Where are we now on Conditional Fees? or why this Emperor is Wearing Few, if any, Clothes

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1 Where are we now on Conditional Fees? or why this Emperor is Wearing Few, if any, Clothes Michael Zander* Conditional fees were first introduced by the Thatcher Government in the Courts and Legal Services Act 1990, though it took another five years before they became operational. Under the legislation 1 and the regulations 2 it became lawful for a solicitor to agree with his client that in the event that the case was won he could charge the client a success fee (sometimes called uplift ) of up to 100 per cent of his costs. The legislation legitimated no win, no fee (or win and I charge you more ) arrangements that would otherwise have been unlawful as contrary to the fundamental rule banning any arrangement that made the lawyer s fee dependent on the outcome of the litigation. If one considers just the case itself, the success fee is pure profit. But success fees must also cover the losses incurred in the very small minority of cases that are unsuccessful. 3 To support this new form of funding of civil litigation the insurance industry started to develop products to enable the claimant to cover himself against the risk of losing and having to pay the other side s costs. And then to cap it all, in 1999 Lord Irvine s Access to Justice Act made both the success fee 4 and the insurance premium 5 recoverable by the successful litigant. (The writer has described the whole story and its implications elsewhere. 6 ) Callery v Gray 7 was the first case concerning conditional fees to reach the House of Lords. The law lords were told that there were some 150,000 cases awaiting the outcome! Leave to appeal had been refused by the Court of Appeal. It was granted by the House of Lords presumably so that it could provide general guidance to everyone involved in conditional fee arrangements (CFAs). In the event, however, the law lords decision answered little or nothing and gave no general guidance provoking the question, why did it give leave? The case arose out of a straightforward claim for damages in respect of minor injuries suffered in a road accident. At his first meeting with his solicitors the claimant C entered into a CFA which provided for a success fee of 60 per cent. A * QC, Emeritus Professor, LSE. 1 s The Conditional Fee Agreements Regulations 1995, S.I. 1995/1675 and the Conditional Fee Agreements Order 1995, SI The 1995 order was revoked and replaced by the Conditional Fee Agreements Order, SI 1998/1860 which in turn was revoked and replaced as from 1 April 2000 by the Conditional Fee Agreements Order 2000, SI 2000/ The agreement commonly provides that in that event the client will still pay disbursements, an eventuality normally covered by insurance. So the losses in such cases are the unrecovered profit costs. 4 New s 58A(6) of the 1990 Act inserted by s 27(1) of the 1999 Act. 5 s 29 of the 1999 Act. 6 M. Zander, Will the revolution in the funding of civil litigation in England eventually lead to contingency fees?, DePaul Law Review, forthcoming 2003, accessible in draft on < Depts/law>. The history is sketched in the Court of Appeal s judgment and in the law lords speeches in Callery v Gray. See also the judgment of Schiemann LJ in Awwad v Geraghty & Co [2000] 3 WLR 1041, See also generally F. Bawdon, M. Napier and G. Wignall, Conditional Fees A Survival Guide (The Law Society, 2nd ed, 2001). 7 [2002] ER UKHL 28, [2002] 1 WLR 2000, [2002] 3 All 417. ß The Modern Law Review Limited 2002 (MLR 65:6, November). Published by Blackwell Publishers, 108 Cowley Road, Oxford OX4 1JF and 350 Main Street, Malden, MA 02148, USA. 919

2 The Modern Law Review [Vol. 65 few days later C took out an after-the-event (ATE) insurance policy, at a premium of 350, against the risk of incurring liability for the defendant s costs. In the event, the claim was settled for 1,500 damages before proceedings were even issued. The defendant agreed to pay the claimant s reasonable costs and disbursements. When the parties were unable to agree the amount of such costs and disbursements, the claimant started costs-only proceedings under CPR 44.12A. District Judge Wallace reduced the success fee to 40 per cent but allowed the ATE premium of 350. The district judge s decision was upheld by Circuit Judge Edwards at Chester County Court. On further appeal, the Court of Appeal in a single judgment given by the formidable trio of Lord Woolf CJ, Lord Phillips MR and Brooke LJ, reduced the success fee to 20 per cent. 8 They held that the ATE premium was recoverable in principle and, after receiving a lengthy report from Chief Costs Judge Master O Hare, they went on to hold that the premium of 350 was not manifestly disproportionate to the risk covered. 