Litigation Funding and Costs

Article by Rani Mina , Matthew Lawson , Andrew Legg , and Kate Elsmore

Originally published June 23, 2011

Keywords:

Part 2 of the Legal Aid, Sentencing and Punishment of Offenders Bill, which was presented to Parliament on 21 June 2011, provides a legislative frame-work for some of the changes to litigation funding and the costs of civil litigation, summarised in our Client Alert of 30 March 2011.

Summary

The Bill provides for:

Introduction of contingency fee agreements
Abolition of recoverability of CFA success fees
Abolition of recoverability of legal expenses insurance premiums
Additional damages for successful claimant where defendant fails to beat claimant's CPR Part 36 settlement offer

Background

As stated previously, the starting point for these changes was a report published in January 2010, following a year-long review of civil litigation costs by Sir Rupert Jackson of the Court of Appeal. In November 2010, the Ministry of Justice launched a public consultation on the reform of civil litigation funding in England & Wales. In late March 2011, the Government published its response to the consultation and this Bill contains the proposed changes which have survived the consultation and which require primary legislation for their implementation.
Timing

None of the changes set out in Part 2 of the Bill are retrospective: they will only affect funding arrangements entered into after the relevant sections of the resulting Act of Parliament come into force.

There is no timetable for the legislative reform in the Bill. Indications are that the target date for implementation is October 2012.

Short on detail?

Much of the detail of the litigation funding and costs changes will be dealt with by secondary legislation, which is not yet available. This will be the responsibility of the Civil Procedure Rule ("CPR") Committee and the Lord Chancellor. This means that MPs debating the changes to civil litigation funding will not have all the details before them and, perhaps more fundamentally, that the full package of reforms will not be debated in Parliament.

Contingency fees: Damages-Based Agreements

As anticipated, the Bill provides for a new way of funding dispute resolution in England & Wales. If the Bill becomes law, lawyers will be permitted to enter into agreements with their clients under which they will be entitled to a share of damages awarded if the case is successful. At present, US-style contingency fees or damages-based agreements ("DBAs") are unlawful in England & Wales, although they are permitted in employment matters.

DBAs will not be permitted in criminal proceedings (apart from proceedings under s82 Environmental Protection Act 1990) nor family proceedings but unless the Lord Chancellor excludes other types of proceedings (as the Bill provides that he may) then contingency fee agreements will be permitted in litigation in this country for the first time.

Existing Regulations on DBAs in employment matters cap the amount of damages that can be taken in fees at 35% of the sum recovered. No such cap was mentioned in the Government's response to the civil litigation funding consultation, except for personal injury cases, where the cap proposed was 25%. Whether this cap will be implemented and whether any cap will be introduced for other civil litigation is not clear at this stage. The Bill simply provides that Regulations may provide for a cap, but any maximum amount or percentage will be introduced by secondary legislation.
The Government response to the consultation in March said that costs would continue to be recoverable from the unsuccessful party on the conventional basis, but insofar as the contingency fee exceeded what would be chargeable under a normal fee agreement, the difference would be paid by the successful party. The Bill authorises the CPR Committee to make rules about assessment of costs in proceedings where a party in whose favour a costs order is made has entered into a DBA. Again, the detail is deferred for another day.

CFA success fees

As expected, the Bill amends existing legislation on CFAs to provide that success fees agreed between a lawyer and client under a CFA will cease to be recoverable. Success fees will have to be paid by the client. However, for CFAs relating to certain types of proceedings (to be specified by the Lord Chancellor), the Bill introduces a safety mechanism, in the form of a cap on success fees, which will be a percentage of damages awarded. The Lord Chancellor is unlikely to specify the level of this cap until after the Bill is passed and will have to consult with the legal profession before doing so.

Legal expenses insurance

The recoverability of After-the-Event ("ATE") Insurance premiums is also to be abolished. When this provision comes into force, premiums will have to be paid by the party taking out the insurance rather than the losing opponent.

As anticipated in the Government's response to the consultation in March, the Bill provides that the Lord Chancellor may provide that ATE Insurance premiums remain recoverable in clinical negligence cases. Again, the devil will be in the detail: future Regulations may provide that recoverable insurance premiums are capped at a percentage of the premium or by an amount calculated in a prescribed manner.

Increase in damages

The proposal to increase damages payable where a defendant fails to beat a claimant's settlement offer has been adopted but we shall have to wait for the CPR Committee to make rules of court before this proposal is implemented and to prescribe the amount of the increase. In relation to non-monetary claims, the Lord Chancellor simply reserves the ability to allow the Committee to make rules about an enhanced recovery where a defendant fails to beat a claimant's settlement offer in this situation.

Conclusion
The changes included in Part 2 of the Bill will not come as a surprise to those who have been following the recommendations made by Sir Rupert Jackson in January 2010. The lack of detail is regrettable but it is hoped that this will not deter MPs from debating the changes fully.

We will report further as matters progress.

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This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.