Rule Britannia

The text of this article first appeared in the June 2016 issue of Litigation Funding.

At the time of writing, the referendum on whether this country should remain in the European Union or not, is some 6 weeks away. Every day, the respective camps for leaving or remaining, tempt the uncommitted voter with the prospect of millions of Albanians, Serbs and Turks moving to the United Kingdom should we remain, or the delights of being part of a free trade area with Montenegro and the Ukraine, as the de facto 51st  state in President Trump’s America. It’s going to be a tough one to call.

This year in January, Jackson LJ set forth a vision for a scheme of fixed costs to apply to all money claims worth up to £250,000, with a prediction that such a scheme, could, if the political will were present, be implemented before the end of 2016. But because this is a referendum year, that seems most unlikely.

The intended consultations on fixed costs for the limited classes of NIHL claims and clinical negligence have not taken place, as the Ministry of Justice goes into lock down and concentrates on the referendum, in peculiar circumstances where the Lord Chancellor is on the other side of the political divide to the Prime Minister.

In such circumstances, it does not seem fanciful to suggest that if the country votes to leave the European Union, the Ministry’s efforts for the next 20 years will be spent uncoupling the country’s laws from the European Union and all interest in fixed costs proposals and similar schemes, will just fall of the political agenda.

It follows in turn that the financial interests of litigation lawyers will be served by voting for Brexit, the costs tail wagging the constitutional dog. But should the country leave the European Union will also become decoupled from not only European Union jurisprudence, but also the comparative jurisprudence of the other member states, including Germany, whose legal system enjoys a much greater incidence of fixed costs than our own, and whose influence is clearly to be seen in the proposals for fixed costs in the vast majority of civil cases.

If the country votes to remain in the European Union, and if, a comprehensive scheme for fixed costs is introduced in England and Wales (that is two pretty big ifs) it follows that it would be instructive to consider what the German experience, over the last one hundred and fifty years has been and what lessons might be learnt for our own jurisdiction.

In volume two of the Review of Civil Litigation Costs: Preliminary Report published as long ago as May 2009, Jackson LJ noted how the regime of fixed fees, originally introduced in the 19th century in the German courts worked:

2.3   The quantum of legal costs that a successful party is entitled to recover from an unsuccessful party, and the fees and expenses of the court which are payable, are prescribed by statute. These rules do not seek to provide a successful party with a complete indemnity for his or her legal fees. Instead, they provide for the payment of legal fees and court costs in scales which increase in a degressive, non-linear fashion and with the use of multipliers that vary according to the value of the dispute, the stage at which the case is resolved, and other aspects of the case. Illustrations are given below of how these rules apply to disputes of varying sizes, in respect of the amount payable by the unsuccessful party (leaving aside that party’s own legal fees, which it must bear).

Amount in dispute = €10,000

Court fees payable €588.00
Lawyer’s fees payable (for one lawyer) €1,869.37
Total payable by unsuccessful party €2,457.37

Amount in dispute = €100,000

Court fees payable €2,568.00
Lawyer’s fees payable (for one lawyer) €5,123.07
Total payable by unsuccessful party €7,961.07

Amount in dispute = €1,000,000

Court fees payable €13,368.00
Lawyer’s fees payable (for one lawyer) €16,900.85
Total payable by unsuccessful party €30,268.85

These fees represent the scale applicable in 2004; it is interesting to note that they represent a small proportion of the amounts in dispute, and far smaller sums than one would anticipate being spent to litigate, substantial claims in this country. They also have a particular policy underpinning them. They are intended to ensure cross subsidisation of the legal profession with larger cases, “carrying” smaller cases, within the same lawyer’s caseload. As Jackson LJ put it:

A notion which underpins the cost scales used in Germany is that of “cross-subsidisation” which, in summary, posits that a lawyer may earn a reasonable living out of his or her profession by accepting a number of smaller cases where remuneration under the scale of fees is not very great (and there may be only a small profit margin) and in addition accepting a number of medium or large cases where the scale fees are higher. If a lawyer’s practice consists of a mix of small, medium and high value cases, the theory is that the fees from the medium and large value cases will “cross-subsidise” those derived from smaller ones, enabling the lawyer overall to earn a reasonable living.

This is a familiar concept to the English and Welsh regimes of fixed costs known as “swings and roundabouts”, but whereas such a system reflected the German legal profession, when introduced in the time of Bismarck and the Kaisers, it is creaking under the strain of changes in the legal profession and practice of Germany in the 21st century, including an increase in the size of law firms, increasing specialisation, and the fact that smaller firms, undertaking smaller claims, find it difficult to attract and undertake the larger claims which should be cross-subsidising their caseload.

In recent years, contingency fees have also been declared to be lawful in Germany, which increases the scope for lawyers to make “own client” charges, which cannot be recovered from the unsuccessful losing party.

It is interesting to note however, why fixed costs have been used by Germany on such a large scale. They are seen as integral to the vision of “access to justice” held in that country.

