Evidence submitted by Guardian Newspapers
1. EXECUTIVE
SUMMARY AND
INTRODUCTION
1.1 The Conditional Fee Agreement (CFA)
system is inherently flawed in its application to defamation and
other cases that engage Article 10 of the Convention for the Protection
of Human Rights ("publication cases").
1.2 This submission will begin with an overview
of the social policy considerations in relation to CFAs and a
basic explanation of how they operate in publication cases.
1.3 The entitlement to success fees in CFA
cases ignores important Article 10 considerations and fails to
distinguish publication cases from other types of CFA litigation.
1.4 The courts have identified problems
with the CFA system in a number of cases such as Campbell v
MGN Ltd (2005)[20],
Callery v Gray (2002)[21]
and Musa King v Telegraph Group Ltd (2004)[22].
1.5 A legislative solution should be considered
to reform the present system.
2. THE SOCIAL
POLICY CONSIDERATIONS
2.1 As Lord Hoffmann noted in Campbell[23]
Parliament's intention, in the Access to Justice Act 1999, was
to impose the cost of all conditional fee litigation (successful
and unsuccessful) on unsuccessful defendants. The underlying principle
is that the losing publisher in one case should pay a success
fee to the winning claimant lawyer firm so that it can take on
other cases against the losing publisher defendant and
other publishers in the future.
2.2 The purpose of the legislation is to
provide access to justice for people who would not otherwise be
able to afford to sue. There is no suggestion in the legislation
or in the judgments of the House of Lords in Campbell and
Callery v Gray that CFAs are intended to punish media defendants
for getting things wrong and although this populist view prevails
it has no part to play in a debate about CFAs.
2.3 Our objection to the CFA system is not
intended as an attack on the principle of access to justice. Similarly,
we are in favour of equality of arms in litigation. The reforms
proposed in this submission are not intended to create anything
other than a level playing field for both defendants and claimants.
3. CFAS IN
OPERATION
3.1 The usual rule in litigation is that
the loser pays the other party's costs as well as his own. There
is therefore a built-in risk to each party involved in litigation.
3.2 CFAs allow claimant lawyers to enter
into arrangements under which claimants will not have to pay their
own lawyers' costs if they win the case because these will be
recovered from the defendant.[24]
Part of the risk in litigation therefore transfers from the claimant
to his lawyers and the defendant.
3.3 The claimant remains liable to pay the
defendant's costs if he loses and may (but is not required to)
take out insurance called "after the event" (ATE) insurance
against such liability. The insurance premium is a "funding
arrangement" which is recoverable from the defendant[25].
If the claimant takes out ATE insurance he does not bear any risk
in the litigation[26].
The risk passes to his lawyer and the ATE insurer.
3.4 Often insurance is taken out even before
a media defendant has had an opportunity to respond to an initial
letter of claim. In May this year the Guardian settled
a claim brought against it by an army officer within seven days
of receiving a letter before action. The newspaper paid substantial
damages, published an apology and agreed to pay costs. Despite
the fact that a settlement was reached promptly and the newspaper
did not attempt to defend the claim, the claimant's lawyers sought
costs of over £9,000, including a 25% success fee and an
insurance premium of £2,400. The claimant's lawyers took
out insurance notwithstanding that the newspaper had recently
been ordered to pay damages of £58,500 in connection with
an identical claim about the same article brought by another army
officer.[27]
In such circumstances it is difficult to understand what risk
could have been identified in the second case, which justified
a success fee, and what justification there can have been for
taking out insurance. The newspaper had no appetite to enter into
litigation about the costs given that the claimant's lawyer would
also have been entitled to a success fee in relation to the costs
assessment, so it settled the costs claim for £8,500.
3.5 In CFA cases insurance premiums can
be "deferred". This means that they will never fall
to be paid by the claimant or his lawyers. They only become payable
by the defendant if it loses the case.
3.6 In return for taking on the litigation
under a CFA the claimant's lawyers are entitled to charge a "success
fee". "Success" means any positive outcome (not
just a win at a trial) and includes settlement of the case on
any terms. The success fee is calculated as a percentage of the
claimant lawyers' costs charged on an hourly basis and is paid
by the defendant if the claimant is successful.
3.7 As the claimant's liability to pay the
success fee is theoretical he has no interest in the level at
which this is set.
