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Consultation on Expenses and Funding of Civil Litigation Bill

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Chapter 1: Proposals Arising from Sheriff Principal Taylor's Review

Background

22. Traditionally in Scotland litigation was funded in one of three ways - through private funding, legal aid or trade union funding. In the last 20-30 years this situation has changed. Increased pressure on public funding for legal aid and a decline in trade union membership has resulted in a decline in those types of funding for civil cases. In turn this has led to the rise of speculative funding - in the form of speculative fee agreements and damages based agreements to fill the void.

23. Speculative fee agreements are a type of "no win no fee" agreement under which success fees are calculated as a percentage of legal fees. Speculative fee agreements have been available in Scotland since they were introduced by the Law Reform (Miscellaneous Provisions) (Scotland) Act 1990[6]. Damages based agreements are a different form of "no win no fee" agreement under which a lawyer's fee is calculated as a percentage of the client's damages if the case is won. Damages based agreements can currently only be offered by claims management companies in Scotland. Both of these funding mechanisms are discussed in more detail below.

Proposals for this Bill

24. Underpinning Sheriff Principal Taylor's report is his conclusion that, contrary to what might be the case in England and Wales, there is little evidence of a "compensation culture" in Scotland. Furthermore, he highlighted a "David and Goliath relationship" between claimants and defenders in personal injury actions in Scotland, resulting in a significant inequality of arms. His recommendations are aimed at addressing this "asymmetric relationship".

25. In the Scottish Government response to Sheriff Principal Taylor's review, we announced the intention to implement the recommendations on speculative fee agreements, damages based agreements and qualified one-way costs shifting and introduce a package of primary legislation that would achieve that. Taken together, implementing these as a package would help address the issue of a potential pursuer deciding not to bring a genuine claim because of fears relating to cost. In particular, it is likely such an approach would increase access to justice for the "excluded middle", i.e. those who neither qualify for legal aid or have the means to fund a litigation privately.

26. In contrast with the position in England and Wales, the Scottish Government is committed to maintaining the scope of civil legal aid in Scotland. However, in order that the legal aid fund is distributed appropriately and available to those who have no other means of funding their litigation it is increasingly important that the Scottish Legal Aid Board is the funder of last resort. The package of proposals in this Bill, as set out in the following sections, would increase the options available for pursuers to fund their actions privately but in turn would require them to satisfy the Scottish Legal Aid Board that there were no alternative potential funding options in the event of them seeking to apply for legal aid.

A. SPECULATIVE FEE AGREEMENTS

Background and current position

27. Acting on a speculative basis has been seen as a way of providing access to justice for those who neither qualify for legal aid nor have the resources to fund a litigation privately. In a speculative fee agreement the client is only required to pay their solicitor's legal fees if the litigation is successful. As with damages based agreements, it provides an alternative arrangement which a pursuer can enter into with their own lawyer to fund litigation. It contrasts with a damages based agreement, where a lawyer's fee is calculated as a percentage of the client's damages if the case is won but no fee is payable if the case is lost. In the speculative fee agreement, an enhanced fee is normally charged in the event of success and success fees are calculated as a percentage of legal fees, and not on the amount recovered by the client. In the event of the success of the client the fees element in the solicitor's account of expenses can be increased by a maximum of 100%. Speculative fee agreements cannot be entered into if legal aid is being received.

28. Solicitors may agree to act on a speculative basis under three different types of speculative funding agreement:

  • Type I - a solicitor may agree to accept party and party expenses with a success fee payable by their client of up to 100% of the fee element of the judicial account.
  • Type II - a solicitor may agree to accept agent and client expenses in the event of the case being successful, without any percentage increase for success. This will cover work done before the start of the litigation together with any other work carried out by the solicitor which the auditor considers to be fair and reasonable.
  • Type III - a solicitor may enter into a written fee agreement with their client with a stated hourly rate and a success fee calculated as a percentage uplift of that rate. The agreement will provide that the judicial account is prepared on an agent and client basis.

29. Although entering into a speculative fee agreement means that parties will not have to pay their own solicitor anything if they lose the case, they still run the risk of having to meet the other side's expenses. Currently, the only way of addressing this risk is through "after the event" ("ATE") insurance which is purchased after a legal claim, such as an accident, has arisen so as to provide protection against the costs and disbursements involved in litigation. ATE insurance is primarily used as insurance against having to pay the opponents costs in the event of losing a case. Should a case be lost, the insurance company will meet the opponents' legal costs and expenses. In the last few years, ATE insurance has become more available at a reasonable premium to Scottish litigants but is not universally available on such terms. We discuss ATE insurance in more detail in section C, of Chapter 1, on qualified one-way costs shifting.

30. Sheriff Principal Taylor found that a large proportion of all personal injury actions, as well as an increasing volume of commercial and insolvency litigation, is funded in Scotland under speculative fee agreements or some form of "no win no fee" agreement.

Advantages

31. Speculative fee agreements offer access to justice for members of middle income groups who are not eligible for legal aid or able to fund their litigation privately and greater use of speculative fee agreements can assist in maintaining the focus of legal aid funding on cases where other sources of funding are not reasonably available.

Disadvantages

32. Speculative fee agreements provide a "no win no fee" element with respect to the client's own solicitor if the action fails but no protection against liability for the other side's costs. It has been argued, for this and other reasons, including the potential incentives that speculative fee agreements may offer lawyers, that these agreements may not always be in the best interests of the client.

