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The changes to civil litigation costs proposed in Lord Justice Jackson’s report, which are to be implemented in the current Legal Aid Bill, could expose litigators to potential negligence claims according to independent risk transfer broker TheJudge.

This increased risk stems from Rule 2 of the Solicitors’ Code of Conduct, which places obligations on solicitors to advise their clients in respect of costs.

While client obligations in respect of costs are not new, TheJudge director Matthew Amey warns that the new regime will make the litigation process more onerous: “Previously, funding options were limited, but solicitors will now need to explore all options to take a case from beginning to end.”

Under the reforms, a claimant will no longer be able to recover their success fee and After-the-Event insurance (ATE) premium from a defendant that loses in civil proceedings.

The cost consequences of this will have to be explained to claimants and may lead to further litigation if they are not. The Bill brings in new products in the form of Damages-Based Agreements (DBA). As a result, there is an ever-expanding market of products offering funding options that must be explored, ranging from third-party funding, to DBA and ATE insurance in which recoverability is no longer an option.

“As these products become more available and mainstream, the expectation is likely to grow that solicitors should be able to advise on them, and that they are available.” says Edward Poulton at Baker & McKenzie.

Poulton suggests that lawyers should at the very least be able to recommend brokers who could advise on the options.

Disputes arising out of fee arrangements may be more commonplace in the post-Jackson era.

Michael Frisby of Stevens & Bolton says: “Clients may well be more likely to seek to challenge the bill at the end of the action; they have had little incentive to do so currently as all costs are recoverable.”

Frisby suggests that costs draftsmen are anticipating a rise in solicitor and own client assessments for this reason.

AFTER THE EVENT INSURANCE

Should the risk of negligence exist at all? Given that ATE has been available for over ten years, Amey concludes that “any reasonably diligent solicitor should advise about the existence of these products.”

Evidently, the adverse costs risk is often significant, according to costs barrister Vikram Sachdeva of 39 Essex Street, who points out that methods for lessening this cost burden should be drafted.

While those who sue on ATE insurance will have lost their cases, those who may not have it and may have needed it will need to prove that they could have obtained ATE insurance, had they been advised to do so.

However, the likelihood of such claims may diminish as ATE becomes less important, post-Jackson.

Katy Manley of Manley Turnbull says: “Specialist brokers would be needed to provide an opinion in each case as to whether or not it would have passed the criteria at the relevant time for cover to have been available.”

THIRD PARTY FUNDING

Given there are now more funders coming into the market, third party funding is an option, but Sachdeva believes, “only if the client asks about it should there be a duty to advise on it.”

He warns: “if the client does ask and advice is given, it must be competent advice – so an awareness of the competitive options that are available is important.”

While solicitors are not financial advisers, there may be a requirement to establish the most competitive offer.

A successful negligence action will require evidence from an expert third party funder demonstrating that the case could have been funded despite the solicitor’s lack of advice.

However, in Manley’s view, such a claim could be defended on the basis that “the risk of payment of a full success fee at an early stage would have deterred the client from this type of funding option even if it had been offered”.

Whether funding arrangements will develop and become more sophisticated is uncertain.

Tim Constable, head of litigation at Matthew Arnold & Baldwin, is sceptical: “People have become so conscious of possible future shifts in law; it has made them reluctant to invest in the same way as conditional fee agreements (CFA) and ATE.”

This, together with Poulton’s assertion that third party funding can become an obstacle to the prompt resolution of claims, suggests that it does not always offer a workable costs solution.

CONTINGENCY FEE ARRANGEMENTS

Jackson paved the way for contingency fee arrangements and DBAs, which are likely to supersede conditional fee agreements.

Although they are widely used in the US, this will be the first time they are permitted under English law.

“The client will need to understand that they will lose some of their damages”, explains Lynne Gregory, an associate at Charles Russell.

She says this may be a price worth paying for clients to be able to pursue litigation that they might otherwise be unable to afford. “Further, if they lose, their only liability will be for the other side’s costs, not their own lawyer’s fees, ” adds Gregory adds.

The danger with such arrangements is that solicitors effectively have a stake in the case, raising the question of whether solicitors should be able to promote a self-interested retainer against other funding, as well as whether they could be caught by negligence actions.

Ultimately the responsibility for fees lies with the client and, as Manley explains: “In most litigation cases there is a risk under the terms of the retainer that the client will be responsible for the payment of some of their legal costs”.

At the moment, that shortfall bears no direct relationship to the damages recovered. However, the amount due under DBA will be restricted to a fixed percentage of damages with a maximum amount payable.

“If this figure is set too low it may not be economically viable for law firms to offer contingency fees in complex, lengthy commercial litigation” explains Gregory.

“Nevertheless, client pressure may lead to law firms taking on contingency work with low percentages and this will clearly have serious financial ramifications.”

The onus will be on the solicitor to show that the client was advised, in his or her best interests, to take out a contingency fee agreement.

Frisby says: “The problem is that a court may readily accept that an unsophisticated cient was introduced by undue influence to enter into a contingency fee agreement.”

Jackson recommended that independent advice should be sought before a DBA is entered into. However, this was not followed up in the draft legislation.

It may in a law firm’s best interest to require a client to seek independent advice before entering into such an arrangement in any event, says Frisby.

CONCLUSION

With the Legal Aid, Sentencing and Punishment of Offenders Bill due to come into force in 2012, the time for analysis is now. As the Bill is not retrospective, any CFA- or ATE-funded cases that are signed up before it comes into force should be dealt with under existing law.

Manley says: “If a case is appropriate for funding, clearly there is some urgency for the solicitor to enter into a CFA retainer and obtain ATE insurance before the Bill comes into force, otherwise the success fee and ATE premium will not be recoverable from the losing party – even if their case succeeds.”

There is clear scope for negligence actions against solicitors who fail to advise and act in such circumstances. However, given the publicity afforded to the Bill and Jackson, solicitors may be caught unawares, causing negligence claims to increase.

David Jones of Cumberland Ellis says: “The changes proposed by the Jackson review have been a long time coming. Solicitors should be ready and able to give advice at the outset.”

The key, according to Frisby, will be making sure that the advice given is in the client’s best interest and that the client truly understands what the proposed funding options entail.

Constable says that it will take at least five to 10 years until the changed bed-in and are properly understood.

It seems unlikely that litigators will become victim to an increase in negligence actions, but there will be a knock-on effect from the greater emphasis on costs management proposed by the new regime.

Gregory says that the courts will only allow solicitors to recover limited costs from the other side, which means the client needs to bear the shortfall. This will inevitably lead to downward pressure on solicitors’ costs.

“Effective cost management is not a new necessity. However, the Jackson changes bring them into sharp focus,” Jones adds.