Outstanding issues in civil litigation under conditional fees

CFAs and government policy

The government is in the process of privatising the provision of legal services by first extending conditional fee agreements (CFAs) for all civil claims except family matters (from 30 July 1998 under the Conditional Fee Agreements Order 1998) and secondly restricting the availability of legal aid. Primary legislation will be needed in order to change legal aid availability. There may be some difficulty over obtaining Parliamentary time for the proposed Modernisation of Justice Bill. If the LCD are successful in negotiating with the government’s business managers, there should be an announcement in the Queen’s Speech around 24 November. It is possible that the Bill may be delayed until July 1999.

The general rule in England and Wales has always been that the losing party in litigation shall pay the majority of the costs of the winning party. This is a significant rule of public policy intended to discourage speculative or low-value litigation and encourage settlement. The government had considered abolishing this rule but have decided to keep it. However, the rule has always been suspended in legal aid. This has led to the well-recognised phenomenon of "legal aid blackmail" which acts generally against the interests of manufacturers and insurers. With the limitation of legal aid, the position of defendants generally should improve in that if they successfully defend cases, they will in future be able to recover costs against plaintiffs who were previously legally aided. This is because the solution in relation to CFAs will be for the plaintiff’s risk to be covered by insurance, the market for which is spreading.

An important issue which the government has had to decide is whether the insurance premium for CFA-related costs policies and the plaintiff’s lawyer’s success fee under the CFA should be recoverable from defendants. The Association of British Insurers (ABI) and defence solicitors, including the Forum of Insurance Lawyers have lobbied against this proposal. However, the Lord Chancellor recently announced that insurance premiums and success fees would be recoverable from defendants. This would obviously have a significant inflationary effect on settlements as well as on costs paid on a settlement as well as a loss. We had previously understood that PGH was against such recoverability, but he said that he had now thought that this would not be such a burden on defendants generally, having thought through the consequences.

Earlier this year the Court of Appeal decided in the Thai Trading case that a contingency fee (common law arrangement for "no win no fee") is legal. Interestingly, a decision on 9 November (Hughes v Kingston) has taken a different view. In any event, insurers would be best advised to support CFAs rather than full-blown contingency fees. Under the former, there is the opportunity first to regulate the uplift which gives rise to the level of the success fee (the current 100% level set by statutory instrument may be amended up or down in future depending upon evidence) and with the level of analysis of identifyable risk that is possible through the taxation process which would review the cost of work done at the current hourly rate basis, and also review the percentage uplift appropriate to the case. Under a contingency fee system, the uplift might not be so identifiable, since the fee might involve a high basic rate and it would be more difficult to analyse an element for the risk of the particular case.

The government have been attacked on the basis that the reforms remove the current welfare benefit of legal aid from poor people without replacing this, since poor people cannot afford the insurance premium or cost of initial disbursements to investigate the case. Research has shown that in the more complex type of cases (industrial diseases, medical negligence and presumably product liability) clients and solicitors prefer to obtain preliminary evidence and expert reports before deciding whether to take the case on a CFA. This means that if they decided not to continue, the initial cost of the disbursements needs to be found by the client. If the case is taken forward on a CFA, funding mechanisms are now being brought forward by finance houses which would retrospectively cover the initial disbursements. The problem is that poor people cannot afford the initial disbursements and would be ineligible for bank funding in any event. Although this is not yet announced, the government is likely to continue a legal aid-type fund for initial disbursements for people who qualify for legal aid. It is possible that, in order to recover the government’s initial investment, they would construct a system of risk-sharing between public and private sectors for cases which it was decided passed the initial scrutiny.

The government believes that it has constructed a system which deals with all major problems, albeit a somewhat complicated system. They are likely to continue legal aid for 2 or 3 years for medical negligence cases, until relevant insurance policies and, in particular, funding mechanisms for initial disbursements have been developed for these types of more complex cases. However, they firmly intend to remove legal aid totally when it is possible to do so. The one exception over which they will tread carefully is that of cerebral palsy, since the issue of brain-damaged babies raises a great deal of heat in the media.

