Publishers in the UK are all too familiar with facing libel claims from claimants represented by lawyers on conditional fee agreements (CFAs). Defending libel actions against claimants represented on a CFA is a potentially expensive business.

The stakes are high. If the defendant is successful, the claimant may well not be able to meet the defendant's costs. Equally, if the claimant is successful, the defendant will have to pay a large proportion of the claimant's costs plus face a claim for an uplift on the costs of up to 100%.

As CFA claimants have no risk of paying their own costs, there is no commercial check on their lawyers' rates or the overall level of their fees. Consequently, claimants' costs in libel actions often spiral out of control. For example in the recent case of Miller v Associated Newspapers, if the claimant had succeeded in its claim at trial (which it did not), the costs (including a claim for recovery of an ATE insurance premium) that it would have claimed from Associated Newspapers would have been approximately £3.5m.

As a leading member of government has recognised recently, these factors could effectively mean that a claimant is able to hold the defendant to ransom. The factors could also have a chilling effect on freedom of speech. In these circumstances, there is a distinct danger of some publishers adopting self-imposed censorship to avoid impecunious claimants. Such an approach is at odds with publishers' rights of free expression under Article 10(1) of the European Convention on Human Rights incorporated into English law under the Human Rights Act 1998.

The Court of Appeal recognised these issues, albeit on an obiter basis in Musa King v Telegraph Group Limited [18 May, 2004]. The claimant's solicitors knew that the defendants "would be placed in the awkward position that whatever they did to defend themselves they would be unlikely to recoup the legal costs they incurred".

Lord Justice Brookes suggested that "if defamation proceedings are initiated under a CFA without [after-the-event insurance] cover, the master should at the allocation stage make an order analogous to an order under section 65(1) of the [Arbitration Act 1996, which provides for tribunals to limit recoverable costs]… if the master considers that a budget or cap is required he should refer the issue of imposing a cap to a costs judge".

In the recent case of Armstrong v Times Newspapers Limited [17 December, 2004], the defendant applied for a costs capping order on the basis of Musa King. Mr Justice Eady refused the order as he felt that the claimant had sufficient funds to meet a retrospective costs award.

However, once again, on an obiter basis, Mr Justice Eady saw that a cost capping order may be appropriate were a defendant facing an impecunious claimant represented on a conditional fee agreement but with no after-the-event insurance. "One can readily see that any libel action conducted in those circumstances would have a significantly chilling effect on the relevant media defendants over and above the normal hazards of litigation," he said.

In the case of Matadeen v Associated Newspapers, Associated Newspapers, the publisher of the Evening Standard, was sued for defamation by the owner of a nursing home, Alberta Matadeen, over allegations made in the newspaper about conditions in the home. Mrs Matadeen commenced proceedings against Associated Newspapers, represented under a CFA. She was unable to obtain afterthe-event insurance to cover payment of Associated Newspapers' costs in the event she was unsuccessful at trial.

At the time the allocation questionnaires were exchanged in this case, the claimant predicted that, to trial, her base costs and disbursements would be in excess of £500,000. In addition, the defendant faced a claim for a considerable uplift on these costs by way of success fee.

Associated Newspapers found itself in classic Musa King territory. There was a real and substantial risk that, in the event that Associated Newspapers was successful at trial, Mrs Matadeen would be unable to meet all or a very substantial part of its costs. Further, Associated Newspapers suspected that it would be inadequately protected by a retrospective costs award.

At the allocation stage of proceedings, Associated Newspapers made an application to Master Eyre to have the claimant's costs (including the success fee) capped. The effect of the cap, if granted, would be that Mrs Matadeen would not be able to recover costs from Associated Newspapers exceeding the cap.

The basis of the application was, because Mrs Matadeen was being represented on a CFA with no after-the-event insurance, Associated Newspapers faced a real and substantial risk that, if it was successful at trial, Mrs Matadeen would not be able to meet its costs. Equally, if Mrs Matadeen was successful at trial, Associated Newspapers would have to meet a large proportion of her costs plus face a claim under the CFA for an uplift on the costs of up to 100% by way of the success fee. Associated Newspapers argued that this scenario could have a chilling effect on freedom of expression.

Mrs Matadeen's lawyers argued that a costs cap at the allocation stage of proceedings was premature and that consideration as to whether a cap should be imposed should only be made by the Court after disclosure and exchange of witness statements. Further, they submitted that Associated Newspapers had adduced no evidence of the claimant's impecuniosity.

Master Eyre adopted the obiter comment made by the Court of Appeal in Musa King and granted an order that a cost cap be placed on Mrs Matadeen's recoverable costs.

In making his ruling Master Eyre made the following points:

. a CFA creates at least a provisional inference that the claimant is impecunious where the claimant has refrained from calling any evidence to the contrary;

. extravagance with regard to costs in any subjective sense is not a necessary condition of making such an order; and

. the need for vindication may well induce a more liberal approach to any assessment of Mrs Matadeen's costs, but scarcely an approach so liberal as to ratify costs on this "giant" scale.

Master Eyre has referred the matter to the senior costs judge to decide what the level of the cap should be. The level of the cap will be decided in June 2005. In the meantime, the senior costs judge has ordered that:

. the claimant must file and serve an estimate of costs in the costs budget format setting out costs incurred to date and an estimate of the costs to be incurred to trial. The claimant must also provide a breakdown of the work under-taken to date and to be undertaken so that the senior costs judge can ascertain the current state of preparation of the case;

. the defendant must file and serve an updated estimate of its own costs to date and for the future;

. the defendant must then file and serve Points of Dispute with a counter estimate setting out submissions as to what the costs cap should be; and

. the claimant must then file and serve a response to the Points of Dispute.

Hopefully, the judgment represents an important first step in bringing proportionality to costs incurred by lawyers representing claimants on CFAs. It recognises that publishers need to be able to report candidly on important issues of public interest without being overly fettered by cost concerns.

It is hoped that in all defamation cases where the claimant's estimated costs to trial are disproportionately high and where the claimant is represented on a CFA with no after-the-event insurance, the Court will exercise its case management powers at the allocation stage of proceedings to impose a cap.

It should be noted that defendants applying for a costs capping order against a claimant are also likely to be required to submit to a cap on their recoverable costs and this should be borne in mind when considering whether to apply for a cap.

Niri Shan and Lorna Caddy are media and entertainment lawyers at Taylor Wessing. They acted for Associated Newspapers on the costs capping application.