Litigation: a numbers game

Contingency fees. Referral fees. Highly restricted expenses against unsuccessful personal injury pursuers. Cost budgeting pilot schemes, subject to judicial control. Litigation funding in Scotland will look very different if Sheriff Principal Taylor’s newly published recommendations, 85 in number, are followed through.

Broadly welcomed in initial reactions, the Report of the Review of Expenses and Funding of Civil Litigation in Scotland is explicit in its main aim: to encourage individuals and businesses to assert their rights via the Scottish courts without the fear factor of unquantifiable and/or irrecoverable costs.

As Taylor states in his foreword, his review was in essence unfinished business of Lord Gill’s civil courts review, left until Lord Justice Jackson’s parallel work for the English courts became available.

His review is no Jackson with a kilt on. The sheriff principal makes no assumptions regarding similarities or differences between the two systems. He recognises that Jackson faced different types of imbalance between litigants; he points out the proportionally lower volume of litigation in Scotland; and he recognises both that similar recommendations may be implemented in a different manner, and that apparently differing conclusions may lead to similar results in practice.

In one respect at least, Taylor hopes to learn from English experience, in recommending pilot schemes to test certain proposals. Rather than being over-cautious, he suggests, “if there is one lesson to be learned in this jurisdiction from the various attempts to reform the issue of legal costs in England & Wales, it is that predicting how lawyers will react when the financial dynamics and incentives are altered is very difficult”.

QOCS: a necessary balance?

His report has been described as “practical”, and Taylor has not been afraid to apply different rules to different types of case, be they personal injury (PI), employment, commercial or other.

In PI cases, his recommendations may be seen as “pursuer-friendly”. Qualified one way costs shifting (QOCS) would protect an unsuccessful pursuer from liability in expenses to the defender, except in cases of fraud, abuse of process, unreasonable conduct of the litigation or summary dismissal. Failure to beat a tender will still matter, but Taylor’s preference is that the court should be able to modify liability if it considered that the pursuer acted reasonably in not accepting. Failing that, their liability should be limited to 75% of the damages awarded.

Taylor believes this change would be less radical in practice than it sounds. He cites Jackson LJ’s finding that costs are seldom recovered from unsuccessful claimants, a position he believes to be reflected in Scotland.

Nevertheless, pursuers’ and defenders’ representatives alike believe it would mark a significant change.

“He has recognised that there is an inequality at the moment between the resources of insurance companies who defend actions and those who pursue actions, and he’s trying to ensure that someone who has a good claim doesn’t have to be unduly concerned about the consequences of it going wrong”, comments Gordon Dalyell of the Association of Personal Injury Lawyers in Scotland (APIL).

Elizabeth Mitchell, head of litigation at Harper Macleod, believes that for insurer clients, QOCS is their biggest concern in the personal injury field. “The concern is that it will just lead to an increase in litigation, as what is the risk for the pursuer? Insurers are concerned that they will see a greater increase in the number of claims with less chance of recovering their costs.”

Similarly for Peter Anderson, managing partner at Simpson & Marwick, QOCS is Taylor’s most controversial proposal. “Defenders would pay for their defence in full but recover nothing despite the court having held they should never have been sued in the first place. That is so radical and potentially unfair that good evidence for the change should exist. But I don’t find that evidence in the report.”

Fraser Oliver, chief executive of pursuer firm Digby Brown, also has concerns in relation to “have-a-go” type claims, from a consumer protection perspective. “QOCS will have to run in conjunction with specialisation, otherwise if people are going to dabble outwith their area of expertise, there’s going to be a rise in professional negligence claims. That’s my one concern about QOCS.”

Bringing order to no win, no fee

Another radical departure is the recommendation in favour of “damages based agreements” (DBAs) – contingency fees by another name, i.e. calculated as a percentage of any damages awarded. Technically unenforceable if entered into by solicitors (but not claims management companies), that drawback is readily circumvented by solicitors establishing their own claims companies, something Taylor concludes “has the considerable potential to bring the law into disrepute”.

He therefore seeks to establish a level playing field by allowing DBAs to be enforceable by solicitors (and hopes the Faculty of Advocates will lift its current prohibition of the practice).

This would apply not only in PI actions but other claims also, apart from family actions – but with controls on the maximum percentage permitted to be levied, varying from up to 20% in PI claims, 35% in employment tribunal cases, to 50% in commercial actions. And solicitors should be entitled to retain the judicial expenses in addition to the agreed success fee, as they can with speculative fee agreements, as an incentive to offer DBAs in lower value cases.

