There has been much debate in the press, as well as within the insurance and legal industries, as to whether businesses can claim compensation under the Act for consequential losses, ie for losses other than damage to property, such as loss of profits. The government has, perhaps unsurprisingly, stated that only damage to property can be compensated under the Act. If consequential losses were to be allowed then the cost of the riots to the police and, by extension, the taxpayer would rise exponentially.

However, having reviewed the Act and the relevant Regulations, it is unclear on what basis consequential losses would be excluded.

The Act states:

Where a house, shop, or building in a police area has been injured or destroyed, or the property therein has been injured, stolen, or destroyed, by any persons riotously and tumultuously assembled together, such compensation as hereinafter mentioned shall be paid out of the police fund of the area to any person who has sustained loss by such injury, stealing, or destruction…

Claims for compensation under this Act shall be made to the compensation authority of the police area in which the injury, stealing or destruction took place, and such compensation authority shall inquire into the truth thereof, and shall, if satisfied, fix such compensation as appears to them just

It is in our view arguable that loss arising from the destruction of property can properly be said to include consequential loss. Further, the only restriction on the calculation of the loss is limited to what appears “just”, albeit what is “just” is to be determined by the compensation authority itself leading, perhaps, to a conflict of interests.

In any event, until the issue is decided, businesses may wish to include consequential losses in claims for compensation made to the body set up by the government in Glasgow for the purpose of handling the claims but ensure that they do so within the 42 day time limit from the date of the damage to property during the riot.

Quinn Insurance Limited (“the Insurer”) provided public liability insurance to one of the Claimants’ sub-contractors (“the Policyholder”). The Policyholder was sued by the Claimants in relation to a fire which occurred in 2006, and the Insurer refused indemnity under the public liability cover in February 2009 alleging that the Policyholder had been in breach of certain policy conditions.

The Claimants’ claim against the Policyholder was successful, and damages were assessed by the Court at two separate hearings, on 11th December 2009 and 13th January 2010. The Policyholder failed to satisfy the judgement obtained by the Claimants, and went into liquidation shortly afterwards. The Claimants then issued proceedings against the Insurer, under the Third Parties (Rights Against Insurers) Act 1930 (“the 1930 Act”), in April 2010.

The Insurer defended the 1930 Act claim on the basis that there was a clause within the policy which required a dispute about liability under the policy to be referred to an arbitrator within 9 months of the dispute arising. The Insurer said that such a dispute arose when it refused indemnity in February 2009, and that the Claimants’ 1930 Act claim was therefore time-barred. The judge at first instance, hearing the matter as a preliminary issue, found in favour of the Insurer.

On appeal the Claimants succeeded in arguing that the 9 month time limit did not begin to run until the Policyholder’s liability had been established and quantified. The Court of Appeal followed Post Office v Norwich Union Fire Insurance Society Limited [1967] 2 Q.B in finding that an insurer’s liability under an indemnity policy does not accrue unless and until the existence and amount of the Policyholder’s own liability has first been established.

In this case the arbitration clause therefore did not operate to bar the Policyholder’s claim, since quantum was not established until December 2009 / January 2010 and the Claimant’s 1930 Act claim, which was issued in April 2010, was therefore brought within the nine month period required by the policy.

Two points of Austrian law are relevant:

1. Austrian law provides that legal expenses insurance contracts may state that a policyholder may only select lawyers who have their chambers in the geographical location where judicial proceedings are at first instance to be conducted; and

2. In Austria lawyers in certain ancillary services in civil law disputes are remunerated by a flat fee. That fee is doubled if the service is provided outside of the lawyer’s particular geographical location.

Mr Stark was the policyholder under a legal expenses policy provided by DAS. In 24.03.2006 he brought an employment claim against his former employer in the Labour and Social Security Court in Vienna. Mr Stark lived approximately 600km away from Vienna and instructed a lawyer local to him.

Mr Stark made a claim under his legal expenses policy and DAS paid his lawyer EUR 5,782.19 by reference to the single flat rate not the double flat rate. DAS also made an application seeking an order that Mr Stark pay the premium of EUR 211.46 due under the policy. Mr Stark made a counter-claim for EUR 3,000, being the balance between the single flat fee DAS had paid and the double flat fee which his lawyer charged Mr Stark and which was not paid by DAS.

Mr Stark ultimately asked the European Court of Justice to decide whether the restriction placed on legal expenses policyholders by Austrian law was contrary to Article 4(1) of Directive 87/344/EEC which guarantees freedom of choice of lawyer to legal expenses policyholders.

