As we head towards the next millennium, the radical overhaul of the civil justice system shows little sign of slowing down. Whilst lawyers and insurers alike grapple with the effects of the Civil Procedure Rules introduced in April this year, further legislation, in the form of the Access to Justice Act 1999 received Royal Assent on July 27, 1999. Legislation is now in place to facilitate the increased use of Conditional Fee Agreements (CFAs).
Under a CFA, a solicitor agrees with the client that if a case is lost he will get no fee but if the case is won the solicitor will be entitled to a success fee. The success fee is agreed at the outset as a percentage of the solicitor's normal costs (NOT as a percentage of damages). The level of success fee will reflect the risk to the solicitor of losing the case (in which case he is paid nothing) and the fact he must wait until the successful conclusion of the case for payment. Running hand in hand with the CFA regime is the growth of Legal Expenses Insurance policies (LEI) to cover the other party's costs in the event of losing .
Access to Justice Act 1999
The Courts and Legal Services Act 1990 introduced the concept of CFAs.
In 1995 CFAs became lawful for certain areas of litigation including personal injury and in 1998 were extended to all civil proceedings except family law.
Part 2 of the Access to Justice Act (due to be implemented next year), allows a successful litigant to recover his solicitor's success fee payable under the CFA from the losing party in addition to his normal costs. Furthermore, the losing party will also be liable to pay the winning party's insurance premium assuming that the winning party had taken out LEI. The inevitable consequence is that cost awards will increase.
The Lord Chancellor's Department published a Consultation Paper in September entitled "Conditional Fees: Sharing the Risks of Litigation". Comments on the proposals must be sent to the LDC by November 26, 1999.
The proposals include the following:
- Where a party has entered into a CFA, the other party should receive notification of the existence of the CFA.
- Where a party has taken out a LEI policy, the other party should receive notification of that.
- Both the client and the losing opponent should be able to challenge the level of the success fee and/or the premium through a court assessment.
- Should the maximum percentage uplift remain at 100%.
Insurance industry fears
Costs payable by defendants and/or their insurers will rise significantly.
Insurers and their solicitors will have difficulties accurately reserving in relation to the costs of litigation. Whilst they will be aware of the existence of a success fee and LEI premium, they will not know the level of these fees until judgement or settlement. This hidden cost will make it difficult to assess the commerciality of defending claims.
On the other hand claimants have argued that if defendants become aware of the level of success fee or LEI premium, this will give them an indication of the strength of the claim, as assessed by claimant solicitors and legal expenses insurers. This they argue, would be an unfair advantage to defendants.
Minimising the impact
Insurers will need to consider how to deal with cost reserving, once the Access to Justice Act is implemented.
Insurers are likely to be challenging claimants costs more frequently than at present. The Consultation Paper foresees claimant solicitors keeping notes, justifying the level of any success fees. These notes will be available to the Court when assessing the reasonableness of the fee. If defendants are to be in a position to challenge, they must have undertaken a similar assessment.
The future CFA landscape is not all bad news for insurers. CFAs should "weed out" claims without merit and if a defendant successfully defends a case, there is greater likelihood of them recovering their costs.