With various types of DBA currently on offer, and consequent potential for confusion among the public (with some agreements, the no win, no fee provision excludes litigation; others require the pursuer to pay for outlays such as medical reports; others still are only “no win, lower fee”), Taylor’s objective is that solicitors quote on a uniform basis to assist the making of informed choices. Thus he would exclude “no win, lower fee” provisions in PI actions, while permitting them in commercial cases.

Gordon Dalyell certainly approves of the level playing field principle, as does Fraser Oliver, whose firm operates a top-of-the-range scheme and would encourage further regulation in terms of what no win, no fee actually means. Oliver further approves of Taylor’s departure from the Jackson position that the percentage fee should only be taken from past loss, which, he says, encourages inefficiency, or solicitors not progressing cases as quickly as clients would want, as past losses increase with the time taken to settle a case. He believes DBAs to be unpopular in England as a result, with firms looking at less restrictive ways of funding cases.

One who admits to having been won over by Taylor’s approach here is Professor Alan Paterson, Director of the Strathclyde University Centre for Professional Legal Studies. Describing the report as “an impressive tour de force”, he comments: “After much consideration I have come round to the view that his argument for DBAs in PI cases can be justified even against future loss, provided the safeguards which he recommends are all implemented.”

Referral fees: out in the open

Another controversial matter on which the report’s pragmatic approach appears to have won over most people is referral fees. With somewhat technical, and again fairly easily circumvented, rules in place as to what is and is not currently permitted in Scotland, Taylor believes that regulated bodies (and only such) should be entitled to charge referral fees, the practice being otherwise criminalised. Transparency would be required with the client as to the factors that might, and those that actually did, lead to the selection of the particular solicitor, wherever a client has been referred by a third party agency.

“This is another example of the practicality of the report”, Dalyell agrees. “He’s acknowledged that referral fees exist, that they do promote access to justice because people who otherwise might not bring a claim, whether through apprehension over going to see a lawyer or whatever, are able to bring a claim and often it can be a good claim.”

Oliver adds: “I think it does make sense that it’s out in the open and is regulated, because one of our concerns was that there was going to be a further drift of work from Scotland down to England & Wales, due to the effect of TV advertising, in terms of personal injury work in particular, and the big brands down there. It’s not in the interests of the consumer for people to have their case that arose in Scotland litigated in England.”

Paterson, however, remains to be persuaded on this topic: “Whilst accepting much of his argument as to the difficulty of curbing this unedifying practice – which in England has had real transparency problems – in the end I remain of the view that there is very little evidence that referral fees are of benefit to clients, who end up paying for them in one way or the other.”

Commercial principles

As respects commercial actions, there is generally less controversy over the Taylor proposals. With the aim of achieving both greater certainty as to the likely cost of litigating, and a higher percentage of recovery of fees incurred (80% is the target), he would revise the table of fees to more fully reflect commercial procedure, allow the possibility of the solicitors’ actual hourly rate being recovered, require applications for an additional fee to be made in advance – and also pilot a system of expenses management, based on case budgets being presented to the court and giving the judiciary a role in managing costs.

Peter Anderson welcomes the emphasis on predictability as of “huge importance” to both pursuers and defenders. “So Sheriff Principal Taylor’s encouragement that block fees be kept but made more relevant; that indications/motions for additional fees and certification of experts be made much earlier are all welcome, as is the whole thrust of chapter 4” (entitled “Predictability”).

But he queries the “overall thrust” of the report that judges will have to become “much more involved in what, until now, they and most counsel have regarded as the rather grubby business of expenses”. He doubts that they will welcome that, or that we should be moving towards the English model, “which surprises Scots lawyers in that there can be specialist ‘costs judges’ and ‘costs counsel’, who spend much of their professional life doing nothing other than arguing about the expense of litigation. Is that really progress?”

Cat MacLean of MBM Commercial also welcomes the general approach of the report, in particular that DBAs should be allowed other than in family actions. “This will undoubtedly open up the funding possibilities in commercial litigation and provide greater flexibility to us as solicitors.”

One of her reservations is the review’s underlying assumption that PI litigation is the only instance of what Taylor calls an “asymmetric relationship” between pursuers of modest resources and large, well funded defenders. Being heavily involved in claims by individuals and small businesses against the UK clearing banks, she comments: “This type of litigation simply does not fit with the assumptions the review makes… I would have liked to see more flexibility on the possibility of extending QOCS to other areas on cause shown”. The possibility is envisaged in England, where the Ministry of Justice will examine how it works in PI claims.

