Important Changes to English Litigation Costs – Part 1

Kent: “This is nothing, fool”

Fool: “Then ’tis like the breath of an unfee’d lawyer …”

(King Lear, Act 1 Scene IV).

That exchange from Shakespeare’s pen probably still represents a widely held view that lawyers will do anything for money and nothing without it. It is certainly the case that English common law developed, over centuries, the doctrine that a lawyer should not conduct litigation on the basis that he would be paid only in the event of success: rather than “no win, no fee” it was a case of “no fee, no breath”.

However, over recent years, partly to increase access to justice and partly to reduce the government’s legal aid bill, English law has been changed to allow conditional fees (“no win, no fee” or “no win, lower fee”). Allied to this has been the development of insurance against the risk of losing and having to pay the opponent’s legal costs (known as “After the Event” or “ATE” insurance when purchased after an event giving rise to a claim has occurred).

A series of controversial and significant changes are shortly to be introduced which, depending on one’s viewpoint, may reduce access to justice for some, whilst increasing it for others and place some losing parties in a fairer position, but some in a worse one. The changes are to (or are likely to) take effect on or after 1 April 2013. If they affect you, you may need to take action well before that date. In particular:

  • the sizeable premium for an ATE policy to cover the risk of losing and having to pay an opponent’s costs will no longer be recoverable from an unsuccessful opponent if the policy is taken out later than 31 March this year. Insurers have advised that applications for ATE insurance should be made as soon as possible.
  • the success fee in “no win, no fee” agreements will no longer be recoverable in respect of agreements entered into after 31 March this year. There is less of a lead-time for such agreements than ATE policies, but work must have been done under them by that date for recoverability to apply.

In this note, when we refer to “litigation” we mean disputes which are, or may come, before the Courts of England and Wales (“Courts”), including cases where proceedings have not yet been issued. We also use the term to apply to disputes which are, or may become, subject to arbitration or any other kind of proceedings for resolving disputes in England and Wales.
The legislation and rules which provide for the changes have in some respects not yet been finalised. Therefore, the position and timing could change before April 2013 and this note should not be treated as setting out the final position. Furthermore, what follows is not complete or specific advice as to your situation. If you wish to receive such advice, please contact us as soon as possible.

1. The present position

(i) There are two main types of costs liability, or potential liability, which you may incur as a party to litigation:

a. Liability for the charges of your own lawyers and for other expenses relating to your pursuit/defence of litigation, such as experts’ fees and government charges (“Own Costs”); and/or

b. Liability for the costs incurred by the opposing party or parties in the pursuit/defence of the litigation (“Opponent’s Costs”).
Own Costs

(ii) The standard arrangement for paying your Own Costs is for you to pay them whether or not you win or lose your case, or settle it before a court judgment. Solicitors usually charge fees by reference to hourly rates and pass on to you any expenses (“Disbursements”) which they incur on your behalf.

(iii) Depending on the strength of your case and other factors, solicitors may be willing to enter into a different arrangement under which you will be liable for their fees only if your case is won (in court or by means of an out of court settlement). That is known as a Conditional Fee Agreement (“CFA”) or colloquially as a “No win, no fee” agreement. A CFA may be entered into by solicitors with a claimant or a defendant. If the case is won, you will be liable to pay your solicitors their usual fees, plus a “Success Fee” calculated as a percentage of up to 100% of their usual fees. If the case is lost, you will not have to pay any fees to your solicitors. Disbursements will usually be payable by you irrespective of the outcome.

(iv) A variant of a CFA is a partial CFA, under which you will pay some of your solicitors’ usual fees whatever the outcome, with the remainder being payable, plus a Success Fee, if the case is won. Colloquially, this is sometimes referred to as a “No win, lower fee” arrangement.
Opponents’ Costs

(v) Whether the agreement with your solicitors is to pay their fees irrespective of the outcome, or is a CFA or partial CFA, it is likely – if you win – that the Court will order a losing opponent to reimburse you with a proportion of your Own Costs (including any Success Fee) for which you are liable to your solicitors.

(vi) Equally, if you lose the case, the Court is likely to order you to pay a proportion of the Opponent’s Costs.

(vii) The amount of Opponent’s Costs for which the loser will be become liable will depend on each case. It will hardly ever be a full indemnity.
Insuring against Opponent’s Costs

(viii) It is possible that – before a dispute arose – you had purchased legal expenses insurance, which might cover Own Costs as well as liability for Opponent’s Costs. Such insurance is called Before the Event insurance (“BTE”).

(ix) If not, once a dispute has arisen, you may be able to purchase specialist insurance against potential liability for Opponent’s Costs, known as After the Event insurance (“ATE”). The premiums can be high, for example in the order of 40% or more of the sum insured, but are, typically and counter-intuitively, not payable until the case ends and are not payable at all if the case is lost and the cover has to be called upon to meet Opponent’s Costs. Conversely, if the case is won, the premium becomes payable, but is usually recoverable from the losing opponent as part of your Own Costs.

