By Andrew Welch, partner and head of insurance at North West law firm, Stephensons Solicitors LLP
Lord Justice Jackson has recently released his final report after carrying out a full and detailed review of costs in the Civil Justice system in England and Wales. It has been keenly awaited by lawyers and other interest groups such as insurers, trade unions and consumer organisations. It makes lots of very far reaching recommendations which are almost certain to change the activities of everyone involved in the Civil Justice system.
The first key question is whether any of these reforms will actually be introduced. Lord Justice Jackson was asked to carry out his review by the Master of the Rolls, the Head of the Civil Justice system. He was not therefore commissioned by the Government and some commentators have taken the view that this means his report will simply be shelved, like many other reviews into various aspects of the law over the years.
But, what might make the Jackson Review more attractive to policymakers, at a time when a General Election is looming, is the fact that if Jackson’s recommendations are implemented they would save many millions of pounds for Government departments who are routinely engaged in litigation, such as the NHS, as well as many Local Authorities who would see the cost of tripping claims for example, fall substantially.
It could also result in savings for policyholders which may be attractive for a Government which wished to relieve some of the burden on small businesses and individuals as we come out of recession. Both Lord Justice Jackson and the Master of the Rolls have indicated that they will be pushing hard for implementation, with the report indicating an implementation date of October 2010, and it may be that a Government of any colour which needs to make savings would find it very attractive after a general election.
The report even goes so far as to specifically set out in detail what changes will need to be made to existing legislation to implement it. The only real question appears to be whether the Government would be prepared to make parliamentary time for those legislative amendments?
There are many aspects of the Jackson Review which covers a wide range of litigation including heavyweight commercial matters, intellectual property and libel. Much of it is devoted to personal injury, including clinical negligence claims, and as a lawyer specialising in that area, I will look specifically at the most salient of those.
It appears to be Lord Justice Jackson’s firm view that legal costs in personal injury claims are too high and disproportionate. He proposes a new test which would allow Judges assessing those costs to look at the overall proportionality rather than whether the costs have been necessarily incurred.
This means while it may be necessary to incur some costs to successfully pursue a claim those costs may not be recoverable against an opponent if they are disproportionate, leaving the successful party to bear at least some of his own costs. The report goes even further by recommending that costs in the Fast Track, which covers the vast majority of personal injury litigation, should be fixed. This would go beyond the current fixed costs in road traffic accident claims to include employer’s liability and public liability claims. If a claimant successfully pursued a claim they would get the fixed costs allowed from the losing defendant regardless of what costs they had actually incurred.
The report also recommends abolishing the recoverability of success fees and after the event insurance premia from a losing party saving even more costs for defendants and their liability insurers.
The net effect of all of this is that if someone is sued in a personal injury claim they, or more usually their insurer, would at least know how much the ultimate cost bill is going to be if they lost and are protected from having to pay after the event insurance premia or success fees on top.
His Honour Judge Cook, who has written the leading text book on costs, characterises what Lord Justice Jackson is proposing as ‘access to justice for defendants’. He also points out that the current system where a losing defendant may have to pay an unknown and uncapped amount for the claimant’s costs, together with the success fee and ATE premium, is one of the few occasions in our society when the person paying for goods or services has no control over ordering them or their amounts.
You would never, for example, accept liability to pay your neighbours builder if you had had no input into contracting with that builder and had had no control over what the builder would ultimately charge. The Jackson proposals seem aimed at addressing that anomaly and giving defendants certainty.
However there are some downsides for losing defendants and their insurers. The report recommends abrogating the indemnity principle which was often used by the insurer’s cost negotiators to take technical arguments and avoid paying claimant’s costs. In addition, an increase in general damages for personal injury Claimants of 10% is recommended and further teeth for claimant’s Part 36 offers. This means that if a Claimant beat their own Part 36 offer the defendant would be ordered to pay an extra 10% on all of their damages in addition to a standard 10% uplift on the general damages which Jackson is recommending.
There is also qualified one way cost shifting in personal injury claims which would mean that even if a defendant successfully defended a claim they would not be able to recover their costs unless the claimant had means or its conduct was criticised. Lord Justice Jackson sensibly makes the point that the amount the defendants are currently paying out to successful Claimant’s in ATE premia vastly outweighs the amount that insured defendants get back on the few cases where they succeed with a defence of the action against them. Therefore giving up the right to claim costs in those few cases is a small price to pay for being relieved if the burden of paying ATE premia.
The report approves Before the Event insurance and Lord Justice Jackson is firmly in favour of SMEs, using it to fund their disputes.
He does not like medical reporting agencies but recognises they are a feature of the litigation landscape that it will be difficult to remove and accordingly appears to be prepared to allow their fees to be recoverable.
Colossus type software which is routinely used by insurers to value modest personal injury claims is approved, although the report recommends a greater degree of independence be brought into it with the control of calibrating the software to be done by an independent body.