9 Dismissing the appeal, the House of Lords declined to intervene saying that this was a topic that should be left to the Court of Appeal! (Lord Scott partly dissented. In his view, the insurance premium should not have been recoverable). The decisions of the Court of Appeal and the House of Lords run to almost 100 pages in the law reports. What, then, does the Callery v Gray saga amount to? The Court of Appeal said the case raised three separate issues: (1) whether an ATE premium could be recovered in costs-only proceedings ( the jurisdiction issue ); (2) the stage of a dispute at which it is appropriate to enter into a CFA and an ATE policy ( the prematurity issue ); and (3) whether the percentage success fee and the level of ATE premium were reasonable ( the reasonableness issue ). The jurisdiction issue This was a pure point of law concerning recoverability of the ATE premium. It turned on interpretation of section 29 of the 1999 Act which states, Where in any proceedings a costs order is made it can include costs in respect of the premium of an insurance policy taken out against the risk of losing. The defendant-appellant s argument was that the only proceedings commenced by the claimant were the costs-only proceedings and that the ATE policy had not been taken out in respect of those proceedings. Ergo the costs order made in the costs-only proceedings could not properly include the ATE premium. Counsel for the claimant-respondent suggested that the right way to approach the problem was to interpret section 29 by adding the words in square brackets, Where in [respect of] any proceedings, [whether commenced or contemplated].... However, as the Court pointed out, at the time when section 29 was drafted there was no such thing as a costs order in respect of proceedings that were merely contemplated. Costs-only proceedings were not added to the rules until July The draftsman would have needed to be clairvoyant to have foreseen that possibility. Instead, the Court adopted an argument advanced on behalf of the Law Society that the costs that could be included in a costs order were the costs that would have been recoverable in the proceedings had the proceedings been 8 Callery v Gray [2001] EWCA Civ 1117, [2001] 1WLR 2112, [2001] 3 All ER Callery v Gray (No 2) [2001] EWCA Civ 1246, [2001] 1 WLR 2142, [2001] 4 All ER ß The Modern Law Review Limited 2002

3 November 2002] Conditional Fees commenced. Apparently that was the end of that issue. The point was not raised by counsel for the defendant-appellant in the House of Lords. 10 The prematurity issue The prematurity question was whether the courts should allow recovery of a success fee agreed at the outset. In routine cases the success fees were commonly fixed in light of the facts of the case as known at that first stage at a level designed to produce a fund from the cases that won which would cover the costs in the cases that lost and which therefore earned them no fee. The defendant-appellants and those who appeared for the liability insurance industry, argued that the success fee should only be recoverable if fixed in light of the risks of losing that particular case which could not be known before the defendant had responded to the claim. The proper time to fix the success fee was at the end of the protocol period i.e. three months from the notification of the claim. ( This is a matter of importance, bearing in mind that over 90% of cases can be expected to settle and may well settle in the protocol period ). 11 It was only then that the claimant could make an informed appraisal of the risk of losing. The Court of Appeal said that this case concerned a category of claim where on the claimant s account of the accident the solicitor reasonably concludes that the claim has every prospect of an early settlement as to both liability and quantum. For the solicitor who handled litigation in bulk the risk assessment involved in determining the success fee at that stage was likely to turn not on peculiar features of the instant case, for there will be none, but on his experience that in a small minority of such cases, when the claim is pursued some unforeseen circumstances result in the ultimate failure or abandonment of the claim. 12 If the Court insisted that solicitors delay setting the success fee until the defence response to the claim was known the result would be a high uplift being justified in a minority of cases, but a small, if any uplift in the majority. 13 The claimantrespondents argued that in small routine cases it was reasonable to take out ATE insurance and enter into a CFA when first instructing the solicitor. At that stage the claimant will be concerned that, by giving instructions to the solicitor, he is not exposing himself to liability for costs. The solicitor for his part will be anxious to offer the claimant services on terms that, whatever the outcome, he will not find himself liable for costs. 14 In those circumstances, the Court said, we consider that, from the view point of both the claimant and his solicitor, it will normally be reasonable for a CFA to be concluded and ATE cover taken out on the occasion that the claimant first instructs his solicitors. 15 But were they recoverable? In considering that question, the Court said it was right to bear in mind that the purpose of the new regime was to facilitate access to justice for those who could not afford the costs of litigation and to reduce the burden on the legal aid fund. Making success fees and ATE insurance premiums recoverable was to put the burden on unsuccessful defendants. It also meant that the claimant had no incentive 10 See Lord Hope s speech n 7 above para 61 and Lord Scott s para ibid para ibid para ibid para ibid para ibid para 91. ß The Modern Law Review Limited

