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» Annex A - List of Respondents
The consultation paper 'Conditional Fees: Sharing the Risks of Litigation' was published on 23 September 1999. It invited comment on proposals about the practical operation of measures included in the Access to Justice Act 1999 to meet the Government's objectives of making justice affordable to all, discouraging weak claims and encouraging early settlement. The provisions in the Act were designed to:
make sure that damages awarded to people winning cases were not significantly reduced by having:
to pay their solicitors an uplift in the normal fee under a conditional fee agreement for the risk of not being paid if the case was lost or having him or herself to meet disbursements; or
meet the cost of insurance taken out to cover their risk in legal costs;
make the use of conditional fee agreements and insurance suitable for defendants or those who are not claiming money, or only modest sums, by making the costs involved recoverable from the losing party;
enable membership organisations, such as trade unions which provide legal services to members and their families, to recover the self-insurance element of their costs; and
enable:
regulations to be made covering the operation of conditional fee agreements and membership schemes; and
rules of court and practice directions to be made governing the recovery of the uplift under a conditional fee agreement and any insurance costs.
The consultation period closed on 26 November 1999. Ninety one responses were received. They included responses from consumer groups, the Civil Justice Council, the Association of District Judges, the Senior Costs Judge, the legal professional bodies (including those with a specialist interest in conditional fees), the trade unions and their legal representatives, individual judges, practitioners and the insurance industry.
Having considered the responses, this report summarises the views expressed by respondents to the issues raised in the consultation paper and sets out the Government's conclusions on
the scheme of regulation required for conditional fee agreements and membership schemes; and
its suggestions in respect of rules of court to govern the recovery of the uplift under a conditional fee agreement and of insurance premiums.
A list of respondents is at Annex A.
Copies of this report and the consultation paper can be obtained by writing to:
Copies may also be requested by telephoning 0171-210 8774.
The introduction of conditional fees in 1995 and their extension in 1998 to all civil non-family proceedings has enabled many thousands of people to bring claims which previously they could not have afforded to do. In April 2000, the Government will introduce new measures to make the costs and risks of pursuing good claims even more affordable. Improvements are being introduced to make conditional fees and after the event insurance even more effective as a means of achieving access to justice, while changes in relation to membership schemes run by organisations such as trade unions will ensure that they are not prejudiced by the new arrangements.
A major barrier to justice for prospective litigants has always been the risk of having to pay the other side's costs as well as their own if they lose the case. The growth in conditional fees agreements and the market in after the event insurance to cover the risk of legal costs have gone a long way towards removing that barrier. However, the uplift in fees that lawyers usually charge for accepting the risk of not being paid if the case was lost, and the cost of insurance, have not been recoverable from the losing opponent. This has meant that:
the amount of damages recovered has been reduced because the claimant has had to meet these costs from the money recovered;
it has inhibited people using conditional fees and insurance where no damages are claimed or the claim is too small to justify the cost of a success fee or insurance policy.
Under the changes that are being made the uplift in fees and insurance costs will be recoverable. This will not only mean that someone claiming money will keep more of any damages that are recovered, but also that it will be easier to bring a case which does not involve a claim for money and it will make conditional fee agreements and after the event insurance suitable for defendants.
The ability of membership organisations to recover the self-insurance element from a losing opponent will allow them to reinvest the costs they recover in providing better legal services for members and their families.
These new arrangements will not encourage the taking on of weak cases. On the contrary, prospective litigants will have to convince their lawyer and insurer that their case is strong enough to justify the lawyer and/or the insurer taking the risk.
The arrangements will not operate harshly on opponents. If a successful defence is staged the claimant will inevitably be insured against having to meet the opponent's costs. In contrast, an opponent facing a claimant who has legal aid has little chance of getting any money back because the claimant has costs protection.
Nor will the arrangements discourage settlement. Where it is appropriate to settle, it will remain in the opponent's interests to do so quickly in order to avoid having to meet the claimants escalating legal fees as well as any success fee and insurance premium that is recoverable.
The Government's policy on the recoverability is to ensure that the expense of shifting all or part of the risk in costs, whether to the solicitor under a conditional fee agreement or an insurer under an insurance policy, are usually met by the losing party and not out of damages or the pocket of the winner. The Government recognises that where people have to sue by borrowing money from commercial organisations to meet upfront costs of running their own case, there will likely be a charge for setting up the facility and interest charges on the money borrowed. It also recognises that included in some success fees charged by lawyers under a conditional fee agreement there is an element to compensate the lawyer for not being paid on account from time to time throughout the case. On balance, the Government does not believe that those costs of borrowing should be recoverable whether as part of the success fee or a credit facility related to an after the event insurance policy. In its view, recovering borrowing costs of that kind could not be justified unless all borrowing costs were recoverable. That would raise not just questions of principle, but also questions of technical complexity. For example, logic would suggest that where a party has to realise savings to pay legal costs he or she should be able to recover lost interest or other income that would have flowed from them.
