RECOVERABILITY MAY BE ILLEGAL RULES SUPREME COURT
In a stunning decision the Supreme Court has declined to order payment of a recoverable success fee and After the Event insurance premium against a losing party and has adjourned the matter for the Attorney General and Secretary of State for Justice to be notified so that they may make representations in relation to the suggestion that recoverability breached a paying party’s right to a fair trial as enshrined in Article 6 of the European Convention on Human Rights and was also an unjustified deprivation of property contrary to Article 1 of the First Protocol to the Convention.
The Supreme Court, in Coventry and others v Lawrence and another (No 2)  UKSC 46, judgment delivered on 23 July 2014 also said that it was considering making a declaration of incompatibility, meaning the matter would be referred back to Parliament, even though the relevant legislation – the Access to Justice Act 1999 – has been repealed.
The decision does not affect post 31 March 2013 CFAs. In relation to pre 1 April CFAs where the success fee and ATE has been paid it is unlikely that the paying party will be able to appeal out of time to try and get these back as the law was clear, if illegal.
Rather the UK government would face claims by defendants, generally insurance companies, for the return of hundreds of millions of pounds, if not billions, for additional liabilities that they were illegally forced to pay. The Government – insurance company love in might be about to end.
In relation to ongoing cases with pre 1 April 2013 CFAs and ATE premiums- on the face of it recoverable – it is unlikely now that any court will order them to be paid. Expect cases to be adjourned until Coventry is decided. Note that the Supreme Court has not made any final decision either way.
While I do not disagree with the Supreme Court’s comments – and I set out Paragraphs 32-48 below- to disallow recoverability for clients who incurred ATE premiums and success fees on the basis that they would be recoverable, as very clearly intended and stated by Parliament in primary legislation would be grossly unfair.
Watch this space.
“32. The final issue arises out of the Judge’s order for costs, namely that the respondents should pay 60% of the appellants’ costs. The appellants’ costs at first instance consisted of three components, as permitted by the Courts and Legal Services Act 1990 as amended by sections 27-31 in Part II of the Access to Justice Act 1999. The first was the “base costs”, ie what their lawyers charged on the traditional basis, which was, in crude terms, calculated on an hourly rate and the costs of disbursements. The second component was the success fee (or uplift) to which the lawyers were entitled, because they were providing their services on a conditional fee (or no win no fee) basis. The third component was the so-called ATE premium, a sum which is payable to an insurer who agreed to underwrite the appellants’ potential liability to the respondents for their costs if the respondents had won. The appellants’ base costs amounted to £398,000; the success fee, which (we will assume) was at the maximum permitted level of 100%, amounted to £319,000-odd (as the uplift does not apply to every item of costs), and the ATE premium was apparently about £350,000.
33. Accordingly, if the respondents had been liable for the whole of the appellants’ costs up to the date the Judge made the order, they would have had to pay the appellants around £1,067,000. As it is they are liable for over £640,000.
34. These figures are very disturbing.
35. They give rise to grave concern even if one ignores the success fee and ATE premium. The fact that it can cost two citizens £400,000 in legal fees and disbursements to establish and enforce their right to live in peace in their home is on any view highly regrettable. The point is reinforced when one takes into account the value of their home, which is less than £300,000 (coupled with the effect of the nuisance on that value, £74,000 at the most) and the fact that there will have been very significant further “base costs” incurred as a result of four-day appeals in the Court of Appeal and this Court. The point can equally forcefully be made from the point of view of the respondents. As relatively small business operators, they are not only having to fund their own costs, which presumably would be of the same order, but in addition they are going to have to pay some £240,000 towards the appellants’ costs. It is true that the respondents lost, but they were seeking to defend their businesses and they plainly had a reasonable case, as is evidenced by the fact that they won in the Court of Appeal.
36. One of the main, and laudable, aims of the proposals made by Lord Woolf in his report Access to Justice (1996), which led to the enactment of the Civil Procedure Act 1997, and the introduction of the Civil Procedure Rules the following year, was to try and achieve a better relationship between the costs and benefits of litigation. As the figures in this case show, and as is reflected in many other cases, that target has not merely proved elusive, but it is often missed by a very wide margin indeed. It is, of course, easy to criticise, and, having been Master of the Rolls until 2013, I am as aware as anyone how hard it is to ensure that a case, particularly one that does not involve a very large sum of money but is potentially complex in terms of fact, law and expertise, such as the present case, is both properly and proportionately litigated. It is also right to acknowledge that the reforms proposed by Sir Rupert Jackson in 2010, which do not apply to this case, have been largely introduced and are being absorbed. Nonetheless, even without the effect of Part II of the 1999 Act, to which I must shortly turn, it would be wrong for this Court not to express its grave concern about the base costs in this case, and express the hope that those responsible for civil justice in England and Wales are considering what further steps can be taken to ensure better access to justice. It is only fair to emphasise that this concern relates to the current system and that it is not intended to imply any criticism of the lawyers in this case.
