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Commercial Question

Dissecting Jackson

updated on 09 July 2013

Question

What are the Jackson Reforms and how have they changed the funding of commercial litigation disputes?

Answer

On 1 April 2013 new reforms to the Civil Procedure Rules (CPR) came into force. It is widely said that these are the biggest changes to the court process in the last 10 years, since the introduction of the CPR by Lord Woolf to ensure that the litigation process was managed more justly and efficiently by introducing greater judicial case management.

The courts considered that the CPR had achieved the desired outcome, but it was generally felt that, while the CPR generally sped up the litigation process, the cost of litigation had increased because case management was expensive and time consuming.

A further review of the court process was instigated, with Lord Justice Jackson tasked with devising solutions. Jackson submitted his proposals in the Jackson Report of 2010 and some of these proposed reforms, referred to as the ‘Jackson Reforms', are now being implemented by the government.

Although the Jackson Reforms are having a major impact on areas such as personal injury litigation, they will also have a significant impact on commercial litigation. The reforms address several areas of the CPR, but notably have a considerable impact on the way litigation is funded and conducted.

New overriding objective

The concept of proportionality is enshrined in the CPR and has been since their introduction in 1999. However, the Jackson Reforms have taken this concept to the next level and have introduced the new 'overriding objective' to Part One of the CPR, which states that the rules are a new procedural code with the overriding objective of enabling the court to deal with cases "justly and at proportionate cost".

Impact of the reforms

In practical terms, this means that case management orders will not be made by the court without also knowing and approving the order's cost as proportionate. This means that litigation is likely to be conducted on a reduced basis.

Specific guidance has now been given on how costs are assessed to be proportionate under CPR 44.3. It is specifically set out that costs which are considered to be disproportionate by the court may be disallowed or reduced, even if they were reasonably and necessarily incurred.

The reforms have implemented new measures to help the courts ensure that recoverable costs are proportionate. One of these measures is court-controlled cost budgeting, which is aimed at assisting in specifying what an unsuccessful party may be liable for from the outset.

In order to do this, each party must submit a litigation budget to the other party and the court. If one party doesn't accept the other's budget, the court will consider it, amend it if t necessary and then approve it. In doing this, the court will closely examine the figures given for each stage of the litigation process and decide whether the amount forecast is reasonable and proportionate. Whatever amount is knocked off, the budget will be unrecoverable from the other side if successful, unless there is a good reason to depart from the cost budget.

Furthermore, the Jackson Reforms have increased the small claims threshold from £5,000 to £10,000 for non-personal-injury claims. Only fixed costs are generally recoverable in small claims matters and the increase in the threshold means that careful consideration will have to be given as to whether or not a claim is economical to pursue through the small claims court.

A potential implication of the Jackson Reforms is that, even if a claimant is successful in a claim or a defendant is successful in defending a claim brought against them, the opponent is likely to be held not liable for a greater proportion of the winner's actual legal costs, leaving the winner with a shortfall between the actual costs incurred and what they may be able to recover from the opponent.

Conditional fee agreements

Both individuals and corporate entities are faced with the task of considering ways of how to fund both the pursuit of claims and the defence of claims brought against them.

The option of a private retainer will remain an important method of funding. There will also naturally be alternative methods of funding to consider as well, such as CFAs, especially given the current economic climate.

However, one of the major implications of the Jackson Reforms is that certain elements of costs associated with CFA funding, such as the success fee of a CFA and after-the-event insurance (ATE) premiums taken out to cover the potential adverse cost risk, will no longer be recoverable from the other side either at all, or to the same extent as before the Jackson Reforms. However, the client may remain liable for such elements of costs and, if so, the successful party that has funded its claim under a CFA may have to cover those unrecoverable costs from any damages which are awarded or, if not, out of its own pocket. This could therefore seriously impact whether a claim is considered to be economical to pursue.

Discounted conditional fee agreements

Another form of funding is a discounted conditional fee agreement (DCFA), which is probably used more frequently in commercial litigation matters than CFAs because of the complexity, nature and the associated risks involved. A DCFA takes a similar form to a CFA, but rather than the client paying no solicitors' fees if their claim is unsuccessful, the client is liable in any event for the lawyer's fees at an agreed discounted hourly rate. If the claim is successful, then the client is liable for the solicitor's costs at the solicitor's normal hourly rates, plus a success fee. However, DCFAs are subject to the same changes that CFAs face through the Jackson Reforms.

Damages-based agreements

The Jackson Reforms mean that contingency fee agreements are now allowed for the first time in the United Kingdom for funding court cases. This method of funding, known as damages-based agreements (DBA), provides for a payment to cover the combined total of the solicitors' fees and counsel's costs, (excluding expenses) that is only payable in the event of making a recovery from the opponent. The payment cannot exceed a cap expressed as a percentage of the amount of damages received and, in commercial litigation cases, this cap is set at 50%. Solicitors can add on the costs of expenses to this.

An unsuccessful defendant who is ordered to pay the costs of the claimant will not be held liable for an amount equivalent to the contingency fee. Rather, the defendant will be liable for costs assessed on the "conventional basis", ie, with reference to an hourly rate and an amount of time spent, but subject to the indemnity principle such that the paying party shall not have to pay more than the payment provided for under the DBA. It is widely thought that DBAs may not be considered attractive in many commercial litigation matters because of the effect of the rules surrounding them. One of these ensures that ultimately, the lawyers take the solvency and enforcement risk.

Overall, the law surrounding DBAs remains murky and further clarification from the courts will be required. Until this happens, DBAs are unlikely to be considered an attractive alternative form of funding in commercial disputes.

Before-the-event insurance/after-the-event insurance

Before-the-event insurance (BTE) covers policyholders against the potential legal costs of bringing a legal action when their legal rights have been breached, or when defending a claim brought against them. BTE is generally paid on an annual basis to an insurance company. For individuals, it is often sold as part of a home or car insurance package, and is also sometimes offered as a benefit to members of a trade union or association.

ATE, on the other hand, is insurance taken out after an event has occurred, to insure the policyholder for disbursements and any adverse costs orders should they be unsuccessful in their case. Typically, if the policyholder loses the case, the insurers will pay any adverse costs orders made against the policyholder and any disbursements. This kind of insurance is typically offered by insurers and claims management companies.

BTE and ATE are likely to continue to play a prominent role in litigation funding going forward, both for corporate entities and individuals. While professional indemnity insurance is usually (and frequently mandatorily) taken out by professional bodies and is advisable for corporate entities generally, it will now be of even more significance to commercial clients to ensure that they have the appropriate procedures in place to manage litigation risk.

The Jackson Reforms have caused widespread uncertainty over the issue of funding commercial litigation disputes and have not yet been tested, so it remains to be seen how they will work in practice. However, this should not put off commercial clients seeking redress through the litigation process, and a number of options are available to commercial clients to fund litigation going forward.

Natasha Guthrie is a final-seat trainee in both the insolvency and commercial litigation departments at Irwin Mitchell.