Select Committee on Constitutional Affairs Written Evidence


Evidence submitted by Times Newspapers Limited

CONDITIONAL FEE AGREEMENTSTHE NEED FOR REFORM

  1.  In Musa King v. Telegraph Group Limited [2004] EWCA 613 (Civ), the Court of Appeal recognised that "something seems to have gone seriously wrong" in actions driven by Conditional Fee Agreements (CFAs) which involve free speech and the media. Lord Hoffmann recently reiterated this in Naomi Campbell v. MGN Ltd [2005] UKHL 61 when he said "I cannot however part with this case without some comment upon other problems which defamation litigation under CFAs is currently causing and which have given rise to concern that freedom of expression may be seriously inhibited" (emphasis added).

  2.  While Times Newspapers Limited, publisher of The Times and The Sunday Times (TNL), accepts that there must be "access to justice" and conditional or contingency fee agreements are here to stay, there is nevertheless urgent need for reform in this area. Without reform, the media will continue to be penalised with wholly disproportionate and unreasonable costs in cases where the claimant's solicitors seek a 100% success fee on base hourly rates of £400 or £500 per hour, and seek to off-load massive insurance premiums or "notional insurance premiums" on defendants. The "blackmailing effect of such litigation", again referred to by Lord Hoffmann in Campbell, is currently having a serious "chilling effect" on free speech and the role of the media as the "eyes and ears of the public". The "blackmailing effect" also breaches the Overriding Objective of the Civil Procedure Rules insofar as "the parties are not on an equal footing" because the defendant will be heavily penalised if the case is lost and in most cases the costs will be wholly disproportionate to the damages (see below). The following problems therefore need urgent attention:

    (a)  The "ransom factor" or "blackmail effect" in CFA libel actions

      This was identified in Musa King and is the situation where a defendant knows that however successful he, she or it may be in defending an action the legal costs of defending the action will never be recovered because the claimant is without any insurance and cannot begin to pay the defendant's legal costs. In short, the defendant will be very seriously out of pocket—win or lose—and will be under very serious commercial pressure from day one to throw in the towel and pay damages to what may be an extremely unmeritorious claimant. As a result of this "blackmailing effect", the truth can all too easily be sacrificed on the altar of commercial expediency.

    (b)  100% success fees on very substantial base hourly rates

    A successful claimant's lawyers may already be charging in the region of £500 per hour to represent a celebrity claimant like Naomi Campbell or Sharon Stone. With a 100% success fee this means a claimant solicitor can charge a losing defendant approximately £1,000 per hour which will put individual defendants or small publishing houses into bankruptcy or liquidation (see Mary Graham v Ossie Stewart for the effect of CFAs on individual defendants). Even large publishing companies and television companies have to think very hard before fighting a CFA driven case where, if they lose, they will end up paying millions of pounds in additional legal costs. Further, claimants' solicitors often seek a 100% success fee even where there is little or no risk that the action might be lost, eg, Gazley v. News Group Newspapers Limited [2004] EWHC 2675 (QB) where a 100% success fee was sought even after the defendant publisher had made an offer of amends under section 2 of the Defamation Act 1996.

    (c)  Rich claimants and their solicitors taking advantage of CFAs

    It is far too easy for solicitors to offer to act for a claimant who may be very wealthy and could afford to pay a solicitor's normal hourly rates on a CFA basis particularly where the claimant has an appealing and almost watertight case against the media. This enables solicitors to cherry-pick cases and increase their costs by up to 100% when in reality there may be very little risk involved in the action (see Gazley v. News Group Newspapers Limited above). While TNL does not object to CFAs in cases where a claimant is genuinely indigent, the present system is open to serious abuse by solicitors taking on cases on a CFA basis for rich clients where there is little or no real risk and solicitors simply want to double their legal costs.

    (d)  No control over a claimant's solicitors' costs

    The claimant in any CFA driven case is usually totally disinterested in his own solicitor's costs as he will never have to pay them. Claimant solicitors are therefore prone to running up huge costs very early on in the proceedings and this can become a real obstacle to an early settlement. In Musa King the Court of Appeal clearly felt that massive and wholly unnecessary costs had been run up by Mr. King's solicitors. Some control and a genuine incentive for a claimant to police his own solicitor's costs must therefore be put back into the equation.