3.8 As the claimant is not paying the ("deferred")
insurance premium he has no interest in how much the premium costs.
There is no limit to the cost of the insurance premium.3.9 The
maximum success fee allowed by the regulations is set at 100%[28].
3.10 At present claimant lawyers charge
a success fee of between 95% and 100% if a case goes to trial
and this applies retrospectively to the whole case[29]
3.11 Publication cases are very expensive.
Costs are commonly more than ten times the amount of damages.
In 2001 the Guardian paid damages of £10,000 in settlement
of a libel case that settled at an early stage following an application
for summary disposal. The claimant's lawyers claimed costs of
£135,000. In 2002 the Observer newspaper made an Offer
of Amends in a case involving an allegation of terrorism: the
newspaper paid damages of only £5,000; the claimant's lawyers
claimed costs of £61,000.
3.12 The fact that claimant lawyers' base
(hourly) rates are very high contributes to the high expense of
publication cases. Carter Ruck's base (hourly) rates are £400
per hour and Schillings are closer to £500 per hour. When
a success fee of 100% is applied the media defendant faces claimant
lawyer fees of between £800-£1000 per hour, throughout
the case, in addition to its own costs.3.13 It is worth noting
that defendants would not contemplate paying their own media lawyers
(even in city firms) these sorts of rates for publication cases.
4. PARLIAMENT'S
FAILURE TO
CONSIDER THE
EFFECT OF
CFAS ON
MEDIA ORGANISATIONS
4.1 A system whereby media defendants are
required to fund successful and unsuccessful litigation against
themselves is questionable in circumstances where the funding
of very expensive cases is borne by few media defendant organisations.
The situation is revealed to be even more inequitable when one
considers that there are only a handful of claimant firms, notably:
Carter Ruck, Schillings, David Price, Russell Jones & Walker
and Simons Muirhead and Burton, benefiting from the system. The
CFA system fails the test of necessity and proportionality as
required by Article 10.
4.2 The effect of CFAs in publication cases
has been to eliminate market forces from the field of claimant
libel work and from the insurance sector insofar as it relates
to ATE insurance. While claimant firms compete with each other
for claimants they do not need to compete on price because their
CFA clients will, in reality, never have to pay their fees or
the "deferred" ATE insurance premium. These items only
ever fall to be paid by the defendant.
4.3 In some cases a commercial settlement
has been agreed after taking into account the success fees and
insurance premiums likely to be claimed by the claimant's lawyers
in the event that the defence does not succeed.[30]
4.4 Media defendants do not usually win
libel actions. Claimant lawyers' losses are few and far between.[31]
If individual claimant firms are not losing cases then the success
fee ceases to compensate them for cases they lose and becomes
a windfall profit.
4.5 Although ATE insurance is seen by the
courts as a panacea, because it may enable a media defendant to
recover costs if he wins against an impecunious defendant[32]
the insurance is, in reality, of limited benefit to media defendants
who hardly ever win cases against claimant lawyers. Moreover,
as discussed above, the premiums themselves are so high as to
have the potential to make litigation prohibitive for media defendants
and they are punitive when cases settle at an early stage and
the defendant has indicated no intention to defend.[33]
5. WHY ARE
PUBLICATION CASES
ANY DIFFERENT?
5.1 Media defendants are often told that
CFAs are working in other areas; in particular the success of
CFAs in road traffic accident cases is trumpeted. But media cases
have distinguishing features—Lord Hoffmann noted two of
them:
(1) Media cases, unlike road traffic
accident cases, engage a human right:
There is no human right to drive a vehicle upon
the road free of the cost of litigation arising from road accidents.
But there is a human right to free expression with which the imposition
of an excessive cost burden may interfere.[34]
(2) In road traffic accident cases
a large number of low value, low cost claims are funded by a very
large sector of the population (effectively the public) through
insurance premiums. By contrast, in media cases the burden of
extremely high costs is spread across a small number of businesses
and individual defendants cannot pass the cost to the public:
There are substantial differences between the
costs in personal injury litigation . . . and costs in defamation
proceedings. In personal injury litigation one is for the most
part dealing with very large numbers of small claims. The liability
insurers are able to pass these costs on to their road user customers.
