Out-Law Legal Update
Individuals advised to check whether they can still claim entrepreneurs' relief
Out-Law Guide | 20 May 2013 | 10:24 am | 12 min. read
From 1 April 2013 a number of changes to the Civil Procedure Rules (CPRs) governing court action in England and Wales took effect. This is a summary of those changes.
Conditional fee arrangements
Conditional fee arrangements (CFAs) are agreements between a lawyer and a client to share the risks of litigation by coming to an arrangement on the fees payable based on the outcome of the litigation. There are two typical CFA structures, 'shared risk' and 'no win no fee'. For more details see Out-Law's guide to Conditional fee agreements, damages based agreements and ATE insurance.
From 1 April CFAs continue to be permissible but if entered into from 1 April 2013 the success fee element of a CFA payable by a client to its solicitor will not be recoverable from an opponent, except in cases related to publication and privacy proceedings; specified insolvency proceedings, and mesothelioma claims. Base costs, disbursements and VAT if applicable continue to be recoverable between parties.
In December 2012, and following the Leveson report, the Government announced that it would not make CFA success fees and legal expense costs insurance premiums irrecoverable in claims for defamation and breach of privacy until it has introduced costs protection for unsuccessful claimants in line with recommendations contained in the Leveson report. Sections 44 and 46 of the Legal Aid Sentencing and Punishment of Offenders Act 2012 will not come into force in relation to defamation and privacy claims until a new regime of qualified one-way costs protection for such claims has been implemented through changes to the Civil Procedure Rules.
After the event (ATE) legal expenses insurance
After the event (ATE) legal expenses insurance can cover a client’s liability to pay an opponent’s costs if the client (the policyholder) loses the case. In addition, ATE may also cover an element of a client’s own costs. For more, see Out-Law's guide to Conditional fee agreements, damages based agreements and ATE insurance.
The changes which came into effect on 1 April 2013 will not prevent a party purchasing ATE, however in respect of any ATE policy entered into from that date, save for exceptions relating to specified insolvency proceedings, publication and privacy proceedings and experts reports in clinical negligence claims, the premium paid or payable by the insured will not be recoverable from an opponent.
Save for the exceptions above, from 1 April 2013, any CFA success fee or ATE premium incurred by a party will be its own liability, will not be recoverable from an opponent, and accordingly, if incurred will reduce a party's net recovery in litigation.
Damages based agreements (DBAs)
A DBA is an agreement whereby a solicitor and a client can agree to share the risk of litigation. Payment of solicitors’ fees, counsel fees and VAT by a client under a DBA is dependent on achieving defined success criteria agreed when the DBA is entered into, and is based on a percentage of the sum recovered from the losing party/opponent. For more, see Out-Law's guide to Conditional fee agreements, damages based agreements and ATE insurance.
From 1 April 2013 it is permissible for solicitors and clients to enter into a DBA, subject to such agreement being compliant with certain requirements, such as the percentage of damages which can be taken as costs by the solicitor.
In essence a DBA is a contingency fee where costs are based on a percentage of that recovered. Whilst prior to 1 April 2013 it was permissible for solicitors to enter into contingency fee agreements in relation to non contentious business, section 45 of the Legal Aid, Sentencing and Punishment of Offenders Act 2012, the 2013 Statutory Instrument relating to DBAs and the 2013 amendments to the court Civil Procedure Rules extend and make permissible the use of such agreements in contentious business for work from 1 April 2013.
DBA cost caps
In respect of first instance proceedings (not appeals) the following maximum DBA cost caps will be payable by a client from sums recovered:
It should be noted that the 'cap’ in commercial cases will apply to the aggregate of solicitors fees, counsel fees and vat.
The 50% 'cap' in commercial cases will not apply to appeals.
All 'expenses', such as expert fees and court fees, will be payable by the client in addition to the maximum DBA fee.
DBAs and recovery of costs from an opponent
As is the case now, costs recoverable from an opponent will be limited to a reasonable hourly rate and reasonable and proportionate time spent. The DBA percentage of fees payable by the client will not be the basis of evaluating a costs recovery from an opponent.
In addition, any between the parties costs recovery is to be subject to the so called indemnity principle, which could potentially limit recoverable costs to a very low sum. For example if as a consequence of a low recovery of damages the total costs payable by the client is low, irrespective of the value of time spent, the costs payable by an opponent will be limited to that payable by the client under the terms of the DBA.