    (e)  Cost of deferred ATE insurance and repudiation if a dishonest claimant loses

    Even in those cases where a claimant is able to obtain insurance cover for his action, the premiums are always huge and a massive additional burden on a defendant. Insurance premiums often run into hundreds of thousands of pounds as in Miller v. Associated Newspapers Limited [2005] EWHC 773 (QB) where a notional insurance premium of £615,000 was chargeable by the Police Federation (as the funding party), if Associated had lost the action. Moreover, the premium is never paid by the claimant to the insurance company prior to trial. Rather it is deferred until after trial. It is therefore a "legal fiction" and could all too easily be repudiated by the insurance company if the claimant was found by the jury to have lied during the trial. Thus although the claimant never actually pays a premium, the defendant will be liable for it if the action is lost. If the action is won, then a successful defendant could face litigating with the claimant's insurance company, which might well refuse to pay out under the policy on the grounds that the claimant had lied to his solicitors and had lied to the jury. The financial pressure of 100% success fees PLUS what may be a huge insurance premium or even a "notional insurance premium" where a trade union funds a CFA driven action and under the legislation can charge a notional insurance premium, amounts to huge commercial pressure on a defendant to settle an action rather than lose it and pay millions in additional liability.

  3.  TNL therefore believes that just as the European Court of Human Rights found, in Tolstoy Miloslavsky v. United Kingdom (1995) 20 EHRR 442, that the £1.5 million damages awarded to Lord Aldington in the original libel action were totally disproportionate and inimical to Article 10 free speech rights (no-one needs to be awarded £1.5 million in order to obtain vindication), so legal costs in CFA driven actions are now totally disproportionate to the damages in the vast bulk of publication proceedings. In Campbell v. MGN the damages were £3,500 while the legal costs ran to over £1,000,000. With 100% success fees in CFA cases plus massive insurance premiums, a defendant fighting, even a strong case, has to be remarkably resilient to fight an action to trial knowing that if the case is lost, eg, a split decision in the House of Lords as in Campbell, it can be heavily penalised and go down for over a million pounds in costs. Associated Newspapers were faced with a threatened bill of £3.3 million. if they had lost the Miller action, which was being funded by the Police Federation and included a notional insurance premium of £615,000. In the circumstances they won.

  4.  As was accepted by the House of Lords in Campbell, publication proceedings engaging Article 10 rights are few and far between and involve substantial costs. They are quite different from personal injury and Road Traffic Accident cases of which there are a huge number and where insurance plays an integral part. This difference between publication proceedings and other areas of law is due to the following factors: (1) the heavy onus of proof on libel defendants, (2) the relatively small number of such cases going to trial compared with personal injury actions, (3) the fact that there is no true ATE insurance market, (4) the disproportionately high fees already charged by claimants' solicitors, and (5) the failure of costs judges to use the regulatory regime effectively to control CFA costs in publication proceedings.

  5.  The position has now been reached in the development of CFAs where it must be acknowledged (as the DCA already seem to have done) that separate provisions need to be made, and can be made, in different areas of the law. Media defendants are particularly vulnerable (the presumptions are all in favour of libel claimants), and both costs and CFA rules need to be changed so that defendants fighting what they believe are proper cases to be fought are not so heavily penalised as to force them into liquidation or bankruptcy.

  6.  TNL therefore believes that the following options for change should be considered by the Government and the DCA:

    A.  Some part of any agreed success fee should be paid by the client

    Historically, legal aid was never available in defamation actions so extending CFAs into publication proceedings was a major break with the past, particularly as the onus of proof in any defamation action is almost entirely placed on the defendant. Under the original CFA scheme, as permitted by the (unamended) Courts and Legal Services Act 1990 (extended to defamation cases in 1998), any success fee was paid out of a claimant's damages, and the profession imposed a voluntary cap on the amount of the uplift. This meant that a) defendants were not being penalised with massive additional liability if the defendants felt that truth was on their side and the action should be fought but was then lost, and b) there was always an incentive on claimants to monitor their own solicitor's costs as any success fee would cut into the damages and could reduce the damages by up to 25%. TNL believes that it is imperative to reinstate this element of self-regulation by claimants policing their own solicitor's costs by making part or all of the success fee payable by the claimant up to a maximum of, say, 25% of any damages in the publication proceedings. This could be done by cost capping, fixed fees or only part (say 50%) of any success fee normally being recoverable from a defendant (see below). This would be infinitely more proportionate than a defendant having to bear all the burden of a success fee—the "additional liability"—when it is the claimant who benefits from a "no win, no fee" arrangement with his solicitor.