• Regulations
In the light of responses to the consultation paper, the Government will introduce new regulations for conditional fee agreements and membership schemes through secondary legislation. More details are contained in the following pages, but in summary these will:
specify that conditional fee agreements with success fees can be used in all civil non-family proceedings;
set the maximum level of the success fee at 100% of the solicitor's normal costs except in certain specialised cases;
require reasons for the level of the success fee to be included in the conditional fee agreement;
prescribe the information that the client should receive from the legal representative both in writing and orally;
make provision for the Lord Chancellor to approve membership organisations as bodies eligible to recover their self-insurance costs in successful cases;
set out the maximum amount recoverable for the self-insurance element by membership organisations.
• Rules of Court
The Access to Justice Act places the recovery of the success fee, any insurance premium and the self-insurance costs of a membership organisation within the courts discretion when it is considering the question of costs, subject to rules of court. These rules of court, subject to the Lord Chancellor's agreement, will be made by the Civil Procedure Rules Committee and together with any supporting practice directions and pre-action protocols will provide detailed guidance to costs judges for the assessment of the costs involved. The Government's views on what provisions are needed are explained in some detail in the following pages, but in summary, it is suggested that following need to be covered:
the opponent's need for early notice that a claim is being supported by a conditional fee agreement bearing a success fee, that there is an insurance policy or that the case is being taken under a membership scheme;
sanctions for non-disclosure if the opponent has been prejudiced;
when there are court proceedings, the court's need for similar notification;
rules to enable the losing opponent to challenge the level of the success fee on final assessment;
on final assessment, the court's need for details of the way a success fee has been calculated, the cover provided by an insurance policy and its price, and how the self-insurance element in a case brought under a membership scheme has been calculated;
the mechanism for assessment and recovery of costs in cases which settle pre-action to avoid proceedings being issued with the sole aim of recovering costs; and
where there is a dispute over an insurance premium rules to enable the paying party to challenge it at final assessment by demonstrating against relevant criteria that the choice of insurance cover was unreasonable and generated excessive costs.
• What should be recoverable?
In the Government's view, only that element of the success fee which represents the risk the lawyer is taking of not being paid and/or having him or herself to pay disbursements if the case is lost should be recoverable. Other elements, such as the cost of foregoing payments on account should not be (see paragraph 14 above).
• Disclosure to opponent.
The opponent should be notified where a case is being supported by a conditional fee agreement which attracts a success fee, but notification should be limited to those basic facts. Notification should take place upon intimation to the opponent that a claim is being pursued or within 7 days of entering into the conditional fee agreement (if later). There should be no requirement to inform the opponent where the conditional fee agreement attracts no success fee (as in Thai Trading style cases).
Explanation of the policy:
The opponent should receive notification of his potential liabilities at a sufficiently early stage, but the requirement should not extend to conditional fee agreements where no success fee is claimed.
In privately funded litigation there is no obligation on either party to disclose how a case is being funded, unlike legally aided cases where an obligation exists as a consequence of the likely impact of the operation of the costs rules upon the non legally aided party. Conditional fee agreements do not alter the liability for costs but does affect the quantum of those costs. The opponent's potential liability for costs is greater than in conventionally funded litigation and this knowledge may well influence the way in which the case is progressed. The opponent, in view of his potentially increased liability, should be informed at an appropriately early stage if the case is being operated under a conditional fee agreement. Providing full details about the terms of the conditional fee agreement could prejudice the client's case, so the notification should be limited to the fact that a conditional fee agreement is in existence, but not its terms.
Views expressed by respondents to the consultation paper:
Responses to the proposal ranged from the proposition that the opponent should be provided with full details of the way in which the case was funded including its terms, to the proposition that the opponent had no need to know how a private case was being funded. Respondents questioned the stage at which the information should be provided since there was little need for notification at a stage where a case may not proceed. Respondents also questioned whether it was necessary to inform one's opponent where the conditional fee agreement did not attract a success fee - given that in such cases there are no financial implications which are not present in a privately funded case. The majority of respondents broadly favoured relatively early notice being given that a case was progressing under a conditional fee agreement with a success fee, but that no further information should be given at that stage.
• Sanctions for non disclosure
Rules of court should provide that where the opponent has not been notified as suggested above, and the opponent has been prejudiced by the failure to notify, then the court on final assessment should have discretion to disallow all or part of the success fee. In using that discretion the court should be able to consider whether the disallowed element should be borne by the client, for instance where the omission was as a result of the client's instructions, or by the solicitor if failure to notify was his or her fault (see paragraph 38 below).
Explanation of the policy:
The court should use its discretion to differentiate between cases where the lack of notification was an oversight which was quickly remedied and was not prejudicial or was the result of a deliberate omission or negligence that was not quickly rectified. The court should also distinguish whether the inaction was the responsibility of the client or his solicitor, and act accordingly.
Views expressed by respondents to the consultation paper:
Views were invited as to what sanctions might be appropriate if a party failed to inform the other side of the existence of the conditional fee agreement. Responses ranged from no sanctions, since notification was unlikely to have altered the way in which the case progressed, to proposals that the party in default should not be able to recover any success fee from the unsuccessful party. However, many of those proposing the latter approach recognised that the responsibility for not informing the opponent may not be clear cut and that a flexible approach to sanctions was necessary. In particular, respondents recognised that an inflexible approach would unduly penalise those where notification resulted from oversight or the client's instructions or where the oversight, once put right, did not result in any prejudice to the other party.