4 The Modern Law Review [Vol. 65 to control costs which made the role of the court in administering the new regime particularly important. 16 The defendant-appellants made a strong point that it was unjust to saddle them with the costs of the ATE insurance and the success fee until they had a fair chance to identify the cases that were not contested. But the Court concluded that at least in small routine cases the prejudice to defendants is not as clear as is suggested and that it is outweighed by the legislative policy and by a number of practical considerations. 17 The Court then listed a number of different considerations. The choice was between apportioning liability in small amounts between many unsuccessful defendants or in much larger amounts between those who persisted in contesting liability. If the latter, apportionment would not be on an equitable basis. Where there was a strong defence a larger success fee would be appropriate than if the defence was weak. Thus the more reasonable the conduct of the defendant the larger the success fee he would have to pay. Defendant interests with the assistance of the court should be able to restrict success fees and insurance premiums to reasonable amounts though for the time being the court had to operate on the basis of inadequate information. Claimants were exposed to liability for costs as soon as they gave their lawyers instructions. They wanted to know that they were protected from the outset. Solicitors and claims managers 18 were anxious to market their services on the basis that the client would not have to pay costs in any circumstances. The last practical consideration listed by the Court of Appeal was probably the clincher: There is the overwhelming evidence from those engaged in the provision of ATE insurance that unless the policy is taken out before it is known whether a defendant is going to contest liability, the premium is going to rise substantially. Indeed the evidence suggests that cover may not be available in such circumstances. 19 When the case reached the House of Lords, the prematurity issue was not even mentioned by Lords Bingham or Nicholls. Lord Hope cited the sentence just quoted ( There is the overwhelming evidence... ). He said that in his report to the Court of Appeal Master O Hare had acknowledged the risks to which ATE providers would be exposed if increasing premiums and the need to make inquiries were to encourage more claimants to dispense with insurance altogether. 20 He had also drawn attention to the advantages which flowed from the insurer s practice of giving delegated authority to solicitors to offer ATE cover to their clients. 21 As Master O Hare had said, it was characteristic of these policies that they did not differentiate between strong cases and borderline cases. This all-in approach reduced the administrative cost of risk assessment. (Neither Lord Hope nor Master O Hare alluded to the fact that a solicitor whose success rate slips risks removal from the scheme which powerfully discourages taking borderline cases. 22 ) Lord Hope said that Master O Hare s findings supported the Court of Appeal s observation that delegated authority arrangements would only work successfully if 16 ibid para ibid para For description of the role of claims managers see Zander, n 6 above at n 8 above para n 7 above at ibid para 16. In delegated authority schemes the authority to accept cases is delegated by the underwriters to the solicitor. 22 See Bawdon, Napier and Wignall, n 6 above ß The Modern Law Review Limited 2002

5 November 2002] Conditional Fees the solicitor did not cherry-pick by taking out ATE insurance only in risky cases. (The Court of Appeal had said, It is a basic principle of insurance that the many pay for the few and that premiums would increase if firms cherry-pick dead certs and run them without paying for insurance. 23 ) It was plain, Lord Hope said, that a finding that the cost of taking out ATE insurance at the outset was irrecoverable would have a profound effect on the cost and availability of this form of insurance cover. 24 Lord Hoffmann, though agreeing with the Court of Appeal in the result, was not convinced by its reasoning. He accepted that giving the client the assurance from the outset that he would not have to pay anything was a valuable selling point. But he doubted whether entering a CFA immediately was essential since he thought that many solicitors would be prepared to offer the first consultation free as a marketing tool. He also questioned whether agreeing a success fee from the outset insured the client against having to pay a higher one later if his case turned out to be more difficult since the client would not be paying the success fee in either case. The transaction therefore lacked the normal features of an insurance arrangement. He also queried whether it was the case that delegated authority arrangements would only work successfully if solicitors did not cherry-pick by taking out ATE insurance only in risky cases. Perhaps that was true. He was not in a position to say that it was wrong. But then neither was the Court of Appeal. When ATE policies first became available premiums were low and underwriters burnt their fingers. 