The use of cost scales is regarded by the courts as beneficial, as their application gives effect to a central value enshrined in the German constitution, being the “rule of law”. The rule of law requires not only that there should be free access to the courts, but that litigation costs should be both predictable and reasonable. It also requires the German legislature to ensure that access to the courts does not depend on the economic situation of an individual. One of the ways in which the legislature ensures access is by offering legal aid to people who meet the relevant criteria for such funding.

Context however is everything. Although Germany has an adversarial, rather than inquisitorial system of courts, there are features of the German system, which are very different from our own: there is no process of disclosure, no exchange of witness statements, cross examination is limited, experts are appointed by the courts, and interlocutory processes are devoted to eliciting what are the relevant issues and disputes, so that the final trial can be very short, rarely lasting more than a day. And with truncated court processes, most cases in the Local Courts run from commencement to final hearing in just over 4 months, and in the Regional Courts just over 7 months.

The key point to note here, surely is that if costs are fixed, at a level, which is below the sums in dispute, as a quid pro quo, then the amount of work that the court, and the substantive law requires must be reduced, to ensure that it remains feasible for a lawyer to complete it within the scale of fixed costs and still make a profit.

A corollary of a large scale comprehensive scheme for fixed costs across the bulk of civil litigation, has been the effect on the legal expense insurance market in Germany, which is unrecognisable in its extent to a lawyer in England and Wales. Such policies are also far more expensive than the modest premiums charged for BTE insurance in the UK.

The Interim Report also noted some research called the Soldan study, which revealed that whilst 35% of litigation was funded in Germany, by legal expenses insurance, in the United Kingdom only 4% of litigation was:

What is evident from the Soldan study is the significant role that legal expenses insurance plays in Germany when compared with England and Wales. It is common for individuals in Germany to take out legal expenses insurance to cover their legal fees in the event that they are involved in litigation, whether as a claimant or a defendant. Legal expenses insurance covers individuals for costs according to the statutory scale. The advantage to insurers is that the scale of costs makes the extent of the insurer’s exposure predictable. The widespread use of legal expenses insurance is seen as the driver of the widespread use of cost agreements according to the cost scales. It is difficult for lawyers whose clients are covered by legal expenses insurance to negotiate an individual fee agreement for remuneration at a rate above the applicable scale.

From these points, some conclusions seem to leap off the page. Should a scheme of fixed costs be introduced in England and Wales, along the lines of Jackson LJ’s proposal, it could well cause, a restructuring, and fragmentation of the legal profession.

Secondly, such a scheme would have to march hand in hand with some fairly radical streamlining and cost cutting of the litigation process, with cherished exercises such as disclosure, being ruthlessly curtailed, if not eliminated. Thirdly, such a scheme might be blunted through the rise of irrecoverable own client charges, a concept inherent in the current principle of proportionality. Finally, although such a scheme would undoubtedly reduce a lawyer’s remuneration on individual cases, it might, just might, through encouraging litigation by making it more affordable, not only increase access to justice, but give opportunities to the cannier lawyers to gain more work too through an explosion of new claims.

A PDF of the article can be found here: PDF file

 

Malkinson v Trim and the sole practitioner

From time to time, solicitors pause from fighting like lions on behalf of their clients and need to go into battle on their own account, either pursuing a debt collection against their former clients who have had the ill grace not to pay their bills, or in some other context.

In such cases, an issue sometimes arises, as to what is the measure of costs, and in particular, the hourly rate that can be recovered when a solicitor is litigating his or her own case, as opposed to acting for someone else.

The starting point is that since 1884, and the seminal decision in London and Scottish Benefit Society v Chorley (1884) 13 QBD 872 a solicitor has been able to recover his full costs, in litigation rather than be regarded as a litigant in person, as a special concession due to the peculiar position of being a solicitor. That is a principle which was preserved in the old RSC.

The important question was whether it survived the introduction of the CPR on 26th April 1999. The Court of Appeal declared that it did in the important decision of Malkinson.v.Trim [2002] 1 WLR 463, where the then rule 48.6(6) and section 52.5 of the Costs Practice Direction were interepreted to mean that the common law rule in Chorley had survived the introduction of the Civil Procedure Rules 1998.

In the case of Zakirov.v Newmans [2012] SCCO Master Leonard an inventive attempt was made to argue that the decision in Malkinson, was per incuriam. This was rejected by Master Leonard.

That that principle survives the introduction of the CPR was expressly confirmed by the Court of Appeal’s decision in Malkinson v Trim. The point is simply one of interpretation, and the correct interpretation of the CPR 48.6, in the light of CPD 52.5, is summarised by Chadwick LJ (at paragraph 22):

‘As I have sought to point out earlier in this judgment, the basis of the principle that a solicitor who acts for himself in litigation is entitled to compensation, by way of costs, for his time and trouble is a recognition that he (in common with any other litigant) ought to be indemnified against the expense to which (on the hypothesis that he has been successful in the litigation) he has been unjustly put. The special position of a solicitor is that he does not need to employ others to provide professional skill and knowledge in the conduct of litigation. He can provide that skill and knowledge himself. Further, there is no difficulty in measuring what it costs him to do so; and there is a potential saving in costs if he is not discouraged from doing so. One effect of CPR r 48.6(6)(b), read in conjunction with section 52.5 of the Practice Direction, is that there is now more clearly recognised a distinction between the solicitor litigant who provides, in connection with his own litigation, professional skill and knowledge in the course of his practice as a solicitor-that is to say, who “is represented … by himself in his firm name”—and the solicitor litigant who provides skill and knowledge in what might be described as “his own time”—that is to say, outside the course of his practice as a solicitor and (typically) outside the office. The latter is treated as a litigant in person for the purposes of CPR r 48.6, and so is subject to the restrictions imposed by that rule, including the two-thirds restriction imposed by paragraph (2). The former is not. Nor is there any reason, consistent with the need to provide an indemnity, why he should be. Further, there is no reason, consistent with the need to provide an indemnity, why he should not recover the cost of providing professional skill and knowledge through employees of his practice’.

