We are well into the new regime post the Jackson reforms and the introduction of the Legal Aid Sentencing and Punishment of Offenders Act 2012, however the recoverability of success fees and After the Event Insurance has not died away just yet.

On the 9th, 10th and 12th February 2015 the Supreme Court UK heard the case of Coventry and Others (Respondents) v Lawrence and Other (Appellants). After what felt like a life time the Lords’ and Lady’s decision was handed down on the 22nd July 2015. This article seeks to provide a balanced view to combat some of the hysteria that has arisen in the legal media, post-judgment.

A majority 5-2 held that that the Access Justice Act regime is compatible with the European Convention on Human Rights. And moreover, the Supreme Court provided a brief, in comparison to the full judgment, press release outlining the basis of their decision. Lord Neuberger and Lord Dyson provided the supporting judgment, with agreement from Lord Mance.

Four Flaws

The judgment focused upon the four ‘flaws’ of the Costs Practice Direction, all of which had previously been identified by Jackson LJ and the ECtHR. Their Lordships focused their attention what was considered the third flaw, the Blackmail and Chilling effect of the regime. It was this flaw that they felt could materially affect a party’s rights under Article 6 and A1P1. However after detailed consideration they found that this was not the case.

Interestingly, the dissenting judgment from Lord Clarke, and supported by Lady Hale, argued that the ALA regime was in fact disproportionate because it failed to treat all Defendants equally. Instead it chose to isolate a particular class of Defendant and impose liabilities which are far beyond what is considered reasonable and proportionate.
The Respondents argued that the scheme for the recovery of success fee and ATE premium from the unsuccessful defendant under the Access to Justice Act 1999 and associated costs rules (‘the 1999 Act scheme’) was in breach of the defendants’ rights under the European Convention on Human Rights.

Furthermore, the Respondents then contended that the breach could be remedied by reading down section 11.9 of the CPD so that the court could reduce the success fee or ATE premium payable by reference to the proportionality of costs overall and the means of the paying party.

The Judgment makes it clear that, after considering full submissions from the Respondents and Appellants and several Interveners, including the Asbestos Victims Support Groups Forum UK, the Respondents should be ordered to pay the success fee and the ATE premium to the Appellants.

The Court heard detailed evidence that the aim of the 1999 Act scheme was to provide legislation for the successful party to recover the cost of the success fee and the ATE premiums from the losing party.

This meant that, in effect, Parliament had transferred the cost of providing assistance in bringing cases from the taxpayer to the insurance premium payer. In addition, it was shown that, after detailed mediations and industry wide negotiations involving both Claimant and Defendant representatives, an agreement to the percentage success fees being paid in various claims had been reached.

The Justices considered Lord Jackson’s four flaws and felt that the third flaw i.e. that the costs burden placed upon opposing parties is excessive and sometimes amounts to a denial of justice, “blackmail” or “chilling” effect, lay at the heart of this case.
The Justices also considered the Legal Aid Sentencing and Punishment of Offenders Act 2012 (the ‘LASPO scheme’) and felt that there are restrictions on access to justice inherent in the LASPO scheme. They considered that the LASPO scheme had curtailed access to the courts in some respects as a result, as demonstrated by the facts of this case.

They made the point that Claimants of modest means cannot finance litigation without a Conditional Fee Agreement (CFA), in effect a ‘no win, no fee’. But that inevitably requires them to pay a success fee on their solicitors’ and counsel’s basic charges.

Success Fees

In a substantial case, these costs are bound to be high. So, how is the success fee to be paid by claimants who bring claims for non-financial remedies or where the damages claimed are very small?

Sir Rupert recognised the problem, when he called for general damages to be increased by 10%. This was effected by the Court of Appeal in Simmons v Castle [2012] EWCA Civ 1039 and 1288, [2013] 1 WLR 1239. But in the present case, this would have benefited the appellants to the extent of only £2,085.

Even if the success fees were to be substantially reduced on assessment, this increase in damages would represent a very small fraction of the overall figure. In essence, under the LASPO scheme, the present litigation would not have been viable. The success fees are almost certainly more than the claimants’ likely damages, and more than the financial value of the rights they are attempting to protect.

In addition, a decision to amend the costs rules under the 1999 Act scheme would have a serious impact on many thousands of pre-April 2013 cases which are in run-off, as well as claims to which the pre-Jackson costs rules continue to apply, such as mesothelioma, insolvency and publication and privacy cases.

Any order made by this court in the present case would have no effect on the contractual obligations of litigants to pay success fees to their lawyers and ATE premiums to their insurers. Successful parties would, therefore, still be liable to pay their lawyers and insurers if they won their cases and could not recover them from unsuccessful defendants.

Although the Court recognised that uplifts and ATE premium would often mean that overall the costs would be disproportionate, and the old rules and practice direction contained many other deficiencies, the fact is that how to best fund litigation was a broad question for Parliament and the final scheme was justifiable and so compatible with the Convention.
This was because it was justified in light of the withdrawal of legal aid, was made after wide consultation and fell within the wide area of discretionary judgment for Parliament and the Government. The Court was alarmed at the practical consequences of finding the old scheme was not compatible.

The Cost of Certainty

The Judgments are lengthy, spanning nearly 50 pages and contains much interesting analysis. But at what cost?
Almost two dozen barristers seem to have been involved at the hearing and there were 8 interveners and 3 days of hearing time. The combined expense must be enormous. And all to challenge a system now largely abolished and which had been never really doubted by a generation of Judges. Yet this decision does, at least, provide a conclusive answer to this issue once and for all and in suggesting alternative ways of funding litigation there is much food for thought.

Lessons for the future

It should be plain from the above, and it becomes even plainer from the detail of the judgment itself, that Coventry v Lawrence was an uncomfortably close run thing. The question is what lessons can be learned from it for the future.
The first lesson is that the issue of CFA uplift and ATE premium recoverability may not have been finally resolved: it will be interesting to see what the European Court of Human Rights (ECtHR) makes of the point of principle, if and when it returns to it. If the ECtHR makes a finding of breach of A1P1, there will then be a further and weighty question as to how domestic courts will react. The issue at that stage may well become whether the consequences of such a finding are visited on the government or on those who have entered into CFA and ATE insurance agreements.

The wider lesson is that a degree of caution may need to be exercised before basing business models upon an assumption that common litigation funding schemes will prove resistant to far-reaching legal challenge in the future.
While that lesson can be easily drawn, it augurs ill for the success of damages-based agreements. That is unfortunate given that absent such agreements it is hard to see how the Jackson scheme will work in the case of potentially substantial claims that there are no immediate resources to pursue: how much weight, one must ask, can be put on the shoulders of the litigation funders?

Finally, a specific lesson for those managing legal practices arises from these points:
• The minority clearly believed that the legal profession as a whole were “on notice” of the risk of their CFA uplifts no longer being recoverable from the losing party. That, in turn, assumes that those managing legal practices maintain, alongside numerous other commitments, a careful eye on trends in costs law.
• Had Coventry v Lawrence been decided as the minority wished, there would have been serious questions about the solvency of a number of legal practices.
• Nevertheless, minimal weight was afforded to such concerns by two Supreme Court justices.

In this context, there must now be a stronger argument for legal practices to consider business structures that would allow for “running off” of old matters and their ancillary risks. This is by no means a straightforward task, but it would be unsurprising if interest in doing so increases.

Hayley Moore
Trainee Costs Lawyer and Team Leader
A&M Bacon Limited