25 But today premiums were much higher and ATE insurers insisted on all claimants taking out policies. Whether that was necessary to keep ATE insurers in business at current premium rates, he suggested, was an open question. Lord Scott agreed with the Court of Appeal that it was reasonable for the client to enter a CFA at the first meeting with the solicitor and before the defendant s reaction was known. ( After all the fees clock begins ticking as soon as a solicitor is instructed. 26 ) But this was not true of the ATE policy. ( The purpose of an ATE policy is to protect the claimant against adverse costs orders. But the risk of such orders cannot arise unless and until the claimant commences litigation to pursue his damages claim. 27 ) The Court of Appeal s view that it should allow the premium to be recoverable was not based on any notion that litigation in this case was a real risk. Rather it had been based on the Court s fear that unless premium recovery under costs orders were allowed in such commonplace minimal risk cases as Mr Callery s, the market in ATE insurance policies might wither. 28 Lord Scott said he accepted that if the premium in such cases was not recoverable, premiums would rise. He was, however, not prepared to accept that cover would be unavailable. But in any event that was besides the point. ( [I]t is in my opinion, contrary to principle for the reasonableness of the premature taking out of ATE insurance to be judged by reference to arguments about the impact on the ATE insurance market if recovery of premiums in commonplace cases such as Mr Callery s is not allowed ). 23 n 8 above para 67 quoting Professor J. Peysner. For a demolition of the many pay for the few argument in this context see Lord Scott s speech on the appeal, n 7 above para 112. He pointed out that it is not the many, namely the claimants who do not suffer an insured risk who pay for the few who do suffer such a risk. It is the liability insurers who pay and the premium fund is not built up for their benefit. 24 n 7 above para 59. As will be seen, p 924 below, despite the House of Lords decision, this is exactly what the Chief Costs Judge has now suggested. 25 ibid para ibid para ibid. 28 ibid para 111. ß The Modern Law Review Limited

6 The Modern Law Review [Vol. 65 The correct procedure for costs assessment purposes, Lord Scott suggested, was to consider the circumstances of the particular case. It is not a question to which the macroeconomics of the ATE insurance market has any relevance. If the expenditure was not reasonably required for the purposes of the claim, it would in my opinion, be contrary to long-established costs recovery principles to require the paying party to pay it. 29 A submission from the Lord Chancellor s Department argued that access to justice would be restricted if claimants could not insure against liability for costs from the point they instructed a solicitor. 30 This, Lord Scott said, missed the point. There was nothing to prevent the client from taking out such insurance. The question was whether it was reasonable to require the unsuccessful defendant to pay the premium when there was no actual risk of an adverse costs order. If there is no real risk of litigation or adverse costs orders, the absence of an ATE policy will not discourage access to justice for the claimant in question. If, despite the absence of any such real risk, the claimant wants to take out the policy, he can do so but cannot then reasonably expect the defendant to pay for it. 31 Moreover, if general policy questions were to be brought to bear, Lord Scott thought they tended strongly to militate against allowing recovery of the ATE premium. One of the main purposes of Lord Woolf s civil justice reforms was to reduce the cost and complexity of pursuing legal remedies and an important part of the system was the introduction of the pre-action protocols. They required the claimant to produce key documents to the defendant and the defendant to respond. In this present case a settlement was indeed the result of such exchanges. The preaction protocol served its purpose. In these circumstances the proposition that the defendant should have to pay by way of costs for an item of Mr Callery s expenditure that related exclusively to the litigation that the parties had succeeded in avoiding seems to me to be inconsistent with the purposes of the pre-action protocol. 