim of promoting access to justice at proportionate cost.

To date the reforms have been of little relevance to those dealing with medium to substantial claims, given the initial exemptions for cases in the Commercial Court and claims of more than £2 million in the Technology and Construction Court, the Chancery Division and the Mercantile Courts. However, that has all changed. From 22 April this year, any claim for less than £10 million in any court (including the Commercial Court) is covered by the regime, so it is much more widely applicable. And even where a claim exceeds £10 million, the court has a discretion to apply the costs budgeting requirements where appropriate.

The rules require parties to file and exchange detailed budgets setting out their estimated costs of the litigation at an early stage, usually some time before the first case management conference. In effect the budgets are likely to act as a cap on the winning party's recoverable costs; unless there is very good reason to depart from the budget, the winning party will not be able to recover more than the budget figure.

There are many benefits to costs estimation, which practitioners have been doing for years and which clients expect. These include enabling clients to undertake cost benefit analysis, identifying an appropriate time for settlement negotiations, and so on. The Jackson reforms have taken the process of costs estimation further, with detailed budgets meant to enable the courts to take case management decisions with an eye on the costs – eg. to consider alternative orders for disclosure if the costs of standard disclosure seem likely to be unreasonable or disproportionate.

In principle this is a good thing, but there are also a number of difficulties. These include the fact that it is not just one budget that has to be prepared but, in effect, ten mini-budgets for each phase of the case. When on detailed assessment the court considers if a budget has been exceeded, that happens on a phase by phase basis and it seems there is no ability to balance out between the phases. That makes it all much more difficult.

Further, there have been a number of decisions illustrating the courts' tough line on allowing parties to increase budgets. In particular, it seems an increase will not be permitted to correct an error or inadequacy in the original budget. Generally, there will need to have been a significant change in the course of the litigation that could not have been predicted when the budget was prepared.

A lot of uncertainty remains, including as to:

• When and how parties should seek the court's approval for an increase in budget: Given that the requirement is, in effect, for ten mini-budgets, a strict regime on applying for increases could mean that parties have to come back to court repeatedly.
• The amount of detail that needs to be given to explain why certain assumptions are made in the budgets: Much of this information may well be privileged and confidential as between solicitor and client.
• The mechanics on detailed assessment, both where parties have agreed the budgets and where the court has approved the budgets: It is not clear whether the costs judge will simply rubber stamp the costs so long as they come within budget, or for example a paying party can seek to pick holes in the costs despite having agreed the budget.
• The enthusiasm of the judiciary for getting into the detail of the costs budgeting exercise.
• Whether all of this will actually reduce costs, particularly given the risk of budgets being "over-egged" because of the perceived difficulties in increasing them later and the potential for them to act as a cap on recoverable costs.

Changes to how litigation is funded and other issues – Kirsten Massey

Kirsten began with a reminder of the reforms affecting how litigation is funded, which are in summary:

• An end to the recoverability of conditional fee agreement (CFA) success fees and after-the-event (ATE) insurance premiums. Parties now have to bear these additional costs themselves, normally out of any damages, rather than laying off the cost to an unsuccessful opponent.
• The introduction of contingency fees, or damages-based-agreements (DBAs), where lawyers conduct litigation for a share of the proceeds. This was not previously permitted for litigation or arbitration in England and Wales. The existence of a DBA does not affect a losing defendant's liability for costs. If the contingency fee is higher than the conventional costs figure, the claimant has to pay the shortfall out of the damages.

The aim behind the reforms to CFAs / ATE was to end the situation identified by Lord Justice Jackson, that parties (overwhelmingly claimants, who are the biggest users of such arrangements) could litigate virtually "risk-free" at huge cost to losing defendants. Claimants had no interest in keeping their costs down because they would never have to pay them, and the huge costs involved could put unfair pressure on defendants to settle.

The previous rules still apply to CFAs / ATE policies entered into before 1 April 2013. Stories abound of ATE insurers doing a year's worth of business in the course of March 2013, and claimant solicitors firms signing up hundreds of CFAs in the final weekend, so there is still a large pipeline of cases brought under the old regime.

There is also an exception for proceedings brought by liquidators, administrators, trustees in bankruptcy, or companies in liquidation or administration. HMRC is often a major creditor in insolvency proceedings, and so the government wanted to allow some time to consider how such cases can be pursued within the changed regime. The government said that the delay would be for two years, so presumably we will be seeing provisions introduced to remove the exception from April 2015. However, we understand insolvency professionals are (understandably) lobbying to retain the exception.

With regard to DBAs, there have been a number of regulatory restrictions on their use including a cap on the level of contingency fee (50% for commercial cases) and, most importantly, an apparent ban on “hybrid” DBAs, where a lawyer might receive for example a reduced hourly rate as the case proceeds plus a contingency fee in the event of success. In other words, if a lawyer agrees to act under a DBA this must be a full “no win no fee” agreement. This came as quite a surprise to the profession, and is likely to be partly responsible for the fact (as we understand it) that DBAs are not generally being used. We understand from comments made at a recent conference that the government is looking again at this issue and hopes to make an announcement soon.