• Disclosure of reasons for success fee to client
Regulations will require that written reasons for setting the success fee at a specific level should be provided to the client at the point where the solicitor agrees to take the case on a conditional fee agreement, subject to any requirements set out in regulations regarding client care. There will be no requirement in regulations for Counsel to produce written reasons for the client. The regulations will also require the agreement to distinguish elements of the success fee relating to the risk of the solicitor not being paid all or any of his costs or the risk of having himself to meet other costs if the case is lost.
Explanation of the policy:
When the terms of the conditional fee agreement are agreed the legal representative should produce written reasons for his or her client setting out the level of uplift charged. This requirement would provide the client with contemporary information on the factors which informed the solicitor's decision to set the level of the success fee, and would provide the court with information upon which to decide whether that part of the success fee that is to be recoverable is fair and reasonable if it is challenged on final assessment. It would not only reduce the negative effect of hindsight on the final assessment. Preparing a written risk assessment which not only specifies what part of the success fee relates to the solicitor's risk in costs, but which also reflects the position when the conditional fee agreement was entered into would assist the court in deciding whether the level set was appropriate given the facts at that time (see paragraphs 35 to 37 below), and would also go some way towards satisfying client care requirements.
Views expressed by respondents to the consultation paper:
In their responses, the majority of respondents favoured clients being given a written record of the reasons for the uplift being charged and further reasons being given in the event of any change to the level of the success fee (although they foresaw such change as unlikely in most cases). The Bar expressed concern that counsel should be under no obligation to provide such an account of their success fee. Ordinarily the relationship is between the barrister and the solicitor and the relationship is of a different nature than between solicitor and client. The solicitor will have already undertaken his own risk assessment before instructing counsel and will have agreed counsel's fee and uplift. Respondents also thought that it was vital that there should be a written contemporary record of reasons for the level of the success fee to reduce the scope for hindsight and argument if that level was challenged by the opposing party in an assessment (see paragraph 26 above).
• Disclosure to Court
Rules of court should provide that the court should be put on notice through information provided in the particulars of claim or defence filed with the court that the case is being funded with a conditional fee agreement which attracts a success fee. However, the court should not receive any other details unless the success fee is challenged on final assessment (see paragraph 35 below).
Explanation of the policy:
The court should be informed by way of the particulars of claim or defence that a case is being supported under a conditional fee agreement with a success fee. If such a conditional fee agreement is entered into after the claim or defence has been filed written notice should be provided to the court. Except on an assessment the court should not see information that would disclose the solicitor's views of the merits of the client's case thus avoiding any possible suggestion of prejudice to a fair trial as guaranteed by Article 6 of the European Convention on Human Rights.
So that the court can identify such a case easily the Rules Committee might wish to consider whether, at any future revision, the standard claim form which is used to commence proceedings should be amended in order to allow a claimant to indicate on the face of that form (perhaps by ticking a box) that costs in the case will include a success fee under a conditional fee agreement.
Views expressed by respondents to the consultation paper:
Responses to consultation were mixed, with a significant number of respondents favouring early notification of reasons for the level of uplift to the court, on the basis that this would encourage solicitors to produce written reasons at the outset. However, the majority of respondents, including the Law Society and the Bar Council, favoured informing the court of the reasons for the uplift only at final assessment, and then only if the success fee was challenged. The Government is conscious that rules requiring a claimant to disclose to the court the percentage uplift for the success fee and hence his or her solicitor's assessment of the merits of the claim could be considered incompatible with the fair trial provisions of Article 6 of the European Convention on Human Rights. The Government recognises that disclosure of the perceived merits of the case may not in fact influence the court in determining the case if it came to trial. However, there would still be the unfairness that parties who have agreed to success fees would be required to disclose the solicitors' assessment of the merits of their case whilst opponents who had not agreed success fees with their solicitors would not. However, there is no reason why the court should not be informed at an early stage that the case is being funded with a conditional fee agreement which will include a success fee.
• Disclosure to paying party
Rules of court should provide that for final assessment a paying party should be able to request a copy of the reasons in the opponent's conditional fee agreement for setting the success fee at a specific level when filing points of dispute if one of those points of dispute is the level of the success fee.
Explanation of the policy:
The Government considers that by the final assessment the claimant's solicitor's assessment of success is no longer sensitive. It also recognises that having information at that point about the basis on which the success fee was set initially may affect the paying party's decision to proceed with the challenge.
Views expressed by respondents to the consultation paper:
Although not addressed in the consultation paper, a number of respondents believed that the written explanation of the level of the success fee should be made available to the opponent, either with the bill of costs, or even earlier.
• Assessment and recovery of success fees.
Rules of court should provide that the losing opponent should be able to challenge the level of the success fee on final assessment on the basis that it was unreasonable given what the solicitor knew or ought reasonably to have known at the time the conditional fee agreement was entered into. If such a challenge is successful the client will not have to meet any shortfall, unless the solicitor can show there were exceptional circumstances which justified fixing a higher fee than it was reasonable to recover from the opponent.
Explanation of the policy:
The Government believes that the opponent should be able to challenge the risk element of the success fee as being unreasonable in the light of what their opponent's solicitor knew or ought reasonably to have known at the time the success fee was agreed with the opponent. If reasons for the level of the success fee have not been set out contemporaneously, as required by regulations, and cannot be produced to the court the court should have a discretion to disallow recovery of the success fee.
