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Should insurers still pay success fees and ATE premiums after Coventry v Lawrence?

14 August 2014

Is the unexpected judgment of the Supreme Court in Coventry v Lawrence (No 2) from 23rd July, saying that the pre-LASPO regime involving recovery of success fees and ATE premiums from defendants may breach the European Convention on Human Rights, of significance to insurers? Or will it become just a footnote in history as we move completely to the post-LASPO world? Whatever the answer to those questions, what if anything should be done about the position in the meantime when insurers are dealing with costs claims which include recoverable success fees and ATE premiums in pre-LASPO retainer cases?

An unusual case

The Coventry case was a claim for nuisance by the owners and occupiers of a bungalow against the occupiers of a stadium 850 yards away which was used for motor racing events and which as you would expect generated a lot of noise. The claimants won before the trial judge, lost at the Court of Appeal, but won earlier this year before the Supreme Court. Damages totalling £20,700 were ordered to be paid, and an injunction was put in place. The claimants got an order that 60% of their costs should be paid by the defendants.

The issue that has led to the recent developments occurred when the Supreme Court came to look at the level of the claimants’ costs, which in the judgment are said to have consisted of base costs of £398k, on top of which there were success fees assumed to be 100% which were worth a further £319k, and in addition an ATE premium of £350k, making a total of £1.067m, of which the 60% payable amounted to £640k. These were just the costs of the heavily contested trial, and did not include the costs of either appeal which will have been substantial as well.

In other words, the liability to pay costs, even though limited to 60%, was 32 times larger than the liability to pay damages, even before the appeal costs were taken into account. Clearly, this was not an average case.

The lead judgment of Lord Neuberger refers to the costs incurred being “very disturbing”, causing “grave concern”, and being “highly regrettable”. These comments applied not only to the success fees and ATE premiums, but to the base costs as well.

The European Convention on Human Rights

Against that background, it was argued for the defendant before the Supreme Court, apparently without the point having been raised in advance, that the extent of their costs liability infringed the defendants’ rights under the ECHR to both a fair trial under Article 6, and to peaceful enjoyment of possessions under Article 1 to the 1st protocol. Specifically, the defendants argued that the obligation to pay the additional liabilities, i.e. the success fee and the ATE premium, were inconsistent with their rights under the ECHR, so that the court should issue a “declaration of incompatibility” as between the legislation that set up the pre-LASPO regime in 1999, and the rights under the ECHR. The Supreme Court did not do so, though suggested clearly that they thought the point was arguable, but that the UK government should be allowed to present its case to the court on the point before any finding was made.

Next steps

These are unclear. If the point is to be argued further by the defendants, then the Supreme Court started mulling over how this should happen. Should there be a trial on the point or should it be heard direct by the Court of Appeal? It seems unlikely that the Supreme Court will be asked to deal with it directly in the first place, as these costs cases are usually matters for the Court of Appeal. But decisions would need to be made once the government had been joined up to the case in order to respond. A key point is that a lot of money has been spent on the case already. Is there more funding available to the defendants from anywhere for a further argument on the point? If there is not, then the case may go no further and the point raised by the case will remain unanswered. If the case does proceed, will any other interested parties also try to be heard?

Why are we here now?

It is right to recognise that we have been in similar territory before regarding the pre-LASPO costs regime and the ECHR. Primarily this though has been with the point coming out of the different issues which are found in libel cases, the main back drop being the privacy case between Naomi Campbell and MGN. In that case the European Court of Human Rights ruled that the pre-LASPO regime which led to costs being incurred by the super model of over £1m in a case where damages were awarded of £3,500 breached the newspaper’s ECHR right to freedom of expression under Article 10, but it is key to understand that these are different ECHR rights to those which are being looked at in the Coventry case. The criticisms of the pre-LASPO regime made by Lord Justice Jackson in his report were at their strongest in relation to libel cases, which he described it as “the most bizarre and expensive system that it is possible to devise”, and the decision in the Campbell case was no doubt influenced by those views.

