Funding clinical negligence claims

Dr Anthony Barton

INTRODUCTION

1. Access to justice and the rule of law are the hallmarks of a civilised society. Clinical negligence cases are known for their cost, technical subject matter and unpredictable outcome. Litigation is expensive and attended by risk. Under the usual litigation costs rule, the loser pays the winner’s costs. Private funding is too expensive and risky for most people; most cases are legally aided.

2. There are thus two aspects to funding litigation:

(1) the claimant’s own costs of legal representation; and

(2) the exposure to liability for the defence costs if the claim fails.

Any system of widening access to justice must address both aspects, making legal representation affordable, and managing the risk of exposure to costs.

3. There are various methods of funding litigation. These will be examined in the context of certain fundamental concepts:

(1) the costs rule;

(2) the indemnity principle;

(3) the prohibition against maintenance and champerty; and

(4) the liability for costs of third party funders.

These concepts are considered first to provide background.

THE COSTS RULE

4. Legal costs, particularly in clinical negligence litigation, can be considerable compared to the value of the claim. This has a profound effect on the economics of litigation. It is the risk of exposure to liability for costs as much as the availability of legal representation which determines access to justice.

5. The award of costs is within the discretion of the court; the court can award costs against the world at large.1 The usual rule is that the costs follow the event, known familiarly as the ‘loser pays’ rule; this rule should apply unless there is good reason to disapply it.2

1 Aiden Shipping Co Ltd v Interbulk Ltd [1986] AC 965, and Supreme Court Act 1981, s 51.

2 CPR 44.3.

6. The operation of this rule is that the loser pays the winner’s costs in addition to the loser’s own costs. The effect of this rule is to deter claimants from bringing and defendants from defending actions they are likely to lose.1 Hopeless claims and defences are discouraged and a willingness to compromise is induced.2 This sensible rule promotes the settlement of cases according to their merits and discourages speculative litigation. The ‘loser pays’ rule does not apply in America where each party is responsible for its own costs.

1 Roache v News Group Newspapers Ltd [1996] EMLR 161.

2 Ridehalgh v Horsefield [1994] Ch 205.


THE INDEMNITY PRINCIPLE

7. The purpose of the rule that ‘costs follow the event’ is to indemnify the successful party as to costs. This rule is subject to the indemnity principle: a client is not entitled to recover under an order for costs more than the amount payable by him to his solicitor. Thus a client cannot recover more in costs than his potential expense.1 The indemnity principle is not absolute but is subject to exceptions (eg legal aid, approved third party funders, and conditional fees). The indemnity principle thus limits recovery of costs, especially in some cases where there is a third party funder. It is regarded as inhibiting innovative methods of funding access to justice by third party funders; there are calls for abolition.

1 Gundry v Sainsbury [1910] 1 KB 645.

MAINTENANCE AND CHAMPERTY

8. Maintenance is defined as the giving of assistance or encouragement to one of the parties to litigation by a person who has neither interest in the litigation nor any other motive recognised by law as justifying the interference. Champerty is a particular form of maintenance in consideration of a promise to give the maintainer a share of the proceeds or the subject of the action. Issues of maintenance and champerty are potentially raised whenever there is a third party funder.

9. The prohibition against maintenance and champerty is ancient and is based on public policy considerations; the traditional view has been that litigation is not a matter to be undertaken lightly and should be regarded as a last resort. More recently, however, the exercise of enforceable rights has been regarded as socially desirable; the public policy considerations are now reversed and access to justice should be made more available. The prohibition against maintenance and champerty tends to obstruct innovative methods of funding cases by third party funders. The recent case law demonstrates a relaxation of the rule against maintenance and champerty in promoting the social policy of widening access to justice. Maintenance and champerty are important because they raise issues of professional conduct on the part of the lawyers conducting the litigation; they also may affect the way in which the court awards costs, including personal costs orders against the lawyers involved. Maintenance and champerty do not of themselves provide any defence to the substantive action.

