UK: Lord Justice Jackson's Review Of Fixed Recoverable Costs

Last Updated: 14 February 2017
Article by Jonathan Haydn-Williams

A. Overview

A.1 I support the principle of limiting recoverable costs in multi-track cases within the claim-value bracket of £10,001 to £250,000 because it should assist in reversing the lack of access to the courts in cases in that claim-value bracket which has existed since 1 April 2013 (when success fees and ATE premiums ceased to be recoverable) and March 2015 (when so-called "enhanced" court issue fees were introduced which raised the fees to 5% of the claim, up to a maximum of £10,000).

A.2 My reasoning is that it should reduce the level of adverse costs which a claimant has to bear if a case is lost and the level of ATE insurance premium which a claimant has to pay to insure against that risk. Currently, the risk of a huge adverse costs order will put off most claimants of ordinary means from commencing proceedings without ATE insurance cover, but the high level of premiums needed to purchase sufficient ATE cover, which are payable in the event of a win, eats too much into damages recovered in the £10,001 to £250,000 claim-value bracket, often rendering such claims not financially viable.

A.3 Limiting recoverable costs will, of course, increase the amount of own costs (if they remain at present levels) which a winning claimant cannot recover from the opponent. That could significantly offset or wipe out the benefit of reduced ATE insurance premiums if lawyers' (solicitors and barristers) charges are not reduced.

A.4 For that reduction to occur, there will need to be:

  • radical simplification of court procedures and processes, which seems likely to happen in the band up to £25,000 under Lord Justice Briggs' 'on-line court' proposals, but will need to be stretched up to the £250,000 claim level; and
  • willingness by lawyers to undertake litigation within the claim-value bracket of £10,001 to £250,000 in more cost-effective ways, including 'unbundling' of legal services and offering capped or fixed costs for specified work stages.

The two have to go 'hand in hand', as lawyers cannot be expected to reduce their charges whilst, at the same time, court rules remain grossly over-complex and over-elaborate.

A.5 The removal of the 'chilling' effect of high costs awards against unsuccessful claimants should open the way for the resumption of claims which have not been viable since the end of recovery of ATE premiums and success fees. Whilst restricted recoverable costs will provide challenges for lawyers in terms of providing their services at an affordable price, at least there will be the opportunity to meet that challenge and to act for claimants in claims which at present cannot be brought. Rather than no fees, lawyers will have the chance to earn some fees.

A.6 The benefit of restricted recoverable costs for defendants is self-evident if they lose. If they win, there is the risk that they will have to bear more of their own costs that at present. Whilst that can be regarded as an expense of doing business for large corporate defendants, there needs to be some safeguard in the case of a less well-off defendant. A suggestion is set out in section G.4 below.

A.7 My preference is for "capped" (i.e. maximum) rather than "fixed" recoverable costs.

A.8 'Lateral thinking' needs to be used as to other sensible, innovative developments such as:

  • the extension of the amount which the Financial Ombudsman Service ('FOS') can award to £250,000 and the introduction of capped qualified one way costs shifting into the FOS's procedures; and
  • willingness by the courts to impose costs sanctions for unreasonable refusal to arbitrate disputes (under cost effective arbitral procedures), in much the same way as the courts apply such sanctions for unreasonable refusal to mediate.

B. The problem of lack of access to the courts

B.1 As indicated above and explained below, there is a lack of access to the courts in cases in the claim-value bracket of £10,001 to (about) £250,000.

B.2 The bracket up to £10,000 is catered for separately by the small claims track (a lower limit applying in personal injury cases). Within that bracket, there is no 'costs shifting2'.

B.3 Lord Justice Briggs' proposals for an on-line court, which appear likely to be implemented, will probably apply to claims up to £25,000. With substantial simplification of court rules to enable unrepresented parties to handle such claims themselves, simplification of costs rules in that bracket would seem inevitable. Moreover, predictability and proportionality of 'adverse costs'3 will be need to be a key aspect of the on-line court, if it is to afford better access to justice. The very fact of simplification of court rules should reduce costs in the on-line court.