She also challenges the suggestion that a third party funder should be potentially liable for the judicial expenses of the party it is funding, as likely in practical terms to significantly restrict the already limited third party funding market in Scotland – though accepts that this may be balanced against likely growth in the DBA market.

Gaining momentum

David Armstrong, head of litigation at Brodies, does not adopt either a pursuer or defender perspective, but enthuses that the report “has deftly struck a balance between the competing interests of the parties involved in litigation – individuals, small businesses, major corporations and legal advisers”.

He comments: “The report’s proposals, if implemented, will be instrumental in improving the process of litigating in Scotland and will put the Scottish courts on the international stage as a forum to litigate complex and cross border disputes. Only time will tell whether these recommendations will be accepted and implemented, but anything short of wholesale acceptance will be a missed opportunity.”

Not everyone waxes quite as lyrical, but given the momentum behind the Gill review and the restructured court system, it would be, you might say, speculative to bet against the Taylor proposals following them into law.

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PI points

Would the availability of DBAs, combined with QOCS, be likely to tempt the Scottish Government into excluding personal injury cases from the civil legal aid scheme? Taylor believes that in contrast to the position on England & Wales, ministers have made clear their commitment to preserving the current scheme, albeit as a fund of last resort. Dalyell agrees that we have in effect already reached such a position, as the main funding method is now the speculative fee – albeit there are different forms in use, something Taylor hopes to simplify.

Two other points are worth covering on the subject of PI actions. One is low-value claims (those under £5,000, to be subject to the new simple procedure in the sheriff court), where pursuers’ and defenders’ representatives are again split over whether Taylor has got it right. While proposing that recoverable expenses in most such actions be fixed according to a formula to be set by the Scottish Civil Justice Council, Taylor would make an exception for PI claims, due to what would otherwise be an imbalance between pursuer and defender funding.

Dalyell and Oliver support this, given that even low value claims can be complex. “It’s important for people to have lawyers make themselves available if they have suffered injury”, Oliver asserts. “We are here to help people in their moment of need, and if the expenses regime had been changed, we would not be here to do that.”

Anderson, however, maintains that, especially with straightforward road traffic claims, “The current disproportion between the amount received by a claimant and the expenses could have been tackled with a fixed fee arrangement, leaving open a discretion to the court where circumstances would justify adoption of another scale, or uplift.”

Both sides, on the other hand, appear to agree on the desirability of the pre-action protocols being made compulsory, a point not covered in the report. “This would have been a quid pro quo for QOCS”, Elizabeth Mitchell comments. “A pursuer in personal injury litigation would only be given the benefit of it if their client had adhered to the pre-action protocol, therefore protecting the defenders at least to an extent.”

Oliver supports the protocols as getting information into the open at an early stage and potentially avoiding court proceedings; APIL’s position is that compulsion would lead to a level playing field with everybody knowing where they are. “There are one or two insurers who don’t subscribe to the protocol”, Dalyell notes, “and that leads to a number of cases being argued about the level of expense. If the protocol was compulsory there would be a saving of court time in that respect as well.”

Further feedback

Some further comments from our respondents:

Peter Anderson, Simpson & Marwick: "A 'soundbite' response is full of dangers. But I suppose I am surprised at the extent to which solutions adopted for England & Wales in the report by Lord Justice Jackson have been adopted. The Jackson report had the stated aim of reducing costs – which was urgently required there. The same problems did not exist in Scotland. Sheriff Principal Taylor recognises the very different regimes but may be finding solutions to problems that don’t really exist here."

"The QOCS proposal, if implemented, gives encouragement to party litigants and others with a financial interest in pursuing very doubtful claims. The proposal is based upon what is said to be a 'true David and Goliath relationship', but there are few if any claimants with a genuine case who are not sought out eagerly by the claims industry. Claimants do have access to protective funding arrangements. There are many funding and insurance products available, so I don’t really understand the evidence basis for the recommendation."

"Further transparency in disclosure of funding arrangements is helpful, and increased regulation of the financial interest of others in claims to include the regulation of claims management companies is necessary to protect the public and the profession."

David Armstrong, Brodies: "The report considers a number of funding options which ought to be available and fully explained to the client at the start of the litigation so that they can make a fully informed decision."

Gordon Dalyell, APIL: "He recognises in his foreword that there are a declining number of [personal injury] cases, and while there are a certain number of firms who will continue to pursue cases in court, there are many more who won’t because of funding difficulties, and a number of measures in the report will hopefully go some way to address that."

