Civil litigation costs review: The final report - A seminar with Lord Justice Jackson

Herbert Smith held a client event on 11 February 2010 to discuss the final report in Lord Justice Jackson's year-long costs review, which was published on 14 January (see post).

Lord Justice Jackson spoke briefly on next steps, including his views on whether and how the report's recommendations would be implemented. There were then brief presentations summarising the report's key recommendations from Herbert Smith partners Damien Byrne Hill and Hardeep Nahal as well as a presentation from Bill Horton, a Canadian litigator, outlining the Ontario model of contingency fees recommended in the report.

These were followed by a panel discussion on the key issues which was chaired by head of dispute resolution Sonya Leydecker and included Lord Justice Jackson, Bill Horton, and Will Luker of RBS giving the client perspective.

Some interesting points discussed at the seminar include:

• The senior judiciary has expressed general support for Lord Justice Jackson's report and there have also been favourable indications from the government.
• In the Judge's opinion, the package of reforms he has proposed is workable and internally consistent. He believes it will promote access to justice and allow litigation to be conducted at more proportionate cost than is currently the case.
• He is cautiously optimistic that the recommendations will be accepted overall. He has been asked to play an active role in securing the implementation of the recommendations.
• Lord Justice Jackson believes that overall his package of reforms will probably lead to more disputes being litigated rather than abandoned. He has aimed to achieve a framework where those with valid claims and valid defences are able to bring them forward. It is then up to the parties whether they want to continue with the litigation or settle it.

Introduction by Sonya Leydecker

In her opening remarks, Sonya Leydecker described the report as a very impressive piece of work, for both its scale and its vision. The Judge had been faced with a difficult task in balancing the many competing interests to achieve his objectives of promoting access to justice at proportionate cost, and had done very well in that aim. For instance:

• In looking to promote access to justice, it is easy to forget that defendants must also be protected from unmeritorious claims and excessive counterparty costs. Lord Justice Jackson had clearly kept this in mind in proposing his recommendations.
• The review had to take into account the whole range of civil litigation, from small debt claims to the high value international commercial case. Throughout the review the Judge had recognised that one size does not fit all, tailoring his recommendations to matters affecting different types of litigation.
• He had kept in mind the need to avoid discouraging international commercial parties from choosing to bring cases in English courts, in particular in considering changes to procedure affecting the Commercial Court.
• He had recognised the interconnected nature of the costs and funding issues, coming up with a suite of recommendations designed to work together.
• He had also been quite bold, suggesting radical changes to the way litigation is currently funded, even though it will provoke great opposition from some quarters.

Sonya commented that the recommendations will initially have the greatest impact on smaller cases, particularly in those areas where conditional fee agreements (CFAs) and after the event (ATE) insurance are currently widespread (most obviously personal injury cases) rather than affecting major commercial litigation. However, this is a time of great change in the litigation market. Clients are looking for an alternative to the hourly rate and for their lawyers to share some of the risk with them, even in commercial cases. As the various recommendations are implemented and mindsets change, for example with greater moves toward costs management, there is likely to be a shift in the expectations and practices of both lawyers and clients.

Lord Justice Jackson

Lord Justice Jackson spoke briefly about next steps, including his views on whether and how the recommendations will be implemented. The Master of the Rolls had indicated general support for the report on behalf of the senior judiciary, and said that Lord Justice Jackson would be asked to play an active role in securing the implementation of the recommendations. There had also been generally favourable indications from the government.

The requirements for implementation of the recommendations are varied: some may only be implemented by Parliament, some by the Civil Procedure Rule Committee and some by other bodies such as the Law Society or Judicial Studies Board. The Judge has presented his recommendations and the evidence on which they are based, and it is not for him to say whether or not the recommendations will ultimately be accepted.

He commented that, in his opinion, his proposed package of reforms is workable and internally consistent. He believes it will promote access to justice and allow litigation to be conducted at more proportionate cost than is currently the case. He thinks it very unlikely that a consensus will emerge, as everyone has different views on the issues addressed: indeed, he commented that it is "impossible that anyone will agree with everything in the report". However, he is cautiously optimistic that the recommendations will be accepted overall.

Bill Horton

Bill Horton gave a brief outline of the historical development and current use of contingency fees in Ontario, since that is the model on which Lord Justice Jackson has based his proposal for the introduction of contingency fees here.

