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The Jackson Reforms

On 1 April 2013, the Jackson Reforms were implemented in England and Wales introducing significant changes to the way in which litigation is both funded and managed.

The Reforms have been driven by political and public concern about the costs of funding litigation.  In recent times, there has been an increase in claims supported by “no win no fee” arrangements and institutional defendants, in particular the NHS, local authorities and insurance companies, have seen the cost of litigation increase dramatically.

Since 1 April, conditional fee agreements (“CFAs”), after-the-event (“ATE”) insurance policies and third-party funding have all been affected in relation to every type of litigation except insolvency proceedings (which are exempt until 1 April 2015).

In addition, in terms of case management, the Court is now able to require parties to produce costs budgets and it has increased sanctioning powers in relation to parties refusing Part 36 settlement offers.

Success fees in CFAs will no longer be recoverable.

CFAs are agreements between a client and their lawyer which fix the amount to be charged for the legal services depending on whether the client is successful.

If the client “wins” the litigation, the lawyer charges their base fees plus an additional percentage uplift known as a success fee.  The success fee can be a maximum of 100% of the lawyer’s standard costs.

Before 1 April, success fees were recoverable from the losing party in the same way as other legal costs.  For CFAs entered into after 1 April, success fees are no longer recoverable from the losing party.

It is widely expected that it is this measure, more than any other, which will result in a significant reduction in litigation, especially in areas such as personal injury.  The exemption for insolvency proceedings benefits HM Revenue & Customs (the largest beneficiary of claims brought by Insolvency Practitioners).

ATE insurance premiums will no longer be recoverable

An ATE insurance policy allows a party to insure against the risk of losing the case and having to pay out the costs of the winning party.

Premiums under this type of insurance can be deferred until after judgment and can be contingent upon the insured party actually winning.  The advantage of this was that the winning party could then claim back the ATE premium from the losing party.

ATE insurance and CFAs are often used together in order to minimise or even remove risk from starting litigation proceedings against another party.  This is particularly the case where third party funders have stepped-in to fund the claim in return for a share of the final award.

However, since 1 April, parties who succeed will no longer be able to recover their ATE premium from the losing party.  (As with CFAs, this does not have retrospective effect for ATE policies entered into before 1 April).

Claimants will now need to undertake a much more rigorous assessment of the chances of success of their cases.  Claimants will have to decide whether they are prepared to fund the ATE premium themselves or forgo insurance and bear the risk that, in the event that they are unsuccessful, they will have to pay the costs themselves.

Contingency fees, or damages-based agreements, will be allowed.

Unlike in the US, lawyers in England and Wales have historically not been allowed to charge a claimant client for work by reference to a percentage of the sum recovered from the defendant.  As the outcome of the case would directly impact his fees, the lawyer would be at risk of not advising his client objectively.

The Jackson Reforms, however, have introduced damages-based agreements (“DBAs”).  Under DBAs, a contingency fee is charged based on a percentage of the damages recovered from the defendant and recovery of legal costs from the defendant is limited to the fees usually charged (i.e. no uplift).

A further limitation, introduced in the recently published draft DBA Regulations 2013, is that the lawyer may not take more than 50% of the client's damages in commercial matters, 35% in employment matters and 25% in personal injury matters (inclusive of VAT and Counsel’s fees but exclusive of other disbursements).  Any recoverable costs must be deducted from the contingency fee rather than added on top (in other words, the percentage cap of the DBA includes recoverable and non-recoverable costs).

DBAs will be appropriate for larger clients where there are sufficient levels of damages to justify the risk for both the lawyer and the client.  However, there must be a robust assessment at the outset of not only the merits of the case but also the defendant’s financial ability to pay any sums due – given the link to the amount of damages actually recovered.  Securing a judgment against a defendant who subsequently will not or cannot pay will not be sufficient to trigger the lawyer’s entitlement to be paid.

Part 36 offers

The provisions relating to Part 36 offers have been amended to enable the Court to apply a sanction against a defendant who unreasonably refuses a claimant’s Part 36 offer.  In the event that a defendant unreasonably refuses a Part 36 offer, a sanction can be applied amounting to 10% of damages for claims under £500,000 or 5% of damages for claims up to £1 million.  As a consequence more pressure will be placed on a defendant to settle cases before they come to trial.