      B.  Costs Council to set base hourly rates for solicitors acting under CFAs

    Given the overwhelming public policy in favour of a free press, the recovery of 100% uplifts on very high base hourly rates (£400 to £500) by libel specialists amounts to a wholly disproportionate advantage and effectively penalises a losing defendant. This penalty TNL believes contravenes Article 6 of the European Convention on Human Rights and has a very serious chilling effect on free speech which is protected under Article 10. Because there is a huge difference between a 100% success fee on a base hourly rate of £250 or £300 per hour and a 100% success fee on a base hourly rate of £500, TNL believes a Costs Council (as recommended in the Civil Justice Council's Report "Improved Access to Justice—Funding Options and Proportionate Costs" August 2005) needs to be set up so that it can recommend base hourly rates for solicitors working in different parts of the country and in different areas of law. In any action where the client agrees to a success fee, the solicitor would have to compute the success fee on the recommended base hourly rate set by the Costs Council and have to justify any increase in that rate before a costs judge. There is TNL believes no "pressing social need" for claimant firms to be allowed to double their costs in publication proceedings, where their base hourly rate is already running into hundreds of pounds per hour.

      C.  Fixed fees and fixed uplifts

    As Lord Woolf commented in both his Interim and Final Access to Justice Reports (1995-96): "The problem of costs is the most serious problem besetting our litigation system". Where practicable, a fixed costs regime furthers the aims of predictability and proportionality, encourages responsibility in the management of costs and encourages litigants themselves to exercise greater control of the expenses, which their lawyers incur. Fixed costs are therefore taking a more and more prominent part in litigation (see CPR Parts 45 and 46), particularly pre-action costs. Fixed uplifts of 12.5% or more are also the norm in a range of RTA and Employers Liability cases where the damages recovered are under £500,000 (see CPR Part 45 (II) (III)). TNL believes there is every reason to promote fixed costs in respect of publication proceedings, particularly those in which costs are the only outstanding issue on a prompt settlement or under the section 2 "offer of amends" regime set out in the Defamation Act 1996. Fixed costs could also play an important part in hearings under section 7 (meaning disputes) or section 8 (summary disposal of a claim) Defamation Act 1996. A scheme of fixed costs would achieve the advantages set out above and greatly reduce the ransom factor identified in Musa King. In any such fixed costs regime there should be a rule permitting a claimant to apply to the court for an increase on the ordinary fixed amounts. At the same time, there should be a sanction in the event that an application for an increase on the fixed costs is unsuccessful. The sanction should reduce both the amount of a lawyer's success fee and the damages recovered by a claimant.

      D.  Part 36 offer or payment into court and necessary rule change

    Given the dangers identified in Musa King and Campbell, it is also appropriate in publication proceedings for there to be a rule change to Part 36 so that a claimant's damages (as well as costs) can be reduced where a defendant's payment into court or offer to settle is not beaten. Such a rule is particularly appropriate in the case of an indigent claimant or a claimant who has not obtained ATE insurance and has little incentive to be practical over the level of damages offered and what is reasonably recoverable.

      E.  Contingency fees or differential fee agreements

    TNL believes that the regulated Ontario Contingency fee system—identified in the CJC Report (see above)—should be considered and encouraged by Masters and Judges in certain types of public interest defamation actions. For instance, it could become regular practice for the court to refuse to allow a Conditional Fee Agreement with any uplift where the defendant had made an offer of amends and the claimant was refusing to accept the damages offered by the defendant and was instead wanting to go to a fully contested section 3(5) hearing on quantum of damages. In such cases, the solicitor would have to make it clear to the claimant that an agreed element of the damages would be forfeited to the solicitor if he was unable to recover any CFA success fee but could only recover his normal reasonable costs from the defendant on the grounds that the court believed that the claimant was indulging in an element of CFA blackmail. This would force the claimant to think long and hard before forcing the issue to a full hearing on damages. Any such contingency fee system would have to come under the auspices of The Law Society and its regulatory system. Further, the statutory protection which currently allows fees to be charged on a differential Thai Trading basis (that is to say which permits ordinary fees (say £300 per hour) to be recoverable in the event of success but reduced fees (say £150 per hour) in the event of failure) enables claimant media firms to act for many middle income clients without a defendant being put under the massive commercial pressure that a CFA can put on a defendant to settle. Again the courts should encourage these types of arrangement as they enable access to justice but without the threat of a massive penalty on a losing defendant which most CFAs produce in publication proceedings. They are also proportional and comply with the Overriding Objective of the CPR.