32 Lord Scott would therefore not have allowed recovery of the ATE premium of 350. There is no question that Lord Scott had a powerful argument. The Court of Appeal and the other four law lords did not allow themselves to look at the ordinary principles of costs recovery probably for the very good reason that if they had looked they would have found it impossible to reach the result they felt was required. Their main reason for saying that an ATE policy taken out at the outset should be recoverable was that if it was not recoverable, the consequences for the ATE insurance market would be catastrophic. Lord Scott doubted whether this Cassandra-like conclusion was correct but even if it was, he said that such a macroeconomic consideration should be regarded as irrelevant. In the subsequent Claims Direct Test Cases 33 (affecting an estimated 100,000 or so cases) Chief Costs Judge Master Hurst indicated obiter that, Where an incident occurs, particularly a minor road traffic accident causing slight injury and where the liability insurer has from the outset accepted liability for the occurrence, it will generally be disproportionate and unreasonable to take out an ATE policy ibid para ibid para ibid. 32 ibid para July 2002, not yet reported but accessible on < 34 ibid para ß The Modern Law Review Limited 2002

7 November 2002] Conditional Fees The claimants, citing the Court of Appeal in Callery v Gray, 35 had argued that it was reasonable to take out an ATE policy even where the defendants admitted liability as cover is thereby made more affordable for the majority. 36 Master Hurst did not give reasons for apparently rejecting this macroeconomic consideration in favour of Lord Scott s dissenting view on the prematurity question. (As will be seen, 37 he was nevertheless prepared to uphold pricing of the ATE premium based on block rating as opposed to individual case by case assessment). It is difficult to be certain as to the significance of this dictum. It could be argued that from the outset means that solicitors should not sign up the client for an ATE policy until they have made efforts to discover whether the insurers admit liability and if so, consider whether this was nevertheless a case where an ATE policy would be appropriate. (In saying generally, Master Hurst recognised that there would be such exceptional cases). But the context was a case where the insurer admitted liability before the claimant saw a solicitor in fact on the day of the accident! If the dictum is limited to such cases, which are presumably extremely rare, it would have very limited significance as it could be satisfied by a single question as to whether the liability insurers had already admitted liability. Until higher authority speaks, there will be continuing uncertainty. The reasonableness issue (1) The reasonableness of the success fee The Court of Appeal started on the question of reasonableness of the success fee by noting that there had not yet been any guidance on the matter from the higher courts. Cook on Costs (4th ed. 2000) proceeded on the basis that there would be one success fee throughout the life of a CFA and that a solicitor was entitled to cover his prospective losses in unsuccessful cases by the success fee income earned in successful cases. In Callery the claimant s solicitors Amelans created an inhouse matrix with points awarded for the different features of a case on a sliding scale. This, the Court said, produced what seemed to us to be a surprisingly high success fee for a fairly straightforward passenger claim. 38 The guidance the Court would give was in the context of modest and straightforward claims for compensation for personal injuries resulting from traffic accidents. But even in that limited area the Court was faced with difficulties in setting guidelines when there was little experience to rely on. The Court went on, There is some statistical support for a success rate in respect of claims of the type with which we are concerned of up to 98%. 39 However, at this stage of its experience it was impossible to be precise as to what was the correct percentage. Even in apparently clear-cut cases there was always a possibility that something would go wrong. But it would be reasonable to proceed on the premise that at least 90% of straightforward cases would settle. The Court then proceeded to pick a figure out of the air. After careful consideration... we have concluded that, where a CFA is agreed at the outset in such cases, 20% is the maximum uplift that can reasonably be agreed. That was on the basis that there was no special feature 35 n 8 above paras n 33 above para n 65 below. 38 n 8 para ibid para 103. ß The Modern Law Review Limited