But in fact one of the main reasons why we are here now with the Coventry judgment is in our view an unintended result of the Jackson Report, and the changes brought about by LASPO. It was that report which identified clearly the significant disadvantages of the old CFA costs regime which was introduced in 1999 and the unfairness it caused to defendants and to their insurers. While that process of reasoning led directly to LASPO and to the new system of funding litigation, the Jackson Report has provided litigants such as the defendants in Coventry with ammunition to now argue that the pre-LASPO system was always so bad that it fell foul of the ECHR, and they point in support to the fact that the government has seen the need to change the system.

While the pre-LASPO system was in operation, there was a clear motivation to ensure that for access to justice reasons, the system succeeded, even though it meant that defendants were paying what was always too high a price. Once the system has been replaced by a new one, perhaps there is less reason to see the old system as ECHR-compliant, and instead there is the opportunity to use Jackson’s own report to criticise it. The effective upholding of the pre-LASPO system by the House of Lords in Callery v Gray in 2002 came as no surprise, as the system was then relatively young and needed to be allowed to work and to be supported.

Coventry - an extreme case

But let’s return to the figures from the case itself, with the level of the additional liabilities being so very much higher than the damages. As Lord Neuberger seems to accept, he is seeing in this case a very extreme example of the 1999 system in operation. He accepts the potential argument that the government would clearly raise if they have to, that the compatibility of that system which was introduced to meet what they will say was a reasonable aim at the time of setting up an alternative regime to Legal Aid, should be judged not in fact by reference to the figures from an extreme case, but from the broad range of cases. At least as far as success fees are concerned, the government will refer to the lid kept on potential exposures by the fixed success fee regime that was negotiated and then found its way into the CPR for motor, EL and EL disease claims. It may be in relation to cases of the more modest fixed success fees and modest ATE premiums that the government will be on strong ground.

Remedy from the government?

If a decision were to be made in the Coventry case that the 1999 Act infringed article 6, then that could, according to Lord Neuberger, have very serious consequences for the government (and for tax payers) as “victims” who have paid excessive additional liabilities could seek compensation for that infringement. It would not therefore be a matter of re-opening cases with claimants, but of insurers turning to the government – but this is entirely dependent on the eventual outcome from this saga.

Human Rights Act

Any claim against the government in relation to the ECHR would be brought under the Human Rights Act which incorporates it into UK law. The limitation period for a claim under the Act is 1 year from the date on which the act complained of took place, or any longer period that the court considers equitable.

And any remedy permitted is calculated on the basis of “just satisfaction”. The quantum of any outcome would be unpredictable.

How to deal in current cases

Clearly the point does not apply to new post-LASPO retainers, but it will still potentially do so in many current settlements where the 1999 regime continues to apply. We are in a period of uncertainty till we see how the point will be taken forward in Coventry, if in fact it does go forward. It may well take a good few months for further significant developments to happen. In the meantime, a paying party dealing with a costs claim including a success fee or ATE premium (or trade union premium equivalent) could reasonably raise a reference to the case and the potential outcome of it, in their costs negotiations or in points of dispute. They may wish to do so in cases where the success fees or ATE premiums are very high, are probably outside the fixed success fee regime, and are out of line with the level of damages. The claimant may be willing to give a discount for risks which they see arising to them from the Coventry case.

We see it unlikely that a settled position will be reached where courts will agree to adjourn assessments of costs pending developments in the case. The position may be too uncertain for that to happen. There is existing law for the courts to apply. If a conclusion to the case is reached which will advantage insurers going forward, then their likely remedy as Lord Neuberger says will be against the UK government for the some or all of the additional liabilities which they have paid out. So why, it will be said by successful claimants, should courts adjourn cases?

If in fact the UK government is held to have infringed wide-ranging rights under the ECHR by having the 1999 costs regime in place then potentially a very large sum of money indeed would need to be found from public funds to compensate paying parties who have paid excessive success fees and ATE premiums.

Contact

For more information please contact Simon Denyer, Partner on +44 (0)161 604 1551 or email simon.denyer@dwf.co.uk

By Simon Denyer

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This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

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