B.4 When, in the 1990s, the government cut back on the availability of Legal Aid, the quid pro quo was that 'no win, no fee' agreements would be extended to all cases. They had for many years been unlawful, but then had been introduced in insolvency and other specified claims. The reason for extending them to all cases was, therefore, so as to grant access to civil justice.

B.5 A 'no win, no fee' arrangement between client and lawyer is made by means of a 'conditional fee agreement' ('CFA'), under which the lawyer charges his/her basic fees, plus a success fee calculated as a percentage of the basic fees. The maximum permitted percentage (under the rules as to recovery from a losing opponent) was 100%, but was usually less than that. More recently, 'contingent fees' have been allowed, under which, in the event of a win, the lawyer is paid an agreed percentage of damages4. However, the restrictive way the rules have been drafted has resulted in a low take up of this option.

B.6 Although, under a CFA, an unsuccessful claimant does not have liability for his/her own lawyer's fees, there is likely to be liability for a substantial part of the defendant's legal fees. If the claimant does not have existing insurance against such liability5, After the Event ("ATE") Insurance can be purchased. The premiums can be high, in the order of 40%-50% of the sum insured6.

B.7 On 1 April 2013, success fees and ATE premiums were made non-recoverable. Since then it has been impossible/very difficult for people of ordinary means and small businesses7 to bring, in a viable way, claims for between £10,001 and about £250,000. That is because, in the event of a win, the addition of the success fee and ATE premium, on top of the claimant's own irrecoverable costs8, may well render the claim not financially viable. The position pre-1 April 2013 was far from perfect, but – unintentionally - 'the baby was thrown out with the bathwater'9. The present Review offers the chance to redress the balance.

B.8 The 'patch' of qualified one way costs shifting was applied to personal injury and fatal accident claims, presumably because someone realised, late in the day, the downside of non-recoverability of success fees and ATE premiums (denial of access to justice). But, rather than dealing with the problem at its root, the patch was applied to those types of claim only, with the odd result that a Russian oligarch can now bring an unsuccessful personal injury claim in the English courts and not have to pay a rouble of adverse costs to the winning defendant.

B.9 The position was made worse by the "enhanced"10 issue fees introduced by the coalition government in March 2015, which imposed a 5% issue fee on claims up to £200,000 (a £10,000 cap applying at that point), with a steadily reducing percentage on claims above that value11. The increase was in the order of fivefold.

B.10 Abolition of ATE premium recovery has possibly had a greater impact than abolition of success fee recovery. Claims with good prospects of success can still attract 'no win, no fee' (or 'no win, lower fee') arrangements with solicitors, in that basic fees remain recoverable from the losing opponent and an appropriate success fee can be paid out of damages (e.g. 20-25%). However, taking out ATE insurance cover may not be viable and the risk of losing and having to pay the defendant's costs means that to pursue a claim without ATE cover is often too big a risk (having lost £250,000 as a result of bad financial advice, a claimant is unlikely to want to risk also losing his house should he lose the claim). A worked example is set out in Appendix 2.

B.11 Several claims which I brought for non-wealthy claimants on a 'no win, no fee'/ATE basis under the pre-1 April 2013 rules against banks, insurance companies and similar large corporate defendants, in which deserved redress was obtained, could not have been brought now. In 2016, a 'no win, no fee' claim for an SME12 against a bank, with a stated 60% chance of success13 and an offer of ATE insurance, had to be dropped because my financial illustration of the outcome if £200,000 were awarded at trial showed that it was not financially viable with non-recoverable ATE premium and success fee14.15

C. Limiting recoverable costs in claims up to £250,000: the solution?

C.1 That a solution to the problem of access to the courts needs to be found seems to me to be beyond serious challenge. In the words of the Lord Chief Justice, commenting on the substantially reduced budget for the justice system:

"Some would say that with such dramatic reduction, our system will break. But that cannot be permitted. If it breaks we lose more than courts, tribunals, lawyers and judges. We lose our ability to function as a liberal democracy capable of prospering on the world stage, whilst securing the rule of law and prosperity at home"16.

Self-evidently, for the court system to have those vital effects, it is not enough for it just to exist: it must also be available for use by those who have need of it.

