In the dock: success fees, ATE premiums and the Human Rights Act Image

In the dock: success fees, ATE premiums and the Human Rights Act

Posted: 03/12/2014

Just as the dust was beginning to settle from the changes to funding and recoverability of costs ushered in by the Jackson Reforms, the Supreme Court has agreed to hear a challenge to the costs regime which they superseded. In essence, the argument in Coventry v Lawrence is that the requirement that the losing party pay any success fee or ATE premium incurred by the successful party is an infringement of their rights under the European Convention of Human Rights (the Convention). The ramifications of such a finding are potentially huge and, for the Government, expensive.

The costs regime pre 1 April 2013

The Courts and Legal Services Act 1990 (the 1990 Act), as amended by the Access to Justice Act 1999 (the 1999 Act) aimed to provide a system in which claimants were able to fund claims and thereby, as the title suggests, access justice through the courts. Section 58A(6) of the 1990 Act (added by section 27 of the 1999 Act) provides that an order for costs 'may, subject … to rules of court, include provision requiring the payment of any fees payable under a conditional fee agreement which provides for a success fee'. Section 29 of the 1999 Act contains a similar provision in relation to After The Event (ATE) premiums.  

Following the 1999 Act, conditional fee agreements (CFAs), often used together with ATE insurance, became one of the most popular funding methods for claims. The minimal risk and potentially high return offered by that funding mechanism led to an influx of claimants who may, pre-1999, have not had means to bring that litigation. Access to justice may therefore have been improved for claimants.

The down side, however, was that it fell to losing defendants to pay not only damages and the claimant’s base costs, but also the ATE premium and the success fee, which could be up to 100% of the base costs. The figures in Coventry (see below) illustrate the potential iniquity of this regime for defendants, who must be equally entitled to access to justice. The recoverable base costs were already equal to the value of the claim, but these were “dwarfed by the total potentially recoverable costs, which are nearly three times as much”. Lord Neuberger also noted thatthe respondents were defending their business, and had plainly had a reasonable case; they had after all won at the Court of Appeal.  

The Jackson Reforms were therefore greeted with an audible sigh of relief by potential defendants. Those defendants who suffered the high costs of the pre-Jackson regime will presumably be following the progress of Coventry with interest.

A finding of nuisance

The claimants/appellants in Coventry owned a property worth around £300,000 close to a motor-sports track. They claimed that they had suffered loss arising from the noise coming from the venue and that the noise amounted to a nuisance. They sought damages against both the tenants of the track and also the landlord owner of the site by way of the landlord adopting the tenant’s nuisance.

The claimants won at first instance, but the finding was reversed by the Court of Appeal.  The appellants then appealed and were successful in the Supreme Court. The nuisance was valued at £74,000.

The respondents were liable for the appellants’ costs under the pre-Jackson regime. At first instance, the appellants’ costs totalled £1,067,000. Those costs consisted of base costs of £398,000; a success fee of £319,000 and an ATE insurance premium of £350,000. The respondents were ordered to pay £640,000, or 60% of the appellants’ costs, although subject to any arguments on proportionality or reasonableness.

In the Supreme Court, the respondents challenged their costs liability and submitted that the requirement to pay what were referred to as the additional cost elements, being the success fee and the ATE premium, was in breach of both their right to a fair trial under Article 6 of the Convention and/or their right to protection of property under Article 1 of the Protocol to the Convention.

It is clear that the ramifications of such a finding could be significant. It is not surprising therefore, that Lord Neuberger, despite his concerns as to the cost of litigation for individuals, handled the matter with great care.

Appeal adjourned

The court did not reach a substantive decision. Lord Neuberger considered that the potential gravity of the issue rendered it necessary for the Government to have the opportunity to consider the wider policy issues and make representations prior to the court reaching a decision. He therefore adjourned the appeal.

Directions have been given for the hearing to be re-listed once notice had been given to the Attorney General and the Secretary of State for Justice. It is likely to be heard early in 2015.

