reign of uncertainty
8 February 2011
Whilst interested parties have been busy preparing their
responses to the Government Green Paper on civil costs the courts
have themselves been reviewing the question of success fees. Two
cases, one decided in the European Court of Human Rights
(ECHR) and the other in the Technology and Construction Court
(TCC), contain heavy criticism of the current system and pose a
number of issues for both Claimants and Defendants who operate in
the “no win, no fee” arena.
MGN v United Kingdom (Case No. 39401/04)
This is a case which has already garnered a considerable degree
of media attention over the past few years.
The claim dates back to 2001 after The Mirror newspaper revealed
that the supermodel Naomi Campbell was receiving treatment for drug
abuse. Proceedings were brought by Ms Campbell against the Mirror
Group which concerned the primary issue as to whether or not that
by publishing its story, MGN Limited breached the privacy of Naomi
Campbell.
In the High Court and in the Court of Appeal Ms Campbell’s
solicitors acted on a privately paying basis but switched to a
Conditional Fee Agreement in the House of Lords, as did her
Counsel. Her solicitors served three bills of cost in relation to
the claim totalling £1,086,295.47. Of that sum, £594,470 related to
the proceedings in the House of Lords with the success fee
totalling £279,981.35.
It was the contention of MGN that the fees it was being asked to
pay were unreasonably high because of the existence of the
Conditional Fee Agreement (CFA) and the success fee. They relied
upon Article 10 of the Convention (Freedom of Expression) on the
basis that the high cost of litigating prevents freedom of
expression. Their argument was rejected by the House of Lords and
so they made their application to the European Court of Human
Rights for a declaration that there was a violation of Article
10.
The Government made its submissions to the ECHR in March 2009
which was after the publication of the Preliminary Report by Lord
Justice Jackson but before the end of the public consultation
period which followed.
Under Article 6 of the ECHR, an individual has the right of
access to the court and so the court had to balance this right
against the right to freedom of expression under Article 10.
Therefore the question that was addressed by the court was
expressed to be:
“The Court will examine whether success fees recoverable against
unsuccessful defendants are “necessary in a democratic society” to
achieve that aim. In particular it must consider the
proportionality of requiring an unsuccessful defendant not only to
pay the reasonable and proportionate costs of the claimant, but
also to contribute to the funding of other litigation and general
access to justice, by paying up to double those costs in the form
of recoverable success fees. The applicant did not complain about
having to pay any After The Event (ATE) premiums of the
claimant.”
The Court found:
“192. The applicant’s complaint … concerns the impact on it of a
costs award which, under domestic law, included success fees
calculated at almost twice most of the base costs of two appeals to
the House of Lords. The Court considered, and it was not seriously
disputed by the Government, that the requirement to pay these
success fees, as an unsuccessful defendant in breach of confidence
proceedings, constituted an interference with the applicant’s
rights to freedom of expression guaranteed by Article 10 of the
Convention”.
The Court noted the findings of the Jackson review and in
particular four flaws identified by Lord Justice Jackson in the
system which can be summarised as follows:
- the lack of focus of the regime and lack of qualifying
requirements for Claimants entering into a CFA, especially
financial
- no incentive for the Claimant to control the incurring of legal
costs on his or her behalf
- the “blackmail” or “chilling” effect of the system of
recoverable success fees where it is felt that the other party is
“driven to settle early despite good prospects of a successful
defence”
- it is not possible to verify the records of solicitors and
barristers to “cherry pick” winning cases
The court did not condemn the CFA regime per se. It is the high
level of success fees that earned the wrath of the Court with the
court stating:
“…the Court considers that the depth and nature of the flaws in
the system, highlighted in convincing detail by the public
consultation process, and accepted in important respects by the
Ministry of Justice, are such that the Court can conclude that the
impugned scheme exceeded even the broad margin of appreciation to
be accorded to the State in respect of general measures pursuing
social and economic interests.”
Redwing Construction Limited v Wishart
Redwing brought proceedings against Mr Wishart arising out of
his alleged failure to honour an adjudication decision. Redwing
entered into a CFA with its solicitors and took out an ATE
insurance policy which covered opponent’s costs and own
disbursements.