      F.  ATE insurance premiums

    Under the Pre-Action Protocol in Defamation proceedings, there should be a clear indication in the defendant's letter of response to the claimant's letter of claim if a libel complaint is going to be disputed. Further, defendants in defamation actions are now entitled to make an "offer of amends" very early in any proceedings under section 2 of the Defamation Act 1996 Act ie at any time up to the filing of a defence. In the light of these two clear provisions, TNL cannot see any reason why claimant solicitors need take out insurance cover from "day one of a libel complaint". Indeed, a claimant cannot know if the newspaper is going to come out with its hands up or the action will be resolutely defended. Thus, insurance from day one, when any risk assessment is totally unquantifiable, is effectively the insurance industry imposing its will on the efficient and proper administration of justice and causing wholly unnecessary additional liability when a media defendant may immediately trigger the "offer of amends" system and agree to apologise and pay damages. Insurance cannot therefore be necessary until a letter in response to the letter of complaint under the Pre-Action Protocol is received OR when a defence is received following the issuing of proceedings. Only then can the claimant's solicitors and underwriters sensibly and effectively weigh the risks which are being undertaken and decide over what period or stage cover should be taken out. Failure at this point by a claimant's solicitors to obtain satisfactory ATE cover for an appropriate period (premiums should still be low at this stage), should result in sanctions. If an unsuccessful defendant can prove that a cheaper policy would have been available when proceedings are first commenced and that it would have been reasonable for the claimant to have bought a premium at that stage (rather than some later stage), then a rule should direct that that is ordinarily the value of cover which can be recovered. The corollary of this is that if an indigent claimant takes out insurance BEFORE proceedings are actually commenced and the defendant triggers the offer of amends system thereby obviating the need for any insurance cover, any ATE insurance premium should not in those circumstances be recoverable from the defendant but would have to be paid by a claimant out of the damages recovered.

      G.  Case management through cost capping, fixed fees and fixed uplifts

    At the end of the day, TNL believes that for CFAs to be operable and for indigent claimants to be able to bring claims but without defendants being disproportionately penalised in "additional liability", the courts need to case manage CFA-driven cases extremely carefully. CPD 11.9 may therefore have to be repealed. Indeed, any CFA needs to be looked at by the court at a very early stage in the proceedings to see a) where any success fee falls, b) what incentives there are on the claimant to police his own solicitors costs c) to what extent any uplift reflects the genuine risk that a solicitor may be taking in shouldering some of the risk by conducting it on a "no win, no fee" basis and d) what alternative means of funding the action there may have been. TNL therefore believes that the key to the future working of the CFA system is proper case management by judges and masters which needs to start at the case Allocation Questionnaire stage.

      H.  The case Allocation Questionnaire

    At the case Allocation Questionnaire stage, a claimant should be made to answer the following important questions:

      (i)  State if the case does or will involve a CFA.

      (ii)  State, like on any Application Notice, if "the action raises issues under the Human Rights Act 1998". This question should be simplified down to the following two questions:- First, "Does the action involve libel, slander, malicious falsehood, blasphemous libel OR the misuse of personal information including any Data Protection claim?" Second, "If so, are the words complained of "a matter of public interest"?

      (iii)  State what the "overall costs of the action are likely to be but do not include any "additional liability".

      (iv)  State, if the action is being conducted under a CFA, if the claimant seeks to pass on any agreed success fee to the defendant as "additional liability", what the percentage uplifts are, if they are staged, and at what stages they occur.

      (v)  State what the base hourly costs are prior to any uplift for a success fee.