What Sheriff Principal Taylor recommended

33. Sheriff Principal Taylor considered that the growing dependence on speculative fee agreements is likely to continue, if not strengthen, and was in favour of such arrangements, partly from an 'access to justice' and 'affordability' perspective, but recommended introducing caps to the level of success fees recoverable. He noted in his findings that speculative fee agreements had operated for a number of years with little evidence of major issues and that the existing regulatory system appeared to deal well with conflicts of interest. While hesitating to intrude into the working of the market, he nevertheless, by virtue of the vulnerability of pursuers in personal injury cases, did not wish to allow market forces to be the sole determinant of what percentage can legitimately be taken from an award of damages. He recommended, therefore, that the maximum success fee which can be charged in a speculative fee agreement in relation to personal injury cases should be capped with respect to what may be taken out of damages.

34. Sheriff Principal Taylor further recommended that that the caps should apply to all heads of damages and that solicitors should not be obliged to offset the judicial expenses against the success fee to which they are entitled. The purpose of allowing them to keep both was to encourage solicitors to offer speculative fee agreements in low value cases.

35. Sheriff Principal Taylor recommended also that all other civil actions funded by speculative fee agreements should be capped at 50% of the monetary award recovered.

36. Given the different types of speculative fee agreements in Scotland and the variations within these types, Sheriff Principal Taylor recognised the need for clarity and transparency in Scotland's "no win no fee" agreements as particularly urgent. In order that a client is able to readily compare one solicitor's offer with another, Sheriff Principal Taylor thought it essential that the quotations do not have multiple variations that make it very difficult for a client to properly compare one with the other. He therefore recommended that, in a speculative fee agreement to fund a personal injury action, the solicitor should be required to meet counsel's fees and all other unrecovered outlays, plus VAT, out of the success fee.

37. Sheriff Principal Taylor concluded that the only outlay which should remain the responsibility of the client is any premium to obtain ATE insurance cover, should the client deem that necessary. However, given his recommendation to introduce a qualified one-way costs shifting regime (recommendation 46), he took the view that there is likely to be a limited requirement, if any, for ATE insurance cover in personal injury litigation.

What Scottish Government is proposing to do and why

38. The Scottish Government intends to bring forward legislation broadly along the lines recommended by Sheriff Principal Taylor. We intend to implement the caps suggested by Sheriff Principal Taylor in personal injury cases (recommendation 42) and other civil actions (recommendation 44). Proposals will include provisions to introduce damages based agreements with the same caps (see section B of Chapter 1) so that there is consistency between the two types of funding agreements.

39. We would also intend that a draft Bill would include provisions to implement Sheriff Principal Taylor's recommendations that, in a speculative fee agreement to fund a personal injury action, the solicitor should be required to meet counsel's fees and all other unrecovered outlays, plus VAT, out of the success fee. The only outlay which should remain the responsibility of the client is any premium to obtain ATE insurance cover, should the client deem that necessary (recommendation 45).

40. Sheriff Principal Taylor noted in his report that such is the competition between law firms in this area that most firms charge less than the proposed statutory caps and some do not charge an enhanced fee in the event of success at all. His conclusion was that competition in the market between law firms would continue to determine and limit the percentage cap on damages that is charged. We would also expect that to be the case but agree with Sheriff Principal Taylor that caps should be introduced as a backstop against excessive charging/profiteering. We are, however, particularly interested to gather information about the impact that the proposed caps are likely to have both on individual members of the public seeking access to justice and law firms and their business models.

Questions

1. Do you think that a lack of cap on speculative fee agreements prevents potential pursuers of actions from obtaining access to justice? Yes or no.

Please give reasons for your answers.

2. What impact would the introduction of a cap on speculative fee agreements have on:

(i) Pursuers of actions

And why, and what would they look like

(ii) Defenders of actions

And why, and what would they look like

(iii) You or your organisation

And why, and what would they look like

(iii) Other organisations:

And why, and what would they look like

3. Which group of individuals/organisations are likely to benefit most?

Please explain how these benefits will accrue, and their likely extent if possible

4. Which group of individuals are likely to be most disadvantaged?

Please explain how these disadvantages will accrue, and their likely extent if possible

5. What measures could be considered to both identify and mitigate against disadvantages?

B. DAMAGES BASED AGREEMENTS

Background and current position

41. A damages based agreement is a type of "no win no fee" agreement under which a lawyer's fee is calculated as a percentage of the client's damages if the case is won, but no fee is payable if it is lost. Commonplace in the USA, most frequently in personal injury cases but also available in commercial actions, these agreements cannot currently be enforced by solicitors in Scotland. Advocates are expressly forbidden by the Faculty of Advocates from entering into damages based agreements.

42. At present, a person with a personal injury caused by the breach of duty by another party can instruct a solicitor directly or, in recent years, we have seen the advent of claims management companies. Unlike a solicitor, a claims management company cannot raise court proceedings, cannot appear in court and cannot instruct counsel. However, as Sheriff Principal Taylor stated, they have become prevalent as they can enter into damages based agreements, while the Law Society of Scotland does not allow such agreements to be enforced by a solicitor.