LIABILITY FOR COSTS OF THIRD PARTY FUNDERS

10. Most clinical negligence litigation is not funded by the client but by a third party funder. It is such a third party funder who is liable to pay the defendant’s costs should the claim fail:

‘Most of the actions in our courts are supported by some association or other, or by the state itself. Comparatively few litigants bring suits, or defend them, at their own expense. Most claims by workmen against their employers are paid for by a trade union. Most defences or motorists are paid for by insurance companies. This is perfectly justifiable and is accepted by everyone as lawful, provided always that the one who supports the litigation, if it fails, pays the costs of the other side. It is the universal experience in this court that if a trade union or an insurance company supports a case and fails, it pays the cost of the other side.’1

1 Hill v Archbold [1968] 1 QB 686, per Lord Denning MR at 694.


11. The legal basis of the liability of third party funders to meet adverse costs orders is uncertain. This liability is well established and appears to operate more as a rule of practice than as a rule of law deriving from the inherent jurisdiction of the court.1

1 Singh v Observer Ltd [1989] 2 All ER 751; McFarlane v EE Caledonia Ltd (No 2) [1989] 1 WLR 366; Murphy v Young & Co’s Brewery [1997] 1 All ER 518; TGA Chapman Ltd v Christopher [1998] 2 All ER 873.


FUNDING ACCESS TO JUSTICE

12. There are several ways in which cases may be funded; they include the following:

(1) legal aid;

(2) conditional fee (‘no win, no fee’) agreement;

(3) private client funding;

(4) third party funder;

(5) speculative (‘spec’) fee agreement;

(6) pro bono;

(7) contingency fee arrangements;

(8) before the event insurance;

(9) after event insurance: own legal costs and opponent’s legal costs;

(10) litigation funding agreement;

(11) contingent legal aid fund (CLAF).

The majority of clinical negligence cases are legally aided, although an increasing number are funded by conditional fee agreements.

Legal aid

13. The introduction of legal aid after the war was part of the massive expansion of state funded professional services for those of limited means. The civil legal aid system has recently undergone radical reform under the Access to Justice Act 1999 (AJA 1999) in response to widespread criticism that it was delivering less to fewer people, yet costing ever more. The purpose of the AJA 1999 is to target the limited resource of legal aid so as to widen access to justice. The underlying policy of the Act is to widen access to justice, and to promote the replacement of civil legal aid by the conditional fee system. The Act establishes the Legal Services Commission to administer Community Legal Services (ie civil legal aid).

14. Actions based on negligently caused personal injury or death are outside the scope of legal aid, apart from allegations relating to clinical negligence.1 Clinical negligence continues to receive public funding.

1 AJA 1999, Sch 2, para 1, as amended by the Community Legal Service (Scope) Regulations 2005, SI 2005/2008.

15. Representation at coroners’ inquests is generally excluded from public funding.1 However, the Lord Chancellor has an overriding general discretionary power to provide funding in certain circumstances for excluded types of case, including inquests.2

1 AJA 1999, Sch 2, para 2.

2 AJA 1999, s 6(8).

16. Stringent financial eligibility criteria provided in regulations must be satisfied as a condition precedent to funding.1 There are upper and lower limits for income and capital, which determine eligibility, and whether any contribution is to be made.

1 AJA 1999, s 7.


17. The AJA 1999 establishes the Funding Code, which sets out the criteria which determine whether an application should receive funding.1 The underlying policy of the Code is to replace the demand led, open-ended entitlement to civil legal aid with a targeted approach based on need and priority drawn on a limited budget. There are specific criteria relating to clinical negligence;2 these introduce the concepts of:

(1) the ‘prospects of success’ expressed as a percentage; and

(2) the ‘cost benefit’ expressed as a ratio between likely costs and likely damages.

The prospects of success are rated as ‘very good’ (80 per cent or more), ‘good’ (60–80 per cent) and ‘moderate’ (50–60 per cent). A case must have at least 50 per cent prospect of success, in which case the cost benefit ratio must exceed 2. If the prospects of success are good (60–80 per cent) then the cost benefit ratio must exceed 1.5. If the prospects of success are very good (80 per cent or more) the cost benefit ratio must exceed unity. The criteria for clinical negligence stipulate that the availability of representation under a conditional fee agreement is not to be taken into consideration in refusing the application.

1 AJA 1999, s 8.

2 The Funding Code, section 9.


18. There is a first charge, the statutory charge, on any property recovered by a claimant in proceedings in respect of legal aid costs. Although costs are usually awarded to a successful claimant there may well be a shortfall, ie the difference between costs actually incurred and costs recovered; this shortfall is paid out of damages.