8 The Modern Law Review [Vol. 65 raising apprehension that the claim might not prove to be sound. Such apprehension would justify a higher success fee. Also the Court would want to review the matter when it had more data. The judgment adverted to the possibility that solicitors might propose a twostage success fee. It suggested that 100 per cent might reduce to as little as 5 per cent should the claim settle before the end of the protocol period. This, it reasonably suggested, would provide a strong incentive to the defendant to settle early. The Court admitted that a two-stage success fee agreed at the outset would inevitably be fixed before the merits of the claim could be known. The determination of the figures would have to be based on overall claims experience, with the proportion of contested cases which succeed, and the costs earned from such cases being particularly significant. 40 When more data were available consideration would need to be given to the question whether, where fees are agreed at the outset, the requirement to act reasonably mandates the agreement of a two-stage success fee. 41 There was no mention of the Court of Appeal s idea of a two-stage success fee in any of the speeches in the House of Lords. There is of course no suggestion of any such rule in the legislation. It would be a remarkable development if the courts were to impose it. Better that it should come, if at all, from amending legislation after full consultation with the various interests. But there was much discussion by the law lords of what would be an appropriate success fee in a straightforward case. Lord Bingham observed that there was obvious force in the defendant-appellant s contention that even a 20 per cent success fee in this type of case provided a generous level of reward... given the minuscule risk of failure. 42 But for two reasons he did not think that the House should intervene. First the responsibility for monitoring and controlling this new field lay with the Court of Appeal rather than the House of Lords. Secondly, there was as yet little reliable factual material, market experience was meagre and trends were hard to discern. Lord Nicholls in a judgment of six paragraphs agreed that for the two reasons given by Lord Bingham he would dismiss the appeal. Lord Hope said that the costs incurred in this case by way of success fee (as well as the ATE premium) do indeed appear at first sight to be wholly out of line with what the case required. 43 But it would be hard to imagine judges who were better qualified to examine these issues than the Lord Chief Justice, the Master of the Rolls... and Brooke LJ. He would be very slow to differ from the conclusions which they have reached. 44 Lord Scott said that it might be, as the appellant submitted, that the 20 per cent success fee was unduly high for a very, very low risk case, 45 but it was in his opinion not sufficiently out of line to justify interfering. Lord Hoffman also declined to interfere, but his speech addressed the reasonableness of the success fee in a very different manner. He first drew attention to the matrix used by Amelans to assess the success fee on the basis of points on a scale of 0 to 20. Virtually no personal injury case, he suggested, could score less than seven (giving a success fee of 35 per cent) and Mr Callery s scored another five. This, Lord Hoffmann said, could hardly be regarded as a rational calculation. 46 He then made this telling observation, 40 ibid para ibid emphasis supplied. 42 n 7 above para ibid para ibid para ibid para ibid para ß The Modern Law Review Limited 2002

9 November 2002] Conditional Fees What in fact determines the success fee solicitors charge is what costs judges have been willing to allow in more or less comparable cases, the fee being set at the level regarded as optimistic but hopefully not so optimistic as to provoke the liability insurers into contesting the amount. 47 The Access to Justice Act 1999 transferred liability for success fees and insurance premiums to insurers and thence to the general public who paid insurance premiums. The question was whether the public got value for money and whether decisions by costs judges with guidance from the Court of Appeal was the best way to ensure that such value for money was obtained. He doubted whether the courts had or could have the material on which to make sensible decisions. Costs judges traditionally decided whether fees were reasonable by reference to experience of the general level of fees being charged for comparable work. But this only made sense if the general level of fees was determined by market forces. Otherwise the exercise becomes circular and costs judges will be deciding what is reasonable according to general levels which costs judges themselves have determined. In such circumstances there is no restraint upon a ratchet effect whereby the highest success fees obtainable from a costs judge are relied upon in subsequent assessments. 48 Here effectively there was no market since solicitors had no incentive to compete on the success fees they charged. The matter became even more difficult when a solicitor carrying on litigation on a large scale was entitled, as the Court of Appeal had said, 49 to fix success fees to ensure a reasonable return overall on a class of litigation. The costs judge had no way of knowing whether the solicitor was carrying on business on a large enough scale to justify such an approach, and still less what level of success fees would give him a reasonable return overall. 50 Moreover the problem would not be likely to improve with time. All that costs judges will learn is what other costs judges are allowing. Solicitors will charge whatever is currently allowed and exert upward pressure to be able to charge more. But that will not tell anyone whether the fees paid to the solicitors represent reasonable value for money. 