43. In some cases, however, firms of solicitors have set up separate claims management companies, which are currently unregulated in Scotland, so that they can offer damages based agreements to their clients. As a result of this practice a number of different business models and funding companies have come into existence, each offering a slightly different service to clients.

44. While solicitors and claims management companies do not operate on a level playing field, as solicitors are heavily regulated by the Law Society of Scotland and claims management companies are not regulated, the fact that the vast majority of claims management companies in Scotland are wholly owned by solicitors as a device to ensure the enforceability of damages based agreements means that in reality there is a form of de facto regulation.

Disadvantages of damages based agreements

45. One of the arguments against damages based agreements is that it is inappropriate, in principle, for professionals to reward themselves out of damages intended to restore the injured party to the position the person was in before the event that caused them injury. It is also argued that they give the lawyer an unhealthy interest in the award to the client and potentially generate conflicts of interest.

Advantages of damages based agreements

46. They offer a further funding option and are therefore likely to increase access to justice. Claims management companies in Scotland have been offering damages based agreements for a number of years meaning that a significant proportion of litigation is already funded by them and that clients like their apparent simplicity.

What Sheriff Principal Taylor recommended

47. Sheriff Principal Taylor drew a distinction between personal injury actions, for which he concluded that damages based agreements should only be on a "no win no fee" basis, as compared with commercial actions for which he concluded that damages based agreements should also be allowed on a "no win lower fee" basis, such that where the litigation is unsuccessful, the solicitor is nevertheless entitled to a (lower) fee.

48. Sheriff Principal Taylor stated that the evidence before his Review disclosed that the public like damages based agreements. They were said to be very straightforward to understand. If a pursuer loses they pay nothing to their advisers. If they win an agreed percentage is deducted from their damages. Market forces effectively keep the maximum percentage taken from damages by claims management companies to 20 to 25%.

49. Consequently, Sheriff Principal Taylor was persuaded that damages based agreements have a legitimate place in the funding of personal injury litigation in Scotland. He concluded that the distinction that allowed claims management companies to provide damages based agreements while solicitors were prevented was not easy to justify. He therefore recommended that the prohibition on damages based agreements for solicitors is lifted and solicitors (except in family actions) should now be free to agree with their clients that, in addition to any judicial expenses the solicitor recovers from a defender, the solicitor will also be entitled to a fee expressed as a percentage of the sum awarded to the client.

50. However, Sheriff Principal Taylor stopped short of allowing the market to determine what should be the maximum percentage which a solicitor or claims management company can take out of the damages recovered. He recommended that the maximum fees payable out of damages should be capped at the same rates as those applied to speculative fee agreements and that in commercial cases the cap will be set at 50%. Sheriff Principal Taylor specifically recommended that the damages from which a success fee may be recoverable under a damages based agreement may include damages for future loss. He did not consider that such damages should be "ring-fenced" from contributing to the success fee.

51. Sheriff Principal Taylor acknowledged that damages based agreements will not always be the best form of funding for a pursuer and it will be necessary for the solicitor to fully advise the client on all alternative forms such as legal aid, speculative fee agreements and legal expenses insurance. He considered, however, that the present position whereby the lack of enforceability can be circumvented by solicitors establishing their own claims management companies has the considerable potential to bring the law into disrepute. Although not determinative, he was also influenced by the availability of damages based agreements for claimants in England and Wales and the potential for further circumvention of the law of Scotland by artificial means to the detriment of Scottish lawyers.

52. Sheriff Principal Taylor also considered what provisions should be put in place for the recovery of judicial expenses under damages based agreements. While his review considered various possible permutations, he had boiled these down to two main options. One was that the solicitor retains the judicial expenses but sets them off against the success fee, which is reduced accordingly. The other was that the solicitor retains the judicial expenses and, in addition, is entitled to take from the client's damages the whole success fee stipulated in the damages based agreement.

53. However, Sheriff Principal Taylor considered that a consequence of requiring solicitors to offset judicial expenses against the success fee, as is the case in England and Wales, was that they would receive far less remuneration than they would under a speculative fee agreement, in which the solicitor can retain judicial expenses and in addition charge a success fee. He found it difficult to see why solicitors should choose to offer damages based agreements, particularly in lower value cases, when they would receive considerably less than they presently do under speculative fee agreements if the action succeeds, and nothing at all should the action fail. He concluded that solicitors should not be obliged to offset the judicial expenses against the success fee to which they are entitled. The purpose of allowing them to keep both was to encourage solicitors to offer damages based agreements in low value cases. It would also simplify the comparison with speculative fee agreements.

What Scottish Government is proposing to do and why

54. The Scottish Government intends to introduce legislation broadly along the lines that Sheriff Principal Taylor had suggested.

55. We intend to legislate to allow damages based agreements to be enforceable by solicitors in Scotland, except in family actions (recommendation 55) and to introduce the statutory caps recommended by Sheriff Principal Taylor (recommendations 57 and 59). We intend also to provide for damages based agreements to be entered into in commercial cases on a "no win lower fee" basis but that personal injury actions should be on a "no win no fee" basis only (recommendations 60 and 61). We also intend to provide that solicitors should be entitled to retain judicial expenses recovered from the defender in addition to recovering the agreed success fee from their clients (recommendation 56). We agree that this would encourage solicitors to offer damages based agreements in lower value cases.

