WHAT ARE THE ECONOMIC CONSEQUENCES OF SUCCESS FEES AND ATE PREMIUMS BEING RECOVERABLE?

(i) Individual consequences

3.1 Nature of success fee. A success fee compensates a solicitor or counsel in any given CFA case for the risk of losing another case. The theory is that the total of the success fees in all the “won” cases constitutes proper remuneration for all the “lost”

cases.²³² Although either party can retain lawyers on a CFA, in practice CFAs are generally used by claimants (especially in personal injury litigation) and much less frequently used by defendants. In the course of Phase 1, claimant lawyers have emphasised to me the amount of irrecoverable costs which they incur on CFA cases which are lost. Defendant lawyers have urged upon me (particularly in respect of publication cases) the high percentage of cases which claimants win. It is a refrain of defendant lawyers that success fees are too high and over-compensate claimant lawyers for the modest number of cases which they lose. In relation to this issue, Professor Paul Fenn (economist assessor to the Costs Review) points out that there is no effective market pressure on success fees. Claimants have no incentive to shop around for the lowest success fee, as they will never have to pay it.

3.2 Effect of recoverable success fees. Leaving aside the statistical question of whether success fees are currently set at the right level, the effect of recoverable success fees in any area where CFAs are the norm is plain. The claimants’ costs of all cases in that area are transferred from claimants to defendants, regardless of the outcome of any individual case. In those cases which they win, claimants recover their costs under the “loser pays” rule. In those cases which they lose, claimants’

legal representatives recover their costs through the mechanism of success fees in other cases.

3.3 Nature of ATE premiums. ATE insurance covers a party against liabilities which he will incur if a case is lost. ATE insurance is normally taken out in conjunction with a CFA. The liabilities covered are (a) (usually) own disbursements and (b) any liability to the other party under an adverse costs order. The disbursements covered under limb (a) may include counsel’s fees, but I am told that in practice this is rare.²³³ Although either party can take out ATE insurance, in

232 Professor Paul Fenn (economist assessor to the Costs Review) comments that success fees under CFAs are akin to insurance provided by solicitors. The solicitor accepts the same

“insurer’s risk” as is discussed in the footnote to paragraph 3.10 below in relation to ATE premiums.

233 Both the Personal Injuries Bar Association and the Professional Negligence Bar Association inform me that if solicitors are acting on a CFA, normally they will only instruct a barrister who is also prepared to act on a CFA.

Chapter 47: The recoverability of success fees and ATE premiums practice ATE insurance is generally taken out by claimants (especially in person

injury litigation) and almost never taken out by defendants. Although ATE insurance comes in all shapes and sizes (as set out in chapter 14 above), I understand that in the vast majority of cases claimants and their lawyers use the so-called “magic bullet”.

This is a form of policy whereby the premium itself is insured and payment of the premium is deferred until the outcome of the action is known. If the action is lost, then no premium is payable. If the action is won, then the premium is payable in a slightly larger amount, in order to compensate for the risk that no premium would have been payable if the action had been lost. This enlarged premium is recoverable from the other side under the provisions set out in section 2 above. Thus the claimant never makes any payment in respect of his or her ATE insurance, but is insured against all liabilities for costs.

3.4 Effect of recoverable ATE premiums. The first effect of recoverable premiums in any area where ATE insurance is the norm is plain. Defendants end up bearing their own costs of all cases in that area, regardless of the outcome of any individual case. In those cases which defendants lose they bear their own costs in the ordinary way. In those cases which defendants win, they nominally recover their costs, but they pay in full for that privilege by reason of their liability for ATE premiums in many other cases.

3.5 The second effect of recoverable premiums in any area where ATE insurance is the norm is also plain. The claimants’ disbursements of all cases in that area are transferred from claimants to defendants, regardless of the outcome of any individual case. In those cases which they win, claimants get their disbursements under the

“loser pays” rule. In those cases which they lose, claimants get their disbursements through the mechanism of recoverable ATE premiums in other cases.

3.6 Is there an effective market in ATE insurance? In Callery v Gray (Nos 1 and 2) [2002] UKHL 28; [2002] 1 WLR 2000 Lord Hoffmann expressed the view that market forces no restrain the levels of ATE premiums. At paragraphs 43-44 he said this:

“43. …ATE insurers do not compete for claimants, still less do they compete on premiums charged. They compete for solicitors who will sell or recommend their product. And they compete by offering solicitors the most profitable arrangements to enable them to attract profitable work. There is only one restraining force on the premium charged and that is how much the costs judge will allow on an assessment against the liability insurer.

44. Again, the costs judge has absolutely no criteria to enable him to decide whether any given premium is reasonable. On the contrary, the likelihood is that whatever costs judges are prepared to allow will constitute the benchmark around which ATE insurers will tacitly collude in fixing their premiums.”

