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COVENTRY V LAWRENCE, OR LESSONS FROM A NEAR MISS: A PRACTICAL VIEW FROM THE BAR

In his monthly column, James Bickford Smith discusses the Supreme Court's decision in Coventry and others v Lawrence and another [2015] UKSC 50.

Reproduced from Practical Law with the permission of the publishers. For further information visit www.practicallaw.com or call 020 7542 6664.

Much of the legal world will have breathed a sigh of relief last week upon seeing the headline result in Coventry and others v Lawrence and another [2015] UKSC 50: the Supreme Court has upheld the principle that Conditional Fee Agreement (CFA) uplifts are recoverable from opposing parties (see Legal update, Coventry v Lawrence - Supreme Court decides by majority that pre-Jackson costs regime did not infringe ECHR (22 July 2015)). That feeling will not have been confined to those firms or lawyers who had entered into CFAs themselves. It will have extended to those concerned by the precedent that would be set if the basis of common litigation funding arrangements was undermined many years after the passage of the legislation that gave rise to them, and after the House of Lords had already upheld the principle of recoverability in Callery v Gray [2002] UKHL 28.

That headline result is, however, not the end of the matter. That is unsurprising insofar as the case represents the first detailed consideration of principles governing costs recovery by the Supreme Court. Equally unsurprisingly, there are sections of the reasoning of both the majority and the dissenting judges that contain much food for thought for those interested in the future direction of travel in this area.



The A1P1 issue and the "imperfect world" submission

Integral to the arguments of the respondents, who were resisting any award of costs to the successful appellants (save for base costs), was that the sums owed by the appellants under CFA and after the event (ATE) agreements were irrecoverable from the respondents as a matter of principle, because they were incompatible with Article 6 of the European Convention on Human Rights (ECHR) and/or Article 1 of the First Protocol to the Convention (A1P1).

That submission was made in a context where the appellants':

  • Base costs at first instance were £307,642, of which the respondents had been ordered by the trial judge to pay 60% (£184,585).

  •  First instance CFA success fee was £215,007, of which the respondents were in principle liable for 60% (£129,004).

  •  ATE premium was approximately £305,000, of which the respondents were again in principle liable for 60% (approximately £183,000).

     

These costs fell to be considered against a background of the appellants having been awarded only £20,750 in damages for nuisance, and where the maximum diminution in the value of their bungalow if the nuisance continued was £74,000.

The point that followed, and which was made by the court in the judgment that led to the separate hearing to deal with issues of costs, was that the costs figures were wholly disproportionate to the value of the claim.

The respondents' contention in that hearing was that the well-known flaws with the system established by the Access to Justice Act 1999 (1999 Act regime) were such as to interfere unjustifiably with their A1P1 rights. Their critique of that system was summarised at paragraphs 43 to 47 of the judgment:

"The system had a number of shortcomings which were described as 'flaws' by Jackson LJ in his Review of Civil Litigation which were summarised by the ECtHR at paras 207 to 210 of its judgment in MGN v United Kingdom. The flaws were (i) the lack of focus of the regime and the lack of any qualifying requirements for appellants who would be allowed to enter into a CFA; (ii) the absence of any incentive for appellants to control the incurring of legal costs and the fact that judges assessed costs only at the end of the case when it was too late to control costs that had been spent; (iii) the 'blackmail' or 'chilling' effect of the regime which drove parties to settle early despite good prospects of a defence; and (iv) the fact that the regime gave the opportunity to 'cherry pick' winning cases to conduct on CFAs. At para 217, the court concluded that:

'... the depth and nature of the flaws in the system ... are such that the court can conclude that the impugned scheme exceeded even the broad margin of appreciation to be accorded to the state in respect of general measures pursuing social and economic interests.'

These flaws were regarded by the ECtHR as sufficiently serious to lead it to conclude that the system was incompatible with article 10 of the Convention. Mr McCracken submits that the same reasoning necessarily requires the court to hold that the system was also incompatible with article 6 and A1P1.

