City litigators size up move to allow firms to take a cut of damages but CFA reforms to slash success fees in PI

Success fees look set to be ushered in for complex commercial cases, ironically just as the Government unveiled reforms expected to severely restrict their widespread use in volume personal injury claims.

The Ministry of Justice (MoJ) last week revealed its long-awaited proposals for civil litigation reform – confirming that it was to implement most of the blueprint put forward in a report last January by Lord Justice Jackson.

The move is set to bring in the use of contingency fees – which allow lawyers to take a slice of their clients' damages – for the first time. The move has been closely watched by commercial litigators who believe it could be used to help fund complex disputes with success fees.

However, the centrepiece for the reforms is a shake-up of the regime for conditional fee arrangements (CFAs), which will make claimants cover the cost of success fee uplifts from their own damages.

The ending of the recoverability of success fees and associated costs like after-the-event (ATE) insurance policies is expected to have a major impact on the personal injury and volume claims markets, slashing the level of success fees that can be charged in such cases.

The reforms have been strongly supported by insurers, business groups and some defendant lawyers who argue that the current regime creates no incentive for claimant lawyers to control costs as legal fees are borne by the losing party.

The MoJ rejected a strong campaign against curbs on the use of CFAs by claimant lawyers and some campaign groups, which argued that the new regime will prevent many valid claims being pursued.

The move is expected to drive substantial change in the volume litigation market, including potentially pushing large players in claimant litigation to use alternative business structures under the Legal Services Act.

Announcing the package on 29 March, Lord Chancellor and Secretary of State for Justice Kenneth Clarke said: "With no major reform for 15 years, the civil justice system has got out of kilter. Businesses and other people who have been sued can find that spiralling legal costs, slow court processes, unnecessary litigation and the 'no win, no fee' structures, which mean greater payments to lawyers than to claimants, are setting them back millions of pounds each year."

The new contingency fee deals – dubbed damages-based agreements – will allow lawyers to take a cut of up to 25% of their client's damages and may see a number of City litigators introduce the option to their current billing models.

Mayer Brown commercial dispute resolution partner Rani Mina said: "Contingency fees will definitely be looked at quite closely by law firms such as ours and they will be of interest to our clients.

"They will require law firms to think about their business in a different way to how they do currently, especially in terms of how much revenue they might want to put at risk in these arrangements."

Herbert Smith global head of dispute resolution Sonya Leydecker commented: "I was interested to see the divergence in views [during the MoJ's consultation] over contingency fees (48% in favour, 52% against).

"This mirrors what we have been told by commercial clients in the surveys we have carried out. Though controversial, they should give scope to come up with more creative fee structures, which is what clients tell us they want."

Clarke has also launched a consultation on raising the maximum amount awarded by small claims courts from £5,000 to £15,000.

In addition, automatic mediation referral in small claims cases, automatic mediation awareness sessions in higher-value cases, and making mediated settlements enforceable by courts are also being reviewed.

The Government will also consult over the creation of one national county court jurisdiction across England and Wales as part of a bid to centralise and speed up the courts.

Clarke has said that the changes to the recoverability of success fees and ATE premiums will save the NHS an annual sum of £50m, with the proposed reforms now open to consultation until 30 June 2011.

Market reaction

Freshfields Bruckhaus Deringer dispute resolution partner Ian Terry: "The changes to the CFA system overall are welcome. These arrangements have been used in some commercial cases for which they were never intended and are quite inappropriate.

"I doubt the changes will have much of an impact on the number of litigation cases brought more generally, though they may have some effect on the number of personal injury and employers' liability cases that are currently taken to court."

Field Fisher Waterhouse personal injury partner Andrew Morgan: "It is by and large a wholesale adoption of the Jackson proposals. It certainly captures Jackson's main point, which is that success fees will not be payable by defendants in claims involving personal injury.

"One of my worries is that this will discourage people from pursuing serious and valuable claims where the evidence is complicated or in a developing area of law.Clifford Chance head of commercial litigation, Simon Davis: "The reforms will allow law firms and their clients to be more creative in their fee arrangements and may save money for the taxpayer."

Hogan Lovells product liability partner Rod Freeman: "I think the changes to litigation costs that have been announced will go some way to curbing some of the bad practices that have grown up around the "no win, no fee" system, by helping ensure that claimants' lawyers do not run up disproportionate costs at an early stage, or drag out cases for unnecessary lengths of time, given that part of their fees will have to be met out of the damage pay-outs.

"Practical experience has shown that the "no win, no fee" system in its present form is often an impediment to the early resolution of claims, and I think aspects of these reforms should help redress the balance."

Barlow Lyde & Gilbert casualty and healthcare partner,David Knapp: "Without the uplifts it is obviously going to have an impact on the financial model of some claimant law firms because they are going to recover less in costs.

"This will be particularly apparent in fast-track cases that are limited to a pay-out of £25,000 and account for around 80% of cases for personal injury claimant lawyers and are the bread and butter of their practices."

Stewarts law personal injury partner Julian Chamberlayne: "Stewarts Law data shows that adding 10% to the general damages is going to get nowhere near to covering the loss of success fees and ATE recoverability as these cases are hard fought by defendants.

"On average catastrophic injury claimants are likely to be more than £40,000 worse off. The proposed 25% success fee cap also shows a lack of joined up thinking, as there is no good reason why it should be lower than the existing cap of 35% in employment tribunals. These proposals will restrict access to justice for some people with the most serious injuries and will stifle the development of law, because the reward for the risks will be too low in the most challenging cases."

James Delaney, director, litigation broker, The Judge: "Clearly, in light of the proposals, certain areas of the litigation insurance market will be severely impacted, most notably those heavily involved in personal injury disputes. Inevitably there will be insurance companies that exit the market as a result.

"Of the insurers who remain in a non-recoverable regime, innovation will be key. Price-led competition will intensify as clients search for the most competitive terms. Without the benefit of recoverability, clients will not enjoy the previous comfort from insurers over the "reasonableness" of their premiums."