Their own solvency is not threatened . . . [35]
In defamation cases on the other hand . . . [o]ne
is dealing with a very small number of claims to payment of relatively
large sums of costs which some publishers may be strong enough
to absorb or insure against but which can have serious effects
upon their financial position. The publishers do not have the
same negotiating strength as the liability insurers because there
are few assessments to be contested and disputing them involves
considerable additional costs.[36]
6. PROBLEMS WITH
THE CFA SYSTEM
THAT HAVE
TROUBLED THE
JUDICIARY
6.1 The Ransom Factor: this is the
enormous incentive for a media defendant to buy out of litigation
when faced with the prospect of bearing not only its own costs
and those of the claimant's lawyer if it loses at trial, but,
in addition an uplift of 100% on the claimant's lawyers' costs.
In Campbell Lord Hoffmann cited,[37]
by way of example, the Turcu case[38]
which featured a claimant who had commenced proceedings using
a false identity, had lied about his age to the immigration authorities
and had spent at least three periods of imprisonment in Romania.
The claimant did not appear at the trial and did not even give
a witness statement. His solicitor told the court at the beginning
of the trial that he was out of touch with the claimant and could
only proceed on the basis of past instructions (although telephone
contact was resumed at some time during the first week of the
trial). The claimant sought a large award of damages against the
News of the World. Eady J dismissed the case commenting
at paragraphs 6 and 7 of his judgment:
[The claimant] is able to pursue his claim purely
because [his lawyer] has been prepared to act on his behalf on
the basis of a conditional fee agreement. This means, of course,
that significant costs can be run up for the defendant without
any prospect of recovery if they are successful, since one of
the matters on which [his lawyer] does apparently have instructions
is that his client is without funds. On the other hand, if a defendant
is unsuccessful it may be ordered to pay, quite apart from any
damages, the cost of the claimant's solicitors including a substantial
mark-up in respect of a success fee. The defendant's position
is thus wholly unenviable.
Faced with these circumstances there must be
a significant temptation to media defendants to pay up something,
to be rid of litigation for purely commercial reasons and without
regard to the true merits of any pleaded defence. This is the
so-called "chilling effect" or "ransom factor"
inherent in the conditional fee system . . . This is a situation
which could not have arisen in the past and is very much a modern
development.
6.2 Chilling Effect: it was recognised
by the Brooke LJ in the Musa King case that CFAs, inevitably,
have an effect on the information media organisations are willing
to risk putting into the public domain:
What is in issue in this case . . . is the appropriateness
of arrangements whereby a defendant publisher will be required
to pay up to twice the reasonable and proportionate costs of the
claimant if he loses or concedes liability . . . The obvious unfairness
of such a system is bound to have the chilling effect on a newspaper
exercising its right to freedom of expression . . . and to lead
to the danger of self-imposed restraints on publication.[39]
6.3 Blackmailing Effect: in Campbell
Lord Hoffmann, elaborating on the themes explored in Turcu
and Musa King talked about the "blackmailing effect"
of CFA litigation in media cases which he suggested arises from
two factors:
First the use of CFAs by impecunious claimants
who do not take out ATE insurance . . . The second factor is the
conduct of the case by the claimant's solicitors in a way which
runs up substantial costs but requires the defendant to do so
as well. Faced with the free-spending claimant's solicitor and
being at risk not only as to liability but also to twice the claimant's
costs the defendant is faced with an arms race which makes it
particularly unfair for the claimant afterwards to justify his
conduct of litigation on the ground that the defendant's own costs
were equally high.[40]
7. OTHER PROBLEMS
7.1 Very few cases get to court—the
vast majority settle at an early stage. In many cases Guardian
Newspapers offers a correction or apology at the outset (without
the need for the claimant to issue proceedings) and we suggest
that in circumstances, where the defendant has evinced no intention
to defend the claim, there can be no justification for the imposition
of either a success fee or an ATE insurance premium as the claimant
has secured a positive outcome and the only remaining issues between
the parties are the wording of the correction or apology, damages
(if appropriate) and costs.[41]
7.2 In many libel cases media defendants
use the Offer of Amends procedure[42]
under which the defendant is able, at any time up to the date
for service of the defence, to call a halt to the litigation (or
prevent proceedings being issued).[43]
An offer of amends is a written offer to:
(a) make a suitable correction of the statement
complained of and a sufficient apology to the claimant;
(b) publish the correction and apology in
a manner that is reasonable and practicable in the circumstances;
and
(c) pay the complainant such compensation
(if any) and such costs as may be agreed or determined to be payable.[44]
7.3 The Offer of Amends procedure is not
cost-effective in CFA cases where claimant lawyers seek to recover
substantial success fees and hefty insurance premiums as if the
action were being defended. It is especially difficult to understand
the justification for success fees and insurance premiums in Offer
of Amends cases as liability is effectively admitted by the defendant.
