Information Note on the Court’s case-law 267
October 2022
Coventry v. the United Kingdom - 6016/16
Judgment 11.10.2022 [Section IV]
Article 6
Civil proceedings
Article 6-1
Fair hearing
Equality of arms
Excessive and arbitrary burden on unsuccessful uninsured defendants in conditional fee arrangement litigation due to recoverability of success fees and insurance premiums: violation
Facts – The applicant was an unsuccessful defendant in a nuisance action which the claimants had funded through a conditional fee arrangement (a “CFA”, or “no win no fee” agreement) and “after the event” insurance (“ATE insurance”), which was intended to underwrite their liability to pay the defendants’ costs. He complained under Article 6 of the Convention and Article 1 of Protocol No. 1 about the fact that, by virtue of the Access to Justice Act 1999, the order for costs made against him included both the “success fees”, intended to compensate lawyers working under a CFA for unsuccessful cases for which they would not be paid, and the ATE premium. Although the claimants were awarded just over GBP 20,000 in damages, the applicant (together with a co-defendant, which has since gone into liquidation) is liable for the sum of GBP 623,203, representing the claimants’ costs before the High Court; and GBP 223,634, representing their costs before the Court of Appeal. The case went three times to the Supreme Court and costs before that court were yet to be assessed. More than half of the assessed costs represented success fees and ATE insurance premiums.
Law – Article 6 § 1:
The merits of the applicant’s case – that is, that he and the third defendant had been individuals or small undertakings carrying on modest businesses without insurance and faced with one-off litigation which had involved them in eye-catchingly large costs exposure – had been largely “untested” before the domestic courts. Nonetheless, it would appear from the proceedings subsequently brought by the applicant against his insurers that he had been informed by the broker that the nuisance litigation had not been covered by his insurance policy. Therefore, regardless of the outcome of the ongoing litigation, the Court would accept that the applicant - not unreasonably - believed himself to be an uninsured defendant throughout the course of the nuisance proceedings. Consequently, the Court will consider the operation of the scheme vis-à-vis uninsured defendants as a class.
In MGN Limited v. the United Kingdom the Court had acknowledged that the introduction of the CFA with recoverable success fees had sought to achieve the widest public access to legal services for civil litigation funded by the private sector, notably by rebalancing the means of access to justice: instead of placing the burden on the public purse, through the legal aid fund, it instead imposed the costs of CFA litigation on the unsuccessful party. However, the Court, in the context of Article 10 of the Convention, had found the scheme to be disproportionate to the legitimate aims pursued and had concluded that it had exceeded even the broad margin of appreciation accorded to the Government in such matters. In reaching that conclusion, it had largely relied on the four flaws: first, there had been the lack of focus of the regime and the lack of any qualifying requirements for claimants who would be allowed to enter into a CFA; secondly, there had been no incentive on the part of a claimant to control the incurring of legal costs on his or her behalf and judges assessed those costs only at the end of the case, when it was considered too late to control what had been spent; thirdly, there had been the “blackmail” or “chilling” effect due to the fact that the costs burden on the opposing parties had been so excessive that often a party had been driven to settle early despite good prospects of a successful defence; and fourthly, the regime had provided the opportunity for solicitors and barristers to “cherry pick” winning cases to conduct on CFAs with success fees.
In the present case, concerning the third flaw, the Court would agree that the risk of a party with good prospects of a successful defence being driven to settle early by the possibility of an excessive costs burden had been one of the principal objections to the scheme, especially when viewed through the prism of the principle of equality of arms. This risk would be particularly acute when the defendant was uninsured. Although insurers would not be oblivious to an opposing parties’ rapidly escalating costs, and would dictate the course of the proceedings accordingly, it was clear that defendants who did not have insurance to cover their opponents’ costs would be at a particular disadvantage. While the obvious risk was that they could be pressurised into an early settlement, the Court would not define the potential prejudice so narrowly (in Stankiewicz v. Poland, the Court had not expressly linked the imbalance in the parties’ liability for costs to any particular outcome in the civil proceedings). On the contrary, the very different financial risks being faced by the opposing parties would be likely to impact every decision concerning the conduct of the proceedings. As the applicant in the present case had suggested, it could also preclude a settlement, even in the early stages, if a party had been simply not in a position to pay the opposing party’s costs.
The risk of a party with good prospects of a successful defence being driven to settle early had been exacerbated by a curious feature of the scheme : the stronger the defendants’ case, the greater their liability for costs would be if they lost, as the size of the success fee and the ATE premium reflected the claimants’ prospects of success. Consequently, a defendant with a good prospect of a successful defence who had ultimately lost the case could find himself paying, in addition to the whole of his own costs, three times the claimants’ base costs. An uninsured defendant would be personally liable for the entirety of this sum.
