Herbert Smith held a client event on 29 June 2009 to discuss the preliminary report in Lord Justice Jackson’s year-long costs review, which was published on 8 May. There were presentations summarising the key proposals in the preliminary report followed by panel discussions on the issues raised. The panel was chaired by head of dispute resolution Sonya Leydecker and included Lord Justice Jackson, Helen Dodds of Standard Chartered Bank giving the client perspective and John Beerbower, partner in Cravath, Swaine & Moore LLP, giving the US perspective.
Although Lord Justice Jackson emphasised that he has not come to a firm conclusion on any of the issues raised in his report, he made a number of interesting observations on some of the key points up for debate:
Methods of funding:
- Lord Justice Jackson could see a case for saying that, outside the personal injury context, success fees and after-the-event (ATE) insurance premiums should not be recoverable from an opponent.
- He commented that no other costs regime in the world allows a private arrangement between the claimant and its lawyer to multiply the defendant’s potential liability in the way our system does.
- He asked for views on the possibility that success fees / ATE premiums no longer be recoverable, but that contingency fees be introduced on the Canadian model (combining regulated contingency fees with cost shifting on a conventional basis).
- Lord Justice Jackson suggested that, for substantial litigation, one alternative would be to move away from standard disclosure as the default position in large cases, adopting instead a “menu” approach.
- Under this approach, before the first case management conference the solicitors for each party would be required to provide statements identifying, in broad terms, what documents exist, where they are located, what costs could be involved in giving standard disclosure, and what they consider would be the appropriate scope of disclosure. The judge would then decide on the appropriate scope in that case, be it documents relied upon, documents relating to particular issues, standard disclosure or some other alternative.
- Lord Justice Jackson is tentatively looking at the idea of having witness summaries plus evidence-in-chief as the norm, but with the court having power to order full witness statements in appropriate cases.
Below is a more detailed report of the discussion.
In her opening remarks, Sonya Leydecker outlined the context for Lord Justice Jackson’s review. We are now 10 years on from the introduction of the Civil Procedure Rules which followed Lord Woolf’s review of civil procedure. One aim of Lord Woolf’s review was to cut costs. It is generally agreed that this did not happen, despite other successes of the Woolf reforms. This is no doubt what has led to Lord Justice Jackson’s review.
The aim of the review is to make recommendations in order to promote access to justice at proportionate cost:
- Access to justice is often thought of as applying only to claimants, and impecunious ones at that. Clearly, however, our system has to work for defendants as well.
- Proportionality means that one size does not fit all, which Lord Justice Jackson has clearly acknowledged in considering possible reforms.
The review is very wide-ranging and raises fundamental issues as to how our civil justice system operates. It is also very complex, given that everything is interconnected: change in one area is likely to affect other aspects of the system, meaning that care must be taken to avoid unforeseen and unintended consequences. The task is also made more difficult because any changes must not discourage international commercial parties from choosing to bring cases in the English courts.
Lord Justice Jackson
Lord Justice Jackson spoke briefly about his review. The Master of the Rolls has given him the task of reviewing the rules and principles governing the costs of civil litigation and making recommendations to promote access to justice at proportionate cost. His terms of reference include looking at the costs rules themselves and how litigation is financed, as well as procedural issues that affect the costs of litigation. The costs of civil litigation cannot be tackled by looking at the costs and funding rules alone; the area must be looked at holistically.
He explained that his review is divided into three phases. Phase I was the fact finding stage, in which he received large quantities of data, reviewed written submissions from interested parties, had meetings with various groups and prepared his preliminary report. Phase II, which continues until the end of July, is the consultation stage. Phase III will be the preparation of the final report, which is due to be published by the end of the year.
The preliminary report identified a huge number of issues. Lord Justice Jackson emphasised, however, that he will not come to a firm conclusion on any of them until the end of Phase II. This is largely because all of the issues are inter-connected and a change in one area affects many other areas.