19. The AJA 1999 provides costs protection against cost liability of a publicly funded person; s 11(1) provides that costs ordered against a publicly funded individual shall not exceed the amount (if any) which is a reasonable one for him to pay having regard to all the circumstances. In practice, this represents an amount not exceeding the level of contribution. The combined effect of the costs rule and the statutory charge has been the subject of judicial comment:

‘… legal aid helps those who lose cases, not those who win them. Legal aid makes “out and about” grants to those who lose cases. It only makes loans to those who win them.’1

1 Davies v Eli Lilly & Co [1987] 3 All ER 94, per Sir John Donaldson MR at 97.


20. Litigation is attended by risk: the parties must assess the risk of losing against the benefits of winning. The effect of legal aid is to distort this mutuality between the parties. Legally aided persons enjoy a protected position; they can participate in litigation without being exposed to its risks. They are in a ‘no lose’ position whilst the defendant is in a ‘no win’ position. This has been the subject of judicial comment:

‘… they are funded at the expense of the state, and they are putting the defendant (who is not legally aided) to a great deal of worry and expense in contesting the case, defendants who will not recover any of the costs even if they win. This puts the legal advisers for the plaintiff in an extremely strong bargaining position. There is inequality of bargaining power. They should not abuse it at the expense of the defendant. Nor should they abuse it at the expense of the legal aid fund.’1

This illustrates two of the inherent weaknesses of the legal aid system:

(1) it lacks independence because funding is granted on the advice of the applicant’s lawyer who has a pecuniary interest in advancing the claim;

(2) the costs rule is inherently unfair and arguably infringes the right to a fair trial.

1 Manley v Law Society [1981] All ER 401, per Lord Denning MR at 411.

21. More recently, the operation of the civil legal aid in clinical negligence was considered in Parliamentary debate:

‘… the problems of legal aid go to the heart of the difficulties that we are experiencing with the clinical negligence system …

Let us run through some of those problems. Legal aid does not ensure access to justice for deserving cases, as most people are not eligible. Instead, it provides access to lawyers for an eligible minority. Legal aid lacks independence. Funding is granted on the advice of the applicant’s lawyer, so there is a clear conflict of interest that may encourage over-optimistic advice, to put it kindly, or speculative litigation, putting it less kindly. Legal aid lacks fairness. Successful defendants cannot recover legal costs. Legal aid puts the claimant in a no-lose position and the health service defendant in a no-win position. It may be cheaper to settle a claim regardless of merit, to avoid irrecoverable legal costs – a practice known as legal aid blackmail.

The Secretary of State referred to the legal costs that the NHS has incurred, and of course the structure of legal aid is one of the reasons why the legal costs that the NHS has had to meet have been so great. Legal aid lacks accountability. Funding decisions involving public money are privileged and confidential, and are not subject to public scrutiny. As a Member of Parliament, I have sought to question some of the decisions made by the Legal Services Commission about the people to whom they grant legal aid. Frankly, that is an impenetrable question. The fact that it has met and made a decision is regarded by the LSC as justification enough.

Most clinical negligence cases are legally aided, but the great majority of households do not qualify for legal aid. Is it the case that clinical negligence harms only people eligible for legal aid? Of course not. It is not a matter of cases not being brought because they lack merit; they are not brought because there is no legal aid available. The record of legally aided claims involving health care is dismal, as I said. In some instances, that has promoted unsubstantiated health claims and scares based on junk science, threatening the health of the nation’s children. Too often, lawyers are the only beneficiaries of publicly funded legal action. Scarce resources are diverted from patient care to lawyers’ fees, all in the name of justice and all paid for by the ­taxpayer.

The solution to the problem of clinical negligence litigation lies in the realm of funding. Legal aid has brought relief to many people, but it is a popular misconception to equate legal aid with access to justice. Access to justice is not best delivered by the legal aid system. There is a better way to do that …’1

1 Andrew Lansley MP HC Official Report Vol 447, col 41 (5 June 2006).

22. The Funding Code contains specific provisions relating to the making of representations by any person including opponents or potential opponents of an applicant for public funding objecting to the grant or continuing grant of legal aid.1

1 Funding Code, Part 2, Part C, section 11.

11.23 The grant and continuation of legal aid are statutory functions and are susceptible to judicial review.1 It is surprising that this remedy is not used more often given the number of cases which are hopeless on their face.

