Government's proposed reform of legal aid - Justice Committee Contents


Written evidence from the Forum of Insurance Lawyers (AJ 38)

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 3,000 members. It is the only organisation which represents solicitors who act for defendants in civil proceedings.

EXECUTIVE SUMMARY

The Government's proposals should be extended to include provisions to ban referral fees, to abolish the indemnity principle and to introduce pre-action costs management.

It is particularly important that the financial impact on the market of a ban on referral fees be considered in combination with the other reforms.

FOIL believes that the implementation of the Government reforms will achieve the following:

A reduction in legal costs overall, and greater proportionality.

Greater access to justice for defendants.

Reduced costs on the taxpayer and society as a whole.

Continued access to justice for claimants.

A fairer litigation regime, particularly for personal injury litigation.

EVIDENCE

In this submission FOIL will focus upon two of the questions raised by the Justice Committee:

Do the proposals to implement the Jackson report recommendations on civil court funding and costs adequately reflect the contents of that report?

What are the implications of the Government's proposals?

THE JACKSON RECOMMENDATIONS

1.  In his Final Report Lord Justice Jackson made it clear that he viewed his recommendations as "a coherent package of interlocking reforms". FOIL endorses that view of the proposals: whilst there are aspects of the reforms which are disadvantageous to FOIL members and their clients, FOIL believes that overall the package represents a careful balance of the interests of all parties involved in litigation and that, as such, it is inappropriate to pick and chose between the provisions.

2.  The current consultation on the Jackson recommendations covers a more limited range of issues which, if implemented, would significantly reform the civil litigation landscape, particularly with regard to personal injury claims. FOIL believes the proposed package represents a very significant step forward in creating a litigation environment in which money damages disputes can be resolved at much lower cost, and in which access to justice is achieved for both claimant and defendant.

3.  In addition, FOIL members are following with interest the other proposed developments including the extension of the Portal and fixed recoverable costs on the fast track, costs and case management through the current court pilots, and the proposed pilot of a predictable damages tool.

4.  There is a further recommendation which FOIL believes should be included within the package of priority provisions—the banning of referral fees. The current government consultation considering the banning of cash payments to potential claimants under the Conduct of Authorised Persons Rules 2007 is welcome but deals solely with this isolated issue. Referral fees create other, more widespread, problems which need to be addressed. Whilst the government has indicated that it will await the outcome of the Legal Services Board's consultation before reaching a view, FOIL believes that the issue is so closely linked with the issues in the Jackson consultation, and has such a significant effect upon the legal services market, that it should be included within the current proposed reforms, to enable the financial impact of the abolition of referral fees to be considered alongside the impact of the other changes.

5.  As Lord Justice Jackson indicated in a lecture in November last year, the issue of referral fees is inextricably linked with recoverable success fees and overall cost levels. A significant percentage of the costs currently paid by defendants to claimants is absorbed in the payment of large referral fees (sometimes as much as 50%): if they were no longer paid, substantial sums would be freed up which would enable success fees to be reduced, for the benefit of claimants, the taxpayer and society as a whole.

6.  FOIL agrees with this analysis of the market: the combined effect of the reforms including the banning of referral fees would drive down success fees to lower levels than those currently listed in CPR Part 45. As it stated in its consultation response to the LSB, FOIL is concerned that this impact on the market has not been addressed in the economic impact reports commissioned by the Legal Services Board which largely confine themselves to reviewing the market as it stands at present.

7.  Obviously, the combined effect of reform to CFAs and referral fees is not considered either in the impact assessments which accompany the Jackson consultation, as referral fees are not part of the current review. In its own impact assessment the Ministry of Justice concludes that:

"In line with the overall objective of reducing the cost of civil litigation, claimants using CFAs are likely to be worse off in aggregate as a result of the package".

FOIL believes that this view is too simplistic as it fails to take into account the changes to the market which the reforms would drive. The market for legal services, particularly for personal injury, is mature and sophisticated and, as Lord Justice Jackson emphasises, it will respond to change.

8.  To enable the full picture to be appreciated it is vital that inter-related provisions be considered together. Even without reform on referral fees the research of Professor Fenn, for Lord Justice Jackson, indicates that 61% of claimants will be better off and 39% of claimants will be worse off. FOIL agrees with Lord Justice Jackson's view that including a ban on referral fees within the package would result in far more than 61% of claimants benefiting from reform and would significantly reduce the number of those claimants who would be worse off. There is the potential here for a significant win:win solution, reduced costs for defendants without reducing claimants' damages.