Questions

6. Do you think that the inability of solicitors in Scotland to enter into damages based agreements with their client prevents potential pursuers of actions from obtaining access to justice? Yes or no.

Please give reasons for your answers.

7. What is the likely impact on you or your business of allowing damages based agreements to be enforceable by solicitors in Scotland?

Please quantify, if possible.

8. Do you think that a lack of cap on damages based agreements prevents potential pursuers of actions from obtaining access to justice? Yes or no.

Please give reasons for your answers.

9. What impact would the introduction of a cap on damages based agreements have on:

(i) Pursuers of actions

And why, and what would they look like

(ii) Defenders of actions

And why, and what would they look like

(iii) You or your organisation

And why, and what would they look like

(iii) Other organisations

And why, and what would they look like

10. Which group of individuals/organisations are likely to benefit most?

Please explain how these benefits will accrue, and their likely extent if possible

11. Which group of individuals are likely to be most disadvantaged?

Please explain how these disadvantages will accrue, and their likely extent if possible

12. What measures could be considered to both identify and mitigate against disadvantages

13. What impact would these proposals have on excessive charging under damages based agreements?

Claims management companies

Background and current position

56. Claims management companies representing pursuers in personal injury cases underpin a significant proportion of the Scottish personal injury litigation market. Whereas solicitors are regulated by the Law Society of Scotland, claims management companies are currently not regulated. This contrasts with the position in England and Wales where they are regulated by the Claims Management Regulator who, amongst other matters, sets and monitors standards of competence and professional conduct, and ensures that arrangements are made for the protection of users. However, many of the claims management companies in Scotland are wholly owned by solicitors as a device to ensure the enforceability of damages based agreements. Were this not to be the case an argument could be made that solicitors and claims management companies in Scotland do not operate on a level playing field.

What Sheriff Principal Taylor recommended

57. Sheriff Principal Taylor found favour with arguments put forward to the review in favour of the regulation of claims management companies. His recommendations on damages based agreements are predicated on the basis that a regulator of claims management companies will be set up. He was not satisfied that the argument put forward that members of the public would appear not to be complaining about claims management companies was sufficient. He took the view that, at the very least, there should be a level playing field with solicitors, with whom some claims management companies are in competition, and who are regulated.

What Scottish Government is proposing to do and why

58. As indicated in our response to Sheriff Principal Taylor's report, the Scottish Government does not intend to regulate claims management companies at present (although we have committed to consider this as part of a wider review of legal services issues at a later date.)

59. The regulation of claims management companies is an issue the Scottish Government has kept under review since the outcome of our consultation on legal services "Wider choice and better protection: A consultation paper on the regulation of legal services in Scotland"[7] reinforced our view that there is little hard evidence of malpractice in Scotland and that it was difficult, therefore, to justify the expense to the taxpayer of establishing a new regulatory framework.

60. We noted from Sheriff Principal Taylor's report that the objections he had received with regard to claims management companies were not founded on any evidence of mischief per se but the potential for mischief, namely that the absence of regulation may expose vulnerable clients to unacceptable risks. He was unaware of any complaints made against claims management companies by the public. We note also that the vast majority of claims management companies in Scotland are wholly owned by solicitors as a device to ensure the enforceability of damages based agreements, effectively meaning that in reality there is a form of de facto regulation.

61. Our decision not to regulate means that, for the foreseeable future, damages based agreements will be offered by both unregulated (at least as a matter of law) claims management companies and heavily regulated solicitors firms. We therefore intend to set up a framework which will apply to any individual or body offering a damages based agreement regardless of whether that person or body is a solicitor or claims management company. Within that framework, the Scottish Government intends to provide the statutory caps and it would be our intention that the agreement will be voidable if the person/body offering the agreement does not comply with the statutory rules.

Questions

14. Do you agree that the proposed statutory controls should apply to anyone offering a damages based agreement? Yes or no.

Please give reasons for your answer.

15. What should the sanction be for non-compliance with the statutory controls?

16. If any of the provisions of the rules are breached then should the agreement become voidable? Yes or no.

Please give reasons for your answer.

Future Loss

What Sheriff Principal Taylor recommended

62. Sheriff Principal Taylor carefully considered the difficult issue of whether future loss should be "ring-fenced" from the success fee.

63. In England and Wales, following Lord Justice Jackson's Review, lawyers' fees recoverable from damages under a damages based agreement are applied to damages on past loss alone meaning an award for future loss is "ring-fenced" and cannot be taken to satisfy the success fee. In contrast, Sheriff Principal Taylor did not recommend that there should be any "ring-fencing." He noted in his report that despite the conclusion Lord Justice Jackson reached he may have subsequently had second thoughts on the issue, as he indicated in a series of lectures on implementation of his report. Sheriff Principal Taylor's view was that he did not wish to make any recommendation which would incentivise delay in raising a court action thereby enabling a larger head of past loss to be built up so as to increase the fee to which the solicitor is entitled. Nor did he wish to recommend anything which would discourage or make more difficult the settlement of cases.