The Government recognises that a significant proportion of clients have little or no experience to enable them to judge whether a success fee is reasonable and has decided that protection from unreasonable success fees should be provided. Where an opponent is not for any reason required to pay all or any of the success fee the client will not have to meet the shortfall if the court reaches the view that the success fee was set at an unreasonable level, based on the information known to the solicitor at the time the conditional fee agreement was entered into unless the solicitor can show there were exceptional circumstances which justified fixing a higher fee than it was reasonable to recover from the opponent.
There may also be other circumstances where it would be unreasonable to expect the client to pay all or part of an unrecovered success fee, for example, where his or her solicitor had failed to notify the other party of the existence of the success fee (see paragraph 22 above).
Views expressed by respondents to the consultation paper:
The majority of respondents believed that the opponent should be allowed to challenge the level of the success fee if he or she considered it to be unreasonable. In the event of a successful challenge by the opponent some respondents argued that as the client had entered freely into an agreement with his or her lawyer he or she should be bound by the contract and should account to his solicitor for any shortfall. Others were concerned that the majority of clients had little understanding of the process of risk assessment and might be persuaded to agree unreasonable success fees and that some element of protection should be afforded to them.
• Fixed trial costs in the fast track
Rules of court should provide that a success fee for advocates' trial costs should be allowed in addition to fixed trial costs.
Explanation of the policy:
The amount of costs which may be awarded to an advocate for preparing for and appearing at trial in the fast track are fixed, depending on the value of the claim. Generally, the court may not award more or less than these figures, and it follows that a under the current rules a success fee cannot be claimed. This is likely to discourage the use of conditional fee agreements by advocates as they cannot charge a success fee to reflect their risk. The Government's policy is to increase access to the courts through the use of conditional fee agreements, including for advocacy services, so a success fee for advocates' trial costs should be available in addition to the fixed trial cost.
Views expressed by respondents to the consultation paper:
Many respondents to the consultation paper, including the Bar Council, expressed concerns that the absence of a provision allowing for recovery of a success fee in these circumstances would discourage advocates from providing services by way of conditional fee agreements.
• Summary assessments in the course of proceedings
Rules of court should provide that the success fee should only be recoverable at final assessment. Where summary assessments take place in the course of proceedings, the assessment of any success fee element should be postponed until the final assessment. An adjustment for the success fee element of the interim costs should take place at the final assessment.
Explanation of the policy:
This would simplify interim summary assessments. Furthermore, to make an assessment and a challenge to a success fee and insurance premium effective at that stage it would necessitate disclosure of the party's own solicitor's views of the merits of the case and, as argued earlier, that in the Government's view would be unfair (see paragraphs 20 and 29 above).
Views expressed by respondents to the consultation paper:
A small number of respondents commented on the role of interim assessment in cases where success fees were an issue. The Government's decision should meet concerns that the client's case will be prejudiced if his or her solicitors are obliged to reveal the level of the success fee at an interim assessment.
• Retrospectivity
Regulations will provide that the success fee should be recoverable only for causes of action in respect of which the first conditional fee agreement is signed after 1 April 2000.
Explanation of the policy:
Cases for which a conditional fee agreement was signed before 1 April should not be eligible for recovery. It would not be possible, where the initial conditional fee agreement was signed before 1 April, to cancel that agreement and enter into another agreement in order recover the success fee.
Views expressed by respondents to the consultation paper:
Responses to the consultation were mixed. Some respondents favoured an approach which enabled the success fee to be recovered in all cases where there was a conditional fee agreement in existence at the point at which the Act came into force. The Law Society favoured recoverability only in those cases where the cause of action arose after the relevant provisions come into effect and that legal aid should be retained for those personal injury cases where the cause of action arose before that date. The Bar and the ABI agreed with the proposal set out in the consultation paper that the success fee should be recoverable in respect of conditional fees agreements entered into or proceedings commenced after the relevant provisions come into effect. The Senior Costs Judge agreed that recoverability should not be retrospective, but should apply to cases which are entered into in proceedings commenced after a specified date.
The Government considered carefully what should be the effective date from which a paying party would be liable to pay the success fee. Making the success fee recoverable for all those conditional fee agreements in place on the day on which the relevant provisions come into force would place an undue burden on the unsuccessful opponent, who would be faced with a liability which was not anticipated and which might, in different circumstances, have acted as a factor in determining how the case was conducted. Making the success fee recoverable for that portion of the costs which related to the period after the relevant section came into effect would require the parties and the court to make additional detailed financial calculations and also introduce the possibility of rear loading of costs in the run up to the implementation date to ensure that the maximum possible success fee was allowed.
• Pre trial settlements
Rules of court should provide a mechanism by which costs can be assessed and recovered in those cases which settle before action.
Explanation of the policy:
A mechanism should be devised by which costs can be assessed and recovered in those cases which settle before action without the necessity for a full case to develop solely to resolve disputes over costs. A number of alternative mechanisms were suggested by respondents to the consultation, as mentioned in paragraphs 53 and 54 below.