The only issues between the parties are; the wording of an apology,
the level of damages and costs, all of which fall to be resolved
by the court if the parties fail to reach agreement. For what
risk then does the success fee compensate the claimant lawyer
in such cases? And what risk is the insurer insuring against?
7.4 It is worth remembering that there are
a number of defences available to defendants in media cases. In
the case of libel the 3 main defences are:
— Justification—that the allegations
complained of are true
— Reynolds qualified privilege—put
simply this is the right to get things wrong provided that certain
conditions prevail at the time the article is published.
We submit that is neither necessary nor desirable
that a CFA system should operate so as to make the threat of success
fees and ATE insurance premiums in publications cases so severe
as to provide a serious disincentive for publishers to avail themselves
of defences created by the courts in order to protect freedom
of expression.
8. JUDICIAL SOLUTIONS
8.1 In Musa King the Court of Appeal
suggested a cost[en rule]capping regime (alongside assessment
of costs at the end of the case and wasted costs orders) as a
solution to the problems posed by CFAs.
The only way to square the circle is to say that
when making any cost capping order the court should prescribe
a total amount of recoverable costs which will be inclusive, so
far as a CFA funded party is concerned, of any additional liability.
It cannot be just to submit defendants in these cases, where there
freedom of expression is at stake, to a costs regime where the
costs they will have to pay if they lose are neither reasonable
nor proportionate and they have no reasonable prospect of recovering
their reasonable and proportionate costs if they win.[45]
8.2 In Campbell Lord Hoffmann endorsed
this approach but also acknowledged that cost capping is not a
complete answer to the problems posed by CFAs. Cost capping does
not deal with the problem of a newspaper faced with substantial
and irrecoverable costs and nor does it deal with "the threat
of having to pay the claimant's costs at a level twice the amount
which would be reasonable and proportionate".[46]
He concluded that `finding ways of moderating the costs of defamation
cases would . . . be in the best interests of all concerned .
. . In the end . . . it may be that a legislative solution will
be needed to comply with Article 10'.[47]
8.3 The reluctance of the judiciary to interfere
with a system created by Parliament is understandable. One has
to have some sympathy with the extremely short judgment of Baroness
Hale in Campbell. It is a separate question whether a legislative
solution may be needed to comply with Article 10 . . . this is
a complex issue involving a delicate balance between competing
rights upon which I would prefer not to express my opinion.[48]
8.4 There are no signs that a legislative
solution is on its way[49]
and we suggest that a legislative solution should be considered
as a matter of urgency.
9. PROPOSED SOLUTIONS
9.1 It is worth noting (as Lord Hope did
in Campbell[50])
that a different legislative solution to the problem of access
to justice has been found for Scotland where a "speculative
fee", payable if the claimant is successful, is not recoverable
from the losing party. This begs the question of why a different
legislative solution could not be adopted in England so as to
exclude success fees in media cases.
9.2 A legislative solution would not involve
amending primary legislation. Section 58 of the Courts and Legal
Services Act 1990, as amended by section 27 of the Access to Justice
Act 1999, confers on the Lord Chancellor the power to exclude
success fees in certain cases and we suggest that publication
cases should be excluded from the legislation.
9.3 We submit that the elimination of success
fees in defamation and other media cases would not be a barrier
to claimant lawyers taking on cases on a no-win no-fee basis.
If ATE insurance is available for a case then the claimant is
protected. Separately, we submit that it must be open to claimant
lawyers to insure their own businesses against the risk of losing
publication cases.
9.4 Whether or not a legislative solution
is decided upon success fees and ATE insurance premiums should
not be recoverable in Offer of Amends cases or when the media
defendant evinces no intention to defend a claim. In such cases
fixed costs should be considered.