Disclosure of CFAs in litigation

The Law Society and plaintiff lawyers (APIL) have lobbied loudly for the result that whilst the CFA uplift should be reviewable (taxable) by the court at the end of the litigation, the fact of the CFA should not be revealed during the litigation, nor the uplift percentage (since that would, they say, disclose their advice on the strength of the case) and the taxation should not be undertaken by the trial judge but subsequently by a Taxing Master in satellite litigation. Insurance interests should argue strongly against these points. First, it is a fundamental principle under the new procedural reforms which the government is to introduce from 26 April 1999 based on the recommendations of Lord Woolf that litigation costs are to be transparent as between the parties. The procedural judge will require parties to disclose what they have spent to date, what they intend to do next and what it will cost. He will then authorise or prohibit the next steps on the basis of relevance and cost. It is, therefore, fundamental that costs should be revealed. The whole point is to enable the parties to carry out continuous risk-benefit assessments in relation to potential recovery as against costs. Second, revealing the percentage uplift on a particular type of case may not reveal a great deal. This is because cases are in general going to fall within well-recognised categories which will have well-recognised chances of success and associated uplifts. For example, the research has shown that the success rate in road traffic cases and industrial industry cases is very high, which would justify a very low success fee. Industrial injury and medical negligence cases are more risky and justify higher success fees, but at rates which are beginning to become recognised as more research is available. Thirdly, under the Woolf system, all the evidence will be available from the beginning of the case to all parties, who are therefore enabled to make an open and objective assessment of the risks of the case. Knowing the risk element which your opponent has put on a case should therefore lead to no great surprise but might even contribute towards settlement. Where the uplift is at the higher or lower end of the range for the particular type of case, that would itself be a relevant factor which the opponent should be entitled to take into account in assessing whether the case is stronger or weaker than normal and whether he might have to incur further costs on a subsequent taxation of an unnecessarily high rate.

Plaintiffs’ lawyers have argued that when the success fee uplift is reviewed at the end of a case, this should not be done with the benefit of hindsight but on the basis of the risk as it appeared at the time of which the CFA was entered into in the light of the evidence which was available at that stage. The key to this problem is for risk assessment forms to be required.

Plaintiffs’ lawyers have also argued that the assessment of the uplift should not be undertaken by the judge at the end of a trial, but in subsequent litigation by a Taxing Master. This is a suggestion which is thoroughly unconvincing and reveals such a strong defence of vested interests that it undermines some of their other proposals. It would be entirely appropriate for the judge to have power to review the case, since he was managing the litigation and would have a complete understanding of its facts. Obviously, a review by him would be the most efficient solution.

Multi-party actions

The government only proposes to remove legal aid for claims involving costs up to £100,000. It proposes to keep a public fund to pay lawyers to bring cases which they could not otherwise afford to bring under CFAs, because they are uneconomic or cannot otherwise be funded. All multi-party actions would fall into this category. The government has said that it intends to include a "public interest" test. Defence interests have made clear strong opposition to a "public interest" test since it is perfectly simple for advertising by plaintiff lawyers to raise the supposition of a public interest merely because of the number of claimants involved with supposed personal injury claims. The Lord Chancellor’s Department understands this point and will be issuing a consultation paper, probably in January. There will hopefully be a fundamental difference from future public funding of this type from the existing legal aid system. Legal aid is currently statutorily focused on being designed as a welfare benefit, on the assumption that it will be given to individuals who qualify under financial and merits criteria. The new legislation will involve a limited budget, a limited pool of contracted suppliers of legal services, and the need to prioritise amongst different cases. The government therefore argues that it is less likely that speculative litigation would be funded than may have happened in the past. Time will tell.

The current situation involves radical change in a number of directions - litigation procedure, funding of litigation, substantive law (proposed amendments to the Product Liability Directive), limitation and damages. All of these issues are fundamentally inter-related. Accordingly, the combined effect of these factors needs to be considered very carefully. Particularly important issues are recent Law Commission proposals to raise levels of damages (a fourth edition of the Guidelines for the Assessment of General Damages in Personal Injury Cases has just been published by the Judicial Studies Board) and on exemplary (punitive) damages. There have been no moves to implement these provisions but no-one should be complacent.

Christopher Hodges