Mr William’s interpretation of CPR 48.6 (6)(b) as applying to all solicitors in all circumstances, says Mr Mallalieu, is one interpretation, but not the only one. The interpretation offered by Chadwick LJ is not per incuriam: it is the correct interpretation as well as the generally accepted interpretation and should be applied.

Master Leonard rejected the challenge in these words:

The distinction between a solicitor acting on his own behalf and a solicitor represented by his firm is not merely hypothetical, nor confined to procedural matters. For example a partnership of solicitors, if sued, will normally, by virtue of section 5A of Practice Direction 7A, be sued and defend in the name of the firm. However that name will represent the partners in the firm at the time the cause of action accrued. If the same firm of solicitors appears on the court record for the defendants, some of the partners in the firm as currently constituted may be defendants and some not.

It would seem to follow, on the Claimant’s interpretation of the rule, that the defendant partners would be litigants in person if no there have been no changes in the partnership since the cause of action accrued. If there have been changes, then any retired partners would not be litigants in person. Continuing partners would be litigants in person unless any new partners have joined, in which case (being represented by someone in addition to themselves) there is room for argument about whether they are or not. If they are then, unlike the former partners, their recoverable costs will be capped by CPR 48.6(2).

My conclusion is that the application of the rule is meant to be simpler, and more obviously fair, than that. A solicitor is a litigant in person, like any other litigant in person, if he is on the court record as acting for himself. If the record shows that he is represented by a firm of solicitors, he is not. That is the case whether or not he is a partner in or employee of the firm on the court record.

I respectfully agree with Chadwick LJ’s interpretation, which was not per incuriam. The Costs Practice Direction does no more than clarify the position by pointing out the significance of the words ‘acting for himself’ in CPR 48.6(6)(b).

Post April 2013, the rules have been amended yet again, so that apparently there is a surprising lacuna, in respect of sole practitioners due to the use of the word “partner” which might suggest that sole practitioners now can no longer claim their full hourly rate. The question then, is whether the rules have fundamentally changed, or changed so that they apply save where for example, a firm of solicitors with 2 partners represents one of them. The new rules provide:

(6) For the purposes of this rule, a litigant in person includes –

(a) a company or other corporation which is acting without a legal representative; and

(b) any of the following who acts in person (except where any such person is represented by a firm in which that person is a partner) –

(i) a barrister;

(ii) a solicitor;

(iii) a solicitor’s employee;

(iv) a manager of a body recognised under section 9 of the Administration of Justice Act 19851; or

(v) a person who, for the purposes of the 2007 Act, is an authorised person in relation to an activity which constitutes the conduct of litigation (within the meaning of that Act).

There is no suggestion in any material I have seen, such as the Explanatory Notes to the amending statutory instrument, or a consultation, or guidance from the SRA that there was any intention to change the existing law.

Indeed, the retention of the “firm” exception above, would point the other way. I think that the true construction which would apply in this situation, is that sole practitioner would not be acting as a litigant in person at all, per Chadwick’s formulation and Master Leonard’s explanation and rule 46.6 simply does not apply, with its limiting case of the requirement that there be representation by a firm, of which the solicitor is a partner.

Otherwise I think that as this is technical legislation, using words of art, known to and understood by the solicitors profession, that references to “a firm” and “a partner” when properly construed, are words which embrace this situation, of a sole practice and a sole principal.

I am strengthened in this view by the definitions under the Glossary in the Solicitors Handbook, which of course are made under rule 23 of the Solicitors Code of Conduct, itself made under the Solicitors Act 1974.

The glossary provides the following definition of what a “firm” is:

(i) save as provided in paragraphs (ii) and (iii) below, an authorised body or a body or person which should be authorised by the SRA as a recognised body or whose practice should be authorised as a recognised sole practice (but which could not be authorised by another approved regulator); and for the purposes of the SRA Code of Conduct and the SRA Accounts Rules can also include in-house practice;

(ii) in the SRA Indemnity Insurance Rules:

(A) any recognised body (as constituted from time to time); or

(B) any solicitor or REL who is a sole practitioner, unless that sole practitioner is a non-SRA firm; or

(C) any partnership (as constituted from time to time) which is eligible to become a recognised body and which meets the requirements applicable to recognised bodies set out in the SRA Practice Framework Rules and the SRA Authorisation Rules, unless that partnership is a non-SRA firm or an Exempt European Practice;or

(D) any licensed body in respect of its regulated activities;

whether before or during any relevant indemnity period;

(iii)in the SRA European Cross-border Practice Rules, means any business through which a solicitor or REL carries on practice other than in-house practice.