64. Sheriff Principal Taylor did, however, recommend that there should be some safeguards in particular in relation to cases of "catastrophic" injury where a pursuer is entitled to a very large settlement in respect of future loss. His view was that protection will be given in such cases by the caps which he has proposed in relation to damages based agreements. In relation to damages over £500,000 only 2.5% of such damages can be taken to satisfy the success fee. This means that the deduction from the bulk of the future care element will be limited to 2.5%. Sheriff Principal Taylor's view was that, from the evidence he had before him, the ability of an award of damages to provide future care for an injured pursuer will not be jeopardised by the deduction of 2.5%.

65. Sheriff Principal Taylor also recommended that periodical payments be excluded from the success fee and advised that certain safeguards should be put in place where a solicitor is advising a client in relation to whether damages in excess of £1 million should be paid by way of a lump sum or periodical payments (recommendations 64 and 65).

What Scottish Government is proposing to do and why

66. Having undertaken a preliminary review, and discussed the issue further with stakeholders, the Scottish Government agrees with the conclusions of Sheriff Principal Taylor. However, given that "ring-fencing" is a difficult and potentially controversial issue, we would want to gather further views.

Questions

17. Do you agree that the future loss from the success fee should not be ring-fenced? Yes or no.

Please give reasons for your answer.

18. What impact would not ring-fencing future loss have on:

(i) Pursuers of actions

And why, and what would they look like

(ii) Defenders of actions

And why, and what would they look like

(iii) You or your organisation

And why, and what would they look like

(iii) Other organisations

And why, and what would they look like

Information and Good Practice

Background and current position

67. An issue which has been raised by stakeholders in the context of Sheriff Principal Taylor's recommendations on damages based agreements is that of how to ensure that members of the public who are signing up to damages based agreements are clear both as to the nature of the terms to which they are agreeing and also how they might be able to compare and contrast the services provided by different firms of solicitors and claims management companies in an informed way. Similar issues apply in respect of speculative fee agreements.

What Sheriff Principal Taylor recommended

68. Sheriff Principal Taylor recommended that prior to entering into a damages based agreement with a client, a lawyer or claims management company should be obliged to write to the client setting out in clear language what percentage will be deducted by way of a fee from the damages awarded, when and how the client may terminate the agreement, and the client's obligations in the event of such termination by the client. How conflicts of interest are to be managed should they arise must also be specified. It should also be made clear who will have the responsibility to meet an award of judicial expenses against the client. He recommends that this information should be contained in a letter to be sent to all clients.

69. Sheriff Principal Taylor also recommended that there should be a 14 day cooling off period after a client enters into a damages based agreement which would be mandatory, save in circumstances where a client's interests would be prejudiced, for example by a claim being time barred should it not be raised before the expiry of the fourteen day period.

What Scottish Government is proposing to do and why

70. We would agree also with the concerns raised by stakeholders that it is important for consumers to be clear about the offers made to them and the other options which might be available to them. There should be standardisation of how the offers are presented to consumers so that they are easily understood and it is possible to assess and compare the information. We take the view that there should be a standard layout and similar language used by different providers.

71. The Scottish Government therefore proposes that a code of conduct, applying to all persons and businesses offering damages based agreements, should be developed. The purpose of this would be to encourage good practice, set standards of service and produce guidance on matters such as feeing. The code could be developed on a statutory or non-statutory basis. However, we propose that a non-statutory code be developed by the sector for the sector to implement on a comply or explain basis. The sector could appoint a steering group to oversee the development of good practice principles.

72. The Scottish Government will work with the Law Society of Scotland with a view to producing guidance on how fees should be quoted and what can be done to ensure that those signing up for damages based agreements understand their nature and implications. Although any guidance produced by the Law Society of Scotland would be for solicitors only, given the link between claims management companies and the legal profession in Scotland, it would be likely to influence practice in the claims management company sector.

73. The Scottish Government agrees also that there should be a 14 day cooling off period and takes the view that this should be implemented.

Questions

19. Do you agree that a new code of good practice, applying to all persons and businesses offering damages based agreements, should be developed? Yes or no

Please give reasons for your answer.

20. Should a new code of good practice be statutory or non-statutory?

Please give reasons for your answer.

21. Should the development of a new code of good practice be sector-led?

Please give reasons for your answer.

C. QUALIFIED ONE-WAY COSTS SHIFTING

Background and current position

74. In Scotland the usual rule in litigation is that expenses follow success, that is, the unsuccessful party bears the successful party's expenses.

75. However, even in a relatively modest claim expenses can mount up. Concern about the costs of losing a case can deter members of the public from bringing a genuine claim in the first place. It can be said that liability for expenses is therefore a crucial component of access to justice and equally can act as a barrier to accessing justice.

76. Like Lord Justice Jackson, Sheriff Principal Taylor came to the view that, almost invariably, there is what can be termed an asymmetric relationship between pursuers and defenders in personal injury litigation. In most cases pursuers are private individuals without the wealth to fund the loss of a litigation. Most defenders have the strength of an insurance company behind them.

77. There is more than one potential method of addressing this imbalance. One way of tackling the problem is through after the event ("ATE") insurance. ATE insurance is purchased after the event that gave rise to the litigation, and covers the litigant against liability for an adverse award of expenses. Depending on the agreement which a party has reached with that person's solicitor, the premium may be deducted from the damages payable to the pursuer or the solicitor may absorb the cost.

