What changed?

From 1 April 2013, where parties fund their litigation via conditional fee agreements (CFAs) and/or after-the-event (ATE) insurance, the CFA success fee and ATE premium are no longer recoverable from the losing opponent if the case is successful. Parties can still enter into CFAs and take out ATE insurance to fund their litigation, but have to bear the additional costs of doing so.

Parties can enter into a CFA with their lawyer, where the lawyer is paid up to double the normal fee if the case is won and nothing, or sometimes a discounted fee, if the case is lost. The uplifted fee is called a success fee, and it is capped at 100%.

Parties can also take out ATE insurance to cover their risk of having to pay the opponent’s costs, as well as their own disbursements, if they lose the case. ATE policies are sometimes available with “deferred and self-insured” premiums, meaning the insured party does not have to pay the premium until the end of the case, and does not have to pay it at all if the case is lost – ie the insurance kicks in to cover the cost of the premium itself as well as the adverse costs if the case is lost.

The crucial feature of this system as it applied before 1 April 2013 was that both the CFA success fee and the ATE premium were recoverable from the opponent if the case was successful. As recommended by Lord Justice Jackson, that is no longer the case for CFAs entered into and ATE policies taken out on or after 1 April 2013.

How was the change implemented?

These changes were implemented by section 44 and section 46 of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO) which amend the relevant sections of the Courts and Legal Services Act 1990.

What transitional provisions are in place?

The previous rules continue to apply to CFAs entered into and ATE policies taken out before 1 April 2013. There are provisions to prevent parties having circumvented the changes by entering into a collective CFA, relating to a class of proceedings rather than a specific claim, before the cut-off date. Where the agreement is a collective CFA, there is an additional requirement that advocacy or litigation services were provided to the party in connection with the specific claim before 1 April 2013.

Why was the change introduced?

As Lord Justice Jackson identified, the effect of the previous arrangements was that claimants (who are the predominant users of such arrangements, though in theory they can be used by both claimants and defendants) could litigate “risk-free” at huge cost to losing defendants.

  • If the claim was lost: they wouldn’t have to pay their lawyer anything under the CFA; they wouldn’t have to pay the opponent’s costs because those were covered by the ATE insurance, and (generally) they wouldn’t have to pay the ATE premium because that had been deferred and self-insured.
  • If they won they would recover their costs from the defendant, including the success fee under the CFA and the ATE premium.

Lord Justice Jackson expressed the view that this placed an excessive costs burden on opposing parties, whose costs liability could become grossly disproportionate if they contested the case to trial and lost. The defendant’s costs liability could be up to four times the “normal” costs of a party to the litigation, in that they would have to pay:

  1. their own legal fees and disbursements;
  2. the claimant’s normal legal fees and disbursements;
  3. the claimant’s success fee of up to 100% normal fees; and
  4. the claimant’s ATE premium which (for a deferred and self-insured policy) could be in the region of 90% of the sum insured.

Lord Justice Jackson took the view that this needed to change, and so recommended that recoverability of CFA success fees and ATE premiums be abolished. The government adopted this recommendation, citing the need to “reduce the unfair costs suffered by the many businesses, individuals and other organisations (including the NHS) that have been faced with CFA actions” and restore greater proportionality to the costs of civil cases.

The decision to abolish recoverability was however very controversial, with claimant lawyers in particular arguing that the changes would mean a decrease in access to justice.

Are any types of case excluded from the change?

The government announced in May 2012 that CFA success fees and ATE insurance premiums would continue to be recoverable in insolvency proceedings until April 2015, on the basis that such cases “bring substantial revenue to the taxpayer, as well as other creditors, and encourage good business practice”. In fact that exception remained in place until April 2016. Until 6 April 2019, there was also an exception for defamation proceedings.

There are also exceptions for:

  • claims for damages in respect of diffuse mesothelioma;
  • in relation to ATE, premiums to cover the cost of expert reports on liability or causation in clinical negligence cases.

What special provisions were made for personal injury claims?

In personal injury cases, as a further restriction on the level of success fee that can be charged, the success fee is subject to a cap of 25% of damages (excluding damages for future pecuniary loss). The lawyer can therefore be paid a success fee of up to 100% of normal fees, capped at 25% of damages.

Two other measures were introduced which were designed to compensate personal injury claimants for the abolition of recoverability, in order to alleviate fears that this would mean a reduction in access to justice:

What are the implications for commercial parties?

Defendants no longer face an increased costs liability where a claim is pursued with the benefit of a CFA and ATE insurance. The changes have therefore generally been seen as good news for defendants, though in personal injury cases the benefit is counterbalanced by the move to qualified one-way costs shifting (QOCS).

Note: Content up to date as at 30 April 2019

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