Effect of the Reforms on claimants

In general terms, the number of ways in which a potential claimant may fund their claim will not vary under the Reforms save for the introduction of DBAs.  Third party funding, CFAs and ATE insurance policies will all still be allowed albeit with restrictions as to recovery in the case of CFAs and ATE premiums.

The introduction of DBAs simply allows lawyers to offer to self-fund in return for a share of the damages received by their clients at the end of the litigation.  While this may be an important change for the legal profession, from the litigant's perspective it is not too dissimilar to the third party funding options currently available.

However, the economic implications of the Reforms will have a practical effect on funding options.  All litigation funding involves a cost, over and above the normal cost of litigation, if a funded party is successful: traditionally, a CFA success fee or an ATE insurance premium.  This is to compensate the funder for the risk it takes in funding a case that could ultimately not be successful at trial.  The burden of paying that funding cost has traditionally been on the losing party in cases involving CFAs or ATE insurance but on the successful party in third party funded cases.  The effect of the Reforms is, in essence, to shift the burden on to the claimant for all types of litigation funding.  Therefore, it is expected that this will result in fewer claims being issued, especially in relation to personal injury matters.

Effect of the Reforms on the market

It is too early to say with any degree of certainty what impact the Reforms will have on litigation generally.  The main effect of the Reforms is expected to be that the cost of using CFAs will become unrealistic where the value of the claim is low but the costs of recovery are high.  Personal injury claims, therefore, will be hardest hit.

In order for a law firm to consider CFAs to be a viable funding option, either the value of the claim must be significant or the firm must be in a position to offer significantly lower charge-out rates, for example by fully utilising trainee solicitors and paralegal support on cases.  Smaller firms, who cannot offer such support, generally have lower charge-out rates any way but not the full legal support resource available that larger firms benefit from.

ATE insurance will continue to be a useful tool for well-resourced corporate claimants looking to minimise the risk of costs judgments against them.  Even though ATE premiums will no longer be recoverable from the losing party, some of the other Reforms will assist the ATE insurance market.  For example, the litigation costs of all multi-track cases (valued above £50,000) will now be actively managed by the Court requiring parties to prepare costs budgets, with the costs assessments at the end of the trial being carried out with reference to that budget and only reasonable and proportionate costs can be recovered.  (This applies to the County Courts, the Chancery Division and the Queen's Bench Division (except the Admiralty and Commercial Courts)).

The effect of this is that costs (on both sides) will be more predictable and it will be less likely that a party seeking ATE insurance cover will over-insure to avoid exposure to uncertain costs.  That said, several insurers have already stopped offering ATE products.

DBAs are new to the legal market in this country and it is therefore difficult to say at this stage how useful the legal profession will find them.  If law firms want to achieve reasonably predictable profits using DBAs then they will need a sufficient number of cases funded by contingency fees to generate a type of portfolio that spreads profits from profitable cases to other non-profitable cases.  Law firms that understand their clients’ markets and needs, as opposed to the traditional risk-averse firms, will prosper from these changes.

Insolvency Practitioners will have two years to watch how these changes unfold in the rest of the litigation market.  If DBAs are proved to be workable, and are widely used by litigants, then they are likely to be adopted by Insolvency Practitioners with larger claims once the exemption for CFAs in insolvency proceedings expires.  If DBAs are not workable, then Insolvency Practitioners like other claimants will need to be more considerate of claims they pursue under CFAs.  With the claimant being unable to recover its uplift from the losing side, this will be recoverable instead from damages awarded, which raises the possibility of the benefit to creditors being wiped out by the success fee.  It may be, therefore, that Insolvency Practitioners working under new style CFAs may look to limit the success fees payable depending on the ultimate benefit to creditors.

Banks and insurers that generally see a large number of claims issued against them are likely to benefit from impecunious claimants not being able to obtain conditional litigation funding to bring low-value claims or claims that have a low probability of success.

If you have any questions or would like more information please contact a member of our Banking & Finance team.

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.