The Civil Justice Council (“CJC”) has recently published its eagerly awaited final report recommending a series of reforms to third-party funding (‘TPF’) and other forms of litigation funding to promote effective access to justice. The report follows a comprehensive consultation by the CJC, to which Stewarts responded in detail.

In the second part of this series examining the CJC’s final report, risk and funding partner Julian Chamberlayne and senior paralegal Jenny Leppard review the recommendations that may impact the serious injury claims that Stewarts’ Personal Injury, Medical Negligence and Aviation and International Injuries departments specialise in.

Reforms to conditional fee agreements (“CFAs”) and damages-based agreements (“DBAs”)

One of the CJC’s most significant proposals is for the current CFA and DBA legislation to be replaced by a single, simplified legislative contingency fee regime. The CJC also recommends responsibility for the drafting and issuing of any new regulations to be transferred from the Ministry of Justice to the Civil Procedure Rule Committee to ensure any future remedial or reform measures are carried out promptly. However, we wonder how long it may take to turn this bold ambition into reality. There is likely to be an overlap between this recommendation and forthcoming recommendations from another CJC working group for the replacement of the aged Solicitors Act 1974.

To improve consumer protection and ensure consistency in the provision of information concerning CFAs and DBAs to consumers, the CJC proposes the development of clear guidance by the Solicitors Regulation Authority (“SRA”) and the government and the provision of template contingency fee agreements.

Irrespective of whether this single regulatory regime is introduced, the CJC recommends that the indemnity principle is abrogated for contingency fee agreements. Under the indemnity principle, the losing party is not required to pay more than the amount the successful party is required to pay their solicitor. This has posed significant challenges in many cost disputes over the years. The CJC also sensibly recommends that the court should have the discretion to enable non-compliant contingency agreements to be enforceable, modifying the current draconian operation of the DBA Regulations since 2013 and minimising the risk of a repeat of the CFA cost wars that plagued the early years after the CFA Regulations were introduced in 2000.

CFAs (alongside after the event (“ATE “) legal expense insurance) are commonly used to fund serious injury claims and, as noted by the CJC, are generally working well. DBAs, on the other hand, have been widely criticised for their complex and draconian provisions, which have hindered their use and reduced access to justice. The CJC has recommended, as a matter of urgency, the long overdue implementation of the DBA Reforms proposed by Professor Rachael Mulheron KC and Nicholas Bacon KC in 2019. This was highlighted as a pressing issue requiring immediate action in Stewarts’ response to the consultation.

A key proposal under the 2019 DBA Reforms is to move away from the Ontario model (under which costs recoverable from the Defendant are treated as a credit towards the DBA fee) to a Success Fee model similar to CFAs. The DBA Success Fee will be subject to the same caps as for CFAs (see further below). This DBA Success Fee model is less complex, more financially viable for moderate-value claims, and makes it easier to account for counsel’s fees. It also reduces the risk of satellite litigation relating to the recoverable costs. Consequently, it will encourage more law firms to offer DBAs to clients for a range of disputes, likely including serious injury claims.

The CJC also recommends that the government review the current caps placed on CFA success fees, including consideration of whether they require adjustment to account for inflation, particularly for mesothelioma claims. One of the least anticipated suggestions by the CJC is that consideration be given to adopting Scotland’s staged damage-related caps on success fees for personal injury claims. Currently, in England and Wales, CFA and DBA success fees for personal injury claims must not be more than 25% of the client’s general damages and past losses (with an additional cap of not more than 100% of the solicitor’s hourly rate charge for CFAs). However, under the approach in Scotland, a cap of:

• 20% applies to the first £100,000 of all damages,
• 10% applies to any damages over £100,000 but under £500,000, and
• 5% applies thereafter for any amount over £500,000.

Firstly, this approach provides greater certainty as to the calculation of the success fee. It is rare for an injury claim to settle with an agreed breakdown of damages, including the amount of general damages and past losses. Secondly, the proposed approach acknowledges the fact that the vast majority of damages in catastrophic personal injury claims are future losses. The current exclusion of future losses has meant that the risk-reward ratio is insufficient for some high-value but high-risk cases (although, to the credit of the profession, many firms still take on this risk).

However, this proposed staging and percentages should be subject to modelling based on the economics of a range of English injury claims (as Scottish procedure and costs are different) and further consultation should take place to ensure a fair and economically viable regime for England and Wales, including for higher risk cases. Plus, the disincentives to Periodical Payments under the Scottish regime, not mentioned by the CJC, must be avoided.