Until class proceedings legislation was introduced in Ontario in the early 1990s, contingency fees were not in theory permitted, although in practice the personal injury plaintiffs' bar commonly operated on the basis that fees would be paid only out of a settlement or judgment. The Class Proceedings Act permitted the payment of a premium fee in the event of success but only on the basis of a “lodestar” (or hourly rate multiplier) approach and not a percentage contingency fee. Within a few years, however, Canadian courts began allowing percentage contingency fees as a method of compensating class counsel.

Class counsel's fee must be approved by the court before it is paid. The courts typically allow percentage fees in a range of 15-30% or lodestar fees in a multiple of anywhere from 1.5 to 5 times normal hourly rates.

Only costs assessed on an hourly rate basis will be recoverable from the defendant, applying normal “loser pays” principles in Ontario. The difference between that recovery and any lodestar or percentage fee is paid by the class out of the recovery, unless (as sometimes happens) the defendant agrees as part of the settlement negotiation to pay some or all of the difference.

The representative plaintiff is liable to pay adverse costs if the claim fails, but it has become common for class counsel to indemnify representative plaintiffs against this liability. Class counsel themselves have banded together in syndicates to spread the risk. Third party funding is theoretically available but rarely used. Class counsel generally prefer to fund the risk themselves so as to better justify large premiums when cases settle or are won.

The acceptance of contingency fees in the class actions context has led to contingency fees being permitted more widely in Ontario litigation. They have been subjected to a plethora of regulation, including the requirement for court approval. Other requirements are that the lawyer state that he or she offered to make services available at an hourly rate, that the agreement provide illustrations of how the fee might work, and that the client is advised to get independent legal advice.

Outside the class actions context, contingency fees in commercial litigation are few and far between but are becoming more common, including partial contingency fee arrangements.

Highlights of panel discussion

Impact on number of cases fought:

Lord Justice Jackson expressed the view that, if his recommendations are implemented, there may be more litigation fought than at present.

If funding alternatives are increased, it is likely to increase the number of claims that litigants will decide to bring. As things now stand a company may have a claim that it is not willing to pursue, due to the costs risk, but if it could find a law firm to pursue the claim for, say, 40% of recoveries it might think this is worth doing.

On the other side of the coin, there may be some claims that defendants want to defend but cannot because of the crushing costs risk if they lose. At one seminar held during the costs review, Lord Justice Jackson was told of an £8 million claim which was being defended until the claimants notified the defendant bank that they were about to take out an ATE policy at a £4 million premium. The defendant decided it was not worth continuing in the face of this huge potential additional liability.

The Judge said that overall his package of reforms would probably lead to more disputes being litigated rather than abandoned. He noted that there have been various debates about whether this would promote a "litigation culture", but in his view access to justice is a good thing. He has aimed to achieve a framework where those with valid claims and valid defences are able to bring them forward. It is then up to the parties whether they want to continue with the litigation or settle it.

Contingency fees:

Bill Horton clarified a number of points regarding the operation of contingency fees in Ontario, in response to questions from the floor:

• Insurance for adverse costs is available but is not widely used. Class counsel are in the business of taking on the costs risk, and want to do so in order to justify a large premium on success.
• The courts do sometimes refuse to approve contingency fee agreements. An agreement made at the outset can turn out to have unfair results at the end of the litigation. For example, in one Ontario case class counsel had commenced litigation in respect of a single investment fund. The defendant decided to settle the claim with reference to both the original fund on which it was sued and 27 other funds, after communications with the regulator. If counsel had been paid based on the total recovery this would have resulted in a huge windfall.  There is however a difficult debate as to the extent to which hindsight should be taken into account in approving contingency fees.
• Apart from class actions, the sorts of cases in which contingency fees are used are still evolving in Ontario. In one case, the plaintiff company had ceased to trade and so the move to a contingency fee allowed the litigation to proceed when the company could not finance it on an ongoing basis. In other cases corporates may choose to pay a partial contingency fee in order to motivate the lawyer to keep costs proportionate to the outcome of the case. These arrangements are not common in commercial cases, but their use is growing.

Will Luker spoke about contingency fees from a defendant's perspective. He said that, in his view, a move toward contingency fees was inevitable, particularly in view of the likely arrival of collective actions. He was however pleased at the recommendation that normal costs shifting should be retained for most commercial claims, including as a default position for collective actions. In the US, there seems to be a general perception pretty much from the outset of a case that the defendant will settle to avoid the irrecoverable costs, and he would not like to move to a similar situation here.

Damien Byrne Hill commented that the Ontario model of contingency fees, with costs shifting, appears to be the right one to choose if contingency fees are to be introduced here. It was interesting to hear how things had developed to reach the current position in Ontario. One point that must be remembered in considering the report's recommendations is that any new procedures will have to live and develop and it may be difficult to anticipate quite where we will end up. In similar fashion, when CFAs and ATE insurance were first introduced, no doubt no one anticipated all of the implications.