Thus it can be seen that for the purposes of the law established by the Solicitors Act 1974, a “firm” does not have to be a partnership, but can be a sole practice. In such a firm there can never be a partner, but there is of course a principal.

Later in the glossary a definition of a principal is:

(i) subject to paragraphs (ii) to (iv) means:

(A) a sole practitioner;

(B) a partner in a partnership;

(C) in the case of a recognised body which is an LLP or company, the recognised body itself;

(D) in the case of a licensed body which is an LLP or company, the licensed body itself;

(E) the principal solicitor or REL (or any one of them) employed by a non-solicitor employer (for example, in a law centre or in commerce and industry); or

(F) in relation to any other body, a member of its governing body;

(ii) in the SRA Authorisation Rules, SRA Practice Framework Rules and SRA Practising Regulations, means a sole practitioner or a partner in a partnership;

(iii) in the SRA Indemnity Insurance Rules means:

(A) where the firm is or was:

(I)a sole practitioner – that practitioner;

(II)a partnership – each partner;

(III)a company with a share capital – each director of that company and any person who:

(01)is held out as a director; or

(02)beneficially owns the whole or any part of a share in the company; or

(03)is the ultimate beneficial owner of the whole or any part of a share in the company;

(IV)a company without a share capital – each director of that company and any person who:

(01)is held out as a director; or

(02)is a member of the company; or

(03)is the ultimate owner of the whole or any part of a body corporate or other legal person which is a member of the company;

(V)an LLP – each member of that LLP, and any person who is the ultimate owner of the whole or any part of a body corporate or other legal person which is a member of the LLP;

(B)where a body corporate or other legal person is a partner in the firm, any person who is within paragraph (A)(III) of this definition (including sub-paragraphs (01) and (03) thereof), paragraph (A)(IV) of this definition (including sub-paragraphs (01) and (03) thereof), or paragraph (A)(V) of this definition;

(iv)in the SRA Indemnity Rules, means:

(A)a solicitor who is a partner or a sole solicitor within the meaning of section 87 of the SA, or an REL who is a partner, or who is a sole practitioner, or an RFL or non-registered European lawyer who is a partner, and includes any solicitor, REL, RFL or non-registered European lawyer held out as a principal; and

(B)additionally in relation to a practice carried on by a recognised body or a licensed body alone, or a practice in which a recognised body or a licensed body is or is held out to be a partner:

(I)a solicitor, REL, RFL or non-registered European lawyer (and in the case of a licensed body any other person) who:

(01)beneficially owns the whole or any part of a share in such recognised body or licensed body (in each case, where it is a company with a share capital); or

(02) is a member of such recognised body or licensed body (in each case, where it is a company without a share capital or an LLP or a partnership with legal personality); or

(II)a solicitor, REL, RFL or non-registered European lawyer (and in the case of a licensed body any other person) who is:

(01)the ultimate beneficial owner of the whole or any part of a share in such recognised body or licensed body (in each case, where the recognised body or licensed body is a company with a share capital); or

(02)the ultimate owner of a member or any part of a member of such recognised body or licensed body (in each case, where the recognised body or licensed body is a company without a share capital or an LLP or a partnership with legal personality).

And it can be seen, therefore that for the purposes of the Code of Conduct, the position of a sole practitioner and a partner, are equated as the principals of their various firms. It follows that there are reasonable grounds for suggesting that despite the slipshod wording in the CPR, the law has not changed after all.

 

Bad bargains

In recent years there has been a growing tendency to consolidation in the personal injury marketplace, with many firms and their caseloads being acquired in whole or in part by other firms. The contexts in which this process has been occurring are legion.

Firms may have decided to cease doing personal injury work because of the reforms made by LASPO 2012, they may have dissolved due to the breakup of a partnership, sadly, some of them may have entered into an insolvency situation, due to a rising costs base and declining revenues.

The acquiring firm will wish to know what the value of the business is that it is acquiring or at the very least, the value of the work in progress of the cases that it is purchasing. Such a purchase is always inherently risky, but I would identify that there are a number of particular types of risk, which are peculiar to the personal injury market, and which at the current time are perhaps under appreciated by the purchasers of law firms.

Risks can be identified to arise from three particular sources. The first is the risk arising from clients who wish to challenge the amount of costs that they have agreed to pay to their own lawyers, a particularly pertinent consideration in a regime of solicitor-own client success fees paid out of damages. This deserves a post of its own.

I note with unease that many firms of solicitors regularly and by default charge a 100% success fee, as a matter of course, without regard to whether this can be justified on the facts of a particular case, whether it constitutes an item of unusual costs, and whether the client is giving informed consent with the requirements of rule 2, of the Code of Conduct firmly in mind.

Risks lying quiescently in the files from this quarter, may serve both to decrease the ostensible value of the work in progress and raise the spectre of litigation or complaints, consuming precious time and resource in dealing with disgruntled clients, the Solicitors Regulation Authority and the Legal Ombudsman.