Changes to the 'overriding objective' of CPRs
CPR 1 is amended to strengthen the overriding objective to enable cases to be dealt with “at proportionate cost” as well as justly. The new test is intended to control the costs of activity that is disproportionate to the value, complexity and importance of the claim and to strengthen enforcing "....compliance with rules, practice directions and orders".
Court costs management and case management
The current costs management pilot schemes in the Technology and Construction Court and in relation to defamation proceedings is extended to all courts except for the Commercial and Admiralty courts; Technology and Construction Court; Mercantile Court, and Chancery Division for all claims in excess of £2 million excluding interest and costs.
Parties are required to exchange and file costs budgets, to be considered and approved by the court. Costs budgets need be agreed or as directed by the court, and will be subject to an order of the court, possibly following submissions from the parties.
Unless the court otherwise orders, all parties except litigants in person, must file and exchange budgets as required by the rules or as the court otherwise directs. Each party must do so by the date specified in the notice served under CPR 26.3(1) or, if no such date is specified, seven days before the first case management conference (CPR 3.13)
Costs budgets are in a "simple" excel spreadsheet format (court form/'Precedent H), which identify the fee earner time and disbursements incurred and to be incurred under specific phases (pre action, issue/pleadings, case management conference, disclosure, witness statements, expert reports, pre trial review, trial preparation, trial, settlement/ADR and with contingencies).
Costs budgets will potentially substantially reduce the time spent or the need for detailed assessment of costs proceedings at the conclusion of an action. In any case where a costs management order has been made, when assessing costs on the standard basis, the court will have regard to the receiving party’s last approved or agreed budget for each phase of the proceedings; and not depart from such approved or agreed budget unless satisfied that there is good reason to do so (CPR 3.18).
Costs budgets will be utilised on matters such as applications for security for costs.
A ‘heavy price’ for non compliance
If a party fails file a costs budget despite being required to do so under CPR 3.14, it will be deemed that the party only wishes to claim court fees at the conclusion of the proceedings – a significant penalty.
Costs budgets are estimates, will not limit the costs a party may incur, and it will always be permissible for a party to seek an increase in any court-approved costs budget during the course of proceedings, assuming it can evidence a change and significant development to justify an increase. Ultimately whilst in court proceedings the recovery of costs will be linked to the court-approved budgets, a commercial party will be at liberty to incur whatever cost it considers appropriate, such as in relation to the instruction of what it deems to be the most desirable solicitors and counsel, in order to achieve its commercial objective or to protect its commercial interest.
Proportionality and costs
The court rules have been amended to introduce a new test of what will be deemed 'proportionate'. An effect of the new rule will be that merely because it was reasonable for a party to incur certain costs in pursuing or defending a claim, it will not necessarily make such costs proportionate, and in turn recoverable from an opponent in a between the parties assessment.
The CPRs say:
"Where the amount of costs is to be assessed on the standard basis, the court will (a) only allow costs which are proportionate to the matters in issue. Costs which are disproportionate in amount may be disallowed or reduced even if they were reasonably or necessarily incurred; and (b) resolve any doubt which it may have as to whether costs were reasonably and proportionately incurred or were reasonable and proportionate in amount in favour of the paying party."
In considering proportionate costs between the parties, the court will have regard to the sums in issue in the proceedings, the value of any non-monetary relief in issue, the complexity of the litigation, any additional work generated by the conduct of a paying party and any wider factors involved in the proceedings such as reputation or public importance.
The new test of proportionality will not be retrospective. As outlined in the amended CPR 44.3(7), paragraphs ,44.3(2)(a) and (5) do not apply in relation to cases commenced and work done before 1 April 2013, and in relation to such cases, rule 44.4(2)(a) as it was in force immediately before 1 April 2013 will apply instead.
New case management rules
General case management rules were amended to ensure that judges are less tolerant of delay and breaches of orders. The Court of Appeal intends to support judges in being more robust about delays and breaches of orders. 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 to enable it to deal justly with the application, including "...the need for litigation to be conducted efficiently and at proportionate cost; and to enforce compliance with rules, practice directions and orders"
The allocation directions in CPR 26 replace the previous 'Allocation Questionnaire'.