He thinks that the soon to be introduced new system for handling low value road traffic accident claims should be allowed to bed in and then be reviewed, but that that should not delay the implementation or the rest of his recommendations. He also suggests that the fixed costs in that scheme and that he is recommending should be reviewed on a regular basis by a Cost Council.
Contingency fees where lawyers will be allowed to pursue claims in return for deducting an amount from their client’s damages are approved, subject to caps on those fees and clients obtaining independent legal advice.
It’s difficult to see that these are likely to be popular and because the cost of arranging independent legal advice in low value claims will be disproportionate and the same effect is, in any event, achieved by the new style Conditional Fee Agreements that he is proposing whereby, as the success fee could not be recovered against an opponent, it would have to be deducted from a claimant’s damages. The net effect is the same, i.e. a deduction from compensation, and that is why Lord Justice Jackson has proposed a compensatory 10% uplift in successful claimant’s general damages.
He strongly recommends that referral fees be abolished or at least capped to a much lower level than currently and cites a figure of £200 per case. It’s recognised that this is going to be difficult to enforce but it’s something that he is very clear about.
If some or all of Lord Justice Jackson’s recommendations are implemented, how is this going to affect how everyone involved in the claims process behaves? Firstly, claimant lawyers will have to plan out the costs that they are going to incur more carefully and run their businesses more efficiently. There may well be some cases where because the costs would necessarily be disproportionate, i.e. a low value but complex case, it would not be economically viable for a claimant lawyer to take it on. Even though it will be possible for the lawyer to deduct from the client’s damages to cover any shortfall, if those damages are modest it still does not render an uneconomic case economic.
There may also be a reducing price bidding war launched by claimant lawyers, which I suspect Lord Justice Jackson would be happy with. The new system would allow lawyers to deduct up to 25% from client’s damages to cover success fees, but it is easy to envisage some lawyers advertising that they will only deduct 10% or 15% and before long it may well be the standard practice for lawyers to advertise no deduction from damages.
The public has become used to the idea that they can litigate for free without any deductions from their compensation and it may be difficult to get that particular genie back in the bottle. The result will be lawyers reducing their margins to agree no deductions and therefore having to work more efficiently.
The fixed fees do not allow additional amounts for Barrister’s fees. This may well be a significant threat to the Bar as they have already seen that in similar fixed fee packages now prevalent in the legal aid funding area, solicitors will do the work themselves that they had previously farmed out to Barristers, and keep the fee themselves.
All of this may have a knock on effect for Judges who may see more litigants in person and more solicitors instead of barristers appearing before them, with less time spent on the preparation of cases.
For defendants and their insurers there is the benefit of knowing that the legal costs in most cases will be capped. However they will probably have to bear their own costs, even if they win, which returns us to the old legal aid style situation where a defendant facing a legally aided claimant knew that they would have to pay out their own costs whatever happened and therefore it was sometimes more economic simply to settle the case.
The abolition of referral fees would seem to squeeze out of the market claims management companies and cause Before the Event insurers to review their business models. If a claims management company cannot make money out of referral fees it is difficult to see where their income will come from unless they started deducting substantial amounts from their customers. BTE insurers would be similarly deprived of referral fee income and therefore have to make up for it by charging realistic premia for their policies. That would reduce the commission opportunities available to brokers and require them to pass the costs onto their insureds.
Much of this hinges on whether referral fees are adequately banned and the ban enforced. No doubt those organisations hooked on referral fees will, in the first instance, attempt to find alternative ways of channelling such funds, such as dressing them up as ‘marketing fees’ or something similar. It may be that the regulatory organisations for recipients of referral fees, such as the FSA, will need to ban receiving fees as well as the Solicitors Regulation Authority banning solicitors from paying them.
The future of ATE insurance would be in considerable doubt if the Jackson proposals were implemented. It is possible to envisage a situation where low cost policies where issued to cover for Claimant’s own disbursements and against the risk that the Claimant would be ordered to pay defendants costs not withstanding the qualified one way cost shifting rule. Much may depend on how the market develops and how much Claimants would be prepared to pay.
As a lawyer who has been practising for a good number of years it strikes me that the net effect of the Jackson proposals would be to turn back the clock to a time when there were no claims management companies, an ATE premium was £70 or £80 and was paid by a claimant, who also expected to pay up to 25% of their damages if they won their case, BTE insurers were able to charge brokers and others a reasonable premium for their product and chose their panel solicitors on the basis of quality of service rather than how high they would go in paying referral fees.
Things have changed a lot since those days and whether the clock can be turned back remains to be seen.
The views expressed in this article are the personal views of Andrew Welch and are not those of Stephensons Solicitors LLP. This article does not constitute legal advice.
ENDS
Notes to editors
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