3.7 Seven years have elapsed since Lord Hoffmann delivered that speech. There appears to have been a substantial growth in ATE insurance during that period.

Whether or not market forces now exert any effective control over premium levels is very much a live issue, which I have touched upon in chapter 14 above. It is a fair point made by defendants that claimants have no interest in the level of ATE insurance premiums, because – win or lose – the claimants are never going to have to pay those premiums. In his submissions for Phase 1 of the Costs Review, the Treasury solicitor wrote as follows:

Chapter 47: The recoverability of success fees and ATE premiums

“Inevitably, as insurance is not a charitable undertaking, those offering ATE will calculate their premiums so as to ensure that they are not out of pocket overall. Such premiums tend therefore to be high and add significantly to the costs of litigation. We, as the Government’s solicitors, find ourselves increasingly faced with claims for premiums of quite staggering amounts but are unable to challenge them because they are what the market has shown it will support and therefore we cannot point to cheaper alternatives.”

On the other hand, claimant solicitors say that they strike the best bargains that they can achieve with ATE insurers.²³⁴ The alternative would be to go forward with no ATE insurance, which would be a disaster for both parties.

3.8 No doubt there will be further submissions and evidence on this issue during Phase 2 of the Costs Review. I shall not therefore express a provisional view on the issue at this stage.

(ii) Overall effect

3.9 All costs transferred to defendants. If one leaves aside all arithmetical issues and doubts over the beneficial effect of market forces and if one assumes that success fees and ATE premiums are set at the “perfect” level in every case (i.e. not favouring either claimant or defendant), then the overall effect of CFAs and ATE insurance in any given area of litigation is this: the total costs of all parties in all cases, regardless of which side wins, is borne by the defendants.

3.10 Additional costs transferred to defendants. In addition to the costs mentioned in the previous paragraph, the administrative costs and profits of insurers must also be taken into account.²³⁵ These factors will be reflected in the premiums charged by ATE insurers, even if those premiums are always set at a perfect level (as defined above).

3.11 Position if the system works perfectly. Thus even if the system works perfectly, defendants in the areas of litigation affected are in practice paying out under costs orders more than the total costs of both sides in all cases.

3.12 But is the system working perfectly? I have already touched upon the issues concerning the levels of success fees and ATE premiums. Defendant representatives have urged upon me that both success fees and ATE premiums are far too high. In relation to excessive costs, liability insurers point to the “largesse” within the system, for example the referral fees paid to claims management companies and middlemen.

On the claimants’ side it is urged that there is no largesse; all the fees now paid are necessary; the genie cannot be put back into the bottle and anyway marketing costs are saved by the payment of referral fees.

234 Having read this paragraph in draft, Senior Costs Judge Peter Hurst commented: “If ATE premiums are to be successfully challenged, the court needs either evidence of similar products offered at lower premiums, or expert evidence demonstrating how the premium claimed is wrong.”

235 Professor Paul Fenn, the economist assessor to the Costs Review, comments that the premium must also reflect “the insurer’s risk”, viz the risk that some years will be good and some years will be bad. This risk is particularly significant for insurers operating in areas with relatively small numbers of high value cases, such as defamation claims.

Chapter 47: The recoverability of success fees and ATE premiums 4. SHOULD SUCCESS FEES AND ATE PREMIUMS CONTINUE TO BE

RECOVERABLE?

4.1 There can be no doubt that the decision taken by Parliament and implemented by the Rule Committee to make success fees and ATE premiums recoverable has (a) promoted access to justice for claimants and (b) massively increased the costs burden upon defendants. Claimants can now litigate at no cost and at no personal risk. If successful, they retain the entirety of the damages awarded or agreed. If unsuccessful, they walk away with no liability.

4.2 The question must now be asked as to whether the correct balance has been struck. In considering this question, regard must be had to the interests of claimants, defendants, liability insurers, others involved and, of course, the public interest.

4.3 As can be seen from Part 11 of this report, in other jurisdictions where conditional fee agreements or contingency fee agreements are allowed, the additional costs of such arrangements are not transferred to other parties. I am told that the approach adopted in England and Wales is the source of some surprise overseas.

4.4 If success fees and ATE premiums cease to be recoverable, then the question arises as to how the interests of individual claimants (most of whom could not sensibly afford the costs of litigation) might be protected. In the field of personal injury litigation, possible measures might include:

(i) Introducing one way cost shifting.

(ii) Capping the proportion of damages which the claimant’s lawyers might take in respect of success fees. Prior to April 2000 the cap was in practice²³⁶ 25% of damages. I am told by Michael Napier QC and Senior Costs Judge Peter Hurst (both assessors to the Costs Review) that this arrangement worked satisfactorily and did not give rise to complaint.²³⁷

(iii) Providing that no element of damages referable to future care costs could be subject to any deduction.

