Evidence submitted by Times Newspapers
Limited
CONDITIONAL FEE
AGREEMENTS—THE
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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