C.2 As indicated above and as illustrated in the worked example in Appendix 2, the problem for prospective claimants posed by the 1 April 2013 changes is not so much the non-recoverability of a success fee, but the non-recoverability of an ATE premium and the potentially ruinous level of adverse costs should the case be lost, with no ATE insurance in place. The benefits of a system of restricted recoverable costs for claimants would be:

  1. lower adverse costs, enabling claimants either to do without ATE insurance or to purchase a lower level of cover at a commensurately lower premium; and
  2. a predictable maximum level of adverse costs, enabling decisions to be made about whether to seek ATE insurance and, if so, what level of cover to purchase and on what terms and premiums.

C.3 Those twin benefits apply also to defendants, especially individuals and small to medium sized businesses. ATE insurance can be obtained for defendants, as well as for claimants, subject to the usual threshold of a prospect of success of at least 60%17.

C.4 At present, using the worked example in Appendix 2, in the case of a claimant with a reasonably complex claim18for £250,000 against a bank or insurer, with an estimated prospect of success of 65%, I might suggest planning for £200,000 adverse costs in the event of a loss19. That would be a sum which an individual of ordinary means, or many small businesses, could not risk without ATE insurance, for which a typical premium would be 40-50% of the sum insured were the matter to go trial.

C.5 If the case were lost, there would be no premium to pay20 and the ATE insurer would pick up the adverse costs bill up to the insured sum (as well as the client's own disbursements if cover for them had been purchased). There would be no liability for own solicitors' fees under a full CFA.

C.6 However, if the case were won, a 45% premium of £90,000 (+ IPT) would be payable by the claimant out of damages, along with that part of the solicitors' basic fees not recoverable from the opponent and the solicitors' success fee. As set out in the Appendix 2 worked example, if damages were £200,000, rather than the full £250,000 claimed, the claimant would be left with only £8,600. It would not take much change in the assumptions made in the example for the claimant to be left with nothing or even a net loss.

C.7 The advent of 'proportionality' into the assessment standard basis cost, without predictability of what a court may decide is 'proportionate', has made the position worse for claimants, as explained in Appendix 2.

C.8 Costs budgeting has not helped because the budgeting takes place too late, after the proceedings are well afoot and significant costs have been incurred on each side. A claimant needs to consider the financial viability of a claim before it is commenced.

C.9 If, however, I can tell the claimant, before the claim is issued, that his maximum liability to the opponent, should the case be lost, is, say, £80,00021, the claim becomes viable. Either the client decides that he can take the risk of losing the £80,000 or, perhaps more likely, we work with an ATE insurance broker to seek partial or full ATE cover up to that level. If, say, the client were willing to take the risk of the first £40,000 of liability on himself, ATE insurance could probably be found for the next £40,000 at a premium of perhaps 35% = £15,400 (inc. IPT). Clearly, there could be many variations on that example, but the overriding point is that, rather than having to pay a premium of, say £95,400 (for £200,000 cover in the event of a win), the premium payable would be of the order of £15,400 (or £39,600 were the full £80,000 adverse costs to be covered).

C.10 Objections from practitioners to restricted recoverable costs have centred on the costs they charge to their client, rather than the adverse costs position. It is said that it is unfair that a successful claimant will not recover all his/her costs. However, that has always been the case: there has always been an element of client's own costs which are not recouped in the event of a costs order on the 'standard' basis, or even on the 'indemnity' basis. As footnoted above, in the past the typical shortfall has been estimated at between ¼ and 1/3. However, it is clear that the effect of 'proportionality' being introduced as a criterion for 'standard' basis costs is that the shortfall may be significantly more than those proportions. In other words, the so-called unfairness is already present by virtue of 'proportionality' (but is not predictable).

C.11 An effect which those who express concern about a larger shortfall between 'solicitor and own client' costs and a restricted level of recoverable costs may not have appreciated is that the amount of premium which goes to the ATE insurance market would be substantially reduced, leaving a saving (of £55,800 in the example in paragraph C.9 above if full insurance were taken or £80,000 if half the adverse costs liability were insured).

C.12 The introduction of restricted recoverable costs may well, therefore, restore the ability for claimants to pursue claims via solicitors, which have been non-viable since the introduction of the 1 April 2013 changes. The reduced level of adverse costs should also mean that defendants, especially those of ordinary means, are not driven to settle claims on unfair terms for fear of the costs consequences of losing.