      (vi)  State what the "overall likely additional liability for the whole case is likely to be including counsel's and solicitors success fees" (this may need a change to CPD 6.2)

      (vii)  State if any ATE insurance premium or "notional insurance premium" has been paid or has been agreed with an insurance policy or funding party and if any such insurance policy is staged. While a claimant could not be made to declare how much any ATE premium or "notional premium" might be, the court could order the Claimant to disclose the amount of any ATE insurance premium in confidence to the court at the Allocation Hearing.

    Once the above questions have been answered the court would know if the case concerned human rights issues, if it contained a serious "blackmail" element and to what extent a defendant might be put under huge financial pressure to settle rather than fight the action. In all cases involving a CFA there would be an automatic case Allocation Questionnaire hearing.

      I.  The Allocation hearing

    Once the Allocation Questionnaire was filed AND a defence served, the court would automatically order there to be an Allocation Hearing. This would substantially reflect the proposals made by Brooke LJ in Musa King paragraphs 92-94 and 104. For cases involving estimated legal costs of over £250,000 (not inclusive of any additional liability) the matter would be referred to a High Court judge specialising in defamation. For cases involving sums less than that, the case would be referred to a High Court master specialising in defamation actions. Having read the pleadings and Allocation Questionnaires and any supporting affidavits and having due regard to all the circumstances, the judge or master would then exercise the following powers:

      (i)  check that the action did involve human rights such as free speech and/or the right to a private life and to what extent there might be a "blackmail" or "ransom factor" element in any CFA funded action;

      (ii)  identify issues which might usefully form the basis for a preliminary issue, eg, meaning or any other factual dispute which lay at the heart of the action and the resolution of which might lead to the early determination of the dispute without substantial legal costs being incurred under any CFA arrangement;

      (ii)  hear representations on the claimant's solicitors base hourly rates and the level of success fees agreed with the client and if these were staged or constant in CFA driven cases. The court would, through this process, check that the success fee did bear a sensible and reasonable relationship to any risk the claimant's solicitor was agreeing to shoulder;

      (iii)  hear representations from both sides on cost capping in CFA driven cases. The master or judge would then be able to impose a proportionate cap on the costs recoverable from one side or the other making due allowance for the fact that the onus of proof in libel actions lies on the defendant meaning that the defendant should normally be allowed greater latitude in recoverable costs. The cap would include any "additional liability" for success fees but not necessarily for any insurance premiums which would have to remain confidential to the claimant solicitor and his client. The judge or master could though be told in confidence what any insurance premium was and then order that only a certain percentage of that insurance premium could be recovered from a defendant;

      (iv)  The judge or master could also decide what part of any agreed success fee could be passed on to an unsuccessful defendant as "additional liability". Alternatively the master or judge could order that the defendant should not have to pay any success fee but rather that the claimant should pay a success fee out of any damages recovered ie a contingency fee system. This would act as an incentive for the client to police his own solicitor's costs and would only be ordered where a) the court was satisfied that the defendant was legitimately defending the action and b) that imposing any "additional liability" on the defendant would amount to a "penalty" or create a "ransom" or "blackmail" factor.

      (v)  The judge or master would also be given the power to order "early neutral evaluation" by a specialist mediator or silk in this area where the judge or master felt that there was merit in forcing one side or the other to consider its position in some detail particularly if the claimant had nothing to lose and was able to put a defendant under serious commercial pressure because of a CFA.

  7.  The current system of allowing successful claimants to recover wholly unreasonable and disproportionate costs ie placing all the "additional liability" on a losing defendant, is we believe peculiar only to the UK jurisdiction and cannot be found anywhere else in the world. It is we believe neither fair nor proportionate when it is the claimant who benefits from a "no win, no fee" arrangement with his solicitor. As Lord Hoffmann suggests in Campbell, CFAs can seriously inhibit free speech (Article 10 rights) and are likely to contravene fair trial provisions (Article 6 rights of the European Convention on Human Rights). Only if the Government gives careful consideration to the above changes to the current CFA system will the overriding objective of the Civil Procedure Rules and the spirit of the Access to Justice Act be fully realised and the CFA system be compliant with the Government's obligations under the Human Rights Act.

Times Newspapers Limited

November 2005


 
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