Memorandum submitted by Adrian Zuckerman
As an academic specialising in litigation I have studied the operation of conditional fee agreements (CFAs) and their effect, amongst others, in defamation cases.
My view is that the CFA system is exploitative and iniquitous. It is a symptomatic of much deeper problems to do with a defective system of rewarding for litigation services and a defective costs recovery rule. These factors create perverse economic incentives which allow lawyers to put unfair pressure on defendants, especially in defamation actions brought against newspapers. In particular, I consider it a grave defect of the present system that in such cases the stronger the defendant's case is, the more reason the newspaper has to plead justification, the more it would have to pay in costs in the event that its defence turns out to be unsuccessful.
To give you an idea of my thoughts on the matter I am providing you with a quotation from Zuckerman on Civil Procedure, 2nd ed, 2006:
The compatibility of the recoverability of CFA success fees and ATE premiums from defamation defendants with the right to free expression was more fully addressed by the House of Lords in Campbell v MGN. The claimant, a famous supermodel, sued the defendant newspaper for breach of confidence and was awarded £3,500 in damages. The Court of Appeal reversed that decision. The House of Lords reversed the decision of the Court of Appeal and restored the damages award and ordered the defendant to pay the claimant's costs in the three courts. The claimant's appeal to the House of Lords was conducted with a CFA, under which her solicitors were entitled to a 95 per cent success fee and counsel to 100 per cent. The total costs exceeded £1m, over half of which (including the success fee) were in respect of the appeal to the House of Lords. The defendant petitioned the House of Lords for a ruling that the success fees should be disallowed on the grounds it amounted to an interference with the right to freedom of expression under ECHR, Art.10. It argued, first, that the success fee rendered the costs so disproportionate as to create a chilling effect on the right of free expression, and, second, that the success fee served no legitimate purpose in this case since it was not needed in order to give the claimant access to a court because she could have afforded to fund her own litigation.
The House of Lords rejected both arguments. The court's starting point was ECHR, Art.10 right to free expression is not absolute but may be restricted in so far as it is "necessary in a democratic society, in the interests of... the protection of the reputation or rights of others, for preventing the disclosure of information received in confidence, or for maintaining the authority and impartiality of the judiciary." Thus, a restriction on the right to free expression is legitimate insofar as it is for one of these aims and insofar as it is proportionate to its objective. The House of Lords held that the CFA legislation served a legitimate purpose because it enables claimants' lawyers to take on other cases which might not be successful and thus provide access to justice for people who could not otherwise have afforded legal representation. "The availability of legal services under a CFA", Lord Hoffmann said, "is necessary to provide the access to a court required by article 6 and thereby give litigants an effective means of enforcing their rights". The second of the defendant's arguments was also rejected. The House of Lords held that the legislation made CFAs available to all, regardless of means.
The incompatibility of the CFA legislation with ECHR Art.6 was not directly considered in either the King or the Campbell case. In the latter case Lord Hoffmann touched on the point when he said that in relation to personal injury actions arising out of road accidents it was legitimate for Parliament to adopt a strategy of shifting the burden of funding that type of litigation from the state to unsuccessful defendants. The legitimacy of such strategy, however, depends on the fairness of the distribution of the advantages and disadvantages created by the policy. In personal injury actions arising from road accidents, the burden of CFA success fees falls on insurance companies, who in turn are able to spread it amongst all policy holders. But CFAs are not confined to cases where the burdens and benefits could be aggregated in this way. It is neither legitimate nor proportionate to adopt a policy that increases access to justice to one litigant by means of denying it to another. Yet this can be the effect of imposing the burden of the success fee on unsuccessful parties who cannot pass the risk to others but must shoulder it on their own.
The last point raises an issue of equality of arms. Equality of arms requires that both parties should be afforded an equal and reasonable opportunity to advance their respective cases under conditions that do not substantially advantage or disadvantage either side. Yet, an individual defendant without the benefit of a CFA is in a worse position than the CFA claimant because he is exposed to the risk of having to pay as much as twice the claimant's reasonable and proportionate costs. The way in which the success fee is calculated compounds the inequality and the unfairness because the magnitude of the "reasonable" success fee is in inverse proportion to the strength of the claimant's case. The riskier the claimant's case, the greater the success fee that his lawyer may legitimately charge. It follows, that the stronger the defendant's prospect of success and the more he has reason to insist on his rights, the more he would have to pay the claimant by way of success fee, in the event that the claimant wins.
Inequality of arms is demonstrable not only in the unequal exposure to costs but also in the unequal treatment in relation to financing litigation. The CFA is a means of funding litigation. As we have seen, under CPD 11.8 a CFA lawyer who undertakes liability for his client's disbursements is entitled to a higher success fee. In other words, the claimant who has financed disbursements by agreeing a higher success fee with his lawyer is entitled to recover from the defendant even that part of the success fee that represents the lawyer's costs in taking the risk for the disbursements. By contrast, a defendant who is not represented on a CFA basis cannot recover his costs of funding the case in the event that he is successful. A defendant who has borrowed money to pay for his legal expenses and who has obtained a costs order in his favour has no right to claim the cost of the borrowing as part of his costs.
It seems to be accepted in cases such as King and Campbell that the court may cap only the costs of the CFA client. But it is questionable whether it is compatible with the right to equality of arms that the CFA party's costs should be capped in advance leaving the other party free of such constraint.
Indeed, it is questionable whether it is legitimate, all else being equal, to cap each party's costs at different levels. There are, of course, situations where it would be legitimate to subject the parties to different costs regimes. This may happen, for example, where a modest road accident claim is suitable for the fast track but the defendant insurance company wishes to obtain High Court resolution that will determine many more cases in which it is involved. This type of situation gives rise to a legitimate argument for making a prospective costs order that the defendant will be liable for both parties costs in any event. In the absence of such considerations it is difficult to see how it may be fair to cap the costs of the CFA party but not those of his opponent.
As already noted, in Campbell the House of Lords was of the view that the CFA legislation represented a legitimate way of widening access to justice.
But it is far from clear that this policy is achievable outside the field of personal injury action arising from road accidents and work related accidents, where the benefits and burdens can be aggregated and fairly distributed. Access to justice is influenced by the cost involved in
litigation: the greater the cost of taking a case to court, the more restricted access becomes to individuals who cannot pass them on to others.
To the extent that CFAs result in substantial increases in the potential exposure of non-CFA parties to costs, to that extent their access to justice is constrained. True, many defendants, such as newspaper proprietors and insurance companies that underwrite motor insurance, are perfectly able to face such risks. But not all defendants are similarly rich. A defendant may be no better able than a claimant to shoulder a heavy costs burden. Just as there is nothing in the CFA legislation to deny the use of CFAs to affluent claimants (as the House of Lords was at pains to tress in CPR Campbell), so there is nothing in the legislation to limit the burden to rich defendants.
Accordingly, it cannot be legitimate or proportionate to widen access to justice to some at the expense of restricting or denying it to others.
The jurisprudence of the ECtHR encourages member states to make provision for poor litigants, but the best way of doing so is by a publicly funded scheme, such as the legal aid scheme, which spreads the cost amongst taxpayers according to means. It is difficult to see how the ECtHR could find justification for requiring individual litigants, who may themselves be poor, to subsidise other litigants. For such a requirement impedes access to justice to defendants who are deterred from prosecuting even a meritorious defence for fear that they would have to pay not just the claimant's costs but his solicitors' success fee as well. Indeed, as already mentioned, the more meritorious the defence the greater the deterrent created by the CFA legislation."
There have been some developments since the book was written, but on the whole the tend to strengthen my conviction that the present arrangements are unsustainable.