51 The CPR, Lord Hoffmann said, required assessment entirely by reference to the facts of the case. Once one invoked a global approach designed to produce a reasonable overall return for solicitors one moved away from the judicial function and into the territory of legislative or administrative decision. In his view it would be more rational to have levels of costs fixed by legislation. That would not only be more likely to keep costs at a reasonable level but also reduce disputes about costs. Lord Hoffmann s speech exposed to public gaze the complete intellectual emptiness of the Court of Appeal s approach to the fixing of success fees which has now been endorsed by the House of Lords. The whole business is based on strings and mirrors. There is nothing solid there at all. (2) The reasonableness of the ATE insurance premium The Court of Appeal initially reserved judgment on the reasonableness of the 350 ATE insurance premium pending a report it commissioned from Master O Hare. 47 ibid. 48 ibid para n 8 above para n 7 above para ibid para 34. ß The Modern Law Review Limited

10 The Modern Law Review [Vol. 65 His report (22 pages in the law report 52 ) is a mine of information on the current ATE insurance industry. His conclusion was that the very wide range of ATE premiums on offer 53 showed that ordinary market forces were not working. 54 This made it inappropriate at least for the time being to think in terms of benchmarks for premiums. 55 Nevertheless he suggested to the Court of Appeal that it was reasonable to presume as a starting point that the premium charged is reasonable... unless the contrary is shown. 56 The Court of Appeal, in an 18-page judgment given by Lord Phillips of Worth Matravers M.R., did not accept that presumption. 57 It urged solicitors to consult the two main sources of information about premium rates the magazine Litigation Funding and the website < It was to be hoped that before long choice would result in competition which established transparent market rates. In the meanwhile the courts would have to do the best they could. The premium of 350 in this case, the Court of Appeal said, was based on rating of the individual case by the solicitor to whom the task had been delegated by the insurers. If it had been done according to block rating the premium would have been Lord Phillips said that the question whether such a premium would have been reasonable did not arise for decision but on the face of it it would seem hard to justify. 59 The Court of Appeal held that recoverable premiums could include ones covering costs incurred on failing to beat a payment into court, or on losing a particular issue, or otherwise made in the discretion of the court. 60 After lengthy discussion of the issues it concluded that own costs insurance (for instance in respect of disbursements) could in principle also be recovered. 61 As to whether 350 was too high, the Court said, In the circumstances, the amount of the premium does not strike us as manifestly disproportionate to the risk. We do not find it possible to be more precise than that. 62 In the House of Lords, Lords Bingham, Nicholls and Hope did not address themselves to whether the ATE premium was too high. Lord Hoffmann, applying the same caustic analysis as he had already directed to success fees said that ATE insurers did not compete for claimants, still less did they compete on premiums charged. They competed for solicitors who would sell or recommend their product. And they competed by offering solicitors the most profitable arrangements to enable them to attract profitable work. There was only one restraining force on premiums how much costs judges would allow. But, Again, the costs judge has absolutely no criteria to enable him to decide whether any given premium is reasonable. On the contrary, the likelihood is that whatever costs judges are 52 n 9 above A search of < showed a range from 210 to 1,050 for the fast track and 210 to 1,837 for the multi-track, though there were differing limits of indemnity n 9 above para At para At para ibid. 57 n 9 above para In fact it was a case of block rating a point made by both Lords Scott and Hope, n 7 above, at paras 51 and 124 respectively. 59 n 9 above para ibid para ibid For extended consideration of what is included in recoverable insurance premiums under s 29 see the 43 page judgment of Chief Costs Judge Hurst in Re Claims Direct Test Cases, July , < 62 ibid para ß The Modern Law Review Limited 2002