9.5 Success fees should not be recoverable
in relation to assessment of costs.
9.6 The market for ATE insurance is currently
very small and appears to be restricted to a handful of insurers
and law firms handling claimant defamation work. Transparency
is required to ensure that this aspect of funding CFAs is not
open to abuse.
Guardian Newspapers
November 2005
20 [2005] UKHL 61. Back
21
[2002] 3 ALL ER 417. Back
22
EWCA (Civ) 613. Back
23
paragraph 16. Back
24
Introduced by the Courts and Legal Services Act 1990 and developed
further in the Access to Justice Act 1999. Back
25
Part 44 Civil Procedure Rules Back
26
Although he may be responsible for disbursements Back
27
Colonel Campbell-James v Guardian Newspapers Ltd 2005
EWHC 893. In that case the newspaper made an offer of amends and
the court was asked to adjudicate on the question of damages. Back
28
Conditional Fee Agreements Order SI/2000/823 Back
29
Carter Ruck will say that they offer claimants staged success
fees in line with staged insurance premiums. According to their
CFA agreements dated 2004 these staged success fees are as follows:
25% if the case settles before proceedings are issued; 50% if
proceedings are issued but the case settles within 28 days of
service of a defence; 100% thereafter. At each stage when the
success fee increases the increased rate applies retrospectively
to the entire case. So that if a case settles 4 months after a
defence is served the success fee of 100% applies throughout the
case. Back
30
See, for example, the statement in open court in Griffin v
Guardian Newspapers Ltd, Lawtel, 04/05/2005 (unreported elsewhere)-where
the newspaper made a payment into court of £50,000 which
was accepted by the claimant who made a unilateral statement in
open court. Back
31
In the last 5 years Carter Ruck have not "lost" (in
the sense of failing to obtain a favourable settlement) a claim
against Guardian Newspapers. Nor has Guardian Newspapers had any
"wins" against Schillings or Russell Jones and Walker.
In September 2004 Russell Jones and Walker admitted that they
had never lost a CFA case. Back
32
Although there is some doubt about whether an insurance policy
would pay out if a claimant loses a case where the media defendant
pleads justification (truth) as this would suggest that the claimant
had lied to the insurer and so invalidated his policy. Back
33
For example by making an unqualified Offer of Amends Back
34
Lord Hoffmann at paragraph 19, Campbell v MGN [2005] UKHL
61 Back
35
at paragraphs 36 Campbell v MGN [2005] UKHL 61 Back
36
at paragraphs 37 Campbell v MGN [2005] UKHL 61 Back
37
At paragraphs 29-30 Back
38
Turcu v News Group Newspapers Ltd [2005] EWHC 799 QB Back
39
Brooke LJ at paragraph 99 of Musa King v Telegraph Group Ltd
[2004] EWCA (Civ) 613 Back
40
At paragraph 31 Back
41
In July 2000 the Observer newspaper offered an apology
to a complainant. She did not accept the apology and appeared
to have gone away. Almost a year after the article was published
the claimant's lawyers, acting on a CFA basis, issued proceedings
without warning. An apology and damages of £2000 were agreed.
The claimants lawyers sought costs of over £19,000 on assessment
these were reduced to £14,500-still an excessive sum in the
circumstances. Back
42
Sections 2-4 Defamation Act 1996 Back
43
It is open to a claimant to refuse to accept an Offer of amends
but the fact that the Offer has been made can be pleaded in defence.
In reality the only time this is likely to happen is if the claimant
asserts that the defendant acted maliciously-see section 4 Defamation
Act 1996 Back
44
Sections 3 (4) Defamation Act 1996 Back
45
Brooke LJ at paragraph 101-105 Musa King v Telegraph Group
Ltd [2004] EWCA (Civ) 613 Back
46
at paragraph 34 Back
47
At paragraph 37 Back
48
At paragraph 48 Back
49
Indeed in its paper Making simple CFAs a reality, published
on 29 June 2004, which discussed the impact of costs and CFAs
in defamation cases the DCA stated that it did not propose to
legislate to restrict the use of CFAs in media cases. Instead
it supports the vigorous use of existing and alternative case
management and cost control powers in the Civil Procedure Rules. Back
50
At paragraph 39 Back
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