Views expressed by respondents to the consultation paper:
The thrust of the changes in civil litigation is to encourage settlement and pre- action protocols in personal injury cases and the Civil Procedure Rules will increase the number of cases settling before the issue of proceedings. Nothing in the Act or the Civil Procedure Rules prevents a party from offering an amount which reflects a success fee, or the recipient of the offer from stipulating for it to be covered, but concern was expressed that the inability to compel the inclusion of the success fee element would result in parties being discouraged from accepting offers and instead proceeding to trial with the sole aim of recovering the success fee as part of the costs order.
There was much support amongst respondents for the proposal that a mechanism be devised not only in respect of success fees and/or insurance premiums but to cover other pre action assessment of costs. The majority proposed some variation on the mechanisms currently in existence, for example, the Bar Council favoured a variation on a Part 36 order (Offers to Settle and Payments into Court), while the Law Society favoured a simple and summary form of resolution rather like a Part 8 application (Alternative Procedure for Claims). The Association of British Insures proposed a new assessment procedure which ran in parallel with Part 36 rules.
The Senior Cost Judge agreed that there should be a mechanism. He suggested that CPR 36.2(4) might be modified to bring pre-action offers within the definition of a Part 36 offer or payment. This would allow a notice of acceptance of a pre-action offer to settle to fall within the definition of a document giving a right to detailed assessment.
• Disclosure to opponent.
Rules of court should require the opponent to be notified where insurance has been taken out by the client to cover the risk of legal costs but notification should be limited to this basic fact. Notification should take place upon intimation of claim or within 7 days of entering into the policy (if later).
Explanation of the policy:
In the Government's view the same policy considerations apply to disclosure of insurance as apply in respect of disclosure of the success fee (see paragraphs 18 to 20 above), namely that as it is a cost that the opponent is potentially liable to meet, he or she should know about it so that it can inform decisions on how his or her side of the case is to be conducted.
Views expressed by respondents to the consultation paper:
The proposal that the existence of insurance premium should be notified to the opponent attracted considerable support. There were concerns that, although an opponent should be aware of their potential liability for an insurance premium, information about the amount of premium could disclose views on the strength of the case. It was therefore proposed that while the other party should receive immediate notification of an insurance policy they should neither receive details of the premium nor the policy coverage.
While many respondents felt that a similar regime should apply as in respect of success fees in conditional fee agreements, some, for example the Bar Council, questioned why the existence of a policy should be disclosed at all since it was a disbursement. Currently, private clients insure against risk and do not disclose that information to their opponents. In addition, those employing before the event insurance will be under no compulsion to disclose the insurance protection. However, the majority supported the proposal, recognising that the recoverability of the after the event premium altered the paying party's liability for costs. Before the event insurance is not recoverable and as such has no direct impact on the paying party.
• Sanctions for non disclosure
Rules of court should provide that where the opponent is not notified as required above, and the opponent has been prejudiced by the failure to notify, then the court should have a discretion to disallow recovery of all or part of the premium. In using that discretion the court should be able to consider whether the disallowed element should be payable by the client, for instance where the omission was as a result of the client's instructions, or should fall to be paid by his or her solicitor if her or she was responsible for the failure.
Explanation of the policy:
The Government believes that the same policy considerations apply to the non disclosure of insurance as apply in respect of non disclosure of the success fee, namely that the court should use its discretion to differentiate between cases where the paying party has and has not been prejudiced by the failure to notify (see paragraphs 22 and 23 above).
Views expressed by respondents to the consultation paper:
Although not specifically covered in the consultation paper, a number of respondents commented on whether sanctions should apply if a party failed to inform the other side of the existence of an insurance policy. A flexible approach to sanctions was advocated with recovery of all or part of the premium being disallowed only if failure to notify was prejudicial to the opponent. This should not, of course, affect the client's liability for the premium to his or her insurer.
• Disclosure to court
Rules of court should provide that the Court should be put on notice through information provided in the particulars of claim or defence filed with the court that insurance has been taken out to cover a risk in costs. However, the court should not receive any other details unless the premium is challenged on final assessment.
Explanation of the policy:
In the Government's view the same policy considerations apply to disclosure of insurance as apply in respect of disclosure of the success fee (see paragraphs 28 to 30 above).
• Disclosure to paying party
Rules of court should provide that where on final assessment the paying party challenges having to pay the insurance premium in full or in part he or she should be able to request, and the court should be provided with, information about the level of the insurance premium, the extent of cover and the date when the policy was signed.
Explanation of the policy:
As with details of the reasons for setting the level of the success fee, at final assessment information about the insurance policy will no longer be sensitive and may affect the paying party's reasons to proceed with the challenge (see paragraphs 32 and 33 above).
The court will only need to be provided with information about the cost of the insurance premium, the extent of cover and the date when the policy was signed if the matter is raised on assessment. It is important that details about the premium and the extent of the cover are available to the court so that any assessment it is required to make about decisions on cover and premium are not distorted by hindsight.
Views expressed by respondents to the consultation paper:
As to the timing of supplying this information, responses to the consultation paper varied, with some respondents favouring early notification to the opponent and the court. The majority of respondents, including the Law Society and the Bar Council, saw no reason to inform the court until final assessment, and then only if the premium was challenged.
• Assessment and recovery of the insurance premium.