10% increase in general damages
As confirmed by the Court of Appeal in Simmons v Castle in late 2012 with effect from 1 April 2013 the proper level of general damages in all civil claims for pain and suffering; loss of amenity; physical inconvenience and discomfort; social discredit, or mental distress will be 10% higher than previously, unless the claimant falls within section 44(6) of the Legal Aid and Punishment of Offenders Act 2012. Unless the claimant has entered into a CFA before 1 April 2013, the proper award of general damages in such specified claims from 1 April 2013 will be 10% higher than prior to 1 April 2013.
Amendment to Part 36 offers to settle
Changes to CPR 36.14(3) can enhance a claimant's recovery by 10% when a defendant fails to beat a claimant's CPR 36 offer to settle,
The new additional amount, which shall not exceed £75,000, is calculated by applying the prescribed percentage set out below to an amount which is where the claim is or includes a money claim, the sum awarded to the claimant by the court; or where the claim is only a non-monetary claim, the sum awarded to the claimant by the court in respect of costs.
Amount awarded by the court
up to £500,000
10% of the amount awarded;
above £500,000 up to £1,000,000
10% of the first £500,000 and 5% of any amount above that figure
Under the changes courts can adopt any method of disclosure appropriate to the case and issues and documentation involved, in conjunction with considering the associated costs.
The new rules provide for disclosure of material relevant to the particular case. In heavier and more complex cases the costly disclosure of material by default may not be justified. Rather than default disclosure, the rules have been modified to allow a tailored list of disclosure requirements thus reducing the overall costs of providing the material.
The CPRs say: "Not less than 14 days before the first case management conference each party must file and serve a report verified by a statement of truth, which (a) describes briefly what documents exist or may exist that are or may be relevant to the matters in issue in the case; (b) describes where and with whom those documents are or may be located; (c) in the case of electronic documents, describes how those documents are stored; (d) estimates the broad range of costs that could be involved in giving standard disclosure in the case, including the costs of searching for and disclosing any electronically stored documents; and (e) states which of the directions under paragraphs (7) or (8) are to be sought."
The CPR says that "Not less than seven days before the first case management conference, and on any other occasion as the court may direct, the parties must, at a meeting or by telephone, discuss and seek to agree a proposal in relation to disclosure that meets the overriding objective,Factual evidence
"The court may give directions (a) identifying or limiting the issues to which factual evidence may be directed; (b) identifying the witnesses who may be called or whose evidence may be read; or (c) limiting the length or format of witness statements."
In order to restrict recoverable costs in respect of expert evidence, the changes require a party who is seeking permission to adduce expert evidence to furnish the court with an estimate of the costs of that evidence.
The court will have power to direct "...the issues which the expert evidence will address". The court will encourage the introduction of 'hot-tubbing', which is where experts give evidence at the same time rather than one after the other.
Qualified one way costs shifting (QOCS)
In personal injury claims brought from1 April 2013 the amendments give claimants protection from a liability for costs in the event of losing except where the claimant is found to have been fraudulent; the claimant has failed to beat a defendant's CPR 36 offer to settle; the claim has been discontinued; the claim has been struck out as an abuse of process, or the defendant has obtained an interlocutory order for costs.
The effect of QOCS is that a losing claimant will not pay any costs to the defendant, however, where a successful claimant is subject to an adverse costs order in favour of a defendant, such as when a where the claimant does not accept and then fails to beat the defendant’s CPR Part 36 offer to settle, the claimant will suffer a loss in respect of costs due to the defendant to the extent that such costs liability will be set off against any damages payable by the defendant.
QOCS protection will be lost altogether if the claim is struck out or is found to be fundamentally dishonest.
Also QOCS protection will be lost in part, and subject to the court’s permission, in two instances. First, if an otherwise successful claim includes an unsuccessful non-personal injury element, such as housing disrepair or costs of credit hire in arranging an alternative vehicle, and there is an order for costs against the claimant of that unsuccessful element, the claimant is liable for all the defendant’s costs of that unsuccessful element to the extent that it is just and fair.
The second situation is where the claim, or an element of it, is made for the financial benefit of someone other than the claimant, such as a credit hire claim in respect of the financing company, an order for the defendant’s costs of the claim, or that element, may be made, and enforced, against that person/organisation.
Small claims limit
The small claims limit has been increased from £5,000 to £10,000, excluding claims for personal injury and housing disrepair.
Detailed assessment of costs
Out-Law Legal Update
Individuals advised to check whether they can still claim entrepreneurs' relief