(iv) Raising the level of damages. This might be perfectly feasible if some of the huge transaction costs could be reduced, as discussed in chapter 26.

(v) Introducing a CLAF or a SLAS for personal injury claims, as discussed in chapters 18 and 19.

4.5 In areas away from personal injury litigation similar measures might need to be considered to promote access to justice, if ATE premiums and success fees become irrecoverable. At the moment CFAs are seldom used in Commercial or Mercantile litigation. Therefore, special measures would probably not be necessary in that area, in the event that success fees and ATE premiums become irrecoverable.

236 The Law Society recommended that practitioners should agree not to deduct more than 25% from damages in respect of success fee and ATE premium. This recommendation was set out in the Law Society Model CFA Agreement and in the Law Society Guidebook on CFAs. A similar restriction was set out in the APIL/PIBA model agreement covering barristers.

Solicitors followed the recommendations almost universally.

237 Professor Paul Fenn tells me that his research found no real access to justice drawbacks to non-recoverable CFAs. See Fenn, Gray, Rickman and Carrier “The impact of conditional fees on the outcome of personal injury cases” (2002) Journal of Insurance Research and Practice, 41.

Chapter 47: The recoverability of success fees and ATE premiums

4.6 Professor Paul Fenn points out that if success fees and ATE premiums become irrecoverable (as they were before April 2000), then market forces would once more come into play. Claimants would have incentives to shop around for low success fees and low ATE premiums. “While there might be costs then faced by claimants to come out of their damages, it is possible that the increased efficiency of the system could lead to reductions in these costs as well as knock-on reductions in liability insurance premiums.”

5. REVIEW

5.1 During Phase 2 of the costs inquiry I look forward to receiving further evidence, data and comment upon:

(i) The appropriateness of the levels of success fees currently set in different types of litigation.

(ii) The appropriateness of the levels of ATE premiums currently charged in different types of litigation.

(iii) Whether success fees and ATE premiums should continue to be recoverable under costs orders.

(iv) If not, (a) what steps should be taken to provide for the funding of personal injuries litigation; (b) what other steps should be taken to preserve access to justice for those who currently depend upon success fees and ATE insurance.

Chapter 48: Costs management CHAPTER 48. COSTS MANAGEMENT

1. INTRODUCTION

1.1 The meaning of costs management. Over the past decade case management by the court has become a concept with which we have all become familiar. It was one of the central features and recommendations of Lord Woolf’s Final Report in July 1996 on “Access to Justice”. The ills of the civil justice system were then thought mainly to be due to procedural distortions arising out of the adversarial design of the system.

1.2 The focus on reducing the cost and delay of civil litigation was on case management. It was considered necessary, as indeed it was, for judges to assert greater control over the preparation for and conduct of hearings. This need for effective case management was embraced as one of the central features of the Woolf reforms leading to the introduction of the Civil Procedure Rules 1998 (“CPR”).

1.3 CPR rule 1.4, defines the elements of case management and makes “active case management” the court's duty, forming part of the overriding objective of the CPR:

“(1) The court must further the overriding objective by actively managing cases.

(2) Active case management includes –

(a) encouraging the parties to co-operate with each other in the conduct of the proceedings;

(b) identifying the issues at an early stage;

(c) deciding promptly which issues need full investigation and trial and accordingly disposing summarily of the others;

(d) deciding the order in which issues are to be resolved;

(e) encouraging the parties to use an alternative dispute resolution procedure if the court considers that appropriate and facilitating the use of such procedure;

(f) helping the parties to settle the whole or part of the case;

(g) fixing timetables or otherwise controlling the progress of the case;

(h) considering whether the likely benefits of taking a particular step justify the cost of taking it;

(i) dealing with as many aspects of the case as it can on the same occasion;

(j) dealing with the case without the parties needing to attend at court;

(k) making use of technology; and

Chapter 48: Costs management

(l) giving directions to ensure that the trial of a case proceeds quickly and efficiently.”

1.4 There is no mention made in CPR rule 1.4 of costs management. Indeed, unlike case management, costs management is not a concept that is expressly recognised by the CPR. These observations beg the question as to what is costs management.

1.5 Costs management may manifest itself in different ways, but broadly speaking it is an instrument of case management, where the principal criterion or emphasis is on controlling costs.

1.6 Costs management is concerned with ensuring that the incidence of costs is actively controlled by the court as the case moves from inception to its conclusion.

Successful costs management might however, also have a part to play in avoiding detailed assessment hearings in all but the most exceptional cases. Specific approval or sanction of the incidence of costs at stated or approved levels throughout the life of the case ought to have the effect of removing or reducing the need for an ex post facto examination of whether the costs incurred should have been incurred or were reasonably incurred.