How the Jackson Reforms impact on litigation costs – An overview
On 1 April 2013 the biggest change to how the cost of litigation is dealt with in more than 10 years were introduced when Lord Justice Jackson’s reforms came into effect. The changes summarised below only affect cases started, agreements entered into and offers made on or after 1 April 2013.
There is a new test of proportionality, namely that costs will be proportionate if they bear a reasonable relationship to:
- The sums in issue;
- The value of any non-monetary relief in issue;
- The complexity of the litigation;
- Additional work generated by the conduct of the paying party;
- Wider factors such as reputation or public importance.
Costs that are disproportionate may be disallowed or reduced even if they were reasonably or necessarily incurred.
The overriding objective under the Civil Procedure Rules has been amended to require the court to deal with cases “justly and at proportionate cost”, which makes the new test of proportionality relevant at all stages of the action.
The greatest impact is likely to be on small to medium-sized cases, where there is the greatest risk of costs being disproportionate.
CFAs and ATE insurance
Conditional Fee Agreement success fees and After The Event Insurance premiums will no longer be recoverable from a losing opponent.
There is no cap on the level of damages that can be taken as a success fee, with the exception of personal injury cases where there is a cap of 25% of damages (excluding damages for future pecuniary loss).
In order to compensate personal injury claimants, the following two measures are being introduced:
A 10% increase in general damages will apply to claims for non-pecuniary loss whether in contract or tort; and
Qualified One Way Costs Shifting (“QOCS”) will be introduced. This means that defendants will generally be ordered to pay the costs of successful claimants, but will not recover their own costs from unsuccessful claimants except if the claim is found to be “fundamentally dishonest”, is struck out or if the claimant has failed to beat a defendant’s offer to settle under Part 36 of the Civil Procedure Rules.
This means that defendants will no longer face an increased costs liability where a claim is pursued with the benefit of a CFA and ATE insurance. However, in personal injury cases, this benefit to defendants is counterbalanced by the move to QOCS.
Damages Based Agreements
Damages Based Agreements are now permitted and lawyers can conduct litigation and arbitration in return for a share of any damages.
Contingency fees for most types of claim are capped at 50% of the damages, inclusive of VAT and counsel’s fees, but not other disbursements. Personal injury and clinical negligence claims are subject to a 25% cap.
An unsuccessful defendant will only be liable for the claimant’s costs which were reasonably incurred, reasonable in amount and which meet the test of proportionality. If the contingency fee agreed between the claimant and his lawyer is not reasonable and proportionate the claimant will have to pay the shortfall out of the damages.
The claimant cannot recover more from an unsuccessful defendant than he is liable to pay to his own lawyer. If the agreed contingency fee is lower than the figure arrived at through a traditional costs assessment, the defendant will therefore only have to pay the lower amount.
It also means that if the DBA is unenforceable the defendant will escape any liability for costs.
DBA’s are likely to be most commonly used in higher value cases, particularly if the issues are complex and the merits uncertain.
Since there will be a greater incentive for lawyers to take risks, defendants may be faced with more high-value and riskier claims.
Before 1 April 2013 a defendant who did not accept the claimant’s Part 36 offer and failed to do better at trial could be ordered to pay the claimant’s indemnity costs and enhanced interest on damages and costs. There is now an extra sanction calculated as 10% of damages on a money claim or 10% of costs for non-monetary claims.
For larger claims it will be calculated as 10% of the first £500,000 and 5% of the next £500,000, so the maximum uplift will be £75,000.
The extra sanction will put extra pressure on defendants to accept a settlement offer, but the impact will be less significant for higher value claims, given the tapering provisions.
Cost Management procedures have been introduced for all multi-track cases (claims worth more than £25,000).
All parties (except litigants in person) must file and exchange budgets setting out their estimated costs for each stage in the proceedings. If there is significant developments in the litigation the budgets must be revised and re-submitted.
Any party that fails to file a budget when required to do so may be treated as having filed a budget comprising of only the applicable court fees.
Where a party fails to keep its budget updated, its recoverable costs may be restricted by reference to its last agreed or approved budget.
The court may, at any time, make a costs management order and will then control the parties’ budgets in respect of recoverable costs. When assessing costs on the standard basis, the court will have regard to a party’s last approved or agreed budget and will not depart from it unless there is good reason to do so.
When making any case management decision the court will have regard to the budgets and take into account the costs involved in each procedural step.
It is unclear whether Cost Management procedures will save costs or, if they do, whether they will generate more costs than they save.
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