In terms of the impact of these changes:

• To date we have seen no great impact in larger commercial cases. We had thought the introduction of DBAs might result in defendants being faced with more high value claims, and possibly riskier claims since there would be a greater incentive for lawyers to take risks under the new regime. But given the problems with the DBA regulations, so far this risk hasn't materialised.
• The changes make smaller claims less viable where funding is required, given that there needs to be a large enough pot of damages to pay the success fee / ATE premium (or alternatively contingency fee under a DBA). It's still early days in terms of assessing impact, particularly as there is still a large pipeline of cases coming through under the old pre-Jackson regime, but there seems to be a pretty clear consensus that smaller cases are harder to run where the client can't self-fund in light of the Jackson reforms.
• There appears to be an increase in demand for third party litigation funding, but it is not entirely clear whether this is organic growth or the result of removing the previous advantage of recoverability for CFA/ATE funding.
• How all of this develops in future will depend crucially on whether the DBA Regulations are reworked and made "fit for purpose", including by introducing the flexibility to offer hybrid arrangements where that is what lawyer and client both want.

Kirsten also briefly outlined the reforms to disclosure, witness and expert evidence and Part 36 offers, none of which appear to be having a huge impact in practice to date.

A judicial perspective on the implementation of the reforms – Mr Justice Ramsey

It is too early to say if litigation is now being conducted at proportionate cost. It will take a number of years before the full impact of the reforms can be seen. There is still a large pipeline of pre-1 April 2013 CFAs working their way through the system and a lot of cases settle and the costs are dealt with by consent.

Reforms to how litigation is funded

It is important to put the reforms to CFAs and ATE insurance in context. Before 1 April 2013 defendants could end up paying close to four times the costs of the action: (i) their own costs; (ii) the claimant's costs; (iii) the claimant's success fee of up to 100% of costs; and (iv) the ATE premium which could be close to the full amount of the costs. That churned costs enormously within the system. All that is gone, so that now the losing party simply has to pay the opponent's costs, not the success fee / ATE premium. That has been a major change.

DBAs were intended to give another possible way of funding litigation. However, the regulations introduced to govern DBAs limited the flexibility of such arrangements. In particular, the general view (in the Judge's view correctly) is that the regulations do not permit so-called hybrid DBAs, which combine a traditional retainer and a contingency fee. That is a problem that has been identified for some time. At the recent Civil Justice Council conference, Minister for Justice Lord Faulks QC announced that the government would make an announcement in this area soon. It therefore seems likely that hybrid DBAs will be permitted within the next year or so.

In personal injury cases, qualified one-way costs shifting (QOCS) has been introduced, so that the claimant does not have to pay the defendant's costs if the case is lost, subject to certain exceptions such as fraudulent claims. Defamation and privacy claims are likely to follow that model, save that there will be a further means test to determine whether a losing claimant has the financial ability to pay any of the defendant's costs. That is a sea change in the long-standing model of two-way costs shifting in this jurisdiction. QOCS is, the Judge said, likely to start spreading to other areas of claims in the future so that people without means are likely to be assisted in bringing claims by not having to pay some or all of the opponent's costs if they lose.

Costs budgeting and proportionate costs

Before the introduction of costs budgeting, parties might realise at the end of a case that they have spent, say, £6 million in aggregate fighting a £2 million claim. It is much easier to control costs if they are considered at the beginning of the claim, rather than the end of the case when it is too late. That is the purpose of costs budgeting.

Costs budgeting is a completely new discipline both for solicitors and for the judiciary. The Judge commented that he has now been involved in costs budgeting for three and a half years (including the TCC pilot of costs budgeting). Over time it has become easier and the problems have become fewer. Parties are becoming more likely to agree budgets, and to the extent they are not agreed arguments are more focused on where there are major discrepancies. In the Judge's view, agreed budgets will become the norm, just as parties now agree directions.

It is not appropriate simply to say that the case is worth £2 million so the budgeted costs should be, say, £750,000. The court has to look at what the costs will be spent on and manage the case in a way that seeks to reduce the costs.

If for example the costs of disclosure seem likely to be disproportionate, the judge may question whether such extensive disclosure is necessary. The purpose of the new approach to disclosure (the so-called disclosure "menu") is to enable the court and the parties to focus on what is really needed from the opponent. Similarly, the new rules on witness statements and expert evidence are aimed at limiting the evidence to the essential issues.

The new approach to relief from sanctions

The Mitchell decision has had more "air time" than it would have had if it had not come as such a shock to the profession. From the perspective of lay people, it may not seem surprising that lawyers have to obey rules, practice directions and orders that are meant to govern the conduct of litigation.

Before Mitchell, it was normal for parties to get to the eleventh hour, decide they could not comply with a deadline and write to the opponent to that effect, following which the opponent would say they are not complying either. The whole focus of the change is to reduce costs, not just for individual litigants but for all court users. Mitchell may have been a hard case, but it has set the stage where parties will no longer just not comply but will give serious consideration to rules and timetables. If that is the case, most people outside the legal profession would say that is a good thing.

Conclusion

With the changes to how litigation is funded aimed at taking cost out of the system, the introduction of costs budgeting to ensure that costs are proportionate, and procedural changes to ensure that costs are spent only where necessary, the effect should be a reduction in costs overall. It will however take a number of years before we know whether that is so.