The second source of risk, is the risk arising from inter-partes costs challenges made by paying parties: in a real sense those solicitors who make a living from personal injury litigation, do so by reason of the miscalculation of insurers whose failure to identify and settle all claims at a pre-litigation stage generate significant costs for claimants’ lawyers.

The insurers in turn will utilise all available arguments to decrease the amount of costs claimed by lawyers, including challenges to the solicitors retainer and its enforceability.

Judging the prospect of success on inter partes costs challenges is itself an art. The principal argument in this respect at the moment, is the ongoing doubt as to the assignability of conditional fee agreements, but there are refinements to this argument relating both to the unwitting termination of conditional fee agreements by incautiously worded letters and the construction of artificial principal-agent relationships, to seek to circumvent the stringencies of LASPO 2012.

The third and the most dangerous area, relates to the regulatory risk, that a solicitors business model, may infringe the Code of Conduct, leading to action by the Solicitors Regulation Authority, with disciplinary sanctions being pursed before the Solicitors Disciplinary Tribunal. An obvious area of risk, relates to the referral fee ban, and the acquisition of cases.

In this respect, many solicitors still take cases from claims management companies(CMCs), under “LASPO compliant marketing agreements”: but do so in the context of clients who have signed up to Damages Based Agreements (DBAs) with the claims management companies.

This can be no more or less than a transparent attempt to circumvent the referral fee ban, with instead of the solicitor paying the client a fee out of costs, the client paying a fee out of damages. The solicitor may also have agreed to send the CMC a cheque for 25% of the relevant heads of damages.

Such an arrangement is problematic in the extreme. It seems reasonably clear under the Damages Based Agreements Regulations 2013, that the only fee a client is liable to pay a CMC is up to 25% of the appropriate heads of damages, net of the costs the client receives from the paying party.

It matters not that the costs accrue to the solicitor, rather than the CMC. In most cases, this will mean that no fee is due at all to the CMC. A solicitor who fails to spot this, advise the client of the position or even worse send a cheque to the CMC does so at his peril.

Moreover a solicitor may not turn a Nelsonian blind eye, to the client’s agreement with the CMC, taking the view that this occurred before his instruction and is none of his business, but is under a duty to advise a client of the nature of the agreement and his obligations.

The sad cases of Beresford and Smith, where solicitors failed to do so and whose relationships with claims management companies were pored over and found wanting, are instructive and on point: the decision of the Solicitors Disciplinary Tribunal can be found here: 9666-2007 – Beresford & Smith and the High Court decision upholding the Tribunal’s decision can be read here: Beresford v Solicitors Disciplinary Tribunal High Court.

Although the Solicitors Practice Rules have been swept away and replaced by the Solicitors Code of Conduct, I do not think it is the case that the regulatory requirements have eased in the years since this case: far from it, if anything the regulatory net is likely to tighten further both for solicitors and CMCs who will shortly be regulated by the FCA.

Digital dreams

When I undertake a heavy detailed assessment (a working definition of which is more than 2 days or more than 2 boxes of documents to read) there are three indispensable things I require in order to function efficiently. The first is good coffee. The second is a bacon sandwich. The third is “Old Faithful”. Here is a picture of “Old Faithful”.

Old Faithful Old Faithful (and its predecessor now retired due to metal fatigue) demonstrate the falsity of the lie I was told some 25 years ago, when considering a career at the Bar, namely that although earnings could vary dramatically, at least it was “an inside job, without heavy lifting”. Old Faithful enables boxes, files and piles of paper to be transported efficiently and without strain, from car to court.

The reason of course that Old Faithful exists, is because despite being able to type this post on a computer in my study, or my room in chambers, or on the train, and upload it remotely, so that you can read it anywhere in the world, the Digital Age has not yet reached the civil courts.

We exist in a paper based system, and so for the assessment of costs, the papers have to be lodged at court and copies transported there in case the costs judge wishes to read them.

There seems no imminent change likely: recently a District Judge in the County Court at Slough, wrote to the Times rebutting the notion that he was about to lose his judicial lavatory, by pointing out that he had never had one, did not have a retiring room, worked in a building with a leaking roof, and also pointed out that in terms of IT, his building did not have Wifi and the computers ran on Windows XP.

It is accordingly against this backdrop, that one considers the Briggs report, a copy of which can be found here: The Civil Courts Structure Review Interim Report. This document repays careful reading, not least because of the speculation that the author’s hat is in the ring to become the next Master of the Rolls.

The report also, though not directly concerned with the law and practice of costs, will certainly impact upon it as recognised in the text and ones notes the language used when discussing the former Access to Justice Act 1999 with its scheme of recoverable liabilities:

3.3. It is no criticism of what are generally called the Jackson Reforms that they were, and their implementation has been, primarily directed to curing very serious abuses and disproportionality in the cost of conducting personal injuries litigation.

3.4. Certain recommendations made by Jackson LJ have not been implemented. In particular, fixed costs have yet to be applied to parts of the fast track or considered for application above the fast track, although there is now a proposal from the Department of Health that a fixed costs regime should be implemented for all clinical negligence cases where the claim does not exceed £250,000. There is growing pressure for an upwards extension of a fixed costs regime across the whole of civil litigation. It is important to my analysis because, although costs reforms are not part of my terms of reference, their availability as an adjunct or an alternative to structural change is material when considering how to address the formidable barriers to access to civil justice still represented by the costs likely to be both incurred and risked by the average litigant.