78. Sheriff Principal Taylor found that an ATE insurance premium can amount to between 40-60% of the amount of cover sought, and that in practice cover is available to only a small number of solicitors. He also discovered that the cost of ATE insurance in Scotland may deter potential litigants from vindicating their rights, despite the availability of speculative fee agreements, and concluded that the same may apply equally to damages based agreements.

79. Although evidence as to the affordability of ATE insurance premiums in Scotland was anecdotal, a number of explanations were put forward to Sheriff Principal Taylor for their high cost. Some attributed it to the small size of the Scottish litigation market. There also appeared to be a reticence to buy ATE insurance where there were good prospects of success, which was exacerbated by the nonrecoverability of the premiums in Scotland.

80. Another way of tackling the issue of protecting litigants from exposure to an adverse award of expenses is through costs shifting. A qualified one-way costs shifting regime is one that may become qualified in certain circumstances, such as where the pursuer has acted unreasonably, or where the resources available to the parties are grossly unequal. Qualified one-way costs shifting provides a degree of certainty to a pursuer in personal injury cases that they will not have to meet the other side's expenses unless they act really badly.

What Sheriff Principal Taylor recommended

81. Sheriff Principal Taylor recommended the introduction of qualified one-way costs shifting in personal injury cases and appeals, including clinical negligence.

82. His reasoning was that, while it is broadly accepted that speculative fee agreements have widened access to justice in Scotland over the past decade, their impact has been restricted by the absence of protection against liability for the other side's expenses.

83. One way of tackling this issue would be to encourage greater use of ATE insurance or indeed to make it compulsory for the general population. However, Sheriff Principal Taylor found that the premiums payable for ATE insurance could sometimes be a significant proportion of the value of modest claims and that ATE insurance was available at a reasonable cost only in certain kinds of cases. His review found that low cost ATE insurance was being sold, but to a restricted number of solicitors and at the discretion of the insurers. He concluded that this revealed something of a sellers' market for ATE insurance products in Scotland and that firms other than those with a volume of personal injury cases could struggle to obtain cover for their clients at reasonable premiums. He did not accept that personal injury litigation needed to be concentrated in the hands of a few firms for the protection of the public. That limited the market.

84. In short, Sheriff Principal Taylor concluded that ATE insurance products and, by extension, access to justice in Scotland, have been heavily dependent on the market and insurers' readings of that market. On this and other evidence before him, he concluded that we could not rely on there being ATE policies available for all who might benefit from them. This was particularly true in personal injury actions, which presently formed 76% of all cases initiated in the Court of Session (although this proportion is expected to decline following the implementation of the Courts Reform (Scotland) Act 2014). Accordingly, Sheriff Principal Taylor concluded there required to be a different approach if access to justice was to be meaningful.

85. Sheriff Principal Taylor considered that the introduction of qualified one-way costs shifting will promote 'equality of arms' by helping remove the danger of the pursuer being bankrupted by an adverse award of expenses when the majority of defenders are advantaged by insurance company backing. He also recognised, however, the clear need to have some safeguards for defenders in order to discourage abuse of the system with claims with little or no merit being brought to the court. He envisaged, therefore, that the benefit of qualified one-way costs shifting should be lost in certain circumstances such as fraud, abuse of process or unreasonable conduct by the pursuer.

86. In addition, Sheriff Principal Taylor recognised the role of tenders in promoting settlement of cases and recommended that, if the pursuer does not accept a settlement offered by the other side and is not awarded a sum greater than this amount, the Court would be able to limit the other side's liability to 75% of the damages awarded if it finds that the pursuer acted unreasonably by not accepting the offer. He was persuaded by the argument that it is too drastic for a pursuer to find that their whole award of damages may be exhausted by an award of expenses following the pursuer's failure to beat a tender.

What Scottish Government is proposing to do and why

87. The Scottish Government accepts, as a matter of principle, Sheriff Principal Taylor's recommendation (46) that a qualified one-way costs shifting system should be introduced in Scotland in personal injury cases (including clinical negligence) and should apply in cases at every level of the court process as, in essence, the principle is the same.

88. Essentially, this proposal will put a privately funded pursuer in a potentially similar position, so far as regards their liability for the expenses of a successful defender, as those who are legally aided and for whom the court exercises its discretion to modify liability for expenses to nil. It is our view that such a system is likely to increase access to justice and provide an important safeguard in the context of an increase in speculative funding through damages based agreements and speculative fee agreements. Together, these form a coherent package of measures which will help address the issue of a potential pursuer deciding not to bring a genuine claim because of fears relating to cost. We are not excluding the role of ATE insurance, which will complement qualified one-way costs shifting e.g. use in non-personal injury litigation.

89. A question that arises is how the rule should be qualified. The Scottish Government believes that in order for the system of qualified one-way costs shifting to work it will have to create an appropriate degree of certainty for pursuers and we agree with Sheriff Principal Taylor that the bar should be set high. Losing qualified one-way costs shifting should be the exception and not the rule and the pursuer should only lose the benefit of qualified one-way costs shifting in extreme cases i.e. where the Scots Law test of fraud is met (recommendation 51), there is abuse of process (recommendation 52), where a pursuer's case is disposed of summarily and in cases of "Wednesbury" unreasonable behaviour (recommendation 54).

90. A reasoning or decision is "Wednesbury" unreasonable if it is so unreasonable that no reasonable person acting reasonably could have made it (Associated Provincial Picture Houses Ltd v Wednesbury Corporation (1947) 2 All ER 680). The test is a different (and stricter) test than merely showing that the decision was unreasonable.

