Government outlines fundamental reforms to civil litigation funding

Out-Law News | 17 Nov 2010 | 9:14 am | 3 min. read

Claimants bringing civil actions on a 'no win no fee' basis should have a financial interest in keeping legal costs down, the Ministry of Justice (MoJ) said this week.

Under the Ministry's proposals, winning claimants would have to pay their own lawyer's 'success fee' and the premium for any after-the-event (ATE) insurance out of the damages they are awarded by the court.

At present many civil actions (and most personal injury claims) are brought on a 'no win no fee' basis under a conditional fee agreement (CFA) with a lawyer, backed up by ATE insurance which covers the claimant against the risk of having to pay the defendant's legal costs if the claimant loses the case.

If the claimant wins, the defendant (or its insurers) must, in addition to the claimant's solicitor's basic costs, pay the lawyer's success fee and an enhanced ATE premium. But if the claimant loses the case, no ATE premium or success fee is payable and the ATE insurance will cover the claimant's liability to pay the defendant's legal costs. Effectively, this means claims can be brought at no cost and no personal risk to the claimant.

The MoJ wants to change this by implementing key recommendations made by Lord Justice Jackson in his report on civil litigation funding in England and Wales published in January.

Its consultation, 'Reform of civil litigation funding and costs', and a companion paper on changes to legal aid "mark the first step in a wider programme of work to radically reform and rebalance the justice system," the MoJ said in a press statement on 15th November.

"This consultation should be considered against the background of costs in civil legal cases having frequently become disproportionate and unaffordable to many individual litigants and businesses – and in particular small businesses," the paper states.

It adds:

"Access to justice is important for both claimants and defendants. Some defendants have complained that the disproportionate costs of defending claims against them mean that they are denied effective access to justice. Disproportionate costs also have implications for the taxpayer who ends up footing many of the bills.

"In seeking to rebalance the costs of civil cases, we are endeavouring to ensure: that necessary claims can be brought; that reasonable claims should be settled as early as possible; that unnecessary or frivolous claims are deterred; and that as a result costs overall become more proportionate. These principles underpin our approach to reform."

But Muiris Lyons, president of the Association of Personal Injury Lawyers (APIL) said 'no win no fee' arrangements had helped provide access to justice for people who could not otherwise afford it.

"The only party to benefit from this proposal is the negligent person, and through him his insurer, who will have collected a premium to cover such costs. The interests of insurance companies and negligent defendants must not outweigh the rights of injured people."

Reforms

The MoJ believes that making claimants financially responsible for part of the costs of litigation will give them an incentive to control those costs. "We believe that the key recommendations – and in particular those on the reform of CFAs – would, if implemented, lead to a significant reduction in legal costs", the paper states.

Balancing measures put forward to assist claimants include a 10% increase in general damages, a possible cap on the level of success fee and limiting a losing claimant's liability to pay the defendant's costs in certain types of case (what it calls "qualified one-way costs shifting"). There are also proposals for tougher sanctions under Part 36 of the court rules to encourage parties to make and accept reasonable offers of settlement.

In addition, the MoJ supports the introduction of contingency fees ("damages-based agreements") under which lawyers take a proportion of any damages awarded in fees. Such arrangements are not currently allowed in English courts, though they can be used in cases before tribunals.

Meanwhile, the MoJ says it is closely monitoring the new fixed-costs process introduced in April this year for low value road traffic accident personal injury claims. One of Lord Jackson's recommendations was to introduce a system of fixed recoverable costs in 'fast track' court cases, where damages claimed are up to £25,000.

Lord Young in his recent report 'Common Sense, Common Safety' strongly recommended the extension of the current scheme to cover all fast track personal injury claims including clinical negligence. The MoJ will consult on this next year with a view to extending the scheme by April 2012.

The paper also supports Lord Jackson's recommendation that legal expenses or 'before-the-event' (BTE) insurance should be encouraged, although no specific proposals are put forward. Lord Young is to consult with the insurance industry on developing stand-alone BTE policies for individuals and small businesses. 

One issue not covered by the consultation is that of referral fees – payments made by solicitors (often to claims management companies) for the referral or introduction of potential clients.

Lord Jackson wanted to see them banned – a view supported by Lord Young.

The Legal Services Board, however, does not currently consider there is sufficient evidence of consumer detriment to justify a ban. Its preferred option would be to improve the transparency surrounding referral fees. Its consultation on the issue ends on 22nd December and the MoJ says it will await the outcome before reaching any conclusion.

In the meantime, the consultation on civil litigation funding closes on 14th February 2011. The MoJ plans to draw up implementation measures by the end of March.

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