2. Changes to recoverability of Success Fees and ATE premiums by the winning party

(i) In the case of CFAs entered into on or after 1 April 2013 (or such later date as may be specified), Success Fees will no longer form part of the Opponent’s Costs for which a losing party is liable. Good news for a losing party, but bad news for a winning party as the Success Fee will have to be paid out of any damages recovered or out of the winning party’s own pocket. That position will be mitigated for the winner by the compulsory inclusion in a CFA of a cap on the Success Fee which solicitors may charge, expressed as a percentage of the damages awarded. The government intends to limit that cap to 25% of some damages in personal injury cases.

(ii) In the case of an ATE policy issued on or after 1 April 2013 (or such later date as may be specified), the premium will no longer form part of the Opponent’s Costs for which a losing party is liable. Again, good news for a losing party, but bad news for a winning party, as the premium will have to be paid out of any damages recovered or out of the winning party’s own pocket.

(iii) If you have any existing litigation or a dispute which may end up in litigation, which you wish us to consider proceeding with under a CFA or partial CFA, please let us know as soon as possible. If it is not a case which we consider suitable for a CFA or partial CFA, you will have the option to approach other solicitors. Any such agreements entered into before 1 April 2013  should benefit from the recoverability of the Success Fee from a losing opponent, but will not be subject to the cap on the Success Fee mentioned above. Any such agreements entered into on or after 1 April 2013  will not benefit from the recoverability of the Success Fee from a losing opponent, but will be subject to the cap.

(iv) If you have any existing litigation or a dispute which may end up in litigation, in respect of which you wish to consider purchasing ATE cover, please let us know as soon as possible.  We do not usually provide advice as to ATE policies, but can refer you to a reliable broker and assist you to make an application to that broker for such insurance cover.  Given that premiums for ATE policies issued on or after 1 April 2013  will not be recoverable from a losing opponent, we understand that demand is strong and that applications should be made as soon as possible .

(v) Please note that the term “recoverability” denotes an entitlement to recover a Success Fee or ATE premium from a losing opponent. Whether in fact it is possible to recover any such amount will depend on the opponent’s ability to pay or the practicality of enforcement against an unwilling payer. Thus, if there is significant doubt as to whether an opponent will be able or willing to pay your Own Costs, including a Success Fee and/or CFA premium, that is a factor for you to take into account when considering whether or when to enter into a CFA/partial CFA and/or whether to purchase ATE cover. There are a number of other factors which it is not practicable to mention in this note, but which we will be happy to discuss with you.

(vi) Please also note that the removal of recoverability of Success Fees and/or ATE premiums in insolvency proceedings is not due to come into effect until 2015.

3. Addition of 10% to damages awards

In partial mitigation for the above changes, Courts are, with effect from 1 April 2013  to be permitted to add an additional 10% to non-pecuniary general damages awards, such as for pain, suffering and loss of amenity.

4. Introduction of Damages Based Agreements (DBAs)

(i) With effect from 1 April 2013, solicitors will be permitted to charge clients for litigation services by reference to a percentage of damages recovered. That is not at present allowed except (1) in employment claims and (2) where court proceedings have not been commenced. (Success Fees are at present calculated as a percentage of solicitors’ usual fees, not of damages).

(ii) DBAs will be subject to restrictions, including:

1. The lawyer’s fee will be capped at 25% of the amount of damages (except for future care and loss) in personal injury cases;

2. The cap in all other cases in civil litigation will be 50% (except for employment cases where there is already a 35% cap);

3. A losing party will be liable to pay (a proportion of) the winner’s lawyer’s ordinary legal costs, but not anything above those costs which the winner has to pay his/her lawyer under the DBA. If the fee payable under the DBA is less than the ordinary legal costs, the loser will be liable for the lower amount.

5. Other changes

There will be other changes, which space does not permit us to explain in detail in this note, including:

(i) “Qualified one way costs shifting” in personal injury claims (claimants who conduct their case properly not to be liable for defendants’ costs if the claim fails);

(ii) A new rule on proportionality intended to control the costs of work which is disproportionate to the value, complexity and importance of the claim.

6. Conclusions

(i) For those considering or already engaged in litigation, who are not as yet covered by a CFA/partial CFA or a BTE or ATE policy, the end of the recoverability of Success Fees and ATE premiums could be an adverse change. If you are within that category, it may be wise to consider the possibilities of entering into a CFA/partial CFA and/or applying for an ATE policy without delay, with a view to meeting the presumed 1 April 2013 deadline.

(ii) Whether it is appropriate to enter into a CFA/partial CFA and/or to purchase an ATE policy can only be judged in the specific circumstances of each case: there may be “cons” as well as “pros”.

(iii) Some of the changes, such as the addition of 10% to some types of damages and Damages Based Agreements, could be to your overall advantage, depending on the specific circumstances of your case. In that event, you might be better off not taking any action before April 2013. However, other important factors might mean that you should take action before then, in particular if there is any limitation or other time limit applicable to your situation.

(iv) If you consider that any of the matters referred to in this note could be of relevance to you, or if you are unsure as to your position or have any query, please contact us as soon as possible.