Analysis: Costs Regime in Peril after Strasbourg Naomi Campbell Ruling

19 January 2011 by Rosalind English

MGN Limited v The United Kingdom – (Application no. 39401/04) Read judgment

The details of the Court’s ruling are set out in our previous post on this case. The following analysis focusses on the success of the newspapers’ core complaint concerning the recoverability against it of 100% success fees.

This judgment has serious practical implications not just for publication cases but for any civil case not covered by legal aid, and although the ruling is only binding on the government, not on the courts, the potential for its immediate domestic impact cannot be ignored. Defendants challenging costs orders will have this judgment at the head of their arsenal from today; the practical resonances of the case are imminent.

The key part of the Strasbourg Court’s ruling was its conclusion that the requirement on an unsuccessful defendant to pay these success fees in breach of confidence proceedings constituted an interference with the applicant’s right to freedom of expression guaranteed by Article 10.

The Brave New World of Conditional Fee Agreements

As so often happens, unintended consequences follow well-intentioned reform, in this case the highly flawed costs regime at the centre of this dispute in the wake of the first wave of legal aid cuts that long preceded the Jackson Review. The funding of many weak or losing cases was moved from the public to the private purse by the introduction of CFAs – this was the acknowledged “legitimate aim” of the respondent government’s interference with Article 10. And the way that claimants sought to mitigate the loss of legal aid for the impecunious claimant was by the introduction of After the Event (ATE) insurance. The premium for this insurance is assessed by reference to the defendants’ costs figure times the risk of losing, so the recoverable premiums escalated the more marginal the case became. So even though legal aid had never applied to defamation, the CFA system, with all its flaws, invaded all areas of civil litigation, with a particularly disproportionate impact on publication cases. The counter to this argument is, of course, media defendants should not fight the publication cases that they are going to lose – a discipline which applies in great swathes of other commercial litigation where costs are substantial in the absence of CFAs and ATE premiums.

So where has all the money gone?

Into the pockets of the lawyers, so they say, since recovery of base and uplift represents a windfall whose redistribution to needy litigants is non-enforceable. Comparative studies undertaken by the media organisations intervening in support of the applicant showed that claimants with CFAs incurred substantially higher legal costs than those in other jurisdictions who had no CFA because of the lack of incentive of a client with a CFA to control the costs of legal work done on its behalf.

It is generally thought that the recoverable costs in a touch-and-go case – base plus 100% uplift – really do not reflect the actual risks that are taken by the profession. In fact it is said that most lawyers in the defamation context only take cases that are going to win, though claimants’ clinical negligence lawyers are rather more generously inclined than this research might suggest. Neither the judiciary nor the civil service flinch from referring to this practice as “cherry picking”. In defamation, in particular, the data turned up in the domestic consultation process as well as the comparative jurisprudence showed that in CFA-funded parties win the “vast majority” of their cases.

This high success rate is no doubt in part the fruit of careful selection. Indeed common sense and the economic incentives would point to the inevitability of cherry-picking. …(Report of the House of Commons Culture, Media and Sport Committee entitled “Press standards,privacy and libel”, 24 February 2010)

So success fees do not in fact achieve the aim of giving impecunious but deserving claimants access to justice because, as all the critics of the regime point out, there are no obligations concerning, or mechanisms controlling, a lawyer’s use of success fees earned in one case to take on other poor claimants with deserving cases. All the research points in one direction: since the introduction of CFAs, access to justice for impecunious clients in defamation cases has not increased.

A rather simpler explanation may underlie the cherrypicking allegation – namely that some claimants’ lawyers overrate the chance of losing in their risk assessment in order to maximise the uplift for success. But this is fully catered for in costs assessments – the costs judge simply reduces the uplift recoverable, and up and down the country, they do this every day of the week. Ironically, this was an argument entirely unpromising for the media applicants in this case, given the touch-and-go nature of the litigation throughout its course, to the last – MGN argued in Strasbourg that the case should have lost. The point is a simple one; assume you, a claimant lawyer, are offered two cases, both with a 50% chance of success or failure. You take both. On average, over the course of your career, you will win as many as you lose of those cases, in which case, if you double your money in the winners, and lose all in the losers, you end up where you would have ended up in the absence of CFAs.

What happens now?

Although this ruling is not immediately binding on the domestic courts, it may breathe new life in to the defunct Conditional Fee Agreements (Amendment) Order, which was laid before Parliament with a view to having the maximum success fee in defamation cases reduced to 10%. It was dropped during the general election in April 2010 and at the time of this hearing the Government had not indicated whether this or any other legislation has since been proposed for adoption.

But even before the government takes any steps to respond to this judgment there is nothing to stop creative defendants appearing before costs judges to try the line that the recovery element should be knocked down. After all the courts are not bound by primary legislation to order unsuccessful defendants to pay 100% success fees whenever it is claimed; it is all part of a discretionary costs assessment process. Hands are not tied behind judicial backs in this regard, by CPR or anything else.

The only remaining question is the extent to which this judgment goes beyond publication cases. The Strasbourg Court has said that 100% uplift is chilling in defamation cases, and indeed the defamation problem is compound, involving, in some cases, evidence of astonishing complexity, and “luxury” parties – big media conglomerates versus celebrity claimants. But there is no particularly strong reason in principle why this ruling should be so limited. It is open to any unsuccessful litigant in a non-media case to make a case for transposition of this Article 10 solution/change by analogy; after all, the Jackson proposals – without which this aspect of the Campbell case may never have seen the light of day – apply to a very wide collection of cases.

So once it becomes generally accepted that it is unjust to submit media defendants to a costs regime which forces them to settle rather than defend their rights to free expression, it will follow as naturally as night follows day that non-media defendants who have other recognised interests to protect should not be obliged to pay up simply because they have no reasonable prospect of recovering their reasonable and proportionate costs if they manage to beat off an attack. Even though Section 12 of the HRA gives freedom of expression an apparently privileged place in injunction cases, there is no hierarchy of rights inherent in the Convention itself. So in any given civil case a defendant could reasonably argue that their right to a fair trial under Article 6 is being infringed by a punitive costs regime which is forcing them to settle and thereby depriving them of access to court. Which would be an ironic outcome, considering that the very rationale for introducing CFAs in the first place has been couched in the following Convention-compliant terms:

it was not so much a question of impairment of Article 10 but a balance between Article 6 (litigants who would not otherwise be able to go to law) and Article 10. (Lord Hoffmann, rejecting the applicant’s appeal on costs in 2005)

Given the pressure on the UK to make radical changes to the costs regime for claimants in environmental claims (from another international body, the Aarhus Compliance Committee) it is difficult to see how the resistance to change on all fronts can be realistically sustained. The Campbell ruling will lend ballast to the Jackson recommendations that for all civil litigation – not just media cases – we should return to a system where success fees and ATE premiums are not recoverable (either at all or to any significant degree) from the losing party. According to the Jackson report, this simply takes us back to the pre- Access to Justice Act 1999 position:

those arrangements had not suffered from the above flaws but opened up access to justice for many individuals who formerly had no such access.If that recommendation were to be adopted, ….it should go a substantial distance to ensuring that unsuccessful defendants in such proceedings were not faced with a disproportionate costs liability.

Read more:

• “Blackmail” costs system violated Article 10
• Environmental judicial review is “prohibitively expensive”