Mitigate to litigate

In the 13th century the natives were restless. Peasants and assorted varlets were increasingly taking their landlords to court over land disputes. The landlords said there was a litigation crisis. (Does this sound familiar?) The solution was to introduce a rule that the loser should pay the costs of the winner in litigation. But what if the loser had no money? At the winner's request, the court could order the loser to be whipped: pain if not gain. (Rumours that the Lord Chancellor's Department (LCD) is considering bringing this back as part of the review of enforcement are, of course, quite baseless.) The "loser pays" rule (the English Rule) has been with us ever since.

The founders of the US came from the same common law tradition but were much keener to avoid central control and autocracy. They valued individualism, including access to the courts and the concept of rights enforced under the law. People were encouraged to bring actions on their own behalf, which were also on behalf of the community. This includes the use of private attorney generals in competition work, in other words companies that bring cases against competitors alleging anti-competitive practices and recover not only damages, but also double or treble damages as an additional punishment to the wrongdoer and an incentive to bring the case. Access to the courts was a right that should be open to all, rich or poor. The American Rule on costs meant that there was little or no cost penalty for failing in a court case. But what about the poor person's lawyer? How would that attorney be paid? Running alongside the American Rule in many cases was the idea of paying lawyers by a contingency fee arrangement; that is, the lawyer sharing the spoils of success but receiving nothing if the case was lost.

In the 20th century both jurisdictions faced the challenge of access to courts, which were dealing with increasing amounts of legislation to help individuals, either through the New Deal or through the Welfare State. In the UK, the model was a uniquely comprehensive criminal and civil legal aid system. In the US, while the public defender system was introduced for the criminal courts, there was no real demand for a state-supported system in the civil area; contingency fees were available in personal injury (PI) and employment work, and now in discrimination cases, and class actions offered representation in product liability and consumer cases. In the UK, the withdrawal of state funding has begun the process of the dismantling of civil legal aid, posing the question: how can access to justice be provided?

In many respects, the present policy of supplementing and replacing legal aid by conditional fees, backed by after-the-event insurance (AEI), has been remarkably successful. Risk-based litigation has had a very limited role in the UK. And while conditional fees have been available since the early 1990s, they were little used, and the Scottish speculative fees system has never really taken off. The secret was to offer the stick – the removal of legal aid – with the carrot, AEI giving clients protection against the opponent's costs and, if required, their own lawyer's fees. The ability to recover the success fee and insurance premium after the Access to Justice Act seems to have completed a neat and self-sufficient package. The problem is that creeping through the gaps in this bundle are some issues which create instability, suggesting that more reform is needed.

There are five areas of continuing difficulty:

1. Complexity

The baffling nature of the conditional fee regulatory regime makes agreements hideously complex to lawyers and clients (although the position of members under collective conditional fees is simpler). The need to avoid the dangers of maintenance and champerty, and the retention of the indemnity principle, makes it impossible to lawfully offer a clear and simple no win, no fee product. While the indemnity principle is on its last legs, conditional fees are never going to be a wholly consumer-friendly product, and lawyers have to wade through documentation which is largely irrelevant to the client.

2. Recoverability

The recoverability of the success fee and insurance premium removed the double whammy that made conditional fees unattractive to many clients. The major difficulty that has emerged so far is the question of whether AEI insurance taken out before proceedings start is recoverable. Here, two policies conflict: the Woolf policy of litigation as the last resort, with compulsory exchange of information to encourage settlement, and the basic insurance rule of risk pooling. If AEI is to cover all disputes cost-effectively, it should kick in at the time the client first sees the solicitor. Otherwise, premiums are bound to be high, as only sticky cases will be litigated. This issue is currently being tested in the courts. The question of how far cost judges will challenge solicitors' assessments of success fees may yet create difficulties.

3. The price of insurance

Although the market sets insurance premiums, it is a very peculiar market. Many premiums are set en masse through delegated schemes such as Accident Line Protect. Choosing between premiums is very complicated. Solicitors are not required to be brokers. Crucially, clients increasingly do not pay upfront for premiums and assume they will never have to pay – either the other side or the policy will pay the premium. This suggests that the premium will not be price sensitive as the buyer is not the ultimate payer (cf teenagers and trainers). The regulations make it clear that the court's backstop role in assessing insurance is very limited. In this environment, it is plain to see that insurers will pitch their prices high.

4. Efficiency

Conditional fees are simply not as economically efficient as contingency fees. With a conditional fee, the arrangement involves a multiplier of basic fees with a maximum of 100 per cent. The difficulty of conditional fee arrangements (CFAs) is likely to arise when a lawyer is offered a simple and effective way of cutting to the chase rather than going through a great deal of litigation. Take a case stayed for alternative dispute resolution (ADR). If it is possible to resolve the case at an early stage then this would be in the interests of the clients, the court and the system as a whole. But it may not be perceived to be in the interests of the lawyer, whose base fee is reduced, and therefore the success fee. Take an assistant solicitor pressed to meet a target before the end of a financial year: how will that lawyer react?

5. Liquidity

There appears to be some difficulty emerging, with more and more AEI products chasing sceptical and limited underwriting capacity. Either capacity will increase or products will fall away; the outcome is uncertain.

An alternative, or an addition to the menu of risk-managed funding ideas, is the genuine contingency fee, which would be particularly useful in PI work, which so far has seen most CFA activity. In outline, this has three elements:

1. Eliminate the English Rule: both sides bear their own costs. Arguments over costs, success fees and premium recovery introduces unnecessary and expensive friction. In some cases the same insurer covers AEI and the defendant's liability, so the money just goes round and round. In PI cases, defendants would simply return to the position they were normally in before legal aid was abolished. If you think this is off the wall, I'm in good company. Since writing this I notice that Lord Scott proposes the same thing (The Lawyer, 12 February).

2. Success fees would be abolished: the winning lawyer would get a cut of the damages (this may make the scheme less attractive to defendants, but in PI work CFAs are not much used by defendants as yet). We would need to return to the Law Commission's idea of increasing general damages as part of the package. (The Court of Appeal in Heil v Rankin [2000] 3 All ER 97 felt that it could not increase damages overnight as the insurers had not reserved for this, so there would need to be a lead-in time to introduce this change.)

3. Costs penalties would be retained for Part 36 to continue to give it teeth: of course, this is just another method of reordering risk and making the money go round – somebody still has to pay. However, it is a much more transparent system, as the risk will be located with lawyers, making them more efficient, and with insurers, who will pass on the costs of higher damages in premiums on everyday things such as motor, product and house insurances, which are subject to much greater competitive pressures than AEI. How about one more heave to a better system?

Professor John Peysner is a professor of civil justice at Nottingham Law School, Nottingham Trent University