91. The Scottish Government agrees with Sheriff Principal Taylor's assessment that, if it were set at a lower test than "Wednesbury", the benefits of qualified one-way costs shifting might well be lost as pursuers may not have the confidence to litigate without the benefit of an ATE insurance policy.

92. The Scottish Government also agrees that if the pursuer does not accept a tender and is not awarded a sum greater than the amount of the tender the protection of QOCS should be lost although the pursuer's liability to meet the defender's post tender judicial expenses should be limited to 75% of the damages awarded (recommendation 50).

Questions

22. Do you think that introducing a system of qualified one-way costs shifting will increase access to justice? Yes or no

Please give reasons for your answer

23. What impact would the introduction of a system of qualified one-way costs shifting have on:

(i) Pursuers of actions

And why, and what would they look like

(ii) Defenders of actions

And why, and what would they look like

(iii) You or your organisation

And why, and what would they look like

(iii) Other organisations

And why, and what they look like

24. Which group of individuals/organisations are likely to benefit most?

Please explain how these benefits will accrue, and their likely extent if possible

25. Which group of individuals are likely to be most disadvantaged?

Please explain how these disadvantages will accrue, and their likely extent if possible

26. What measures could be considered to both identify and mitigate against disadvantages?

Question

27. Do you agree that the test for losing the benefit of qualified one-way costs shifting should be fraud, abuse of process and in cases of Wednesbury unreasonable behaviour? Yes or no

Please give reasons for your answer.

Damages based agreements, speculative fee agreements and qualified one-way costs shifting - overall impact of package

93. Concern has been expressed that pursuers will have nothing to lose in raising and pursuing claims, even those with little prospect of success, as the combination of damages based agreements and qualified one-way costs shifting will remove all risk from the pursuer, and this may lead to the courts being flooded with unmeritorious cases and defenders paying off poor cases on an economic basis.

94. Sheriff Principal Taylor, however, had thought that this was unlikely. He argued that a client will have to persuade a solicitor that they should accept instructions on a "no win no fee" basis and it is very unlikely that firms will take on weak cases for which they are not likely to get paid.

Questions

28. What is your view on the argument that the reform package removes all risk to pursuers of actions?

29. What is likely to be the overall impact of the package on you or your business?

Please quantify, if possible.

30. What do you think the impact of the overall package will be on:

a) The general level of claims?

b) The general level of litigation?

c) The trajectory of claims, and settlement rates?

d) Pursuers of actions?

e) Defenders of actions?

f) Pursuers solicitors?

g) Defenders solicitors?

h) Insurance companies?

i) Case management companies?

j) The courts?

k) Scottish Legal Aid Board?

l) The general public?

m) Others?

D. NEW POWERS FOR THE SCOTTISH CIVIL JUSTICE COUNCIL (SCJC) IN RESPECT OF ALTERNATIVE SOURCES OF FUNDING

What Sheriff Principal Taylor recommended

95. In chapter 11 of his report, Sheriff Principal Taylor considered alternative mechanisms for funding litigation beyond the main recommendations elsewhere in his report. It included consideration of third party funding, legal aid for family actions, self-funding schemes and pro bono funding.

What Scottish Government is proposing to do?

96. In responding to the review, the Scottish Government expressed the opinion that many of the recommendations on alternative sources of funding were highly speculative in nature.

97. Having consulted further, we intend that the Bill will make technical provision to ensure the Scottish Civil Justice Council has the appropriate powers to allow the Courts to take forward Sheriff Principal Taylor's proposals:

  • to extend/remodel existing provisions on domini litis (recommendation 77)
  • to oblige parties to disclose funding arrangements (recommendation 78)
  • in relation to the pro bono funding of litigation (recommendations 80 and 81)

E: COUNSEL'S FEES

Background and current position

98. Another cost associated with litigation, which can be significant, is fees paid to counsel which are incurred as an outlay by a solicitor on behalf of a party during a litigation. The issue of counsel's fees was considered by both the Scottish Civil Courts Review and Sheriff Principal Taylor in his Review of Expenses and Funding of Civil Litigation in Scotland.

99. The amount of solicitors' fees which may be recovered as expenses from an opponent is regulated by Act of Sederunt which prescribes regulations and tables for both the Court of Session and the sheriff court.[8] There is no corresponding table of fees for counsel.

100. The Scottish Government believes that counsel play an integral and valuable role in our justice system and has no intention to impinge upon their freedom to enter into arrangements with solicitors as they see fit in relation to their fees.

101. However, the Scottish Government agrees with the recommendations of both the Scottish Civil Courts Review and Sheriff Principal Taylor namely that with regard to counsels' fees which may be recovered as expenses, providing a table of fees for counsel, as is currently the case for solicitors, would provide clarity and transparency to users of the courts.

Current Practice

102. Sheriff Principal Taylor set out the current situation regarding counsel's fees as:

"Counsel's fees as a potential cost that must be paid by a party to a dispute can arise in two ways. Firstly, the instructing solicitor and counsel will enter into a private arrangement for the payment of counsel's fees. Such an arrangement is not viewed as contractual. Counsel's fees are instead viewed as an honorarium which means that counsel is not entitled to sue for his or her fees, at least unless the solicitor has claimed payment of them from the client and the client has paid them to the solicitor.