Rules of court should provide that on final assessment the losing opponent (but not the client) should be able to challenge the client's choice of insurance cover and the cost of insurance premium by demonstrating to the court that the choice was wholly unreasonable and generated excessive costs.
Explanation of the policy:
The losing opponent should be allowed to challenge the cost of the premium. The challenge is not to the insurers who provided the policy, but to client's decision to take the policy up. The challenge should only be successful if the opponent can demonstrate to the court that the choice of cover was wholly unreasonable and generated excessive costs. In that event the court would be able reduce the amount recoverable from the losing opponent.
Because of the many ways in which clients may insure to cover some or all of the risk of legal costs, including insurance in support of conditional fees, the assessing officer at a court cannot be expected to have detailed knowledge of the range of approaches available and a comprehensive knowledge of the insurance market. The onus must lie on the challenging party to demonstrate by way of evidence to the court that the choice of cover was wholly unreasonable and generated excessive costs. By "wholly unreasonable" and "excessive costs" the Government means a choice and cost that no reasonable person would think it appropriate respectively to make or pay. The purpose of setting so tough a test is to preclude the court having to decide between insurance arrangements which are marginally different or where the advantages and disadvantages of different products may be open to debate but not such that a clear decision that choosing one was more or less reasonable than choosing the other.
Issues which the court may wish to consider in so far as they are relevant in order to come to such a decision could include:
the type of claim, for example personal injury, medical negligence, commercial;
the anticipated complexity of the case at the time insurance was taken out, including to which "track" it is to be allocated if it gets to court;
the anticipated value of the claim at the time insurance was taken out;
where the insurance cover is purchased in support of a conditional fee agreement with a success fee, the percentage of the premium compared to the level of cover;
where the insurance cover is not purchased in support of a conditional fee agreement with a success fee how its cost compares with the likely costs of a similar case running under a success fee and supporting insurance cover;
the level of cover provided;
the extent of the cover provided, for example against the other side's costs or both sides' costs;
the availability and accessibility of alternative products to the one chosen;
the ability of the client to pay the premium - a client without the means to pay the premium would need to use an insurance product with no requirement to pay out monies at the start or during the lifetime of the proceedings;
the level of service provided to the client and the ease and convenience of the product from the client's perspective;
the certainty of ultimate cost to the client;
for higher cost insurance products, whether there is a rebate in the premium for early settlement; and
any other relevant issues raised by the challenging party, including whether the level of the success fee and the price of the premium taken together are unreasonable and constitute excessive costs.
The Government intends to monitor the development of the insurance market and the level of premiums for legal expenses insurance, so it will keep in close touch with the judiciary as to whether any problems are arising, including any growth in satellite litigation in respect of costs. The Government believes that the operation of the insurance market will discourage disproportionate increase in premiums, but if experience demonstrates that clients are buying unnecessarily expensive cover steps might be taken, for example, to limit the percentage of the premium that is recoverable, thus providing an increased incentive for the client not to take out unnecessarily expensive cover.
Views expressed by respondents to the consultation paper:
Respondents to the consultation paper raised a large number of issues about assessment and recovery of the insurance premium.
The consultation paper proposed that both the client and the opponent should be able to challenge the level of the insurance premium. The majority of respondents agreed that the opponent should be allowed to challenge having to pay all or part of the premium. The Law Society and the ABI believed that it would be inappropriate to make the terms of an insurance contract subject to challenge by the insured, because to do so would seriously undermine the development of the insurance market. The same bodies also believed that if the solicitor had acted negligently in recommending a policy then the remedy for the client would be a complaint or a negligence action rather than assessment of costs. In contrast, the Senior Costs Judge and the Bar felt that the client should be able to challenge the level of the premium, which could be treated as any other disbursement. Any solicitor who encouraged his client to accept an excessively high premium would be acting negligently and it was right that the client had the opportunity to challenge their responsibility for paying that premium. They also agreed, however, that a successful challenge would result in the solicitor, not the insurer, meeting the difference between the amount the client should have paid and the amount which was actually paid. The Government is of the view that allowing the insured to challenge the premium could lead to the insurers not being paid which might undermine the insurance market and in so doing deny access to justice to many thousands of people.
It was suggested that there were elements of the cost of the insurance that it would be inappropriate to ask the losing party to meet. However, the insurance premium is calculated with regard to the insurers' business costs in the same way as solicitors' hourly costs are calculated with regard to the business costs of their firms and have to be reflected in the success fee which under a conditional fee agreement is the premium that solicitors in effect charge for bearing the risk of not recovering their own costs. Trying to tease out and disallow certain elements of business overheads, whether in respect of insurance premiums or the success fee, would be impractical and unjustifiable in the Government's view.
It has also been suggested that the client should not enter into an insurance policy until all the steps under a pre action-protocol had been taken and a response received from the opponent, because this would prevent the premium being assessed at a point where the extent of the risk could be uncertain and hence over-estimated. Limiting the ability of a client to recover premiums only on insurance policies entered into at such a late stage in the proceedings would mean that in the vast majority of cases that settle early, no premium would be recoverable. That would seriously undermine the Government's policy. Without recovery it would often be uneconomic for claimants seeking smallish damages or making non-money claims and for defendants to take out insurance at the outset. That in the Government's view would impede access to justice unnecessarily.