Collective actions:

Lord Justice Jackson explained the background to his recommendation that there should be full costs shifting as a default position (save in personal injury collective actions) but the court should be able to order that a different costs regime should operate in appropriate cases.

There may be some cases where the claimants have a proper and meritorious case but would not be able to bring the claim forward if (as the report also recommends) there is no recoverable ATE insurance. At the certification stage the court should have the discretion to depart from the normal rule, taking into account the positions of the claimants and defendant, whether it is a frivolous claim, and whether a different rule is required to promote access to justice. The Judge commented that collective actions by necessity receive a huge amount of judicial attention at an early stage and are managed by the same judge, so procedures can be introduced which would not be feasible in other cases.

Will Luker asked whether there might be a danger of the judge in effect summarily assessing the merits of the case without the benefit of the evidence. Further, claimants will have access to a range of funding under the proposals, and therefore one-way costs shifting will not be needed to give access to justice.

The Judge responded that if the claimants have access to funding (eg. through third party funding or contingency fees) there will be no need to modify the costs shifting rule in that particular case. The proposed discretion is designed for cases where no such funding is available. Further, his recommendation is not that the judge should try the merits in advance, but that there should be no departure from normal costs shifting if the case is frivolous or unmeritorious.

Procedural issues:

Ian Gatt said that from an advocate's perspective the report is exciting, because there will be a new landscape with new rules to apply. After the merits of a case, the second major driver of strategy is the ability of the parties to pay and recover costs, so changes to the costs and funding rules will have a major impact on how litigation is conducted. For example it will be interesting to see how the proposed changes to the Part 36 regime (particularly the 10% enhancement of damages where a claimant beats its own Part 36 offer) affect the dynamics of settlement offers going forward.

Ian welcomed the proposal that, where possible, a judge with relevant experience will be assigned and will remain for the life of the case. The recommendation for adequate pre-reading time is also very welcome. The heart of making the reforms work will be for judges to be able to practice informed case management: the ability to make appropriate disclosure orders and so forth will follow from there.

Ian said that the recommendations are also exciting in giving an opportunity for legal advisers to come up with more innovative ways of charging. Clients are looking for alternatives to hourly rates and for their lawyers to share in the risks of litigation. The proposals allow greater scope to accede to such requests.

Will Luker commented on the "menu option" recommended for disclosure in large commercial cases, in which there is no default position but the court will select the order which is most appropriate to the case (ranging from dispensing with disclosure through the whole spectrum to full pre-CPR "train of enquiry" disclosure). Will was a member of the working group set up to consider this option and prepare a draft rule for Lord Justice Jackson's consideration. He had welcomed the opportunity to be involved in a potential change that could trim down the disclosure exercise, influenced by his experience of being in court surrounded by lever arch files but with no one looking at anything but the core bundle.

Will said that some had criticised the proposed menu option on the basis that the parties would revert to standard disclosure in any event. He did not agree. If parties are forced to look carefully at the whole issue of disclosure (as part of their obligation to frontload), which in many cases is the most important and expensive aspect of litigation, it should improve the process and save costs. Will welcomes the proposed new rule and believes that it will work.

Hardeep Nahal said that he was interested in the report's conclusions in relation to the second biggest driver of costs after disclosure, namely witness evidence, and why Lord Justice Jackson had decided to retain witness statements rather than moving to the greater use of witness summaries.

Lord Justice Jackson said that during the consultation he had been leaning slightly in favour of a move to witness summaries, but had ultimately been persuaded in favour of retaining witness statements. The message he had received during the review was that although statements can be too prolix and expensive, they serve a valuable function and have improved the litigation process. He therefore decided that the way forward is to reign in statements, by ensuring that they focus on the necessary issues and that parties bear the costs of statements that are overly prolix. He did not want to "throw the baby out with the bath water" and get rid of something that serves a useful purpose.

Lord Justice Jackson also commented on experience to date with the pilots of his costs management proposals. It is too early, he said, to draw any conclusions from the defamation pilot. In relation to the Birmingham pilot, which is voluntary, there had been a slow start but the take-up has steadily increased. Judges are becoming more comfortable in operating the procedures and they appear to be serving the interests of parties.

Sonya Leydecker concluded the event by thanking the panel and in particular Lord Justice Jackson. She commented that no doubt the discussion on these issues would reconvene in future, as the Judge's final report is really just the beginning of the process for reform.