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Civil litigation costs – imminent revolution or evolution?

Following Jackson LJ’s Review of Civil Litigation Costs: Final Report, published in January 2010, and a Ministry of Justice consultation paper in November 2010, lawyers waited with eager anticipation (or, in some cases, trepidation) as to what civil litigation costs reforms the government would recommend implementing. The Ministry of Justice’s response highlighted that “the way forward” is to implement Jackson LJ’s main reforms.

The way forward

The Ministry of Justice proposes to:

  • Abolish the recovery of conditional fee agreement(CFA) success fees (not the abolition of CFAs) and after the event legal expenses insurance (ATE) premiums by a successful party from an opponent.
  • Introduce contingency fees to allow solicitors to be able to charge fees wholly or partly based on a percentage of damages recovered. These will be known as damages based agreements (DBAs).
  • In personal injury claims, introduce:
    •  a 10% increase in non-pecuniary general damages (that is, for pain and suffering, and loss of amenity) to compensate for the loss resulting from non-recovery of a CFA success fee from an opponent; and
    • a claimant having no liability for an opponent’s costs in the event of losing court proceedings (known as “qualified one-way cost shifting”), subject to rules on fraudulent, frivolous or unreasonable behaviour.
  • Introduce a new test of proportionality in respect of the costs that a successful party can recover from an unsuccessful party, and a mix of other proposed reforms and court rule changes in respect of court proceedings, including case and costs management by the court.

The Bill

In June 2011, the government introduced a lengthy and congested Bill with the snappy title, The Legal Aid, Sentencing and Punishment of Offenders Bill 2010-11.

Despite the Bill’s title and overall content, buried within it are three very significant proposed reforms in respect of civil litigation funding. By randomly shoehorning clauses 41 to 43 in to the Bill, the government has sought to fast track the:

  • Abolition of the recovery of CFA success fees and ATE premiums by a successful party from an opponent.
  • Introduction of contingency fees/DBAs for any sort of proceedings for resolving disputes (and not just proceedings in a court), whether commenced or contemplated.

While there is still a degree of uncertainty as to the final form of the legislation, and how the reforms will be applied by way of court rules, the one certainty is that there will be reform and an evolution of funding options and civil litigation costs.

Costs management by the courts

As part of the reforms, from October 2011 the Technology and Construction Courts (TCC) and Mercantile Courts are going to take a more pro-active approach to costs management, with the object of controlling the costs of litigation in accordance with the overriding objective.

New claims in the TCC and Mercantile Courts will be subject to a costs management pilot scheme (previously piloted in Birmingham and Bristol), which will require parties to seek to agree estimates (budgets) in advance for each phase of proceedings. These budgets will be subject to continual review, and will increase if it is appropriate.

In managing the case, making pre-trial directions and agreeing costs estimates, the court will consider all the circumstances of the claim, including:

  • Its value and substance.
  • Its importance to the parties.
  • The complexity, novelty and difficulty of the issues in dispute.
  • The time and cost to be incurred by the parties on each phase of work, including solicitors’ fees, counsel fees, experts’ fees and other expenses.

The budgets agreed by the court will be taken into account when a successful party seeks to claim its costs from its opponent.

The court’s approach of linking costs management with case management will not prevent a party incurring costs it considers reasonable and appropriate to achieve its commercial objective, but estimates previously agreed by the court will provide a guide as to what costs the court considers might amount to reasonable costs to be recovered from an opponent.

Be aware, assess and know the options

In view of likely developments in the next 12 months, parties engaging in commercial disputes must, as should have been the case in any event, insist on being made aware of:

  • Funding and legal expenses insurance options.
  • The potential of the case being funded by a third party in return for profit.
  • Whether any form of litigation risk transfer is available or appropriate.

Lawyers should, at the earliest opportunity, be advising on the potential outcome, which includes the potential quantum of the claim and costs.

Commercial clients must ensure that they receive adequate advice on the overall potential financial outcome. They should question their lawyers as to:

  • The court’s approach to costs management.
  • What software their lawyers have in place for costs budgeting (such as Pinsent Masons’ proprietary costs budgeting software referred to in Jackson LJ’s final report).
  • Whether the costs software has a live link to the firm’s time management system to enable real time monitoring of incurred as against estimated costs.

Ignorance costs money

In commercial disputes, a party may be at a distinct disadvantage in any negotiation or dispute resolution procedure if it fails to “keep up with the game” as to the available costs options and how to potentially make it easier. Failing to get clear and full advice from lawyers (and, if appropriate, a specialist costs lawyer), is likely to prove an expensive mistake.

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