It also ominously contemplates further costs reforms as an alternative to structural change: in effect implying that if the report’s vision for digitisation of the courts does not come to pass something must be done, in order to further reduce costs.

The report is not directly concerned with the HMCTS reform programme including IT, but describes what is happening in these terms:

4.10. As is reflected in the second of the Reform principles (see paragraph 1.8) the ambition of HMCTS is to digitise the whole of the processes of the courts, including the civil courts, within four years from now, subject to funding and technical constraints. That can be (and is intended to be) achieved in two broad ways. The first, less ambitious, way is simply to replicate in digital form the current processes of the courts, so that the digital process is as near an approximation to the current paper or other physical process as can be achieved, thereby minimising changes in practice and procedure, including procedure rules. Thus for example, where an order of the court currently exists primarily in a physical form, as an original and one or more sealed paper copies, it will in future exist primarily as an electronic document, but be capable of being copied onto paper where necessary, for example where it has to be served on a person without facilities for receiving electronic documents.

4.11. The second, more ambitious, method is to make use of IT for new or different processes and procedures which are not capable of being carried out on paper. Thus for example, modern IT would enable court users to issue a claim without the assistance of lawyers by accessing online software, pre-designed to elicit the relevant information, evidence and documents necessary to enable the court to determine the claim, by an interactive process of question and answer, where each new question or set of questions is responsive to answers input by the user. This is the sort of IT contemplated for use in Tier One of the HM Online Court (“HMOC”) model described in the report to the Civil Justice Council and to the Master of the Rolls entitled “Online Dispute Resolution for Low Value Civil Claims” by the Online Dispute Resolution Advisory Group in February 2015. I will refer to it as “the ODR Report”. The same tiered structure was also adopted in the report by JUSTICE later in 2015 entitled “Delivering Justice in an Age of Austerity (“the Justice Report”). Both reports noted the precedents set Civil Courts Structure Review: Interim Report The HMCTS Reform Programme 43 for an online court or tribunal of broadly this kind already in use for family and consumer disputes in the Netherlands, and about to be deployed for small claims in British Columbia.

4.12. Digital innovation of this second kind would enable the creation of wholly new processes for the resolution of civil disputes. The current thinking of the HMCTS design team is that a new type of civil court (currently labelled the Online Court, or “OC”) could be created for the resolution of relatively straightforward debt and damages claims up to a provisionally chosen value at risk of £25,000. As will appear, the OC would achieve its purposes as far as possible by automated software, both for initial triage and basic conciliation, but disputes not thereby resolved would receive human attention both from Case Officers (previously labelled DJOs) and, for final determination, from judges.

4.13. This wholly new concept of an Online Court takes its lead from the ODR Report and from the Justice Report, but it is significantly different from both. I shall have a great deal more to say about it in due course but, for present purposes, it is sufficient to say that it is a concept which is wholly dependent on the introduction and imaginative use of IT, as well as upon behavioural and cultural change, both of which are principal aims of the Reform Programme, and would be impossible without them.

4.14. Running in parallel with these two different modes of digitisation is the development of “Assisted Digital” provision. Recognising that there is a substantial section of civil court users who would find it difficult or even impossible to conduct civil litigation through computers, it is being designed to ensure that they thereby suffer no impairment in their access to justice by the proposed digitisation of courts, by providing them with the requisite assistance. Forms of assistance currently being considered include online help, telephone help-lines and face to face human help.

Reading these proposals, reading the HMCTS reform programme, and noting the departure this month of its Chief Executive, who in a speech last year airily noted the possibility of a boundary dispute between neighbours over leylandii trees being just the sort of case, that could be resolved through evidence given over Iphones, without the need to go to court (yes, really, the speech is still on the web), one cannot help but feel sceptical as to how much of this is likely to come to pass.

The impediments as I see them to a digital future are threefold. The first is the money. Although £750 million has been promised, digging a little deeper, this assumes that £300 million is raised from selling off court buildings. A dip in the property market, may yet derail the whole project.

Secondly, what seems astonishing is the lack of emphasis on IT security: there is very little detail to be gleaned in any of the publically available documents as to how the government will protect the system from an attack from North Korea, or more prosaically, stop copies of all the data on it flowing to the USA under the Patriot Act. Devotees of the early 1980s flick, Wargames and the reimagined Battlestar Galactica, will readily note the vulnerability of networked computers.

Thirdly, there is a fundamental issue here, which is not to be glossed over: access to justice, includes as a necessary element, the public administration of justice. Anyone can walk into a Crown or County Court and see a public hearing, or report it in the press. How is that to be achieved when matters are dealt with digitally in cyberspace?

So at the moment, I remain dubious as to how the digitisation of the courts will proceed. But it is badly needed.

I wonder if there is scope for an alternative vision. Perhaps reform might start to take place, from the bottom up, and using off the shelf solutions. There seems no reason, why in this respect the profession cannot move forward, without having to wait for the courts. It doesn’t have to cost millions either.