Regulation of third-party funding (“TPF”)

TPF is rarely available for serious injury claims, apart from a very small number of large group actions. For those claims in which TPF is available, the CJC proposes additional, albeit still light-touch, protections for consumers above those proposed for commercial disputes. These include imposing a consumer duty on funders, which requires providing the proposed-funded party in advance with clear, simple and transparent information about the nature of the funding, the risks and benefits and the likely amount of the funder’s return. In combination, the recommendations for the regulation of consumer group claims will enable lawyers to better advise on and clients to make more informed decisions about the suitability of the funder and terms of the proposed funding arrangement.

In its recommendations, the CJC makes a clear distinction between the regulation of lawyer-funding (CFAs and DBAs) and non-lawyer funding (TPF). As part of this distinction, the CJC recommends that the provision of claims management services should not fall within the scope of the contingency fee regime but rather should be regulated as a form of TPF.

Recoverability of success fees, ATE or funding costs

The CJC makes it clear that the report does not recommend revoking the Jackson Reforms to reintroduce some form of recoverability of success fees or ATE premiums. However, the report does recommend the recoverability of litigation funding costs in exceptional circumstances, notably David v Goliath disputes where the defendant’s conduct drives up the costs.

That is an all too familiar scenario for firms specialising in injury-related product liability group claims. However, the draft wording of the proposed Civil Procedure Rule (“CPR”) provision excludes its application to personal injury proceedings. That exclusion is, in our view, both unfair and unwarranted. The reasoning related to qualified one-way costs shifting (“QOCS”) makes little sense, as QOCS does not enable a claimant to fund their claim; rather, it relates to adverse cost exposure and the need for ATE insurance. We also do not understand why, if the exceptional circumstances arise, a funded claimant should be able to recover TPF costs, but had that same claimant brought their claim under, say, a DBA with an ATE insurance, they would be unable to recover that type of funding cost.

Before-the-event insurance (“BTE insurance”)

BTE insurance is occasionally used alongside CFAs to fund a serious injury claim, but it rarely provides a complete funding solution. The use of BTE insurance has long been hindered by restrictions placed by BTE insurers on the claimant’s freedom to choose their preferred solicitor.

We welcome the CJC’s proposal to implement the related recommendations made by Lord Justice Jackson in his 2009 Review of Civil Litigation Costs. Such proposals include changing the point at which freedom to choose legal representation arises to when a letter of claim is sent to the opposing party. Currently, this right only arises when proceedings are issued. Investigating pre-proceedings is a crucial time that can make or break a claim. Requiring the use of a panel solicitor during this time may result in the entirety of the policy indemnity being exhausted before the seriously injured claimant can change to their preferred lawyer. Implementing this recommendation would promote access to justice and the uptake, utility and use of BTE insurance.

Additional recommendations

The CJC makes recommendations for regulating crowdfunding, with different regulatory regimes applying based on whether the donor receives a financial reward if the litigation is successful.

Lastly, the CJC recommends the establishment of an “Access to Justice Fund”, a form of legal aid funded by a small percentage of the profits recovered by funders and legal representatives from TPF, CFAs and DBAs to fund the provision of early legal advice and alternative forms of dispute resolution for all types of civil disputes.

Lawyers conducting serious injury claims effectively have to represent their impecunious client on CFA or DBA terms. It is not a question of choice by those lawyers aimed at making extra profit. Many of those claims, notably in the medical negligence sector, are discontinued after initial investigations and so they are already meeting an access to justice need similar to that proposed in this recommendation.

In addition, many firms, including Stewarts, provide extensive pro bono legal advice to their seriously injured clients on a broad range of issues. Since the Jackson Reforms and with the increasing scope of fixed costs, the profitability of injury claims is under pressure and is incomparable to the potential profit levels under many TPF agreements. If this contentious recommendation were applied to injury claims, it would need to be offset by increases in the caps on success fee charges. Otherwise, firms would be forced to put their hourly rates up to the detriment of injured claimants.

Conclusion

The CJC’s final report presents a series of progressive recommendations to reform various forms of funding for serious injury claims, promoting clarity and certainty. Furthermore, the long-overdue reforms to DBAs and BTE insurance will open up these underutilised forms of litigation funding, providing seriously injured claimants with more options to fund their claims, thereby promoting greater access to justice.

The plan to consolidate the CFA and DBA regulations into a single act is conceptually sound. Still, the scale of it, coupled with its relationship to the reform of the Solicitors Act, means this will take some time and will require careful drafting. The reform of CFA (and DBA) caps for serious injury claims requires further consultation to ensure a fair return on risk and the economic viability of these claims.