11 November 2002] Conditional Fees prepared to allow will constitute the benchmark around which ATE insurers will tacitly collude in fixing their premiums. 63 Some form of financial regulation was normally considered necessary in those parts of the economy where market forces are insufficient to produce an efficient use of resources. That seemed to Lord Hoffmann to be the position in regard to ATE insurance in which the premiums are not paid either by the claimants who take out the insurance or by the solicitors who advise or require them to do so. The cost judge was wholly unequipped to perform that function. 64 Of all the judges who considered the matter, only Lord Scott would have disallowed the premium of 350. CPR 44.4(2)(b) provided that a doubt had to be resolved in favour of the paying party. In this case, where a block rate calculated for use in cases with a prospect of success of more than 50 per cent had been applied to a case with a prospect of success of well over 90 per cent, there could not in his opinion, be other than doubt as to the reasonableness of the charge. 65 QED. Conclusion a right mess, but carry on anyway Giving the first judgment in the Lords, Lord Bingham said that conditional fees were open to three forms of abuse. First, lawyers might charge excessive costs knowing that their own client would not have to pay them. Another, for the same reason, was that lawyers would set the success fee at a level that was grossly disproportionate to any fair assessment of the risks of failure in the litigation. A third possible abuse, with insurers having no incentive to moderate premiums, was that they might be grossly disproportionate to the risk being underwritten. The front-line responsibility for making the system work fairly and effectively lay with lawyers and insurers. The watchdog was the court. Lord Bingham concluded his judgment, I feel sure that district judges, circuit judges and in the last resort the Court of Appeal can be relied on to maintain a fair and publicly beneficial balance between competing interests. 66 Lord Nicholls said, A theme running through much of the appellant s case in your Lordships House was that the new funding arrangements for personal injuries claims in road traffic cases are unduly open to abuse and are being abused. Costs are being incurred unnecessarily and at an excessive level. The underlying problem, it was said, is that claimants now operate in a costs-free and risk-free zone. 67 As a result unfair burdens were thrown on liability insurers and the general public who pay the insurance premiums. Lord Nicholls did not deny that that this was the case. Plainly, he said, the criticisms give cause for serious concern. So what should be done about them? All he could suggest was that they should be watched closely as the system develops and matures. 68 Lord Hope agreed that unless the 63 n 7 above para ibid. 65 ibid para 57 cp Re Claims Direct Test Cases, n 33 above, where Master Hurst held that block rating of premiums in straightforward Road Traffic Act cases had been reasonable but that it might be otherwise if there were evidence that the cost of individually priced premiums was significantly lower, see paras ibid para ibid para ibid paras ß The Modern Law Review Limited

12 The Modern Law Review [Vol. 65 new regime is controlled very carefully unfair burdens would be thrown on insurers. But he too was content to leave the matter to the Court of Appeal. The trouble, as Lord Hoffmann convincingly pointed out, is that however carefully they watch developments, the costs judges, the circuit judges, and the Court of Appeal do not and will not have the tools to do the job. Nor is it very likely that the Lord Chancellor will accept Lord Hoffman s suggestion that the Government should intervene to regulate the field. In the field of personal injury litigation an alternative to legal aid funding has been found that sort of works and that effectively gives the claimant a free ride. If it also gives claimants solicitors and ATE insurers something over the odds, the defendant insurance industry will raise premiums to cover the cost and pass it on to the public. The Lord Chancellor may feel that he can live with that. True, there is widespread agreement amongst the senior judiciary that costs is an area in total chaos. The Civil Justice Council, chaired by the Master of the Rolls, is actively engaged in finding a way to fix costs in smaller personal injury cases. 69 The difficulties of achieving that for ordinary costs are formidable. To find a way of fixing success fees and ATE insurance premiums would be even more difficult. Postscript A major and disturbing further development occurred when this case note was at proof stage. The Court of Appeal in Halloran v Delaney, 70 without producing any new data, said that in simple cases that settle without proceedings being issued, unless the court was persuaded that a higher uplift was appropriate, the success fee should be restricted to 5 per cent and that this applied retrospectively to all CFAs entered into since 1 August 2001, the date of Callery v Gray! It referred approvingly to the concept of a two-stage (100% reducing to 5%) success fee. Its pronouncement, which seemed to ignore the outcome of Callery v Gray on the reasonableness of success fees, understandably caused consternation amongst claimants solicitors See J. Peysner, Fixed costs: The Facts, 17 Litigation Funding, Feb 2002, [2002] EWCA Civ, 6 September, per Brooke, Peter Gibson and Tuckey LJJ with the Chief Costs Judge as assessor. 71 See for instance, D. Chalk, Sounding the retreat, Sol. J., 20 September 2002, ß The Modern Law Review Limited 2002