The system was arbitrary. It singled out from the class of unsuccessful litigants a subset of those who happened to have been opposed by CFA/ATE- funded litigants and imposed on that subset the burden of funding other unsuccessful cases which did not involve them at all.

The real vice of the system lay in the CPD. Paragraph 11.7 based the assessment of CFA uplifts and ATE premiums exclusively on the ex ante perspective of the CFA/ATE party; and para 11.9 expressly disallowed any reduction on the basis that the overall total of base costs and uplifts appeared to be disproportionate. Decisions on uplift therefore disregarded the financial circumstances of the payer, the importance to the payer of fighting the case and the reasonableness of his decision to fight.

The system was not redeemed by the fact that costs were subject to assessment at the end of the proceedings. By that stage, it was too late to control what was being spent. Nor is it an answer to say that the court had the power to cap the costs of a CFA-funded and ATE insurance-protected party at an early stage." (Coventry and others v Lawrence and another [2015] UKSC 50, at paragraphs 43 to 47.)

These criticisms will be well-known to readers of this column, and indeed most of those who have practised law over the last decade. One point to which both will be alert, however, is that it is far from clear whether the Jackson regime that has replaced the 1999 Act regime has provided a satisfactory solution to the problem of litigation funding. On one view, it has merely replaced one set of problems with another, albeit that its emphases on proportionality and on active control of costs by the courts throughout the litigation process do attract considerable support.

The difficult question that was always likely to arise in Coventry v Lawrence was how the Supreme Court would address a system that had now been superseded following substantial and long-standing criticism, including by the senior judiciary themselves. Leaving aside the detail of the ECHR arguments, the practical question was whether it followed from Jackson's endorsement of that criticism that the 1999 Act regime was no longer defensible and, if so, what was the status of funding arrangements entered pursuant to it?

Faced with this situation, the numerous bodies who stood the risk of substantial prejudice if the respondents' argument succeeded intervened in numbers, and the appellant instructed specialist costs' counsel. The astute argument that resulted proceeded as follows:

"There was, and indeed there is, no perfect solution to the problem of how best to enhance access to justice following the withdrawal of legal aid for most civil cases. A successful defendant was often better off under the 1999 Act scheme than he had been when legal aid was generally available to appellants. At that time, a successful defendant usually had to bear his own costs of defending a claim. The appellant did not have the means to meet the defendant's costs and it was a rare case in which a successful defendant would be able to obtain its costs from the legal aid fund. Under the 1999 Act regime, the successful defendant would usually obtain its costs from the ATE insurer. On the other hand, the unsuccessful defendant was unquestionably better off under the previous regime because it was only liable for the claimant's base costs. This was the policy choice that was made by Parliament.

Mr McCracken submits that the current LASPO scheme (based on the proposals for reform made by Sir Rupert Jackson) is fairer than the scheme that it replaced. The LASPO scheme was intended to readjust the balance which had been adjusted in 1990 and 1999, and it has inevitably curtailed access to the courts in some respects as a result, as is demonstrated by the facts of this case. Appellants of modest means cannot finance litigation without a CFA. But that inevitably requires them to pay a success fee on their solicitors' and counsel's basic charges. In a substantial case, these costs are bound to be high. How is the success fee to be paid by appellants who bring claims for non-financial remedies or where the damages claimed are very small? Sir Rupert recognised the problem, when he called for general damages to be increased by 10%. This was effected by the Court of Appeal in Simmons v Castle [2012] EWCA Civ 1039 and 1288, [2013] 1 WLR 1239. But in the present case, this would have benefited the appellants to the extent of only £2,085. Even if the success fees were to be substantially reduced on assessment, this increase in damages would represent a very small fraction of the overall figure. In short, under the LASPO regime, the present litigation would not have been viable. The success fees are almost certainly more than the appellants' likely damages, and more than the financial value of the rights they are attempting to protect (the diminution in value of their home being, on the expert evidence, no more than £74,000)." (Coventry and others v Lawrence and another [2015] UKSC 50, at paragraphs 69 to 70.)

