Costs determined by the market: the time has come

Posted by Charles Feeny, director of Legal Futures Associate Complete Counsel and Complete Mediation

Fixed costs: the best regulator of price is the market

Fixed costs: the best regulator of price is the market

Lord Justice Jackson’s lecture, Fixed costs: the time has come, has been characterised by his many critics as his latest assault on access to justice. However, it is reasonable to ask whether an even more fundamental question should also be considered: is there any justification for regulating costs by statute, rule or the judiciary once fixed costs are introduced?

That costs are regulated by the courts on the basis of legislation and rules has been in position for so long that it might seem natural to treat it as a given. This approach, however, dates back to a much less sophisticated market for legal services, both in terms of clients and the type of legal service provided. It is reasonable to question whether such regulation really would have a place if costs were substantially fixed for litigation.

Reading the Jackson report and his subsequent pronouncements is reminiscent of the earlier Woolf report. One has a sense of the inevitability of judicial control, with litigants and lawyers seemingly being portrayed as dysfunctional cowboys and Indians awaiting the arrival of the judicial cavalry. It may be that this reflects the judiciary’s experience of costs that is cases where the level of costs is disputed.

However, this assumption of benign judicial intervention does not really accord with the facts. The Woolf reforms, which were supposed to control costs, were wholly unable to deal with the explosion in costs disputes which resulted from the funding arrangements after the abolition of civil legal aid.

Similarly, confidence in Jackson’s latest proposals would be increased were he to be more frank about the failure of costs budgeting. He seems to dismiss costs budgeting now, on the basis of its unpopularity, but if popularity amongst lawyers was the critical factor, it appears unlikely that the debate over fixed costs would get very far.

In reality, costs budgeting has proved hopeless and is now widely being abandoned by the courts. In practical terms, there is a clear limit to the amount of control that an individual district judge can bring to a costs bill at this stage and abandoning costs budgeting in favour of fixed costs represents an acceptance of this fact.

If, therefore, the costs to be awarded by the court are to be fixed, why should there be any further regulation of the amount of costs? Why should the parties not be able to enter into agreements with their lawyers for further payment of costs, either on a conditional or damages-based agreement?

It seems arcane that multi-national companies are not able to enter into such agreements with major law firms. Such companies see legal costs as a business expense rather than something they should expect to recover from a third party. By contrast, SMEs operate to tighter margins but are able to negotiate competitive rates with legal providers who understand the market.

The principal justification for regulation of costs is to ensure that a paying party is not unreasonably taxed with the costs of a successful party. However, that rationale disappears once costs are fixed. The only justification then would be to protect litigants from rapacious lawyers. Such an argument, however, could only relate to what might be described as vulnerable clients.

Is this so great a risk that it justifies the current regime of intricate cost regulation with inevitable satellite litigation? Are there not already in place a number of safeguards which would protect the vulnerable litigant?

Settlements involving protected parties would require the approval of the court, and it is likely that vulnerable litigants short of that status would have the services of a case manager or similar, to protect their interests.

Solicitors undertaking litigation for vulnerable litigants would be subject to the professional obligations to act in their client’s best interests, and disciplinary action if they were shown to have exploited their client.

Most importantly, however, profiteering solicitors would not survive in an increasingly competitive market for personal injury litigation. Litigants now do not wander into their local high street solicitor and trust that solicitor to be telling them that what he or she is charging is reasonable.

Potential litigants are now assailed by marketing, in particular on television and radio, which emphasises that litigation, is ‘no win, no fee’. Solicitors who seek to charge substantial sums out of clients’ damages are unlikely to be competitive in the developing market for personal injury. The best regulator of price is the market and the market for legal services has a clear surplus of supply over demand.

The objection that fixed costs would obstruct access to justice still requires consideration. This pre-supposes that access to justice is synonymous with the profits that large, essentially corporate, law firms have made out of exceptionally favourable trading conditions since the late 1990s. Such profits have arisen through mass-produced road traffic litigation and the ability to generate large surpluses on the labours of junior fee-earners. That such a model is no longer sustainable does not mean that access to justice should become impossible, or even impaired, in the digital age.

The laptop lawyer can operate substantially on his or her own account, outsourcing such additional support as they require. Such a lawyer should be able to conduct personal injury litigation within the budgets allowed in fixed costs.

Whilst this will amount to a significant culture change for many personal injury lawyers, they may eventually reflect that pursuing litigation as a predominant activity has greater personal and intellectual satisfaction than dealing with HR issues, attending strategic meetings or other similar activities demanded as part of a corporate law firm.

Many of them might ultimately reflect that they have ended up doing the job that they thought they were going to do when they first qualified.

The writer would like to thank Darren Smith, Hill Hofstetter, for his helpful comments on this piece.

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