Highlights of panel discussion:
Contingency fees: The preliminary report invites views as to whether contingency fees (whereby a lawyer is remunerated by way of a share in the client’s damages) should be permitted and, if so, whether the losing party should pay costs on a conventional basis or should also be liable for the contingent element of the fee.
Helen Dodds said she does not believe contingency fees should be ruled out. It very much depends on context, and in particular what the costs shifting rules are. If contingency fees were combined with one-way cost shifting in favour of claimants, then this would result in a serious imbalance between the parties to litigation. In the US, contingency fees are combined with no cost shifting. This also results in disadvantages for defendants, and can lead to a divergence of interests between claimants and their lawyers. Helen expressed interest in the Canadian model of contingency fees (combining regulated contingency fees with cost shifting on a conventional basis).
John Beerbower, commenting from a US litigator’s perspective, suggested that the ban on contingency fees is worth reconsideration. The US experience is that contingency fees work reasonably well outside the class action context. There is a question as to whether contingency fees create improper incentives for lawyers, but for sophisticated clients this should be an option available for negotiation. It is doubtful that the traditional fee model, where lawyers charge on an hourly basis, aligns the interests of the client and lawyer very well. However, it must be remembered that with contingency fees typically 20-30% of the damages go to the lawyer, which means that the claimant is not fully compensated (unless, as some suspect, the existence of the contingency fee is taken into account by US juries awarding damages).
In the class actions context, the US opt-out system (whereby an action includes all those who fall within a defined class of claimants unless they specifically opt out) means that claims can be brought on behalf of a huge group whose individual losses are very small. Since the lawyer receives a percentage share of the total damages, the predominant beneficiary of the litigation will generally be the lawyer rather than the actual claimants. This leads to various difficulties, but is not a necessary feature of contingency fees outside the class actions context.
Denis Chemla explained that contingency fees are illegal in the French system. There is a system of conditional fees depending on the value of the case, which respects the idea that the lawyer’s fee should be proportionate to what is at stake. Denis said that, in his view, contingency fees are a necessary corollary of class actions. If a class action system is introduced in France (as has been talked about for some time) they will also need to introduce contingency fees to make the system viable.
Ted Greeno commented that the introduction of conditional fee agreements (CFAs) “broke the dam” regarding the objection to contingency fees based on conflict of interest. In his view, regulated contingency fees with “normal” costs shifting would be preferable to the current CFA regime. He said they were rejected by policy makers no doubt because of the stigma of the US experience, with very high recoveries for lawyers.
Sonya Leydecker said that there has been a lot of talk about alternative charging models for litigation, and how difficult it is to find an alternative to hourly rates because it is so difficult to predict what will happen in the course of the litigation. It may be that contingency fees would provide at least part of the answer.
Helen Dodds said she would not rule out using contingency fees or litigation funding (i.e. third parties who provide funding in return for a share of the damages), but for a commercial claimant who can afford the litigation it may be preferable to pay the lawyers on a conventional basis: if the prospects were very uncertain, the case probably would not be pursued in any event (for various reasons, including reputational issues); if the prospects were good then it might well be better to pay hourly rates. So in theory there is no reason not to use alternative funding mechanisms, but in practice their use might not become so widespread among commercial parties.
Lord Justice Jackson asked those present how many would consider it acceptable to permit contingency fees on the Canadian model. The great majority were in favour.
Conditional fee agreements (CFAs) and after-the-event (ATE) insurance: The report invites views as to whether success fees payable under CFAs and premiums for ATE insurance should continue to be recoverable.
A participant from the floor commented on his experience where an opponent was funded by a CFA with ATE insurance. In that case the costs became a real issue, with the uplift under the CFA and the “enormous” ATE premium standing in the way of resolving the dispute. At the mediation, it was quite clear there was a conflict of interest between the claimant and its lawyers, who did not want to settle unless their fees were paid.