9.  In addition, FOIL believes that it would be convenient to include, within the proposed legislation, provisions to allow for the abolition of the indemnity principle and to allow for pre-action costs management, both of which are recommended in the Jackson Report.

THE IMPLICATIONS OF THE GOVERNMENT'S PROPOSALS

A reduction in cost

10.  FOIL believes that the Government proposals will result in an overall reduction in litigation costs, to a more proportionate level. This change would reverse the escalation in costs being experienced currently. To quote just one set of figures, to give an indication of how disproportionate costs have become: in 1999, in motor cases, for every pound paid in damages a further 38p was paid in costs. By 2009 that figure had risen to 87p. In EL/PL cases the ratio increased from 37p to 93p for every pound, an increase of over 250% in ten years.

11.  One of the major flaws in the current system, which creates cost inflation, is the lack of control by the claimant. The claimant has no responsibility for his costs, win or lose, and therefore has no interest in the level of costs charged. As one of the claimant participants in the research conduced by Charles River Associates for the LSB commented, claimants don't "give a monkey's" about the level of costs as the insurance company will pay them. The Government's proposals will subdue this damaging indifference: by requiring claimants to pay a proportion of the costs themselves claimants will have an incentive to shop around and make cost-effective decisions on pursing their claims in a proportionate manner.

12.  It should be remembered that the first impact of the reforms will not be upon claimants but upon their lawyers. All suppliers of services have an indirect interest in ensuring that their clients or customers are in a financial position to pay their fees but claimant lawyers are in a different position: they have a direct interest in the level of costs they recover from their opponent without reference to their client. Under the reforms claimant lawyers will have their own incentives to become more competitive and keep costs proportionate.

ACCESS TO JUSTICE FOR DEFENDANTS

13.  FOIL believes that the Government's proposals will enhance access to justice for defendants. The recent judgment of the European Court of Human Rights in MGN v UK has highlighted that justice is not just a matter for claimants, but also requires that a defendant is able to put forward and pursue a legitimate defence in an environment which treats all parties fairly.

14.  It is frequently argued that when considering access to justice issues the focus should be upon claimants and that little sympathy should be extended to those who find themselves paying costs in personal injury claims, firstly, because costs are paid by insurers and injured claimants should have priority over shareholders in insurance companies: and secondly, because the "polluter pays"—only those who are at fault are required to pay legal costs. Both of these arguments are flawed.

15.  As Lord Justice Jackson succinctly notes in his report the effect of the changes of the funding regime in 2000 was that the burden of financing a huge swathe of litigation was transferred from taxpayers (through the legal aid scheme) to opposing litigants. Ironically, in many cases those opposing litigants are funded by taxpayers—through the NHS, local councils, public authorities etc. With regard to insurance companies their funds obviously come from premiums, which many individuals and businesses are struggling to pay in the current economic climate. Under the current rules millions of other individuals are required to pay the costs of those involved in personal injury litigation. Once legal costs become disproportionate a painless route to litigation for one section of the community is only obtained through the imposition of an excessive burden on society as a whole.

16.  The neat phrase "polluter pays", adopted from the environmental context, is designed to give the impression that high legal costs, and a system which focuses entirely on the claimant, is justified as those paying costs are in some way "guilty" and therefore less deserving of appropriate treatment. This argument is false. When a business or an individual faces a claim and is held responsible for causing an injury or death, that defendant will have no direct responsibility for paying costs as these will be paid by the insurer. Higher costs, therefore, do not act as a just punishment, or deterrent to a wrongdoer: it is not the "polluter" who pays but millions of ordinary, "innocent" taxpayers and purchasers of insurance.

17.  Under the current personal injury litigation system defendants pay all of the costs in all cases, whether the claimants win or lose. A defendant which loses a case, in which it may have raised a reasonable, but ultimately unsuccessful, defence, will be required to pay not only the costs of the claimant who has been successful but, in many cases, a further sum equalling the costs, as a success fee to the claimant lawyer with the aim that it be used to cover the costs of unsuccessful cases in the future. Lord Justice Jackson is particularly critical of this characteristic of the system, that defendants pay all of the costs of both winners and losers: the reforms would reduce this unjustifiable burden.

CONTINUED ACCESS TO JUSTICE FOR CLAIMANTS

18.  It is useful to consider exactly what the phrase "access to justice" means. Throughout the development of civil litigation and funding procedure the right to bring proceedings has never been interpreted as a right to bring proceedings without cost. It is notable that although Art 6 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 actions within the declaration. By way of example, until the year 2000 potential claimants seeking damages for personal injury were able to apply for legal aid to bring a claim, subject to means testing. In the event that the claim was successful the Statutory Charge was applied to enable the Legal Aid Board to recoup the costs which had been incurred from the successful claimant's damages.