Fraser Oliver, Digby Brown: "I think whether to make the pre-action protocols compulsory is for the Civil Justice Council. We offer to deal with all cases under the protocols. Some insurers or defenders refuse but most will try to. I think that compulsory protocols are a good idea because it means that there needs to be an element of interaction between the solicitors for the injured person and for the potential defender... If they are going to say we don’t think there is any legal liability here, here are the reasons, it’s far better to know this at an early stage, rather than to be faced by a brick wall and no response, and to have a compulsory protocol as a good way to exchange the appropriate information between both parties and that way we can look at whether a case is suitable for settlement without involving the courts."

Cat MacLean, MBM Commercial: "The review assumes that in a commercial litigation the litigants on both sides will have a sufficient level of sophistication and experience that they need not be given the kind of protection Taylor recommends should be provided to personal injury litigants with the proposed introduction of QOCS. Banking litigation can often involve an individual director or a small and unsophisticated SME with little resource up against a UK clearing bank with enormous firepower, and this type of litigation simply does not fit with the assumptions the review makes... The comment in the review, which appears to have held sway in the recommendation that QOCS be introduced for personal injury cases, that “for the vast majority of individuals it would be prohibitively expensive to pay the costs of a contested litigation” can apply equally to such a commercial litigant. I would have liked to see more flexibility on the possibility of extending QOCS to other areas on cause shown."

More from the report

A selection of Sheriff Principal Taylor's other recommendations:

• The concept of an additional fee should be retained for all other litigations [commercial actions are dealt with separately] subject to active judicial case management, the decision as to percentage uplift being made at the outset and with a maximum of 100%. Applications should not have retrospective effect. In cases subject to case flow management, the decision should be taken at the conclusion as at present.
• The Scottish Civil Justice Council should form a subcommittee to deal with the level of fees for litigation which may be recovered as expenses.
• The courts should have power to award interest on judicial expenses from 28 days after an account of expenses has been lodged.
• The test for granting sanction for counsel in the sheiff court should continue to be based on circumstances of difficulty or complexity, or the importance or value of the claim, with a test of reasonableness also being applied. The court should also have regard to the resources deployed by the party opposing the motion, so that no party gains undue advantage through the resources available to them. The motion should be made at the start of proceedings, or at a later stage on cause shown. The amount recoverable should be stipulated by the sheriff.
• In the Court of Session, counsel and solicitor advocates should be able to recover payment only for preparation, appearance and cancellation. The concept of a commitment fee should play no part in a judicial account.
• Certification of an expert witness should be obtained prior to his or her instruction, or if that is not possible, as soon as reasonably practicable after proceedings are begun. When assessing reasonableness, the court shold have regard to the proportionality of instructing the expert and his or her charges.
• The court should have a discretion to restrict recoverable expenses in small claims where a defender, having stated a defence, has decided not to proceed with it.
• With the exception of PI actions, recoverable expenses in actions under the simple procedure should be fixed.
• A procedure for the summary assessment of expenses, and a system of expenses management should be introduced as pilot schemes for commercial actions in the Court of Session and sheriff court.
• The power to apply for a protective expenses order should be available in all public interest cases, and unless otherwise prescribed should be a matter for judicial discretion. It should be available in multi-party actions, if a public interest can be demonstrated.
• Solicitors should be under an obligation to explore with their clients all potential funding options, including whether the client is covered by an existing insurance policy, at the time the solicitor is first instructed. In addition, solicitors should be obliged to write to clients with their reasoned recommendation as to which funding option best suits the cient's position.
• The maximum success fee that can be charged in a speculative fee agreement should be capped in the same way in relation to different types of case as the proposed maximum percentage that can be taken by way of fee in a damages based agreement. In PI cases the solicitor should be required to meet counsel's fes and all other unrecovered outlays, plus VAT, out of the success fee.
• A professional funder who finances part of a pursuer's expenses should be potentially liable for the judicial expenses of the opposing party to the extent of the funding provided.
• In all civil litigation, parties should be under an obligation to disclose to the court and intimate to all parties the means by which the litigation is being funded, at the outset of their involvement.
• The civil courts should be given express power to make an award of expenses in favour of a successful party who has been represented on a pro bono basis, payment being made to a registered charity with pro bono support as its aim.
• Expenses management should be mandatory in all actions under multi-party procedure, unless determined otherwise. Damages based agreements should be available.
• There should be a regulator of claims management companies.