Reed Smith Client Alert

Authors: Carolyn E. Pepper

Billed as the most wide-ranging changes to the civil litigation system since 1999, radical reforms following a review by Lord Justice Jackson will come into effect in England and Wales on 1st April 2013.

Background As a result of concerns that in some areas of civil litigation costs are disproportionate and impede access to justice, Lord Justice Jackson began a review of the rules and principles governing the costs of civil litigation in January 2009. His objective was to make recommendations “in order to promote access to justice at proportionate cost”. His proposals were published in January 2010 and the majority will be implemented commencing 1st April 2013.

It is worth noting that although these changes apply only to High Court litigation, in our experience, these changes may filter their way through to arbitration a few years down the line.

What are the main changes? The main changes can be broken down into three areas:

  • Changes to how litigation is conducted;
  • Changes to how litigation costs are dealt with; and
  • Changes to litigation funding

Changes to how litigation is conducted The most significant changes are:

Disclosure There will be a new requirement in larger cases for the parties to try to agree an approach for sharing documents which are relevant to the case. The parties must file a disclosure report which will set out what relevant documents the parties have and where they are located and give an estimate of the costs of disclosure. They must then try to agree an approach to exchange of documents which should be just and proportionate.

Part 36 Settlement Offers Part 36 offers are offers to settle a case by either party, backed up by the possibility of costs sanctions if the other party refuses the offer and at trial fails to beat the offer made. The sanctions can be very serious for successful claimants in particular. This is because claimants who refuse Part 36 offers but who do not then beat the Part 36 offer at trial are at risk of not having their costs paid by the defendant from the date the Part 36 offer was made (in the absence of an unreasonable refusal to accept a Part 36 offer, a winning claimant is entitled to look to the defendant to pay its costs).

To date, if a defendant refused a claimant’s Part 36 offer and failed to beat it, the sanction was indemnity costs i.e. paying a greater percentage of the claimant’s legal costs than they would usually be ordered to pay. The new regime seeks to impose an additional penalty on defendants who refuse Part 36 offers. From 1st April 2013, defendants who have refused a Part 36 offer and fail to beat it may have to pay an additional 10% of the damages awarded for money claims (or an additional 10% of costs for non-monetary claims) for awards of up to £500,000. Awards in excess of £500,000 will attract a 10% penalty on the first £500,000 and a 5% penalty on the next £500,000 to £1,000,000. The maximum penalty will be £75,000.

Witness Statements The courts will be able to give directions identifying or limiting the issues which can be dealt with in witness statements and limiting the length and format of those statements. They can also decide which witnesses can give evidence.

Expert Evidence Those who want to adduce expert evidence must make an application to do so, provide an estimate of the costs of the expert and give details of the relevant field of expertise with their application. As with other witnesses, the court can specify the issues which the expert can address.

Changes to how litigation costs are dealt with The changes below are the most significant commercial changes in this area:

Judicial Costs Management All significant cases except:

  1. claims in the Admiralty and Commercial Courts;
  2. claims in the Chancery, Technology and Construction and Mercantile Courts which exceed £2 million; and
  3. claims where fixed or scale costs apply or the court has ordered otherwise

will be subject to new judicial costs management powers from 1st April 2013. This means that the parties must file budgets for the case at a relatively early stage. Failure to do so is likely to mean that the defaulting party will only be able to recover court fees and not any of their other legal costs. Once budgets have been filed, the court may make costs management orders revising and/or approving the budgets. If a costs management order is made, the court can control the budget going forward and may restrict the costs awarded at the end of the case to the approved budget. It is envisaged that a party who wishes to increase a budget will need to make an application to the court and will need to have good reasons for the changes.

Proportionality There will now be greater emphasis on proportionality of costs. Costs will need to be proportionate taking into account factors such as the value and complexity of the claim.

Changes to Litigation Funding Up until now conditional fee agreements (“CFAs”) were the most common form of success-based fee agreements used in England and Wales. CFAs are agreements between a client and a solicitor that the solicitor may charge a reduced (or no) fee, with a ‘bonus’ element in the event that the client is successful in the case (‘success’ being defined in the CFA). The success fee can be up to 100% of any base costs, i.e. the lawyer can charge a success fee of up to double the lawyer’s normal fees. CFAs are frequently backed up by an insurance policy so that there is cover available if the client loses and has to pay the other side’s costs. In relation to CFAs and insurance entered into prior to 1st April 2013, assuming that the claim is successful, the losing party usually pays the winning party’s legal costs including any success fee under the CFA and the insurance premium.

CFAs after 1st April 2013 Neither the success fee element of a CFA nor the insurance premium will be recoverable from the losing party in most cases for CFAs entered into after 1st April 2013. The client will have to bear these costs himself, which will make CFAs a costlier funding option.

Damages-Based Agreements (DBAs) From 1st April 2013, DBAs are being introduced. Like CFAs, DBAs allow the solicitor to charge a success fee in the event that a case is successful (as defined in the agreement) and damages are recovered from the other party. However, instead of the lawyer charging an uplift in fees, the client can agree to give his lawyer a share of his damages, capped at 50% of the damages recovered for commercial matters (to include VAT and any Counsel’s fees). At present, DBAs can only be used by claimants but this may change. The success fee element will not be recoverable from the defendant and so liability to pay it will lie solely with the claimant client.

Although DBAs will be introduced on 1st April 2013, there are a number of key issues which still need to be ironed out. For instance, many commentators believe that the relevant Regulations as currently drafted only permit DBAs to be used for no-win, no-fee arrangements and do not allow ‘hybrid’ no-win, low-fee arrangements which are likely to be of most interest in commercial cases. The Regulations are also less than clear in other respects and we anticipate many law firms will adopt a cautious approach to DBAs until these issues are resolved.

Conclusion There are still a number of uncertainties about aspects of the Jackson Reforms which need to be resolved, in particular in respect of DBAs. However, the changes (and in particular those relating to costs management) are likely to have a significant effect on how litigation is conducted going forward.

Client Alert 13-081