Dispute Resolution: The Big Bang Reforms

The world of litigation has been turned on its head with the long-awaited reforms recommended by Lord Justice Jackson having been brought in on 1 April 2013 through a combination of legislation, regulations and rule changes.  Although the effects of these changes have had the greatest impact on personal injury litigation, much has also changed in the world of commercial disputes. Here are a few of the key changes:

Funding a claim - In recent years a growing number of claims have been funded through Conditional Fee Arrangements (otherwise known as no win no fee agreements) with the backing of an insurance policy to cover against the risk of losing the claim.  If a party is successful in their claim then they will need to pay their solicitor's normal fees plus an uplift on those fees (otherwise known as a success fee to represent the risk that if the claim is lost the solicitor will not get paid) plus the insurance policy premium.  However, the usual costs rules mean that the losing party should be responsible for paying all of these costs.

Effect of the reforms - the losing party is no longer responsible for paying the uplift on the winning party's solicitor's fees or the insurance premium.  This leaves the winning party having to foot the bill from its own pocket.

Although the previous arrangement allowed claimants to litigate virtually risk free at huge expense to losing defendants, there is great concern that the pendulum has now swung too far the other way and that although these changes might succeed in reducing the large costs bills payable by losing parties, it may well be at the expense of access to justice, preventing those with genuine claims, but without the financial resources, the ability of pursuing a claim without a huge cost risk.

Settlement Offers – The court rules make special provision for parties to put forward formal settlement offers during the life of a dispute.  These can be quite effective in persuading an opponent to settle a dispute due to the consequences of refusing to accept it.

In particular, where a defendant refuses a claimant's formal settlement offer but fails to do better at trial than the terms of the offer then the court will impose various sanctions on him (unless it is unjust to do so).  The Defendant will be ordered to pay costs on what is known as an 'indemnity' basis (which usually means a larger proportion of the winning party's costs will be payable) as well as enhanced interest on both damages and costs.

Effect of the reforms - the losing party must now pay an additional 10% of the damages awarded by the court (where the claim is or includes a money claim) or 10% of costs for non-monetary claims.  The hope is that this will encourage earlier settlement of disputes outside of court.

Costs management – The costs incurred in dealing with a dispute on the court's multi-track (which is generally for those disputes with a value of over £25,000) will now be subjected to costs management by a judge.  This means that at the outset of litigation, parties must prepare a detailed budget of the costs they estimate will be incurred in dealing with the dispute.  This budget must then be approved by the court and each party will be expected to remain within this budget unless there is a justifiable reason for departing from it.

At conclusion of a case, in determining the amount of costs that the losing party should pay, the court will not depart from an approved budget without good reason.

Effect of the reform – this has potential to have a positive effect as it will bring more transparency about costs.  Parties to a dispute will therefore know about their financial commitment and potential downside should they lose the case.  This can be very useful when determining the likely level of risk in pursuing a matter to trial. 

However, the potential downside is that the winning party is likely to be held to its costs budget when the amount of costs it should recover from the losing party is being determined.  It could therefore be very restrictive in nature and leave a winning party with a significant shortfall in its recoverable costs.  The preparation and management of the budget must therefore be undertaken very seriously by both lawyer and client at the outset and as the case progresses to ensure, as best possible, not to come unstuck at conclusion of the case.

Case management – Courts have been given wider powers to manage cases and to ensure that parties comply more strictly with the directions given by the court.

Effect of the reforms – the indication is that the court will be much quicker to take a hard line against parties who do not comply with the timings and the rules and orders of the court.   Parties must therefore ensure careful compliance in order to avoid falling foul of tougher case management under the new rules.

Conclusion – The changes to funding and to the costs rules are wide reaching and are likely to have the biggest impact upon the world of disputes.  However, as the changes are still relatively new it is still rather uncertain how the various reforms will interact as a whole, and how significant their effect will be in practice.