• Retrospectivity
The insurance premium will be recoverable only for causes of action in respect of which the first policy was entered into after 1 April 2000.
Explanation of the policy:
Existing cases where the policy was signed before 1 April will not be eligible for recovery. It will not be possible to enter into another policy in order to take advantage of the new provisions for recovery of the premium.
Views expressed by respondents to the consultation paper:
Again, respondents to the consultation expressed a variety of views. Some felt that all premiums in existence at the commencement date should be recoverable, others including the Senior Costs Judge and the Law Society supported limiting recovery to premiums entered into after a specified date. As explained in respect of the success fee the Government's believes it is right to avoid retrospectivity in relation to recovery of the insurance premium.
• Legal representative to explore methods of funding with the client
Regulations will require the legal representative before entering a conditional fee agreement to explore with the client whether alternative methods of funding the litigation are available, including whether the client's liability for their costs (including the costs of another party) may be covered by insurance.
Explanation of the policy:
The Conditional Fees Agreement Regulations 1995 require the legal representative to draw the client's attention to the possible availability of legal aid, their liability for disbursements and between the parties costs, and the way in which an assessment of own client costs operates. From 1 April legal aid will no longer exist in its current form. Where cases can be taken employing a conditional fee agreement then funding help is unlikely to be attractive to the client or indeed justified as a call on limited public resources.
There is no requirement in the 1995 regulations for the lawyer to explain that alternatives to conditional fee agreements exist which may be more appropriate for funding their cases. While these alternatives include the possibility of Community Legal Service funding, this is not the only option - there may also be the option of funding through stand alone insurance cover, including through before the event cover already purchased by the client, or through employer, trade union or membership organisation schemes. The new regulations will employ a general requirement to inform the client about alternative funding methods.
In addition to ensuring the client is made aware of his potential liability for costs the new regulations will draw on the example of the Solicitors Client Care Code to require the legal representative to explain how a client's liability might be minimised through the use of insurance cover, including explaining whether the client's liability for costs (including the costs of the party) may be covered by insurance, the types of insurance products which are available, and why he or she thinks a particular type of product might be suitable to the client's needs. If the legal representative recommends a particular product, but also has an interest in doing so, for example because he or she will receive a commission or is a member of the insurers panel of solicitors, then this must also be disclosed to the client.
Views expressed by respondents to the consultation paper:
Responses to the questions on whether new regulations should specify that additional information should be provided to the client were mixed. A number of respondents including the Senior Costs Judge and the Law Society believed that the new Solicitors' Costs Information and Client Care Code 1999 covered the provision adequately, so that further regulation was unnecessary. Others such as the Bar, the Association of British Insurers and solicitors representing the trade unions favoured further and better details being provided to the client and that this be required in new Regulations. On balance, the Government favours the latter approach.
• Legal representative to explain the terms of a conditional fee agreement to the client
New regulations will require the legal representative to provide an oral explanation of the agreement in addition to providing written information
Explanation of the policy:
The regulations currently require the legal representative to bring the client's attention to certain matters and for the conditional fee agreement to take the form of a written agreement signed by the legal representative and client. There is no requirement for the legal representative to explain to the client how a conditional fee agreement operates. The Government believes it is important for the legal representative to explain the terms of the agreement so that their client is aware of his or her potential liabilities and the nature of the risk the legal representative is taking.
Views expressed by respondents to the consultation paper:
See paragraph 84 above.
•Litigation friends to fall within the term client
The term "client" in the new regulations will encompass litigation friends
Explanation of the policy:
The regulations will be amended, if necessary, to make it clear that litigation friends are covered within the term "client". It is important that children and patients should be able to use conditional fee agreements, and that the person who acts as their litigation friend does so on the same terms and is provided with the same information as any other client.
Views expressed by respondents to the consultation paper:
A small number of responses to consultation indicated concern that the regulations are insufficiently clear and that litigation friends might not fall within the term "client".
• Litigation friends and competent minors
Rules of court should allow, but not require, a litigation friend who is representing a competent minor to seek the court's prior approval to enter into a conditional fee agreement or an insurance policy.
Explanation of the policy:
A facility should be provided for a litigation friend to seek ex parte in advance the approval of the court of his intention to enter into a CFA or insurance policy on behalf of a competent minor.
Views expressed by respondents to the consultation paper:
The Bar suggested that such a facility should be available to avoid potential legal and practical problems in respect of agreements entered into by litigation friends of competent minors. Litigation friends of incompetent minors and patients receive this facility as a matter of course from the Court of Protection.
• Maximum level of the success fee
The maximum success fee should remain at 100% other than in the Commercial Court, the Admiralty Court and the Technology and Construction Court.
Explanation of the policy:
The Government has decided that the maximum success fee should remain at 100% for the time being, except for proceedings which would be brought in the Commercial Court, the Admiralty Court, and the Technology and Construction Courts. The complexity of the cases and the sophistication of the users of these forums are such that a limit on the success fee appears neither to be desirable nor necessary. The position will be kept under review.
