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The civil litigation costs reforms

This guide is based on the law of England and Wales. It was last updated in May 2012.

A new Act passed on 1st May 2012 implements radical changes to civil actions brought on a "no win no fee" basis and a ban on the payment of referral fees relating to personal injury claims.

Tucked away in Part 2 of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (also known as the Justice Act) are provisions that will mean claimants who win their court case will have to pay their own lawyer's "success fee" and the premium for any after-the-event (ATE) insurance out of the compensation they are awarded.

The measure will implement one of the key recommendations made by Lord Justice Jackson in his January 2010 report on civil litigation funding.

At present, many civil actions (and the vast majority of personal injury claims) are brought on a "no win no fee" basis under a conditional fee agreement (CFA) with a lawyer, backed up by ATE insurance which covers the claimant against the risk of having to pay the defendant's legal costs if the claimant loses the case.

If the claimant wins, the defendant (or its insurers) must, in addition to the claimant's solicitor's basic costs, pay the lawyer's success fee and an enhanced ATE premium. But if the claimant loses the case, no ATE premium or success fee is payable and the ATE insurance will cover the claimant's liability to pay the defendant's legal costs. As a result, cases can be brought at no financial risk to the claimant.

Under sections 44 of the Act, however, recoverability in almost all civil litigation actions will be abolished and claimants will have to pay the success fee and premium themselves.

The exception will be ATE premiums relating to the cost of obtaining expert reports in clinical negligence cases. Section 44 enables the Lord Chancellor to make regulations allowing all or part of the premium in such cases to be recovered.

Section 44 also provides for a maximum limit on the level of success fee in certain types of claim. This will be based on a percentage of damages to be specified by the Lord Chancellor. According to the Ministry of Justice's March 2011 response paper (80-page / 1.05 MB PDF), the cap will apply to personal injury cases and will be set at 25%.

In addition, the "part 36" rules on settlement offers have been strengthened. Section 55 enables the court to make rules allowing it to order a defendant who refused to accept a claimant’s reasonable settlement offer which is subsequently not beaten at trial to pay the claimant an additional amount on top of the judgment figure.

The Act, which also includes controversial measures for reforming legal aid, was given royal assent on 1st May 2012, and will come into force on a date to be fixed by order of the Lord Chancellor or Secretary of State for Justice. In February 2012, the MoJ confirmed implementation will not take place before April 2013.

Damages-based agreements

Section 45 removes current restrictions on contingency fees (damages-based agreements or DBAs) in the courts of England and Wales

DBAs are another type of "no win no fee" arrangement where the lawyer's fee is related to the amount of damages awarded rather than the work done by the lawyer. If a claimant wins the case, the costs recovered in the normal way from the other side would be set off against the "DBA fee" due to the claimant's lawyer.

The section enables the Lord Chancellor to restrict the types of proceedings in which DBAs are available and court rules will provide how costs are to be assessed when a DBA-backed claimant wins their case.

In its March 2011 response paper, the MoJ indicated that, in personal injury cases, the amount lawyers could deduct from the damages would be capped at 25%.

Referral fees

Sections 56 to 61 of the Act implement the Government’s ban on referral fees, announced in September 2011.

Referral fees are payments made for the referral or introduction of potential clients. They are commonly paid by solicitors to claims management companies, but other parties in the litigation chain, such as car repairers, may also pay such fees.

The ban, however, will only apply to referrals to or from "regulated persons" (solicitors, barristers, claims management companies and persons authorised by the Financial Services Authority) of "prescribed legal business", which is defined as the provision of legal services to a client in relation to a claim or potential claim for personal injury or death.

Breaking the prohibition does not constitute an offence or give rise to an action for breach of statutory duty. It merely renders the contract to make or pay for the referral unenforceable. It is a defence for the regulated person to show the fee was paid for the provision of services or "for another reason" and not as a referral fee.

The ban, like other provisions in the Act, will come into force on a date to be specified by order of the Lord Chancellor or Secretary of State.

Other changes

Many of the other changes recommended by Lord Justice Jackson will be implemented by amendments to the court rules.

These include a 10% increase in "non-pecuniary" general damages for all claimants, such as damages awarded for pain, suffering and loss of amenity, and a system of "qualified one way costs shifting" (QOCS), which will mean that, in almost all cases, personal injury claimants who lose their action will not be liable to pay the defendant's legal costs.

But the MoJ has indicated that, in cases of "exceptional behaviour" (where the claimant has acted fraudulently, frivolously or unreasonably) and where the claimant is very wealthy, QOCS would not apply. The proposal has been criticised because claimants will not know for certain from the outset whether or not they bear the risk of meeting the defendant's costs if they lose.

At the moment, the Government is only proposing to introduce QOCS for personal injury cases including clinical negligence claims. The normal costs principle that the loser pays will continue to apply in other cases.

One consequence - not unwelcome to the MoJ - is that QOCS will drastically reduce the need for claimants to take out ATE insurance, which covers them against the risk of having to pay the defendant's costs. The March 2011 response paper commented: "When they do [take out ATE insurance], they will pay the premium themselves, which will encourage the market to set more reasonable premiums."

There will also be a new general rule that only reasonable and proportionate costs may be recovered from the losing party, taking into account the value, complexity and importance of the claim.

County Court actions

In February 2012, the MoJ published its final proposals for reforming County Court disputes following its March 2011 consultation, although no timetable has yet been announced for their implementation. 

The proposals include provisions that non-personal injury claims worth £100,000 or less will no longer be able to be heard in the High Court and so will come before the County Court (the current limit is £25,000).

In the County Court, the small claims limit will be raised from £5,000 to £10,000 with a view to increasing it again to £15,000 subject to evaluation. All small claims will be automatically referred to the Small Claims Mediation Service, though mediation will not be mandatory.

Following further evaluation, the Government plans to extend the fixed recoverable costs scheme currently used for low value road accident cases (worth up to £10,000) to RTAs worth up to £25,000 and eventually to employer and public liability personal injury cases (see: Low value road traffic accident personal injury claims).

It also intends to modernise and streamline the County Court system by introducing a single county court. This will enable all claims to be handled electronically at modern centralised business centres, and to then be allocated across neighbouring courts according to demand. 

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