37. The amount of the base costs in this case is however dwarfed by the total potentially recoverable costs, which are nearly three times as much. The figures illustrate the malign influence of the amendments made to the 1990 Act by Part II of the 1999 Act, and as implemented through CPR rule 44 and CPR44 PD – now fortunately repealed and replaced by the provisions of Part 2 of the Legal Aid, Sentencing and Punishment of Offenders Act 2012, following Sir Rupert Jackson’s Review of Civil Litigation Costs (2010), referred to above. As Sir Rupert pointed out in his Review, and as is explained in Zuckerman on Civil Procedure Principles and Practice (3rd ed 2013), the system introduced in 1999 had a number of unique and regrettable features, four of which are worth mentioning for present purposes. First, claimants had no interest whatever in the level of base costs, success fee or ATE premium which they agreed with their lawyers, as, if they lost they had to pay nothing, and if they won the costs would all be paid by the defendants, who, on the other hand, had no say about the costs (other than retrospectively on an assessment). Secondly, in many cases, unsuccessful defendants found themselves paying, in addition to the whole of their own costs, three times the claimants’ “real” costs. Thirdly, while proportionality had a part to play when assessing the recoverability of base costs (albeit a limited part – see Home Office v Lownds  1 WLR 2450), it was excluded from consideration in relation to the recovery of success fee or ATE premium (which were simply required to be reasonable) – see CPR44 PD, paras 11.7-11.10. Fourthly, the stronger the defendants’ case, the greater their liability for costs would be if they lost, as the size of the success fee and the ATE premium should have reflected the claimants’ prospects of success.
38. Even accepting that they have no complaint about their liability for 60% of the appellants’ base costs, the respondents are understandably aggrieved by the consequences of the Judge’s order that they pay 60% of the appellants’ costs, because it means that they have to pay (i) 60% of the 100% success fee, and (ii) 60% of the ATE premium. Mr McCracken QC contends on their behalf that this is a grievance which can be accorded legal recognition through article 6 of the European Convention on Human Rights and/or article 1 of the First Protocol to the Convention (“A1P1”). His argument is that, by virtue of section 6 of the Human Rights Act 1998 the court, as a public body, must exercise its discretion when awarding costs in accordance with the Convention, save where otherwise required by primary legislation (such as the 1990 and 1999 Acts), and that secondary legislation (such as the CPR and Practice Directions) must be disapplied where it requires otherwise. Relying on the judgments of the Strasbourg Court in MGN Limited v United Kingdom (2011) 53 EHRR 5 and Dombo Beheer BV v Netherlands (1994) 18 EHRR 213, he contends that article 6 would be infringed if the court required the respondents to pay 60% of the success fee and the ATE premium. As to A1P1, he relies on the reasoning of the Strasbourg court in James v United Kingdom (1986) 8 EHRR 123.
39. In MGN v UK at para 217, the Strasbourg Court said that “the depth and nature of the flaws in the system” introduced by the 1999 Act and the provisions of the CPR referred to above were “such that the Court can conclude that [it] exceeded even the broad margin of appreciation to be accorded to the State in respect of general measures pursuing social and economic interests”. That provides some support for the respondents’ case. However, the observation and the decision itself were made in connection with an alleged infringement of article 10, where the claimant was rich enough not to need to take advantage of a conditional fee agreement. In the present case, by contrast, article 10 does not apply and it is apparent that the appellants needed the protection of a conditional fee agreement and recoverable ATE premium in order to be able to bring their claim. Dombo Beheer was a case concerned with article 6, and the Strasbourg court said that it was “clear that the requirement of ‘equality of arms’, in the sense of a ‘fair balance’ between the parties applies in principle” to “cases concerning civil rights and obligations”. However, it is by no means clear that that general observation would necessarily support the respondents’ argument. In James v UK at para 50, the Strasbourg court said that, when someone is deprived of property, there must be “a reasonable relationship of proportionality between the means employed and the aim sought to be realised”, and that “a ‘fair balance’ …. must be struck between the demands of the general interest of the community and the requirements of the protection of the individual’s fundamental rights”. I am unconvinced that this takes matters any further than the argument based on article 6.
40. In Callery v Gray  1 WLR 2000, the House of Lords effectively confirmed that, subject to reasonableness, success fees and ATE premiums were recoverable, and in Campbell v MGN Ltd (No 2)  1 WLR 3394, the House of Lords held that the 1999 Act costs recovery regime did not infringe article 10. However, as I have mentioned, the Strasbourg court took a different view in the latter case. In those circumstances, it must, in my view, follow that the issue of whether the 1999 Act costs regime, and in particular a claimant’s right to recover any success fee and ATE premium from an unsuccessful defendant, infringes the Convention, is one which it is open to this Court to reconsider.
41. In the light of the facts of this case and the Strasbourg court judgments relied on by Mr McCracken, it may be that the respondents are right in their contention that their liability for costs under the 1990 Act, as amended by Part II of the 1999 Act, and in accordance with the CPR, would be inconsistent with their Convention rights. However, it would be wrong for this Court to decide the point without the Government having had the opportunity to address the Court on the issue.
42. This concern is based on the proposition that a declaration of incompatibility ought not be made by a court without the Government having the opportunity of addressing the court. It appears to me that there is a substantial argument to the effect that it is not merely secondary legislation, namely CPR 44 and CPR44 PD, but also Part II of the 1999 Act, which had the effect of requiring defendants who have been ordered to pay a claimant’s costs to pay the uplift and ATE premium in full, subject to the uplift and premium having been reasonable, but irrespective of proportionality. Section 58A(6) of the 1990 Act (added by section 27 of the 1999 Act) provides that an order for costs “may, subject … to rules of court, include provision requiring the payment of any fees payable under a conditional fee agreement which provides for a success fee”, and section 29 of the 1999 Act has a similar provision in relation to an ATE premium. It is true that these provisions are not on their face mandatory, but it seems to me to be arguable that the costs charging and recovery system introduced by Part II of the 1999 Act simply would not work unless a claimant’s success fee and ATE premium were recoverable in full, irrespective of proportionality, from a defendant who had been ordered to pay the claimant’s costs.”