The ECJ ruled that the question at issue was not, in fact, a question pertaining to the freedom of choice of lawyer, but instead on the scope of cover available under an insurance policy and that such a question is not subject to the Directive. It noted that Mr Stark had been able to freely select his lawyer but that did not mean that the insurer was required to reimburse all the lawyer’s fees, regardless of geographical location.

The Court did note however that this should be “on condition that that freedom is not rendered meaningless. That would be the case if the restriction imposed on the payment of those costs were to render de facto impossible a reasonable choice of representative by the insured person.”

The Claimant suffered subsidence damage to his property caused by the roots of a tree which was owned by the Defendant. The Claimant claimed on his house insurance policy for the damage, and his insurer provided him with a full indemnity. The insurer then proceeded to exercise its right of subrogation and instructed a firm of solicitors who were to work under a collective conditional fee agreement.

The claim succeeded but the Defendant objected to the payment of the success fee on the basis that the Claimant was never at any risk of having to pay costs as he had the benefit of an insurance policy. At first instance this argument was upheld. The Claimant appealed the decision and the Court of Appeal has now reinstated the success fee.

In reaching its decision the Court followed the decision of the House of Lords in Campbell v MGN (No.2) [2005] UKHL 61 and allowed recovery of the success fee, holding that “the mere fact that a person is able to fund litigation without resorting to a conditional fee agreement does not make it unreasonable for him to do so”.

The Court also dismissed as without merit any argument that the case was comparable to the ECHR decision in MGN v UK (Application No. 39401/04) on the grounds that (i) the question of whether the success fee interfered with freedom of speech was not applicable; and (ii) as the liability to pay a success fee did not interfere with the Defendant’s rights under the European Convention for Human Rights in this case, questions of proportionality and reasonableness did not arise.

NES was approached by a new, apparently wealthy, client and asked to provide an undertaking to pay Halliwells £1.5 million as part of a share purchase agreement. The client provided a “gold delivery certificate” purported to be worth £10 million. The partners of NES, in reliance on the certificate, but knowing the funds had not cleared, provided the undertaking. The certificate was later found to be worthless.

NES failed to honour the undertaking and was sued by Halliwells. Halliwells obtained summary judgment. The professional negligence insurers of NES, Quinn, refused to pay the claim made by NES on the basis that:

i) the partners of NES were dishonest or condoned dishonesty;
ii) that the undertaking was not given in a solicitorial capacity; and
iii) that the undertaking was given for the benefit of NES (ie a £15,000 fee)

It was held that NES had acted dishonestly and as such Quinn was not required to provide an indemnity.

Solicitors should always carry out the requisite money laundering checks and consistently be on the look out for unusual transactions. With regard to undertakings the giving of an undertaking in a ‘solicitorial’ capacity requires substantive legal advice to have been given or a legal service provided. Undertakings have to be given in connection with legitimate legal work and not merely in order to receive remuneration.

However, in Jones v Kaney the Supreme Court held by a majority of 5:2 that immunity for experts should be abolished. In this case the Claimant was involved in a road traffic accident. When bringing proceedings his solicitors appointed Dr Kaney, a consultant clinical psychiatrist, who initially concluded that Mr Jones was suffering from severe PTSD.

When only quantum remained in dispute Dr Kaney held discussions with the Defendant’s expert. A joint experts’ report was then signed that was extremely damaging to Mr Jones’ claim and contrary to Dr Kaney’s initial prognosis. The Claimant ultimately settled for significantly less than could have been achieved without this joint statement.

The court held it would be unjust for Dr Kaney to be immune from the effects of signing a statement which detrimentally affected the Claimant, especially when she admitted afterwards that it did not reflect what was agreed in the telephone conversation, and that she had felt pressurised to agree to it.

The majority were confident that this would not reduce the number of practitioners willing to give expert evidence and would not make an expert witness less likely to be willing to concede points or to comply with his duty to the court. They disregarded the suggestion that experts would quickly become subject to a multiplicity of claims and the decision is an attempt to ‘professionalise the expert witness industry’.

MGN was ordered to pay Miss Campbell’s costs of the litigation, in the sum of just over £1 million. £600,000 of this sum related to the House of Lords Appeal in which solicitors and counsel acting for Ms Campbell had acted on a CFA with a success fee.
MGN appealed to the House of Lords (the ‘Costs Appeal’) on the basis that it should not be liable to pay the success fee due to the huge disparity between the amount awarded in damages and the level of Ms Campbell’s costs. MGN argued that the disparity constituted an infringement of its right to freedom of expression under Article 10 of the European Convention on Human Rights (“Article 10”).