The contention, in other words, is that while the 1999 Act regime had flaws and, in some cases at least, led to injustice, that was also the case of the previous legal aid system and the subsequent Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO)/Jackson regime. Accordingly, it was no answer to the problem of how to fund litigation that all pre-LASPO/Jackson regimes were contrary to A1P1.

That argument was accepted by the majority:

"The reason for referring to the LASPO scheme at some length is not to criticise the Jackson reforms, but (i) to show that there are restrictions on access to justice inherent in the LASPO scheme and (ii) to demonstrate that, at least in the absence of a widely accessible civil legal aid system (which had ceased to exist by 1999), it is impossible to devise a fair scheme which promotes access to justice for all litigants." (Coventry and others v Lawrence and another [2015] UKSC 50, at paragraph 72.)

The majority also held that even if they had found the 1999 Act regime incompatible with the ECHR, they would not have read the relevant provisions down in a manner that would have made them compatible with it. Here, the majority echoed the concerns of much of the legal world:

"Even if it was open to us to read down para 11.9 in the way for which Mr McCracken contends we do not consider that it would be right to do so. Nor would it be right to disapply it. As the Bar Council points out, the Court of Appeal actively shaped the law relating to additional liabilities throughout the period from 2000 until 2013. It was implicit in all of the cases that success fees (often substantial success fees) were recoverable. In none of the cases did the court disallow or reduce the amounts payable in success fees on the grounds that they were so high as to amount to a breach of the paying party's Convention rights. In these circumstances, litigants and their lawyers had a legitimate expectation that the court would not (at least without reasonable notice) decide that these fees were in principle incompatible with the Convention.

This is no mere abstract statement. A decision to declare that the 1999 Act scheme was incompatible with the Convention would have a serious impact on many thousands of pre-April 2013 cases which are in run-off, as well as claims to which the pre-Jackson costs rules continue to apply, such as mesothelioma, insolvency and publication and privacy cases. Any order made by this court in the present case would have no effect on the contractual obligations of litigants to pay success fees to their lawyers and ATE premiums to their insurers. Successful parties would, therefore, still be liable to pay their lawyers and insurers if they won their cases and could not recover them from unsuccessful respondents." (Coventry and others v Lawrence and another [2015] UKSC 50, at paragraphs 89 to 90.)



The minority view 

Anyone who considers the above no more than a statement of the obvious would be well-advised to read the minority judgment of Lord Clarke and Lady Hale:

"The majority place weight on what they call the 'legitimate expectation' of litigants and lawyers that courts will uphold the legality of the costs regime around which they have contracted. They say that, even if the system is incompatible with article 6 and A1P1, litigants' and lawyers' legitimate expectation that successful appellants would receive a costs order covering the success fee and ATE insurance premium should be weighed in the balance so that a remedy of reading down the provisions so as to be compatible with respondents' Convention rights is not appropriate: Lord Neuberger and Lord Dyson, para 89; Lord Mance, para 106. The appellants before us argued that their expectation that they would receive such a costs order was a "legitimate expectation" which was a protected possession under A1P1. Presumably (though they do not say so) the members of the majority intend to use the term "legitimate expectation" in that sense.

The question is what order the court must make. To my mind the answer is clear. By section 6 of the Human Rights Act, the court must not act incompatibly with a Convention right. It is the court's duty to balance these competing rights as part of the balancing exercise and determine the proper way forward. Insofar as the expectations of litigants and their lawyers are relevant to the article 6 balancing exercise, I consider that they are one factor only and cannot render proportionate the discriminatory treatment of the particular classes of defendant I have already discussed.