Secondly, counsel's fees may form part of a judicial account of expenses which are recoverable from the unsuccessful party to a litigation. The mischief is said to be the impression created in the mind of the party paying the judicial account that counselʹs charges are neither fair nor transparent and also that there is a lack of predictability. The problem with the second aspect will on occasion have its roots in the first aspect."

103. Sheriff Principal Taylor stated that there was support from respondents to his consultation for a table of fees, as recommended by the SCCR.

Scottish Civil Courts Review

104. The SCCR considered the issue of the cost and funding of litigation in Chapter 14 of its Report and provided information on counsel's fees.

Recommendation 185 stated:

"We support the introduction of a judicial table of fees for counsel in the Court of Session, as well as in the sheriff court for those cases in which sanction for the employment of counsel is given."

105. The Report of the SCCR provided further detail on how this could be developed. It proposed that there should be a band or range of fees for different categories of work (for example, drafting pleadings, proposing or opposing motions, advising in consultation or conducting hearing), reflecting the complexity of the case and the seniority or degree of expertise of counsel.

Courts Reform (Scotland) Act 2014

106. Any system which aims to keep the cost of litigation under reasonable control must start by ensuring that cases are dealt with at the appropriate level and with a suitable degree of case management. The Court Reform (Scotland) Act 2014 contains provisions to implement many of the reforms recommended by the SCCR to achieve these goals.

107. These reforms are designed to provide structures and procedures to enable litigation to be conducted in as efficient a manner as possible. It is expected that these reforms will make a significant contribution to controlling the cost of litigation.

108. Furthermore, the increase in the privative limit of the sheriff court to £100,000 is expected to give rise to an increase in the use of counsel in the sheriff court. A table of fees for counsel will ensure consistency in the recovery of expenses across Scotland.

What the Scottish Government is proposing to do and why

109. The Courts Reform (Scotland) Act 2014 provides the Court of Session with the ability to regulate fees in relation to any proceedings in the Court of Session, the Sheriff Appeal Court and the sheriff court. This clearly confers on the Court of Session the power to regulate the fees of certain persons in the exercise of their functions in relation to civil proceedings in the courts in Scotland.

110. A table of fees for counsel was not included when the Act was developed as the proposal represented a departure from current practice and the Scottish Government wanted to consider the views contained within the Taylor Report before committing to its implementation. However, a power is provided in the Act to add persons by order to the list of persons whose fees may be regulated. Therefore, it is the Scottish Government's intention that an Order under[9] the Courts Reform (Scotland) Act 2014 should be used to allow the Court of Session to develop a table of fees for counsel.

The Scottish Civil Justice Council (SCJC)

111. The SCJC replaces the Court of Session Rules Council and the Sheriff Court Rules Council. The new Council has taken over the rule drafting functions of those bodies and also has a new, wider role to advise and make recommendations on the civil justice system. It will prepare draft rules of procedure for the civil courts and advise the Lord President on the development of the civil justice system in Scotland.

112. The SCJC has a wide membership made up of members of the judiciary, representatives from the Faculty of Advocates, solicitors, the Scottish Legal Aid Board, the Scottish Government and representatives from consumer groups.

113. The SCJC also has a number of committees including a Costs and Funding Committee. Again, these committees have a wide membership, ensuring all key stakeholder groups are represented.

114. The Scottish Government considers that this body, or a sub-committee of it, is best placed to develop a table of fees for counsel. This is in line with its role in undertaking similar work on tables of fees for solicitors.

Solicitor Advocates

115. One issue identified by the SCCR was the treatment of fees for solicitor advocates. The Scottish Government agrees with recommendation 186 that the table of fees for counsel should apply to solicitor advocates.

Advantages

116. The Scottish Government believes that the main benefits of introducing a table of fees for counsel will be intangible. We are aware that any fees need to be set at a realistic level as a substantial shortfall in what can be recovered could create a disincentive to litigate even when there were good prospects of success. Therefore, as stated in the SCCR, we believe that the rates should be based on historical data regarding the amount allowed for counsel's fees at taxation. As such we do not foresee this change making a substantial difference to the fees recovered for the use of counsel.

117. However, we believe the increased transparency and clarity that a table of fees will give parties may give people more confidence in bringing their cases to court and help ensure access to justice.

118. We also believe that the groups represented on the SCJC and its sub-committees are best placed to ensure that all relevant considerations are taken into account and that fees are set at a realistic and viable level.

Questions

31. Do you agree that there should be a table of fees introduced for counsel in the Court of Session? Yes or no.

Please give reasons for your answer

32. Do you agree that there should be a table of fees introduced for counsel in the sheriff court for those cases where sanction for counsel has been granted? Yes or no.

Please give reasons for your answer

33. Do you agree that solicitor advocates should be included in this table of fees? Yes or no.

Please give reasons for your answer

34. Do you agree that the Scottish Civil Justice Council is best placed to develop and maintain the table of fees? Yes or no.

Please give reasons for your answer

35. What do you think the impact of introducing a table of fees will be on:

a) Pursuers?

b) Defenders?

c) Solicitors?

d) Solicitor advocates?

e) Counsel?

f) Scottish Legal Aid Board?

g) Others?