Jackson Report – Kerry Underwood responds
Now that we have all had a chance to fully consider the Jackson Costs Review, the Legal Costs Blog has approached some of the “great and the good” in the costs world to ask them to share their views with us.
First up is Kerry Underwood, senior partner with Underwoods Solicitors, Chairman of Law Abroad and recognised expert on litigation funding issues.
TALKIN’ ‘BOUT JACKSON
In Jackson, Johnny Cash sang of “talkin’ bout Jackson ever since the fire went out”.
Many of us think that maybe the fire is the best place for this report.
Indeed rumours of a Cappelo/Jackson job swap are being well-received by lawyers and football fans alike.
So why has the report met with a reception as affectionate as that greeting the returning England World Cup team?
Its headlines have been about banning referral fees and abolishing the recoverability of success fees and after-the-event insurance premia, but those issues have been the subject of fierce debate for years and the proposals are nothing new; they represent a reversion to the pre-2000 position.
If one judges the report on its new proposals it is illogical and internally inconsistent and many of its recommendations are unworkable. It shows signs of having been completed in a hurry, with spelling errors and mistakes of grammar.
Let us look at some specifics.
The report recommends that contingency fees be allowed in civil litigation but that “costs should be recoverable against opposing parties on the conventional basis and not by reference to the contingency fee”.
What on earth does a contingency fee where you still get conventional hourly rate costs from the other side achieve that a conditional fee agreement does not achieve?
It is pointless. The other side pay as usual. The client pays to his or her own solicitor an extra fee related to damages. That is precisely what happens when the client pays a conditional fee success fee capped at 25%.
It achieves no change in behaviour. The benefit of contingency fees is that there is an incentive to settle very quickly; same fees – less work. Indeed the danger is of rapid under-settlement. To maintain the old “how thick is the file” basis of recovery from the other side is self-defeating and shows a failure to understand the point and psychology of contingency fees.
Lord Justice Jackson also recommends that such agreements be invalid unless the client has received advice from another solicitor.
Why the need for independent advice? This means a conditional fee agreement with a 25% damages capped success fee can be signed there and then but a 10% contingency fee agreement is subject to the client going to see another solicitor. In the average English town you will be lucky to find one solicitor who understands contingency fees, let alone two.
So, my firm agrees to carry out a piece of work on a 20% contingency fee basis. My client takes it to our competitor down the road who says to my client:
“No you must not sign that, 20% is far too much. I will do it for 15%.”
Client returns to me to get me to approve that solicitor’s 15% etc, etc.
Is this now to happen with cars? Is a Mercedes dealer to refer a customer to another Mercedes dealer to check that the price given by the first one is acceptable?
Can the second dealer undercut the first dealer and so on and so on?
Why trust heavily regulated, disciplined and insured professionals less than a car-dealer?
I support strongly the concept of contingency fees but this proposal is illogical and unworkable – like the 4-4-2 system.
Third Party Funding
The lack of a coherent approach is shown clearly in relation to third party funding.
At present a client’s success fee is paid by the other side but the third party funder’s fee is paid by the client.
If the client is to be the payer in any event then an informed decision needs to be made in each case between these two methods of funding.
For example in what looks like a safe case the client may feel better off with a Third Party Funder taking 20% of any damages and agreeing to pay the solicitor in the event of defeat. The potential loser here is the solicitor who will receive no success fee but face no risk.
These will be difficult calls and the tension between non-recoverable success fees and third party funding has not been fully considered.
In the pre-2000, pre-recovery days there was no third party funding and so the issue has not arisen.
Supposing a third party funder was to advertise that it would back any viable road traffic accident case in return for 10% of damages.
What would the solicitor’s duty then be?
To limit their own success fee to 10%?
Solicitors are subject to all of the professional discipline that Third Party Funders are not.
Third Party Funding in an age of non-recoverability of success fees risks a re-run of Claims Direct and the Accident Group.
Unfortunately this chapter also deals with Maintenance and Champerty and even more unfortunately recommends retaining the rule, and even more unfortunately that the rule should be abrogated for third party funders.
So, a qualified extremely heavily regulated, insured solicitor who agrees to indemnify his or her client against an adverse costs order breaks the rule;
In Dix v Townend  APP.L.R 06/30, Deputy Master Victoria Williams, Costs Judge, controversially ruled that solicitors who agreed to indemnify their client against the other side’s costs are acting unlawfully by reason of champerty and thus are entitled to no costs at all. However, such a retainer is not unenforceable or illegal by reason of ss 23 and 26 of the Financial Services and Markets Act 2000 as an unauthorised contract of insurance.
A voluntary coded (weren’t they discredited 30 years ago) unqualified Third Party Funder Claims Management Company Alternative Business Structure is free from such restriction.
Because “A number of respondents pointed out that abolishing the common law doctrine of maintenance could have unintended consequences”.
Well, that could apply to any proposal ever made anywhere. That is the problem with unintended consequences – they are just that – unintended.
The independent advice rule for contingency fee agreements is not to be applied to third party funding agreements.
So, solicitor and client are considering possible methods of funding and narrow the options down to:
(a) Conditional fee agreement
(b) Third Party Funding
(c) Contingency fee agreement
In each case the take will be 25% of damages.