As the majority observe, legitimate expectation may be relevant on the issue of remedy. It strikes me that it may be relevant in this way. When deciding what order to make in light of the facts at the present day, considerations of legitimate expectation should cause the court to go back to the balancing exercise it has already undertaken when evaluating the scheme itself. The court would then take account of the parties' legitimate expectations in a new balancing exercise and decide whether to maintain its previous view. Considerations tending to the conclusion that that the scheme is still incompatible might include the following: (i) the ECtHR was untroubled by this concern in MGN v United Kingdom; (ii) the legitimacy of an expectation that the Government would enforce a scheme which breaches the Convention rights of others must be very limited indeed; (iii) the application of A1P1 to the question of whether a superior court should feel able to disturb settled case-law is an area where the court should act with great caution; (iv) as a matter of fact the scheme was heavily criticised from its inception, so that litigants must have known that there was an issue under article 6; (v) since it is the court's duty to act compatibly with the Convention, the court should not make an excessive costs order which directly infringes a respondent's rights, even though this may have a deleterious effect on the claimant; (vi) it may not have such an effect because the solicitors may not enforce their rights against the appellants; and (vii) the appellants may have rights against the United Kingdom. If all these points are borne in mind when striking a balance between the rights of the parties, the correct conclusion is that respondents' article 6 rights are still breached because leaving the scheme in place is still not proportionate." (Coventry and others v Lawrence and another [2015] UKSC 50, at paragraphs 133 to 135.)

It is salutary to note that two members of the Supreme Court would have struck down a regime on which a significant section of the legal sector had relied and would have held that there was no legitimate expectation that that regime would continue to obtain. That would, in turn, have led to the extreme repercussions discussed in my previous columns, effectively putting many firms in the very vulnerable position of relying on success in a class action against the government. Further, it is striking that Lord Clarke only stated that such a claim "may" exist, a somewhat tepid endorsement at best.



Lesson for the future

It should be plain from the above, and it becomes even plainer from the detail of the judgment itself, that Coventry v Lawrence was an uncomfortably close run thing. The question is what lessons can be learned from it for the future.

The first lesson is that the issue of CFA uplift and ATE premium recoverability may not have been finally resolved: it will be interesting to see what the European Court of Human Rights (ECtHR) makes of the point of principle, if and when it returns to it. If the ECtHR makes a finding of breach of A1P1, there will then be a further and weighty question as to how domestic courts will react. The issue at that stage may well become whether the consequences of such a finding are visited on the government or on those who have entered into CFA and ATE insurance agreements.

The wider lesson, which does not make for easy reading, is that a degree of caution may need to be exercised before basing business models upon an assumption that common litigation funding schemes will prove resistant to far-reaching legal challenge in the future. While that lesson can be easily drawn, and may perhaps have been drawn by those sceptical of litigation funding in general, it augurs ill for the success of damages-based agreements. That is unfortunate given that absent such agreements it is hard to see how the Jackson scheme will work in the case of potentially substantial claims that there are no immediate resources to pursue: how much weight, one must ask, can be put on the shoulders of the litigation funders?

Finally, a specific lesson for those managing legal practices lies in the facts that:

  • The minority clearly believed that the legal profession as a whole were "on notice" of the risk of their CFA uplifts no longer being recoverable from the losing party. That, in turn, assumes that those managing legal practices maintain, alongside numerous other commitments, a careful eye on trends in costs law.

  •  Had Coventry v Lawrence been decided as the minority wished, there would have been serious questions about the solvency of a number of legal practices.

  • Nevertheless, minimal weight was afforded to such concerns by two Supreme Court justices.

In that context, one wonders whether the indifferent or phlegmatic view of corporate structure still taken by a fair number of practices is sensible. There must now be a stronger argument for those legal practices not precluded by professional rules from doing so to consider converting to structures that would allow for "running off" of old matters and their ancillary risks. This is by no means a straightforward task, but it would be unsurprising if interest in doing so increases.



Posted: 14.08.2015 at 16:36
Tags:  Comments  Commercial Law
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