More and more solicitors and barristers are moving to paperless working, irrespective of what the courts are up to. I can give a couple of examples from my own use of IT as to how it doesn’t have to cost a lot and actually saves me money.

Some years ago, when contemplating setting up this website, I was quoted £6000 plus VAT by a company to design and build it. Instead, using free WordPress software, each year I pay £6.99 for the website name and £49.99 for hosting services.

I often work remotely, receiving papers, and sending off documents by email, in itself an anachronism, to be replaced by secure document drop services. It is now a couple of years since I have signed paper Advices, and fondly sent them off with the DX. It means that I can be working without leaving my home or incurring wasted time travelling to and from chambers.

What I would like to see as the next logical step in costs work, is those boxes of photocopied paper, reduced to scanned images, catalogued, searchable and provided to me on a flash drive.

I would like to see the documents routinely loaded onto a £300 laptop, which is then lodged at court, so the costs judge can read them or be able to access them during the course of an assessment.

Then Old Faithful can be retired, and I can indeed have an indoor job, without heavy lifting. And I suspect that the detailed assessment would be shorter and cheaper too.

 

Principals, agents and Conditional Fee Agreements

As is well known, one of the effects of LASPO 2012 and the removal of recoverable success fees and ATE premiums has been to cause firms to leave the personal injury market, or more sadly, to cause many well known and well regarded firms, to enter into insolvency procedures.

When their work in progress is sold on, including the retainers made on a conditional fee agreement basis, there are a number of ways by which this transaction of the sale of work in progress can take place.

Perhaps the most familiar, is the attempt to assign conditional fee agreements, a concept which has proved problematic, given the number of recent cases litigated over this point in the County Court and SCCO. It will be some time yet before the Court of Appeal gives a definitive answer to the question of whether a conditional fee agreement is capable of assignment.

Another route, which has been utilised, is for the original firm of solicitors and the subsequent firm of solicitors, to declare that they have entered into an agency agreement, whereby the original firm is declared to be the principal, and the subsequent firm acts as their agent, undertaking work on their behalf.

Thus the argument runs, that the original conditional fee agreement with its recoverable success fee remains in place, the subsequent firm’s fees are recoverable as agent’s charges, with the success fee claimable on top in accordance with long established authority and the problems of assignment are avoided.

But will this arrangement work? In particular, if the original firm of solicitors has ceased to exist, or the original firm does no further work on the case, nor act as a principal supervising the agent, it would seem that the arrangement is open to attack on the basis of the doctrine of sham.

The doctrine of sham in its modern formulation is derived from the principle contained in the case of Snook v London and West Riding Investments Ltd [1967] 2QB786 at page 802 where Lord Justice Diplock as he then was said this:

As regards the contention of the plaintiff that the transactions between himself, Auto Finance and the defendants were a “sham”, it is, I think, necessary to consider what, if any, legal concept is involved in the use of this popular and pejorative word. I apprehend that, if it has any meaning in law, it means acts done or documents executed by the parties to the “sham” which are intended by them to give third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create.

The reason why  the scenario outlined above can give rise to a sham is because in an insolvency situation, the effect of the solicitor ceasing practice and being unable to perform his obligations under the conditional fee agreement would ordinarily terminate the conditional fee agreement or discharge it by reason of the doctrine of frustration. To suggest otherwise, is to argue against the clearly established fact that one party to the retainer, has to all intents and purposes ceased to exist.

If the original firm is still in existence, but has no meaningful role in the litigation, does not exercise supervision and does no work in the case, it is difficult to see how this is a relationship of principal and agent in any real sense:the obligations of a solicitor principal are quite onerous, as set out in a long chain of cases going back to the Law Society V Waterlow Bros and Leighton (1883) 8APP CAS 407 through to Hollins V Russell [2003] 1 WLR 2487 at page 2536 to 2538. If they have not taken place, this lends force to the analysis, that there is no true principal and agent relationship at all.

Where a sham exists, the transaction is either of no effect or the court gives effect to the true relationship that has been established: the difficulty for solicitors is that the likely conclusion on a true construction of the agreement, is that the original firm of solicitors has terminated its retainer and is not entitled to be paid for the work that it has done.

The second firm of solicitors in turn will be acting without a written retainer which complies with the requirements now set out in the Courts and Legal Services Act 1990 and the Conditional Fee Agreements Order 2013, and any implied retainer, or argument that a novation has taken place on the same terms of the original conditional fee agreement, will lead to a conclusion that this latter retainer is unenforceable and again no costs are recoverable under it.

Challenging costs awards in international arbitrations

Arbitrations in the international context, can be an expensive business. Arbitrators frequently can and do, make awards of costs, on a broad brush basis, and then go onto award compound interest on those costs, adding further expense to the losing party’s bill.

The assessment of costs can take place in the SCCO, but there is an increasing tendency for arbitrators to roll up their sleeves and enter into the nitty gritty of awarding particular items of costs, or what are claimed to be costs.