However, the third flaw was not he only one relevant to the case at hand. The Court’s task was to assess whether the scheme had struck a fair balance between the litigants in CFA litigation, and in particular whether defendants in such cases had been placed at a substantial disadvantage vis-à-vis their opponents. It was therefore relevant that, unlike an uninsured defendant, who would personally be facing rapidly escalating costs, a claimant with both a CFA and ATE insurance would not normally be liable for his own costs or those of the defendant if his claim had been unsuccessful.
The Government had not been able to point to any safeguards built into the scheme which would be capable of redressing the imbalance. While it was true that in principle defendants could also take out ATE insurance, in view of the fact that a claimant could usually only obtain ATE insurance if his chances had been “better than evens”, a defendant in the same proceedings would have little or no prospect of obtaining such insurance. In addition, while costs were subject to assessment at the end of the proceedings, where the principal source of prejudice to the defendant was the chilling effect occasioned by the prospect of rapidly escalating costs, that assessment would come too late to correct the imbalance between the parties during the course of the proceedings. In any event, while proportionality had a part (albeit a limited part) to play when assessing the recoverability of base costs, it had no part to play when assessing the recoverability of success fees or ATE premiums, which only had to be reasonable. As the Court observed in MGN Limited, the reasonableness of success fees essentially concerned the review of the percentage uplift on the basis of the risk undertaken in the case.
The Court considered two further factors to be relevant. First of all, the scheme had not placed the burden of widening public access to legal services on unsuccessful litigants; rather, it had singled out unsuccessful litigants who had happened to be opposed by CFA/ATE funded litigants and had imposed on them the burden of funding other unsuccessful cases which had not involved them at all. While some litigants might themselves have had insurance, uninsured litigants would have been burdened with costs which had vastly exceeded the fair and reasonable costs incurred by their opponents in order to encourage solicitors to act for litigants in other cases.
Secondly, the Court acknowledged the findings of Supreme Court’s judgments that depriving claimants of the ability to recover the success fees and ATE premiums for which they were liable to their legal advisors and ATE insurers respectively could potentially infringe their rights under Article 1 of Protocol No. 1. Also ATE insurance afforded protection to successful defendants by providing them with the opportunity to recover their costs. Therefore, in contrast to the position in respect of success fees, which aimed to compensate lawyers for their unsuccessful cases, in paying the ATE premiums unsuccessful defendants were not required to contribute to the funding of other litigation and general access to justice. Nonetheless, having regard to the depth and nature of the flaws in the scheme, which had been highlighted by the public consultation process, which had been accepted in important respects by the Ministry of Justice and which had resulted in the abolition of the recoverability of success fees and ATE premiums from the losing party, the Court considered that in respect of uninsured defendants, who had born an excessive and arbitrary burden in CFA litigation, the impugned scheme, when viewed as a whole, had infringed the very essence of the principle of equality of arms as guaranteed by Article 6 § 1.
This conclusion would appear to be borne out by the facts of the present case. The Court had accepted that the applicant had - not unreasonably - believed himself to be an uninsured defendant throughout the course of the nuisance proceedings. Moreover, the Government had not sought to challenge his assertion that the third defendant, with whom he had been jointly and severally liable, had gone into liquidation without making any contribution to the claimants’ costs. To put it into context, even excluding the costs before the Supreme Court, the order for costs made against the applicant was more than eighty times the award of damages made against him.
Conclusion: violation (unanimously).
Article 1 of Protocol No. 1:
While the aim of the “loser pays” rule (namely, the avoidance of unwarranted litigation and unreasonably high litigation costs by dissuading potential plaintiffs from bringing unfounded actions without bearing the consequences) had been quite different from that of the 1999 Act scheme, the Court would nevertheless accept that that scheme had both a basis in domestic law and had pursued a legitimate aim. However, in light of its finding that the scheme placed an excessive burden on uninsured defendants, in CFA litigation, in the context of Article 1 of Protocol No. 1 the Court considered that in respect of that class of defendant the scheme had exceeded even the wide margin of appreciation accorded to the State in matters of social and economic policy. While litigants who had entered into CFAs might, at the time the arrangement had been entered into, had had a legitimate expectation that it would be enforced, that could be no answer to the question posed in the present case, namely, whether the scheme had been itself compatible with the Convention.
Conclusion: violation (unanimously).
Article 41: just satisfaction reserved.
(See also Stankiewicz v. Poland, 46917/99, 6 April 2006, Legal summary; MGN Limited v. the United Kingdom, 39401/04, 18 January 2011, Legal summary; Cindrić and Bešlić v. Croatia, 72152/13, 6 September 2016, Legal summary)
© Council of Europe/European Court of Human Rights
This summary by the Registry does not bind the Court.
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