Legal Aid, Sentencing and Punishment of Offenders Bill

Memorandum submitted by the Forum of Insurance Lawyers (FOIL) (LA 70)

FOIL (The Forum of Insurance Lawyers) exists to provide a forum for communication and the exchange of information between lawyers acting predominantly or exclusively for insurance clients (except legal expenses insurers) within firms of solicitors, as barristers, or as in-house lawyers for insurers or self-insurers. FOIL is an active lobbying organisation on matters concerning insurance litigation.

FOIL has over 5000 members. It is the only organisation which represents solicitors who act for defendants in civil proceedings.

This response has been drafted following consultation with the membership.

Summary

1. In this submission FOIL will focus on a limited number of issues, namely Clauses 41, 43, 44 and 51 in Part 2 of the Bill.

2. FOIL believes that many of the arguments put forward in opposition to the proposed reforms do not withstand scrutiny: the negative consequences of the introduction of the reforms are being significantly overstated whilst there is a failure to recognise the benefits that the changes will bring.

3. FOIL challenges, in particular, four of the arguments put forward by the claimant lobby to oppose the reforms. It argues that:

a. There is no fundamental right to recover compensation without any deduction in costs.

b. The new rules will not leave personal injury claimants under- compensated.

c. The current system may provide access to justice to claimants but access to justice for defendants is being stifled.

d. Legal representatives will still take on cases after the reforms.

4. Addressing the detail of the Bill, the current wording in Clauses 41 and 44 may not achieve the intended result with regard to the abolition of recoverability of success fees and ATE premiums payable under CCFAs.

5. The provisions under Clause 51 need careful thought to avoid creating perverse incentives for undesirable behaviour by claimants.

6. It is important that the Jackson reforms are adopted as an interlocking package.

7. On a further issue not included currently in the Bill, FOIL believes that referral fees should be banned.

Introduction

1. In this submission FOIL will focus on a limited number of issues, namely Clauses 41, 43, 44 and 51 in Part 2 of the Bill. As the Committee will be aware these sections deal with some of the reforms to the civil justice system proposed by Lord Justice Jackson in his report on civil funding, namely, abolishing the rules on recoverability of costs to prevent a success fee or an ATE insurance premium from being recovered as part of a costs order from an unsuccessful opponent; and making changes to the additional sums to be recovered by a claimant who makes a successful offer to settle.

2. The Legal Aid, Sentencing and Punishment of Offenders Bill 2011, and the Jackson report before it, have prompted a fierce debate within the legal profession, the insurance industry and the wider claims community.

3. The arguments put forward in opposition to the reforms by the claimant community speak of a catastrophic impact upon individuals seeking to bring claims and upon the concept of access to justice. It is claimed that only the current rules can preserve the ability of injured people to bring actions and obtain appropriate compensation.

4. FOIL believes that many of the arguments that have been put forward do not withstand scrutiny. Whilst the changes to the system will require adjustments to be made in the legal services market, FOIL believes that the negative consequences of the introduction of the reforms are being significantly overstated whilst there is a failure to recognise the benefits that the changes will bring.

5. Lord Justice Jackson himself anticipated that his recommendations on CFAs would cause discomfort within the legal profession. As he indicted in his final report:

"It must be frankly admitted that the conclusions reached in this chapter will cause dismay to many lawyers. It is, of course, congenial for claimant lawyers to see their clients provided with comprehensive funding and insulated from all risk of adverse costs. It is congenial for both claimant and defendant lawyers to have a constant stream of work passing across their desks…But these undoubted benefits have been achieved at massive cost, especially in cases which are fully contested. That cost is borne by taxpayers, council tax payers, insurance premium payers and by those defendants who have the misfortune to be neither insured nor a large and well-resourced organisation".

6. FOIL shares His Lordship’s concerns for those who ultimately bear the brunt of excessive legal costs. The people whom Lord Justice Jackson identifies have been the least vocal in the debate on funding. It would be regrettable if the considerable noise being created by the various campaigns against reform were allowed to drown out the reasonable demands of the less vocal man on the street who is currently paying the price of the litigation regime through taxation and escalating insurance premiums.

7. FOIL believes that the proposed changes will create a more balanced civil justice system in which individuals, and companies and organisations will be able to enforce their rights and obtain full redress from the civil justice process but at significantly reduced cost, benefiting society in general and creating an environment in which access to justice is a reality for all parties involved in litigation.

Rules on Recoverability - the Principles

FOIL would wish to address in more detail some of the arguments put forward in the current debate:

Claimant Argument 1 – Claimants have a right to recover compensation without any deduction in costs.

8. Throughout the development of civil litigation and funding procedures the right to bring proceedings has never been interpreted as a right to bring proceedings without cost. It is notable that although Art 6 of the European Convention on Human Rights enshrines the right to a fair trial in both civil and criminal proceedings, and includes the provision of free legal advice within the definition of a fair criminal process, there is no right to free funding for civil proceedings.