Lord Justice Jackson said he understood that success fees and ATE premiums had been made recoverable mainly due to the withdrawal of legal aid in personal injury cases, so that claimants would not have to suffer a deduction from their damages to meet these costs. He said he could see a case for saying that, outside the personal injury context, these costs should not be recoverable from an opponent. He commented that no other costs regime in the world allows a private arrangement between the claimant and its lawyer to multiply the defendant’s potential liability in the way our system does. He asked for views on the suggestion that success fees / ATE premiums no longer be recoverable, but that contingency fees be introduced on the Canadian model.
Views on this question were mixed. Murray Rosen QC commented that this suggestion appeals at a psychological level, but the economic implications are somewhat difficult. In seeking to promote access to justice, anything that causes a gap between what a claimant must pay and what it will recover can be unhelpful. A claimant may decide it is simply not worth going to court if it will have to cover potentially large fees out of any damages recovered.
A participant from the floor agreed, saying it is fair that success fees / ATE premiums are recoverable. A change would mean that claimants were discouraged from pursuing valid claims, as the claim might be wiped out by the fees. This would reduce access to justice.
Another participant, from the publishing sector, disagreed; he said that from a publisher’s perspective, the recoverability of such costs denies access to justice. A publisher will often feel forced to settle an action where there is a CFA / ATE cover due to the huge costs they could be facing if they lose. This has a chilling effect on freedom of expression. Further, claimants in such actions are often very wealthy and do not need the CFA / ATE regime to obtain access to justice. The regime may be there to help those who cannot afford litigation, but it is also open to abuse by those who can afford it.
John Beerbower said that this is a good analogy to the US system, in which the costs regime allows skilled plaintiffs’ lawyers to engage in what some might refer to as a type of blackmail – i.e. where a defendant feels forced to settle because of the sheer costs it knows it will have to face if it fights the action, and which it will not be able to recover. As an economic matter, the defendant may have no choice but to pay off the claim. It seems that the CFA / ATE regime is similar in allowing claimants to increase the defendant’s potential liability to such an extent as to pressure them into a settlement.
Ted Greeno commented that, in addition to the disproportionate burden imposed on defendants by recoverability of success fees / ATE premiums, this system also removes any incentive on claimants to control the costs of litigation, since they will not be paying the costs in any event. Indeed, it may be argued that it gives the lawyers an incentive to ramp up costs because if successful (which they will no doubt consider likely, or they probably would not have agreed to act under a CFA) they could double their fees.
Lord Justice Jackson asked those present how many would favour abolishing recoverability of success fees / ATE premiums. The great majority were in favour of such a change.
Disclosure: The report puts forward various options ranging from limiting disclosure to the documents on which a party relies (with the ability to seek further documents) to reverting to the old “train of enquiry” test. For heavy cases it proposes the use of disclosure assessors, who would be experienced lawyers appointed to assist the court in relation to disclosure.
Nick Gardner said that in his specialist area, Intellectual Property, there is a fairly marked trend away from disclosure. He recently had a large case come to trial where there was almost no disclosure at all. He pointed out that the rules currently do allow flexibility; standard disclosure is not invariable. Nick also commented that, at the time of the Woolf reforms, there was not a wide appreciation that the problems with disclosure would go on getting worse as a result of the rise in electronic communication. He predicted that it will go on getting worse, with the emergence of new methods of communication through social networking etc, and so it is time that we address the issue. Lord Justice Jackson’s report puts forward a large number of options, effectively putting everything up for grabs. The question is: what does the “consuming public” want?
Helen Dodds expressed the view that disclosure is the most significant problem in terms of the costs of litigation. She said that the explosion in electronic documents had had a very damaging effect on the common law model for disclosure, and we need to have an open mind in looking at alternatives. The legal systems in many other jurisdictions, as well as international arbitration, have a more restricted starting point, and we cannot say they do not achieve justice. She said she would support starting with a narrow test for disclosure, with the possibility of widening it in appropriate cases, rather than the current very wide starting point.
John Beerbower commented that the US discovery process (as disclosure is known there) is a major source of cost. He described it as the worst aspect of the US system. There have been efforts to address the problem, but to date without success. The test is very broad, comprising not only relevant documents but any document that could lead to the discovery of relevant documents (similar to the old “train of enquiry” test applied in English litigation before the introduction of the Civil Procedure Rules). This test was formulated in a different era, and is no longer useable in the modern business world.