From time to time, they go onto award items of costs, which would not be recognisable as items of costs under the common law of England and Wales, such as, for example the cost of litigation funding, as a discrete head of costs, rather than as a cost compensable through an award of interest. This could be regarded as the cost of financing the costs of the arbitration, rather than the costs of the arbitration itself.

What is a paying party to do in such a situation?

There is an immediate difficulty in relation to any challenge to the arbitrator’s conclusion that he has the power to order an award of the costs of litigation funding against the respondent namely that this is an arbitration conducted according to a particular set of international rules, such as the ICC rules.

By way of example, the  former 1998 ICC rules provided in article 28 (6) that the parties by submitting the dispute to arbitration had waived their rights for a further determination: in this respect they have excluded the option of an appeal on a point of law to the High Court pursuant to section 69 of the Arbitration Act 1996.

In the context of such a challenge, there would be no point of jurisdiction here permitting a challenge under section 67 of the Arbitration Act 1996 and it follows that the only possible route of challenge is an arbitration claim issued and pursued further to section 68 of the Arbitration Act 1996. This is however a most problematic route.

The reason is that the limited grounds for a challenge contained within section 68 mean that the respondent would have to establish that there had been a serious irregularity in making the award and serious irregularity means according to section 68 (2) an irregularity in one of a closed list of 9 categories of potential faults, which has caused or will cause substantial injustice to the applicant to such a challenge.

Looking at the 9 categories, these are matters which include the failure by the tribunal to comply with section 33 (the general duty of the tribunal); or the failure by the tribunal to conduct the proceedings in accordance with the procedure agreed by the parties; or the failure by the tribunal to deal with all the issues that were put to it; or any arbitral or other institution or person vested by the parties with powers in relation to the proceedings exceeding its powers; or uncertainty or ambiguity in the effect of the award; or the award, being obtained by fraud or being contrary to public policy; or failing to comply with the requirements as the form of the award; or any irregularity in the conduct of the proceedings which is admitted by the tribunal or some other body.

The only real potential ground for challenging an award of costs, such as eg, the award of the cost of litigation funding, is that set out in section 68 (2) (b) which provides for a ground of challenge on the basis that the tribunal has exceeded its powers. That is, that it has acted in a way that amounts to an error far more serious than a simple error of law.

What does this mean? And how do sections 68 and 69 relate to each other? The leading case on the correct approach remains that of Lesotho Highlands Development Authority v Impregilo SpA [2006] 1 AC 221 a decision of the House of Lords which is the guiding authority on this particular point.

A V B [2011] EWHC 2345 and Kaneria v England and Wales Cricket Board [2014] EWHC 1348 (Comm) , are more recent cases, but these are first instance decisions which cite the House of Lords decision, rather than expanding upon the principles set out within in it.

The essential question arose in the Lesotho Highlands case as to how section 68 and section 69 were meant to work and the question that fell to be grasped in that case was whether an alleged error of arbitrators in interpreting the underlying or principal contract was an excess of power or simple error of law?

In the case of a simple error of law as the parties had excluded a right of appeal under section 69 they would effectively be left without a remedy and so had to pin their hopes on shoehorning the challenge into section 68. At paragraph 24 Lord Steyn said:

But the issue was whether the tribunal exceeded its powers within the meaning of section 68 (2) (b). This required the courts below to address the question whether the tribunal purported to exercise a power which it did not have whether erroneously exercised the power that it did have. If merely a case of erroneous exercise of power investing in the tribunal no excessive power under section 68 (2) (b) is involved. Once the matters approach correctly, it is clear that the highest in the present case on the currency point, there was no more than an erroneous exercise of the power available under section 48 (4). The jurisdictional challenge must therefore fail.

He noted that the requirement of a serious irregularity was a new concept in English arbitration law. A high threshold must be satisfied. He also noted the requirement that the regularity must cause substantial injustice to the applicant and was designed to eliminate technical and on meritorious challenges.

In particular at paragraph 29 he noted that there was no hint in section 68 that a failure by the tribunal to arrive at a correct decision could afford a ground for challenging the section 68.

On the other hand section 68 had a meaningful role to play where for example in conflict with an agreement in writing of the parties under section 37 the tribunal appointed an expert to report to it.

He also noted an example where an arbitration agreement expressly permitted only the award of simple interest and the arbitrators in disregard of the agreement awarded compound interest.

I think this is interesting or particularly this latter example is interesting because of course if the tribunal had no power to award compound interest but only simple interest but went ahead in so doing it would plainly be acting contrary to section 68.

One could argue by way of analogy that if a tribunal awards the costs of financing the costs of the arbitration as opposed to the costs of the arbitration itself then it is acting in a way which is in excess of its powers.

Lord Steyn concluded his analysis by stating it was necessary in paragraph 32 to focus intensely on the particular power under an arbitration agreement, the terms of reference  and the  relevant provisions of the 1996 Act which are engaged, judged in all the circumstances of the case. Noting, that it must always be borne in mind that the erroneous exercise of an available power cannot by itself amount in excess of power. A mere error of law does not amount to an excess of power.

Thus any challenge to an arbitrator’s costs decision, is going to be fraught with difficulty, with a very limited scope for challenge existing in the Commercial Court.