Reforms over cost rulings may hit firms in low-value disputes

Andrew McAulay, the manager of costs and litigation funding at Leeds-based Clarion, believes that many businesses could soon find it uneconomical to instruct lawyers in some disputes.

According to Mr McAulay, changes to cost rulings coming up in April will have a major impact on commercial litigation.

From April 2013, conditional fee agreements (CFA) and ATE premiums, which cover the risks of failure, will no longer be recoverable from the other side in a dispute. The client will have to pay them.

April will also see the introduction of Damaged Based Agreements. Lawyers will be able to take a share of the client’s damages if they are successful, which is like the American system.

Mr McAulay added: “Businesses will have to pay success fees and ATE premiums out of their own pocket in the future – a huge cost. This is a complete culture change as success fees and premiums have been paid by the losing party since 2000.

“Damage Based Agreements provide additional access to justice, but law firms will be looking for decent claims in order to justify taking the claim on.”

Jeremy Cook, the Dewsbury-based partner in Ramsdens Commercial department, added: “There is no doubt that personal injury litigation will see the majority of changes. CFAs will be largely replaced with Damage Based Agreements (DBAs). There will be no recovery of success fees or ATE premiums. Moreover, the landscape will alter with the introduction of Qualified One Way Cost Shifting. Civil and commercial litigation will be similarly affected.

“These changes mean that if CFAs are entered into, the additional costs of success fees and ATE premiums are no longer payable by the losing party. However, in practice, the majority of civil cases are not funded by CFAs. Subsequent to the introduction of DBAs the major change in civil claims is the increase in the small claims track limit from £5,000 to £10,000.

“Under the small claims track there is no liability on the losing party to pay the winning party’s costs. This will remain the case.”

However, with the introduction of DBAs clients may well find access to legal representation for small claims less feasible.

Mr Cook added: “Currently, it is not usually cost effective to engage lawyers. Clients will now know from the outset how much they will be spending in legal fees and these will be capped at an agreed percentage.

“The challenge for the legal profession is to adapt to these changes and to make them work for the benefit of their clients.”

Claire Moss, an associate solicitor in the dispute resolution department at Lupton Fawcett Lee & Priestley, said: “The reforms are a significant departure from the current system and will impact on both those involved in litigation and solicitors acting for them. The main concern to businesses and individuals with a valid claim will be whether they can afford to pursue it. Full details of the reforms are yet to be made available, and it may be that, once these have been released, solicitors will be able to come up with alternative cost-effective solutions for clients.”