Litigation focus | LASPO has left judges to step into the unknown

In 2009, Lord Jackson embarked on a perilous journey to reform civil litigation in England and Wales. The changes that were proposed by Lord Jackson came into force three months ago in what many observers had already called the "Big Bang". But were the changes really a "Big Bang" or rather a "Big Bust"? What actual changes for commercial litigators have the reforms brought in and how might the landscape develop?

Even though it is too early to give definitive answers to these questions, a few comments and a summary appraisal can already been given at this stage. The manner in which the reforms were brought into law after years of reflection and consultation were somewhat haphazard and lacked clarity for practitioners. There was no thorough consultation before the implementation and the bill implementing the changes was hastily tagged on to another bill as opposed to a standalone piece of legislation which may have made navigating the reforms more straightforward. This lack of clarity is all the more surprising given the spirit of the reforms was to simplify the process for smaller claims to ensure that disproportionate amounts of money were not spent litigating small claims. From a commercial litigator's perspective, two main issues emerge: who will be obliged to comply with costs budgeting obligations and what is the use of damages-based agreements (DBAs) as they currently stand?

Mixed messages

The Jackson reforms were designed to reduce the cost of civil litigation and, to that end, litigation must now be managed at proportionate cost. However, practitioners have been given mixed messages on how this will operate in practice and who it will affect. Initially, the new rules on costs management were supposed to apply to all claims in the Chancery Division, the Technology and Construction Court and the Mercantile Court until an edict by the Chancellor of the High Court and the President of the Queen's Bench Division narrowed the application of these stringent rules to multi-track cases worth less than £2m. In addition, the budgeting requirements do not automatically apply to the Admiralty and Commercial Courts. The introduction of the £2m limit was supposed to prevent "forum shopping" given the discrepancy with the Admiralty and Commercial Courts, but it seems inevitable that the Commercial Court will be more attractive to claimants trying the avoid the onerous nature of the new cost rules. Can it therefore really be said that "forum shopping" has been completely avoided?

To address this problem the Civil Procedure Rule Committee (CPRC) has set up a sub-committee to advise on whether to retain the blanket exception to the mandatory requirement to produce costs budgets currently enjoyed by the Admiralty and Commercial Courts. In addition, the sub-committee plans to review the current exemption for all claims where the sum in dispute is over £2m, and to consider whether certain specific types of claim should be excluded from the mandatory costs budgeting regime. A consultation on these issues closed on 20 July 2013 and the outcome of the review is awaited. It is by no means certain that the exemptions will remain in place and Mr Justice Ramsey has recently said that his own view is that the exemptions should not exist. If, in fact, they are removed then clients with high-value cases may have to accept that their legal costs will be subject to the rigours of costs budgeting. This in turn may give rise to varied strategies to disadvantage an opponent through the new rules, and it will be up to the judges to police this.

Out with CFAs

The reforms have also paved the way for a fundamental change in the way that parties can fund their disputes. The conditional fee agreement (CFA) regime has been dismantled to address the perceived unfairness of exorbitant success fees and after the event (ATE) premiums in personal injury and small claims. Accordingly, CFA success fees and ATE premiums are no longer generally recoverable from the losing party where those arrangements were entered into on or after 1 April 2013. The implications of this are that defendants will no longer face increased costs liability where a claim is funded using a CFA or ?ATE insurance.

A party may still wish to fund its claim in that way but will ultimately be responsible for paying the success fee or ATE premium. For lower value commercial claims this may mean a reduction in the use of a CFA or ATE insurance, particularly if the damages awarded are not likely to be large enough to pay the success fee or ATE premium. For large commercial claims, the impact is probably not that significant. Nevertheless, there was doubtless a rush by many claimants to ensure that their arrangements were in place before 1 April 2013, thereby allowing them to retain the ability to recover the success fee and/or ATE premium from the defendant. There are therefore still likely to be a significant number of claims brought under the new rules that will not be affected by the changes to the CFA and ATE insurance regime and it will take some time before a level playing field is established.

Prior to the implementation of the Jackson reforms, it was unlawful for lawyers to be paid contingency fees, except in relation to employment claims. Under the new regulations, DBAs are now permitted. It is therefore possible for a client to ?agree that their lawyer will receive, by ?way of fees, a percentage share of the damages recovered from the opponent if the case is won, capped at 25 per cent of the damages for personal injury, 35 per cent ?for employment, and 50 per cent for all other claims.

In with DBAs

DBAs ought to have presented clients with a viable further funding option where they were prepared to give up a share of the damages and share the risk with their lawyers. Commercial litigation practices had been particularly anxious to use the regulations on DBAs to replace hybrid CFAs, which have become increasingly popular in the last few years. A strict interpretation of the regulations suggests, however, that a hybrid DBA would be unenforceable. A blended fee arrangement (i.e. part DBA, part standard fee arrangement) may not be permitted either. In those circumstances, commercial law firms are going to be very wary about entering into a DBA that may potentially result in no fees at all if the claim is unsuccessful. This issue needs to be addressed and Mr Justice Ramsey, in charge of implementing the reforms, has recently said that the regulations for DBAs should be changed to free up solicitors to offer a mixture of contingency fees and hourly rates in commercial cases. Quite when that will happen remains to be seen, but it may not be until April next year before the regulations are amended. In the meantime, the correct interpretation will have to be decided through the courts.

If, for the reasons above, commercial law firms are reluctant to enter into DBAs, the natural alternative for clients with substantial claims is third party funding (especially given that a post-Jackson CFA may be potentially less attractive). Third party funders are not restricted in the percentage they can take from a client's damages and can take on all costs risk in a case, which law firms may be unwilling to do. A number of large funders are increasingly active in the UK market and their future looks to be secure. Indeed, DBAs offer third-party funders an additional opportunity to work with law firms and potentially fund their contingency cases by covering WIP, barristers' and experts' costs, for example. This would allow law firms some of the benefits of contingency fee work but with a funder taking on some of the risk, which may be particularly attractive if hybrid DBAs are in fact prohibited. There has even been some speculation that third-party funders may set up boutique litigation firms to do contingency fee work, perhaps as alternative business structures under the Legal Services Act 2007.

So far it has been a rocky start and we will not know for some years whether the reforms have been a success. It will depend to a large degree on the judiciary and whether they seize the opportunity to manage their cases, as well as the cooperation of the parties and the extent to which the cost benefits are unravelled by any satellite litigation.