With regard to the proposal for disclosure assessors, similar to the US system of special masters / magistrates to deal with discovery issues, John said that this makes the system “less bad”, but he could not really say that it works. To be effective, the process would have to be made much more inquisitorial than the US system, with the assessor having the power to demand the necessary information rather than relying on the parties to present their opposing positions.
John also expressed interest in the proposal of shifting some of the cost of the disclosure exercise onto the party requesting the documents, particularly for electronic disclosure. The costs of an electronic disclosure exercise tend to be huge, and if the requesting party had to pay for this upfront it might well have an impact on the breadth of disclosure sought.
Denis Chemla commented on the French system, which is at the other extreme from US-style discovery in that parties need only disclose the documents on which they rely. He said that the lack of disclosure brings its own problems, including that there is generally no way to obtain critical documents which it is clear the opponent must have. He expressed a preference for limited disclosure with court powers to ensure compliance.
Lord Justice Jackson said that with the increase in electronic material, it is sometimes suggested that in heavy cases standard disclosure has simply become impossible. One alternative would be to move away from standard disclosure as the default position for substantial litigation, adopting instead a “menu” approach. Before the first case management conference, the solicitors for each party would be required to provide statements identifying, in broad terms, what documents exist, where they are located, what costs could be involved in giving standard disclosure, and what they consider would be the appropriate scope of disclosure. Then at the case management conference the judge would decide on the appropriate order, whether standard disclosure or some other alternative. He asked for views on this approach.
Several stated that they would be in favour of the “menu” approach in principle, but a number of concerns were expressed. In particular, it was felt that the success of this approach would depend on the quality of the work done by the solicitors in preparing for the case management conference; it could only be effective if the information had been gathered and presented properly. Concern was also expressed at the amount of effort this would require parties to put in at a very early stage, with several commenting that it might create a significant burden. The view was also expressed that for this option to work it would require greater judicial resources, including better training for judges on disclosure issues.
Lord Justice Jackson asked those present how many would favour:
- keeping the present approach of standard disclosure – only two were in favour.
- adopting the “menu” option – about a third of those present were in favour.
Witness statements: The report identifies various options, including making witness summaries the norm rather than detailed witness statements.
Helen Dodds said that she thought witness statements generally represented money well spent. She had experienced “trial by ambush” before witness statements were introduced, and she did not think a return to that situation would be helpful. Even if there were no witness statements, the parties would still need to produce proofs of evidence so that they would know what their witnesses were going to say, so the cost savings from doing away with witness statements would not be that great. In fact, she said she could see some merit in moving toward US-style depositions.
Nick Gardner said that he agreed with this generally, but thought that what was lost as a result of witness statements was the benefit of hearing a witness give evidence-in-chief, which often would assist the judge to assess the truth of the evidence. He wondered whether there might be some mix of the two approaches.
Hardeep Nahal suggested that there might be a middle road. Witness statements were designed to cut costs, but have become a huge exercise where, for example, witnesses typically comment on every document relevant to them even if they have nothing to add to the content of the document itself. A solution might therefore be to have witness summaries followed by examination-in-chief. He said that it was interesting that Lord Justice Jackson did not endorse the approach recently adopted by the Commercial Court, of tying the witness statements to the list of issues.
Lord Justice Jackson said that he was not a huge fan of lists of issues as in his experience they never provided any great benefit. Huge costs could be spent on them and it was generally quite obvious what the issues were in any event.
Lord Justice Jackson said that his perception from Phase I was that witness statements can be a significant problem. Equally, however, he could see potential problems with witness summaries. He said he is tentatively looking at the idea that the better course might be witness summaries plus evidence-in-chief as the norm, but with the court having power to order full witness statements in appropriate cases.
Lord justice Jackson asked the audience how many would favour this approach. There was a slight majority in favour of retaining the status quo.