C.13 The effect of the restriction of recoverable costs in increasing the winner's non-recoverable own costs is not to be under-estimated. As noted in section A above, without reduction in the level of non-recoverable own costs, the end of the chilling effect of the risk of a large adverse costs order could be 'set at naught'.

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1 I am engaged by Goodman Derrick LLP as 'Senior Counsel', but the views expressed are mine. By the same token, I do not speak for the Law Society's Civil Litigation Section Committee of which I am a member. My CV is attached in Appendix 1. 

2 I.e. the system under which the starting point for making a costs order is that the losing party should be liable for the winning party's 'standard basis' costs. 

3 I.e. the amount of the opponent's costs for which a party may be liable if the case is lost.

4 Labelled as a 'Damages Based Agreement', or 'DBA' for short.

5 Known as "Before the Event" Insurance. It is often not present and, when it is, is usually insufficient or unsatisfactory, in my experience.

6 ATE premiums are often "staged", so that they are lower if the claim settles early. Premiums are usually deferred until the outcome is known and are contingent, in that they are not payable if the claim is lost (but the insurance will still pay out in that situation). That is perhaps counter intuitive, but it works in practice.

7 As well as some medium sized ones.

8 For as long as I have practiced as a solicitor (since 1983), there has been a shortfall of about ¼ to 1/3 between what solicitors charge their clients and what clients can expect to recover by way of reimbursement on a 'standard' costs detailed assessment (or 'taxation' as it used to be called). The recent advent of 'proportionality' as a factor in determining the amount of 'standard' basis costs has made it impossible to give such an indication to clients and has thus reduced not only the amount which they might recover, but also the predictability of the proportion of their 'solicitor and own client' costs which they might recover on a win. 'Proportionality' as a concept is fine, but its implementation has seen inconsistent court decisions as to what it means. 'Capped costs' would solve this problem, in that the cap would be the means of establishing proportionality, without the need for any further court input (one cannot imagine a 'capped costs' system in which a court would be permitted to reduce fees to below the level of the cap on the ground of lack of proportionality).

9 There has been substantial criticism of aspects of the 'Jackson Reforms' in some quarters, and it is clear that I agree with some of them. However, personalised criticisms of Jackson LJ should not be made. I was sorry to see some appear recently in the Law Society Gazette's on-line comments section, but glad that they were rapidly 'taken down' by the moderator when I raised objections.

10 The surprisingly 'Orwellian' term used by the Government and the Ministry of Justice, without any apparent realisation of the irony of their use of 'newspeak' to avoid having to use the word 'increased'.

11 The effect of capping the issue fee at £10,000 is that the cap is reached at £200,000. Thus, a claim for £1 million has an issue fee of 1%. The effect is to discriminate against those with claims in the bracket £10,001 – £200,000. 

12 Small to Medium sized Enterprise.

13 My view and that of counsel.

14 The non-viability prevailed even after I offered to waive a success fee.

15 No further details can be provided because all the cases are subject to settlements containing confidentiality clauses.

16 The Rt. Hon. The Lord Thomas of Cwmgiedd, Reshaping Justice (3 March 2014). 

17 That threshold also applies in practice to solicitors, who will not wish to take on cases on a 'no win, no fee' basis unless there is a reasonable prospect of success. This is (and was pre-1 April 2013) a twin filter against unmeritorious claims being brought on a conditional fee basis.

18 By which I mean non-generic, with a significant factual matrix and documentation, as well as moderately complex legal issues.

19 Based on experience of acting against corporate defendants, their panel solicitors' charges may be relatively low, sometimes fixed for particular work such as disclosure. It is counsel's fees, especially those of a Queen's Counsel, that would push them to or above the £200,000 level. Not allowing for recovery of QC's fees in claims of up to £250,000 could in itself have a major moderating effect on costs.

20 Assuming a usual ATE insurance policy on fully deferred and contingent terms.

21 Under LJJ's 'grid' on page 13 of the transcript of his lecture, the total costs for a Band 4 claim (£175,001 - £250,000) which goes to trial is £70,250 (£80,787 if a London uplift of 15% is applied). 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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