The case was resolved in Redwing’s favour and the decision of 17
January 2011 concerns the costs aspect of the CFA and ATE insurance
so far as they relate to the extent and scope of recovery.
Mr Justice Akemhead, in his introduction, notes that the large
majority of adjudication enforcements are resolved in favour of
claimants. Despite this, claimants very often enter into CFA’s with
their solicitors and that “it is difficult to avoid the inference …
that this is being done so as to impose greater economic pressure
on the defendant to settle early”.
He went to slash the success fee in the CFA from 100% to 20%. In
addition, the premium for the ATE insurance which was being sought
from the Defendant was £8,480 for £20,000 worth of cover. He judged
this to be excessive and ordered that the Defendant pay 20% of the
premium.
Whilst it is reasonably unusual to see the Courts take this
line, it is the judicial comment in the case that it worth noting.
The terminology reflects many of the concerns raised in the Jackson
Report. Mr Justice Akemhead looked at the reason why Redwing
entered into a CFA. This is in line with the Jackson criticism that
the ability to enter into a CFA is not linked to one’s ability to
pay and also echoes the concerns that were raised in the decision
of the ECHR in the MGN case.
Furthermore, at paragraph 16 of his judgment he notes that so
far as adjudication enforcement claims are concerned that:
“It must follow that courts, particularly the TCC which deals
with virtually all such cases, will think long and hard about
allowing substantial CFA mark ups, particularly when there is a
summary judgment application by the party with the CFA. It is
important that Claimants that do not use CFAs and ATE insurance
primarily as a commercial threat to Defendants. It is legitimate
for the Court to ask itself whether in any particular case a CFA or
ATE insurance was a reasonable and proportionate arrangement to
make”.
Where does this leave us?
The cases raise a number of interesting and perplexing
discussion points and certainly issues that will need to be
considered by the Government when its consultation period on the
Green Paper ends.
The first and the most critical for the Government is the need
to balance the rights under Article 6 with those under Article 10
and that means that the fundamental question as to who funds
litigation generally and as to how access to justice is preserved
must be addressed.
Immediate legislation is unlikely as the consultation on the
Green Paper does not close until 14th February, the responses will
need to be considered and the issues carefully considered. Further
the Government will need to review this matter in conjunction with
the responses to its consultation on legal aid.
If we then look at a possible judicial response, we then face
the possibility of a “costs war” with paying parties arguing that
the MGN decision means the end of recoverable success fees or at
the very least arguing proportionality, not only in accordance with
the CPR but also incorporating ECHR rights. The factual matrix that
would need to be considered in each case raises questions of
proportionality in itself!
Of course, receiving parties will suggest that the courts are
bound by the House of Lords decision in the Campbell case which
upheld success fees. The difficulty with that is given the dicta in
the House of Lords, which has been echoed in the Redwing decision,
is that even if the courts continue to be sympathetic to the
concept of recoverability of success fees, they are likely to only
be recoverable at a lower level.
Further the recent decisions suggest that solicitors operating
under a CFA ought to, at the very least, factor in extra
considerations to their current risk management criteria to give
themselves the greater chance of recovering the success fee. In
particular:
- proportionality of the costs will become a bigger issue so
solicitors will need to balance the success fee as against the
amount in dispute
- solicitors will need to look at their client’s means and
alternative forms of funding which may be available. Will we see a
greater uptake of discounted conditional fee agreements to balance
the risk, particularly when we are looking at a better off
litigant?
- is it beneficial to think about staging the success fee, just
as staged premiums operate in ATE insurance and perhaps advising
the other side as to when they become operative (but clearly not
advising at that time the precise level of the success fee)?
- we also have to wonder as to whether we will see further
challenges to ATE premiums along the same lines that success fees
have been attacked
We now find ourselves in a situation where we have the ECHR
heaping damning criticism on high success fees but with no guidance
as to at where we go from here. We have no firm guidance as to what
percentage it may be permissible to set success fees and now face a
possible period of uncertainty whilst the Government decides what
to do as regards litigation funding generally whilst at the same
time waiting to see if we have another round of “costs wars” in the
courts.
What is clear is that we are witnessing the final days of the
100% uplift and the sooner we have some certainty as to how costs
will be treated going forward, the better.
This article was first published in New Law
Journal