1 AB v John Wyeth & Brother Ltd (No 2) [1994] 5 Med LR 149.


24. There is now a body of authorised litigators known as the clinical negligence franchise panel. The grant of legal aid is now restricted to such specialist solicitors.1

1 Legal Aid (Prescribed Panels) Regulations 1999, SI 1999/166.

Conditional fee agreements

25. Conditional fee (‘no win, no fee’) agreements have been permitted since July 1995 as an exception to the prohibition against maintenance and champerty, and as an exception to the indemnity principle. They are now regulated by the AJA 1999 and subsidiary regulations, and the Civil Procedure Rules. The CLSA 1990, s 58(2) provides the definition of a conditional fee agreement:

‘(a) a conditional fee agreement is an agreement with a person providing advocacy or litigation services which provides for his fees and expenses, or any part of them, to be payable only in specified circumstances; and

(b) a conditional fee agreement provides for a success fee if it provides for the amount of any fees to which it applies to be increased, in specified circumstances, above the amount which would be payable if it were not payable only in specified circumstances.’

This definition is wide ranging and encompasses ‘no win, no fee’ agreements with a statutory requirements in order to be enforceable. It can apply to claimants and to defendants.

11.26 The legislative scheme envisages a percentage uplift (‘success fee’) on the fee that would otherwise be payable in the event of a successful outcome (‘specified circumstances’). This sum is related to the fees rather than to damages.

27. Conditional fee agreements are subject to the court’s assessment. The court considers the solicitor’s costs as being made up to two components: the base costs; and the percentage increase, ie the success fee.

28. The availability of funding by conditional fee agreements represents only a partial solution to the challenge of providing access to justice. There is liability for costs if the case is unsuccessful. After event insurance is available to provide protection against such costs liability of the claimant if the case fails. Such after policies tend to be bespoke and are offered after careful assessment of the merits of the case. There is an identity of interest of the client, his lawyer, and the after event insurer: all want the case to ­succeed.

29. Access to justice with conditional fee agreements for clinical negligence depends more on the availability of after event insurance than on the willingness of lawyers to undertake cases on this basis. The risks are far higher for insurers than for lawyers. After event insurance in connection with a conditional fee agreement is not compulsory. Furthermore, the liability for cost where clients are uninsured does not fall on their lawyers.1

1 Hodgson v Imperial Tobacco Ltd [1998] 2 All ER 673.

30. Since 1 April 2000 the cost of after event insurance and the success fee are recoverable against the unsuccessful opponent, subject to the assessment of the court.1

1 Callery v Gray (No 1) [2001] 3 All ER 833 and Callery v Gray (No 2) [2001] 4 All ER 1.

31. A conditional fee agreement which does not confirm with the statutory scheme is unenforceable. It may also:

(1) contravene the prohibition against maintenance and champerty;

(2) infringe the professional codes of solicitors and barristers; or

(3) fall foul of the indemnity principle.

Accordingly, claimants and defendants would do well to ensure that any purported conditional fee agreement is valid.

Private client

32. The solicitor is retained by the private client under a contract. The lawyer’s fees are subject to the court’s assessment.1 If the client is successful there will be a costs order in his favour; however, such a costs order may be insufficient to cover his own solicitor’s fees, giving rise to a shortfall. The shortfall will have to be met out of the damages award. If the client is unsuccessful in the litigation, he has to pay his own solicitor’s fees as well as the successful defendant’s costs. Private funding is risky: not surprisingly, it is rare for cases to be so funded.

1 CPR 44.

Third party funder

33. This includes a miscellaneous group of funders who are not parties to the litigation, but who may have a well-founded connection with the claimant. They include relatives, trade unions, mutual benefit associations, before event legal expenses insurers, charities and ‘white knight’ benefactors. Such funding is unlikely to be considered maintenance; but as explained above such funders may be liable for costs should the case fail. Increasingly, third party funding of disbursements may be undertaken as a commercial enterprise.1

1 Arkin v Borchard [2005] EWCA Civ 655.


Speculative fees

34. This is similar to a private client solicitor’s retainer but there is an understanding that should the case fail, the solicitor will waive his fee; if the case succeeds there will be a claim for costs against the opponent. There has been uncertainty about the lawfulness of this sort of arrangement at common law and the cases are conflicting.1 Speculative fee arrangements ought to be obsolete now since the statutory conditional fee system has been introduced.