9. In all cases which are funded by legal aid, in the event that the claim is successful the Statutory Charge will be applied to enable the Legal Services Commission (LSC) to recoup its costs from the successful claimant. As the guidance provided by the LSC explains, part of the rationale of the Charge is a recognition that if legal services are free costs tend to escalate: the Charge is designed to deter people from running up unnecessary legal costs.

10. It is argued that receiving full compensation without any deduction for costs, as under the current personal injury regime, is a fundamental right. Ironically, this can result in claimants using a CFA being in a better position that some of the most vulnerable people in society who are eligible for means tested legal aid and who, if they are successful in their claim, are then required to surrender a portion of what they have recovered to repay their legal costs.

Claimant Argument 2 – the new rules will leave personal injury claimants under-compensated.

11. There has been much criticism of the 25% of damages (excluding damages for future losses) which it is said will be absorbed in costs under the new rules.

12. Firstly, it should be noted that the financial modelling, undertaken by Professor Fenn for Lord Justice Jackson, has confirmed that even if 25% of damages are absorbed in costs, 61% of claimants will still be better off due to the proposed 10% increase in general damages. FOIL does not believe that this data is "flawed", as suggested by one of the witnesses before the Committee and would be happy to provide further details on this point if required.

13. The figure of 61% will further increase when the impact of the new additional awards under Part 36 are factored in. The many claimants supported by trade unions and other membership organisations will also be better off under the package of reforms as it is likely that the market will adjust and that no success fees will be charged in those cases.

14. Secondly, there is no requirement in the rules that 25% of damages must be absorbed in costs. That will be the maximum deduction permitted. What is likely to occur is a change in the market, creating a commercial environment in which claimant firms compete to obtain instructions, particularly on high value cases, by offering to accept lower success fees. By this means the financial impact on claimants will be significantly reduced.

15. It is argued that claimant firms need to recover success fees at current levels to cover the cases they lose. Lord Justice Jackson did not accept that that was the case and, although he gave the claimant lobby an opportunity to produce evidence to substantiate the claim, no data was produced. In evidence presented to the then Master of the Rolls, Lord Woolf, during his review of civil procedure in 1996, claimant lawyers claimed a success rate on personal injury cases of 95%. Anecdotally, defendant lawyers support that claim, particularly on high value cases: most defendant lawyers will only win one or two high value claims a year. This suggests that there is room for claimant lawyers to reduce the success fees charged and still operate profitably, if the operation of the legal services market required them to do so.

Claimant Argument 3 – the current system provides access to justice.

16. When Lord Woolf published his report on the reform of the civil justice system in 1996 he used the title, "Access to Justice". He identified a number of principles to which the system should adhere to deliver access to justice. These included "offer proportionate procedures at reasonable cost" – recognition that there is more to access to justice than unlimited expenditure. For Lord Justice Jackson keeping costs proportionate is also a crucial element in ensuring access to justice. As he stated in his report:

"Access to justice is only practicable if the costs of litigation are proportionate. If costs are disproportionate, then even a well-resourced party may hesitate before pursuing a valid claim or maintaining a valid defence. That party may simply drop a good claim or capitulate to a weak claim, as the case may be".

17. Current case law abounds with judgments in which judges express dismay at the high level of legal fees incurred by claimants, often far in excess of the value of the claim. In recent cases judges have described claimant funding arrangements as "grotesque" and have described themselves as "aghast" at the level of costs incurred. In a recent case in which the costs exceeded the sums involved in the case Lord Justice Ward commented that "the great British Public must think that something has gone wrong somewhere if litigation is conducted in this way. I share that sense of horror".

18. One of the major reasons for such excessive costs being incurred in personal injury cases is that as claimants do not pay any part of their costs, win or lose, they have no interest in the level of costs being incurred. As the Legal Services Commission has recognised a "free" service leads to excessive costs.

19. Under the current system it could be argued that claimants have access to justice, but the excessive costs created have the effect of stifling access to justice for defendants. As Lord Justice Jackson indicated in his report:

"If the opposing party contests a case to trial (possibly quite reasonably) and then loses, its costs liability becomes grossly disproportionate. Indeed the costs consequences of the recoverability rules can be so extreme as to drive opposing parties to settle at an early stage, despite good prospects of a successful defence. This effect is sometimes described as "blackmail", even though the claimant is using the recoverability rules in a perfectly lawful way".

20. This can be a particular problem with ATE premiums with staged premiums, with the final stage coming into effect just before trial. In high value cases the final stage payment can be hundreds of thousands of pounds, placing significant pressure on defendants to settle even where they have a reasonable defence. This is exactly the "blackmail" effect mentioned above.

Claimant Argument 4 – solicitors will no longer be prepared to handle claims under the new regime, leaving claimants unable to obtain justice.