View from the top

It is interesting that the arguments held any credence for their Lordships. Lord Neuberger was clear that although the primary legislation (s29 and s58A(6) of the 1990 Act) was not expressed in mandatory language, in practical terms the costs and recovery regime it introduced would not work unless the additional liabilities were recoverable in full from the defendant, irrespective of proportionality.

If the respondents were correct in their argument, Lord Neuberger held that “it may well be that the proper outcome would not be to disregard” (ie the secondary legislation), “but to grant a declaration of incompatibility, although that would be questionable as the relevant provisions of the 1990 and 1999 Acts have been repealed and replaced by a far less unsatisfactory system”. That declaration would declare the offending (but now repealed) statute to be incompatible with the obligations of the UK under the Human Rights Act 1998.

The deficiencies of the old system appear to have weighed heavily on Lord Neuberger’s mind.  He talks about the “malign influence” of the 1999 Act, and set out four of its “unique and regrettable features”:

  • Claimants had no interest whatever in the level of base costs, success fee or ATE premium which they agreed with their lawyers, as, if they lost they had to pay nothing, and if they won the costs would all be paid by the defendants. Conversely, the defendants had no say about the costs (other than retrospectively on assessment).
  • In many cases, unsuccessful defendants found themselves paying, in addition to the whole of their own costs, three times the claimants' 'real" costs.
  • While proportionality had a part to play when assessing the recoverability of base costs it did not apply in relation to the recovery of success fee or ATE premium (which were simply required to be reasonable).
  • The stronger the defendants' case, the greater their liability for costs would be if they lost, as the size of the success fee and the ATE premium should have reflected the claimants' prospects of success.

It seems therefore that the Supreme Court is not enamoured with the now repealed costs regime, which should make for an interesting hearing in due course. 

The potential impact

During the course of Lord Neuberger’s judgment he acknowledged that the determination by a UK court that the provisions of the 1999 Act infringed Article 6 of the Convention would have “very serious consequences for the Government”.

The Strasbourg court would not be bound by a decision of the UK court, although it is likely that the Strasbourg court would accept or agree with the decision. The end consequence might be that unsuccessful litigants who had been ordered to pay the additional costs in question could well be able to seek compensation from the Government. Given the proportion of claims involving the use of CFAs and ATE by at least one party, the compensation payments would be likely to run into billions. The Government can be expected to fight its corner in a robust manner.

Such a decision would also have an impact on those ongoing cases governed by the pre April 2013 regime, where liability and/or costs have not yet been decided. Many parties who find themselves in this situation have been asking for an adjournment of the detailed assessment of any additional liabilities claimed until the Supreme Court’s decision in Coventry is known. Similarly parties ordered to pay costs at the end of a hearing have been asking for the question of their liability to pay additional liabilities to be adjourned.

In his speech to the Commercial Litigation Association on 1 October 2014, the new Senior Costs Judge, Master Gordon Saker noted that these applications “have been given short shrift. Additional liabilities are recoverable under primary legislation. If that primary legislation is incompatible with the Human Rights Act, that should not affect recoverability as between the parties. Although …  there are arguments to the contrary”.

For the moment then, it is business as usual. But all eyes will be on the Supreme Court in 2015. Will they make a declaration of incompatibility against the now repealed provisions, unpick the secondary legislation (the old CPR Rule and Practice Direction) to import the concept of proportionality, or find another way through this costs quagmire?

Access to justice and proportionality

Coventry makes clear that even cases still subject to the pre-2013 costs regime are coming under heavy criticism as to proportionality, mirroring the post-reform emphasis on cost management. Lord Neuberger warned in his judgment that:

“The fact that it can cost two citizens £400,000 in legal fees and disbursements to establish and enforce their right to live in peace in their home is on any view highly regrettable.”

Noting that the Supreme Court’s concern related to the current system and did not imply any criticism of the lawyers in this case, Lord Neuberger stated that “it would be wrong for this court not to express its grave concern about the base costs in this case, and express the hope that those responsible for civil justice in England and Wales are considering what further steps can be taken to ensure better access to justice”.

The gauntlet has been thrown down. The question is whether the Government will take it up, and if so, how and if they can balance the need for costs proportionality with the need for all parties to have access to justice.

This article was published in the Commercial Litigation Journal in November 2014.

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