19.  The rules on civil costs within this jurisdiction operate currently on the basis of costs shifting, requiring the losing party to pay the costs of the winning party. However, the rules have never required the losing party to pay a full indemnity: an award of costs on the standard basis requires the losing party to pay a proportion of the winning party's costs, with the remainder being made up by the winner. The rationale of the principle is to protect the losing party from the direct effects of the costs agreement that the winner has entered into with his or her legal representative.

20.  The concept of full compensation with the defendant paying all costs, without any risk to the claimant, is a very recent phenomenon. The "inviolable principle" of full recovery which, it is frequently claimed, is at the heart of the personal injury civil justice process, only became possible following the changes to the CFA rules in 2000. Before 2000 it was accepted, without controversy, that claimants would lose a proportion of their damages in costs—a situation which still exists in Scotland and Northern Ireland.

21.  The claimant lobby has argued that if the system is changed only claimants with strong cases will be able to find representation. Lord Justice Jackson considered this argument is detail in preparing his final report. In his recent response to the Government proposals he indicates that in his view the new arrangements will not deny access to justice to claimants who have strong claims. He views with scepticism the claim that, following the reforms, fewer "risky" cases will be taken on, because he believes "that (with certain honourable exceptions) claimants with risky cases are already unable to find CFA lawyers". He quotes various statistics which confirm that "cherry-picking" of strong cases is routine, and that a very large percentage of claims unlikely to be successful are removed from the system at an early stage. The vast majority of claims pursued under a CFA are successful. The current CFA regime increases costs enormously but does nothing to increase access to justice. The additional costs are merely a windfall for claimant lawyers.

22.  It is claimed that without the success fees from winning cases to support tougher cases they would not be pursued. It is easy for claimant lawyers to state that under the reforms cases with prospects below a certain percentage will not be taken on but there is a danger here of maths being used as a smoke-screen. Given the opportunity to put data behind its claims, even under the current system the claimant lobby was not able to put evidence before Lord Justice Jackson to show that current levels of success fee are required to fund "lost cases". If, under the reforms, success fees became irrecoverable, client pressure and competition would reduce their level and the level of hourly rates, firms would become more efficient, and the higher damages from a rise in general damages and from the amended Part 36 rules would provide claimants with more money from which to pay success fees.

23.  If costs are reduced work practices will change. A proportionate amount will be spent on achieving access to justice for claimants, in place of a disproportionate amount. In effect this is the process that has already shaped defendant firms, as a commercially demanding insurance industry has driven down fees and required firms, in a very competitive market, to develop or die. In the claimant field the reforms recommended by Lord Justice Jackson will reshape the market to some degree; in a more competitive market claimant firms are likely to become leaner and fitter. Undermining this competitive environment by allowing disproportionate costs ultimately rewards inefficiency and waste.

A FAIRER SYSTEM

24.  As with so many aspects of the law, on the issue of funding the devil is in the detail. Rules introduced with the laudable motive of increasing access to justice and ensuring that individuals could continue to fund litigation after the removal of legal aid have resulted in a litigation landscape so disproportionate, expensive and out of control that in the recent Court of Appeal case of Pankhurst v White [2010] EWCA Civ 1445, a case involving catastrophic injury and very large damages, the claimant's funding arrangements were described as "grotesque".

25.  The claimant lobby has been vociferous in its defence of the current rules, arguing that any change would impact detrimentally upon vulnerable claimants. In truth, over the past fifteen years the claimant lobby has consistently made the same claim in response to many proposed changes. When CFAs were first proposed, to be available in tandem with legal aid, ethical and consumer protection issues were raised by claimant lawyers as an argument against their introduction. In 1996, with Lord Woolf reviewing the issue of access to justice, concern was being expressed at the possibility that fixed costs might replace CFAs. In 1998, with the Government proposing to introduce CFAs with recoverable success fees in place of legal aid, the claimant lobby argued that under such proposals access to justice would be harmed. It is now argued that those same "damaging" CFAs are essential to maintaining access to justice.

26.  If the government reforms are introduced the forces of the market will take effect, greater competitiveness will be introduced and, overall, costs will be reduced without affecting claimants, who would be empowered with the ability to control their own costs. "Access to justice" is an emotive phrase and liable to be abused but if a just result is to be achieved for all parties it is vital that the debate is widened, beyond the limited interests of claimants, to examine all of the facts.

January 2011



 
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