1 Thai Trading Co (a firm) v Taylor [1998] 2 All ER 65; Hughes v Kingston upon Hull City Council [1999] 2 All ER 49; Swain v The Law Society [1983] 1 AC 598.

Pro bono

35. Both the Law Society and the Bar Council promote pro bono work among their members. Such work represents a well-established exception to the prohibition against maintenance. Where an impecunious client cannot meet any adverse costs order, the court will not make a personal costs order against his lawyer1 even if the case is hopeless.2

1 Singh v Observer Ltd [1989] 3 All ER 777; Abraham v Thompson [1997] 4 All ER 362.

2 Tolstoy-Miloslavsky v Lord Aldington [1996] 1 WLR 736.

36. There is a proposal to allow legal fees in successful cases funded pro bono to be recovered and paid into a central charitable fund. This proposal has some features of a contingent legal aid fund (see below).

37. A person who is represented pro bono is liable to an adverse costs order and may wish to apply for costs protection. The court has wide discretion in relation to costs including the jurisdiction to make a protective costs order, that a successful defendant should bear its own costs. Such an order operates as a ‘shield’ rather than as a ‘sword’ in the litigant’s armoury. This is a narrow but developing jurisdiction; stringent conditions must be satisfied:

(1) the issues raised are of general importance;

(2) the public interest requires that such issues are resolved;

(3) the applicant has no interest in the outcome of the case;

(4) it is fair and just to make the order having regard to the resources of the parties; and

(5) the applicant would reasonably discontinue proceedings but for the order.

Such protective costs orders are generally available and not confined to pro bono cases, but the court has indicated that such representation would enhance the merits of an application.1

1 Goodson v H M Coroner for Bedfordshire [2005] EWCA Civ 1172.


Contingency fee arrangement

38. Under a contingency fee arrangement a claim is funded in return for a share in any settlement; the contingency fee is related to a percentage of the compensation rather than an uplift in the fees incurred. Such contingency fee arrangements are not permissible under professional rules in contentious business such as litigation; however, such arrangements are permissible in non-contentious business (arguably prior to issue of proceedings; and, for example, employment tribunals) or if conducted by non-lawyers. There is some support for a contingency fee system coupled with abolition of the loser pays costs rule.

Before the event insurance

39. This is a form of legal expenses insurance; it is often an add on policy to a general household or motoring policy. Increasingly, such policies are used to meet the cost of investigating a claim, in combination with conditional fee agreements and after event insurance policies for the prosecution of the claim.

Own legal costs insurance

40. In this arrangement the claimant takes out insurance to cover the cost of his own solicitor’s fee and his opponent’s costs in the event of failure. A success fee is not claimed in the event of success, but this saving must be balanced by the higher cost of the insurance premium.

Litigation funding agreement

41. This is a proposed statutory scheme whereby approved third party funders may fund litigation with enhanced repayment in the event of success.1 It is a privatised system that allows for a bulk management of conditional fee agreements for administrative convenience.

1 AJA 1999, s 28.

Contingent legal aid fund

42. A contingent legal aid fund (CLAF) has been proposed from time to time. The proposal is that claims should be funded from a public fund, and that there should be enhanced repayment (either a success fee or a percentage of any compensation recovered) with a contribution into the fund. Such a scheme would be self-financing. However, the government has shown little enthusiasm for such proposals; they would import the difficulties of adverse case selection. The operation of the legal aid scheme gives little reason to believe that any such proposed scheme will not be abused. However, a proposal for a central fund receiving fees recovered in cases where representation is provided pro bono is presently under consideration (see para 39 above).

CONCLUSION

43. Access to justice has two aspects:

(1) the availability of legal representation; and

(2) the exposure to liability for the opponent’s costs.

The challenge of widening access to justice is to address both these aspects and balance the interests of the parties fairly in a way which is commercially viable.

[extract from Clinical Negligence, fourth edition (2008); edited by Powers Harris Barton]
 

 

 
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