Views expressed by respondents to the consultation paper:
The paper took the opportunity to ask whether the current limit of 100% for the success fee continued to be appropriate. Opinion amongst respondents was mixed. Some, including insurers and some solicitors firms, felt that no maximum was needed as assessment by the courts would weed out success fees set at an unreasonable level. The Senior Costs Judge shared this view. However, others believed, particularly in respect of personal injury cases, that the 100% limit should be retained to protect unworldly clients. While supporting this view, both the Law Society and the Bar believed that for proceedings which might be heard in the Commercial Court and the Technology and Construction Courts a limit of 100% was neither needed nor desirable. The same would also be true of some shipping cases in the Admiralty Court. Clients in proceedings which would be heard in these courts tended to be sophisticated users of litigation services who did not need the protection afforded by the 100% limit. A 100% limit might discourage their use of conditional fee agreements. In turn that could affect the ability of British lawyers to attract foreign business - something which the Government is eager to encourage.
• Prescribing membership organisations
Regulations will make provision for the Lord Chancellor to approve membership organisations as prescribed bodies for the purposes of section 30 of the Access to Justice Act.
Explanation of the policy:
The Access to Justice Act provides that regulations may prescribe bodies that can recover a sum towards the provision made to protect the member against the risk of having to meet an opponent's costs and their own disbursements. It also allows for regulations to prescribe the maximum amount that can be recovered in this way. In particular it provides that the way the recoverable sum is to be determined may be prescribed so that it may take into account the costs of commercial insurance. The provisions apply to bodies of a "prescribed description" which undertake to meet liabilities of members or other persons who are parties to proceedings. The Act says that regulations may prescribe as a description of such a body "one which is for the time being approved by the Lord Chancellor" or a prescribed person.
Initially, the Lord Chancellor intends to approve as prescribed bodies trade unions listed by the Certification Officer (Endnote 1.), but other organisations will also be able to apply for approval as prescribed bodies.
Rather than set down rigid criteria for prescription in regulations the Government believes that there should a flexible approach with each application for approval treated on its merits. Therefore, in deciding whether an organisation should be approved, the Lord Chancellor will take account of any relevant representations in its application for approval, but will be mindful, so far as it is relevant, of whether the organisation in question:
Exists to protect, defend represent and promote the interests of its members.
Has an exclusive range of benefits for members.
Offers litigation funding as one of those benefits and on a discretionary basis, at no additional charge.
Publishes annual accounts.
Invests its membership payment within the organisation for the benefit of the members and the organisation.
Covers all those deemed eligible by the organisation (not only members).
Views expressed by respondents to the consultation paper:
The consultation paper sought views on what factors should inform the Lord Chancellor in prescribing such bodies. Many respondents chose not to provide views on the issues raised in this section of the paper. Of those who did, views were polarised. The insurance industry questioned why membership organisations should be favoured in such a way, since to do so would be unfair competition for the insurance industry. The Senior Costs Judge favoured welfare organisations, while the Law Society believed that such organisations should be non-profit making. Trade Union responses made a number of suggestions, including that any prescribed organisation should exist to protect, defend represent and promote the interests of its members.
• Recovery of the self-insurance element
Rules of court should provide that the additional amount which the prescribed body can recover towards the self-insurance element should not exceed the likely cost to the member or other person of the premium of an insurance policy against the risk of having to pay the costs of the other parties to the proceedings. There should be similar provisions for disclosure in the rules as for success fees and insurance premiums.
Explanation of the policy:
The recoverable self-insurance element should not exceed the likely cost to the member or other person of the premium of an insurance policy against the risk of having to pay the costs of the other parties to the proceedings.
In considering the options for meeting the requirement to prescribe the way in which the self-insurance element should be determined, it was recognised that a simple fixed sum would not suffice given the range of cases undertaken and any linking of the level of the insurance premium to a notional success fee level would be irrelevant in cases not being pursued under a conditional fee agreement.
Views expressed by respondents to the consultation paper:
Very few respondents addressed the issue, but there were mixed views about how recovery of the self-insurance element should operate. The Law Society argued that the market was so complex that the mechanism and formula would not succeed and that in preference trade unions should be allowed to recover a notional percentage of the award or damages. However, they recognised that this appeared too close to a contingency fee. The Senior Costs judge suggested that insurers, trade unions and membership organisations should agree on the level of self-insurance premiums to be recovered, but in the absence of agreement the method proposed was acceptable. In general, the insurance industry argued that recovery of the self-insurance element should not be allowed.
The majority of responses came from the trade unions, who suggested that the sum should be calculated with regard to the market and premiums which corresponded to the way in which case was being funded. If challenged, the membership organisation would have to justify to the satisfaction of the court the self-insurance element being claimed.
• Provision of information by membership organisations
Membership organisations will be required by regulations to provide information to members taking advantage of the legal services they provide.
Explanation of the policy:
Although members are generally insulated from opponents' costs, the Government believes they need to know the basis on which the funding is provided and any liability they may have if they or their union decide they no longer wish to proceed with the case. The regulations relating to membership schemes will set out the requirements, and these will be broadly similar to relevant regulations governing conditional fee agreements.
Views expressed by respondents to the consultation paper:
Although not addressed in the paper, the Trade Unions questioned whether, given members extremely limited liability for costs, it was necessary for the Unions to comply fully with the regulations on providing information.
The Certification Officer exercises certain statutory functions in respect of trade unions under the Trade Union and Labour Relations (Consolidation) Act 1992, including maintaining a list of, and determining the independence of , trade unions.