21 It is regularly claimed that unless full success fees can be recovered from defendants it will not be economically viable for claimant solicitors to handle compensation claims. There are many issues raised by this assertion, which are not possible to address in detail in this submission, but, in brief, an examination of the detail of costs under CFAs will indicate that claimant work is extremely profitable:

o Even without success fees the base costs charged on a large personal injury claim can be as much as £350-£400 per hour.

o The total claimant’s base costs, without a success fee, on a large personal injury claim routinely reach £400,000- £500,000.

o Success fees are set as high as possible to maximise recovery. As Prof. Zander has indicated in his research on costs the current detailed assessment process which is designed to control the costs incurred on a case cannot properly control the level of the success fee. Senior Costs Judge Peter Hurst has stated that whilst costs judges do their best they are inhibited as they can only look back over the "smoking ruins" of the litigation.

o Success fees do not only reflect the chances of winning or losing but other risks are factored in, including the possibility that the claimant may misjudge the value of the claim. This can result in a situation where a success fee of 25% can still be payable even though liability is admitted and the case is therefore bound to succeed.

22. Prior to 2000 the costs regime prevented recovery of success fees and ATE premiums and these were paid by claimants themselves, in provisions very similar to those to be introduced by the Bill. At that time claimant lawyers asserted that CFAs with non-recoverable success fees and ATE premiums worked well. In 1996 when Lord Woolf was gathering evidence for his review of civil litigation rules claimant lawyers argued in their evidence to him that CFAs under which claimants paid their own success fees and premiums were:

"providing access to justice in personal injury cases for those who previously did not litigate through fear of costs".

23. There was no indication from the claimant lobby at that time that the regime preventing them from taking on cases, or that the rules caused hardship to their clients.

24. The costs regime to be introduced by the Bill already operates in Scotland, with no indication that claimants there find it difficult to find lawyers to represent them. As Lord Justice Jackson noted:

"…at the Glasgow seminar …a number of speakers made the point that personal injuries litigation, which is currently being conducted under the new procedures developed by the Court of Session, is the most successful part of the Scottish civil justice system".

25. One of the features of the funding regime for personal injury which has developed over the past 10 years is the increase in referral fees, to absorb the excess profit generated by success fees. FOIL supports a ban on the payment of referral fees as one of the measures required to re-adjust legal costs to a correct level.

The Detail

FOIL would wish to draw the Committee’s attention to a number of points of detail in the Bill.

Clauses 41 and 44

26. Sub-paragraph 41(6) in this Clause indicates that the new rules on recoverability of success fees will only apply to CFAs entered into after the section comes into force. Under Clause 44(2) bodies will still be able to recover a ‘self-funding insurance premium’ in cases where the undertaking was given before the Act takes effect.

27. There is no specific mention of Collective Conditional Fee Agreements (CCFAs) in the Bill – the type of CFAs which are usually entered into by membership organisations, which cover a large number of individual cases under one agreement. Without specific reference to CCFAs there is a danger that under these agreements, entered into, in some cases, many years ago, success fees and ‘self-funding premiums’ will continue to be recoverable after the Bill has become law.

Clause 51

28. This provision will allow claimants who subsequently recover more than their offer to settle to receive an additional payment of damages (which Lord Justice Jackson recommended should be 10%).

29. The aim of this provision is to encourage early offers of settlement but unless it is carefully thought through it has the potential to encourage undesirable claimant behaviour.

30. In a large claim the additional 10% could be worth anything from £50,000 to £1m: very considerable sums could be at stake. The availability of these additional sums could have the following impacts:

o a reluctance for claimants to engage in rehabilitation for fear of affecting the value of their claim and losing the additional payment;

o The adoption of a more adversarial litigation style by claimants

o The creation of an incentive for claimants to proceed to trial in the hope of beating their offer, thereby receiving the additional payment.

31. To avoid the new provisions creating perverse incentives it is important that the consequences of the additional payment are considered carefully. The impact could be tempered either by capping the additional payment, particularly in large cases, or by building in judicial discretion which would allow the additional payment to be denied to those who have not adhered to the Overriding Objective or who have not mitigated their losses.

Provisions not included in the Bill

32. Lord Justice Jackson viewed his recommendations as an interlocking package of reforms and took the view that it would be the "worst of all worlds" to retain some elements of recoverability or to create a more complex system by qualifications and exceptions. FOIL endorses the view that the reforms should be adopted as a package.

33. Some of Lord Justice Jackson’s recommendations are not included in the Bill, including the introduction of one way costs shifting; a new test of proportionality; reversal of the decision in Carver v BAA; increasing the rates for successful litigants in person; and increasing general damages by 10%. From the research paper published with the Bill FOIL understands that these issues will be addressed by other means. It is important that these provisions are introduced to ensure that the reforms result in a balanced regime.

34. As indicated above, on a further issue included in the Jackson proposals but not included in the Bill, FOIL believes that referral fees should be banned.

September 2011

Prepared 7th September 2011