Conditional fee agreements are notoriously complicated and for the client, in spite of what is in the report, the percentage take is not limited to 25% of damages. That is the limit on the success fee. Solicitors can still take extra costs by way of the difference between solicitor and own client costs and recoverable between the parties costs – see my book No Win No Fee No Worries 2nd Edition.
Third Party Funding agreements are much more complex – trust me I have just drafted one and the solicitor can, and indeed often will, act on a conditional fee agreement in a third party funded case. Thus the client risks a double dip into damages with both the third party funder and the solicitor taking a cut.
Contingency fees by contrast are beautifully simple and 25% means just that – no extra, no solicitor and own client costs, no nothing except the clear percentage figure. That is why clients love them so much. There is a nice short simple agreement, written by me in the Law Society Practical Precedent book.
So what is the recommended regulatory proposal?
Separate advice needed for contingency fee agreements but not conditional fee agreements or third party funding!
I couldn’t make this up!
One-way costs shifting
The proposal is that in personal injury cases the claimant will have no liability to the defendant in the event of losing, but the defendant will continue to pay the successful claimant’s costs in the usual way.
The report says that there needs to be deterrence against bringing frivolous claims or applications and incentives for claimants to accept reasonable offers.
If the claimant fails to beat the defendant’s offer then the existing consequences as set out in CPR 36.14(2) will apply, that is that the claimant will pay all of the defendant’s costs from then on, the assumption being that the costs in respect of the pre-offer period plus the damages recovered by the claimant will provide sufficient funds for the claimant to pay the defendant’s costs.
This is where the whole scheme breaks down. The claimant will have no after-the-event insurance to protect him or her against the adverse costs consequences of failing to beat a Part 36 offer as recoverability is to be abolished.
In a footnote on Page 191 Lord Justice Jackson says:
“It has been suggested to me that such a regime is open to abuse by defendants, in that they could make an offer of £10 in every case. In my view, a stratagem like this would be doomed to fail. A miniscule (sic) offer is in effect no offer. Furthermore if the claimant loses on liability (as opposed to recovering damages lower than the amount of a Part 36 offer), he or she does not acquire any funds out of which to meet an order for costs.”
That appears to suggest, although it is not clear from the report, that a claimant who fails to beat a defendant’s Part 36 offer only has to pay the defendant a maximum of what they have recovered from that defendant.
This has bizarre consequences.
A claimant brings a perfectly reasonable claim and the defendant offers £10,000 and the claimant rejects that offer and goes to trial and recovers £9,000 plus pre-offer costs of say £3,000. The claimant is at risk of paying £12,000 and getting nothing for a perfectly valid claim where he or she was no doubt told that because of one-way costs shifting he or she was not at risk of paying costs.
Another claimant brings a very weak claim. The defendant has a choice
(i) make no Part 36 offer and defend the claim; or
(ii) make a Part 36 offer.
In (i) the defendant is on a hiding to nothing – no offer – no costs payable at all by the losing claimant, because of one way costs shifting.
In (ii) the defendant is forced to make an offer to inflict a potential costs penalty on the claimant, but what a Pyrrhic victory that is.
The claimant can accept the offer and thus get compensation where he or she should not get compensation.
If the claimant does not accept the offer and goes on to lose at trial the defendant gets nothing as there is no damages or costs fund for the claimant, out of which to pay the defendant.
So, quite simply, the weaker your case the greater the costs protection!
Recently I delivered a series of lectures for Central Law Training in relation to the Jackson Report. I put to the delegates a case scenario under the existing scheme and under qualified one-way costs shifting.
The case scenario is that you act for a claimant and the case is worth £100,000 at full value and you are very likely, but not certain, to win.
What level of Part 36 offer has to be made before you advise the client to accept?
Different solicitors had different views but £75,000 to £90,000 was the band with a concentration of around £80,000 to £85,000.
I would not disagree.
Same scenario, but the new regime, so no after-the-event insurance protection against failing to beat a Part 36 offer, and indeed no recoverable after-the-event insurance at all.
Everything due from the defendant goes in to the pot from which the defendant can get post Part 36 costs back.
You incur £10,000 disbursements pre Part 36. The client has not paid for these and cannot afford to. If the Part 36 offer is not beaten then apart from the existing risks that the client and the solicitor run the solicitor now faces losing £10,000 cash that he or she has actually paid out, because there is no insurance to cover it. (Under the current system in the event of a win, but a failure to beat a Part 36 offer, the other side’s costs would be paid up by the insurance and thus the defendant would have no need or right to offset against money due to the claimant for pre – Part 36 work and disbursements).
Now what Part 36 offer has to be made before you advise the client to accept?
Now the band was £35,000 to £50,000 with a concentration around £40,000 to £45,000.
Again, I would not disagree.
So precisely, my Lord Jackson, where do the words “Access” and “Justice” come in?
The Jackson Report is as useful as the England midfield. I know. I have had the misfortune of reading and lecturing on this miserable publication AND being in South Africa and watching every minute of England’s dismal performance.
Jackson and Capello. Sounds like a law firm. Looks like a circus.