Woolf at the door

One of the golden rules in life is that every action has an equal and opposite effect to the one intended. We should all have bought shares in paper companies when they announced the computer would lead to the paperless office. We should have invested in cinemas when it was said that video would kill the big screen. We should have smiled wryly when we heard Lord Woolf announce in April 1999 that the civil court system reforms would speed access to justice and reduce cost. In fact, the reforms have spawned a whole new industry in cost recovery which, not surprisingly, has to be paid for – thus having the opposite effect of what was intended.

The first mistake was to implement a system whereby on any application the court considers, and usually awards, costs. Under the old system, parties were awarded their costs as a case progressed, but they could not actually recover them until the case concluded, when the entire cost position was addressed. That all took place before a costs judge, who was experienced in determining a fair and reasonable recovery rate.

Now the issue is argued by two barristers, neither of whom have experience dealing with litigation costs, and a judge who is usually a former barrister. As a result, solicitors now have carefully cost their files before any court hearing and provide that information to the court. The net effect is increased costs.

The next mistake was to penalise parties who failed to accept reasonable settlement offers. These are "without prejudice save as to costs" offers, but are termed Part 36 offers.

Their purpose is to enable either side to set out what they are prepared to accept or pay. If the other party fails to beat that offer, they can be ordered to pay indemnity costs and punitive interest up to 10% above the ordinary rate. As a result, most parties are now making Part 36 offers purely for tactical advantage. This is spawning many challenges to costs orders made under Part 36 through the court and creating yet more litigation.

Premium bombs
The problem goes further. The courts will now look at proportionality to determine recovery of costs. To do that they must look at overall costs and assess if they are proportionate to the amount recovered. This can be a difficult, subjective exercise and where such tests are used there is bound to be dispute.

Perhaps we should have a people’s court where lawyers are banned and the judge investigates the case and decides

The complexity doesn't end there. Recognising that the increased cost of litigation was a deterrent, two measures have been adopted. First, the insurance world has come up with a new product: post-event insurance cover. This is an all-singing, all-dancing insurance policy which for the right premium – and therein lies the catch – you can obtain just about any form of post-event cost cover. Allied to this, access to legal aid has been severely curtailed and, in some cases, entirely withdrawn.

Insurance companies are not known for their philanthropy, so access to justice has been increased only where there is a more than 60% chance of success in a claim. In commercial cases, premiums can be as high as 50% of the amount of cover being sought.

These issues have had an impact on businesses. With the court now publishing permitted recovery rates – which in central London can be £400 plus an hour – small practices can now target commercial organisations and seek to recover far higher levels of costs than would have been possible before the system was changed.

What's the solution?
For a start, the courts should cap hourly rates. Why should recovery at £400 or more an hour be permitted? Indeed, why not scrap cost rules altogether? Fixed rates for fixed cases could be introduced. This would be a radical departure. You could budget and the other side would know what their liability would be if they lost, irrespective of the opposing lawyer's actual costs. Insurers would not like this however, as they see it as a growth area.

Perhaps we should have a people's court where lawyers are banned and a judge investigates the case and makes a decision. But the law of inverse logic tells me people wouldn't entertain that notion; they want the privilege of argument and the opportunity to recover the cost of such privilege.