MGN was unsuccessful in the Costs Appeal, which was conducted by Ms Campbell’s solicitors on a CFA with a 95% success fee. The House of Lords found that the existing CFA regime, with success fees, was compatible with Article 10, even when used by wealthy litigants. MGN was ordered to pay the costs of the Cost Appeal, which were in the region of £250,000.
On 18 January 2011, the European Court of Human Rights (“ECHR”) found that the requirement that MGN bear the cost of the success fee was disproportionate and a violation of Article 10. MGN’s total costs liabilities were subsequently settled for £500,000.

Four “flaws” in CFAs were particularly noted by the ECHR:
1) The lack of a qualifying requirement for claimants entering into a CFA, so that CFAs can be used by wealthy individuals who are able to pay legal fees;
2) That there is no incentive on the claimant to control costs under a CFA;
3) Than an opposing party would often be “held to ransom” for early settlement due to the excessive costs burden being put on them;
4) That cases funded by CFAs could be “cherry picked” on the basis of their chances of success, which the ECHR considered indicated that recoverable success fees did not achieve the intended objective of providing access to justice to all.

Paying parties in non-defamation/privacy cases will want the principles in this case expanded to all civil cases. However this may prove to be difficult in cases not concerning Article 10, especially if the shield of Article 6 (Right to a fair trial) is used by CFA funded claimants.

The recoverability of CFA success fees was already under attack before the ECHR’s decision in Campbell –v- MGN. However, this decision may hasten the abolition of recoverability which was recommended by Lord Justice Jackson in his review of civil litigation costs. Solicitors will now need to consider alternative ways to fund claims on a basis that Claimants can afford.

The ‘Atomic Veterans Litigation’ (Ministry of Defence v AB and others [2010] EWCA Civ 1317) concerned injuries alleged to have been caused by atmospheric nuclear tests that took place in the Pacific between 1952 and 1958. Claims were issued by a group of 1,011 ex-servicemen who claimed to have suffered injury through exposure to radioactive fallout. The Ministry of Defence denied liability.

Upon the making of a Group Litigation Order in favour of the Atomic Veterans, 10 lead cases were tried on limitation as a preliminary issue. The trial judge found in favour of the claimants in all 10 cases: five on the basis that the claimants did not have the relevant knowledge of the injury, for the purposes of s.14A, until less than 3 years before proceedings were commenced.

On Appeal it was held, in all but one of the five cases originally allowed to proceed under s.14A, that they were statute barred, as the claimants had relevant knowledge more than 3 years before the claims had been issued. On the question of what exactly constitutes knowledge, the Court of Appeal held that a claimant only needs enough knowledge for it to be reasonable to expect him to set about investigation. In this case the claimants sought to rely on the fact that they were awaiting the results of expert evidence as to the cause of their injuries before pursuing the claims. The Court of Appeal refused to allow them to do so, finding that time began to run for the purposes of s.14A when it was reasonable to the claimants to investigate, not when the result of that investigation was known.

One recommendation aimed at reducing costs which is currently being trialled is the practice of more than one expert giving oral evidence to the court at the same time, known as concurrent evidence or, more colloquially, “hot tubbing”.

It is not clear at this stage whether the cost savings that will be made by the introduction of hot tubbing will justify the increased risk of a case collapsing due to a bad performance of an expert under pressure. The value of experts is, in our view, in their technical expertise, rather then their advocacy skills or their ability to outwit their counterpart in an artificially pressurised situation.

Litigation is already the highest-risk form of dispute resolution available. The high risk nature of litigation is responsible, at least in part, for driving the increased popularity of alternative dispute resolution, and it is inevitable that any measures which further increase the risk inherent in litigation will inevitably disourage potential litigations from using the process.

That being the case, we would question whether the proposed introduction of hot tubbing signals a loss of confidence in litigation itself. If so, it shouldn’t do: litigation remains a valuable and important form of dispute resolution which, in its present form, is capable of appropriately complementing other forms of dispute resolution, several of which (mediation, early neutral evaluation, adjudication, and of course negotiation) can be pursued alongside litigation.

On the basis of the above, we would be wary of any changes to the litigation process which increase the risk of litigation, unless the cost savings that would be achieved are so significant as to outweigh the negative impact of that increased risk.

Eschig / the FSA have made clear that any provisions in a legal expenses policy which detract from, or qualify in any way, the freedom of a policyholder to retain a lawyer of their own choice, will be unlawful. Specifically, the July 2006 undertaking given to the FSA by legal expenses insurer DAS, pursuant to which the FSA had agreed that DAS was entitled to restrict a policyholder’s right to choose their own lawyer in exceptional circumstances, is longer acceptable as it contravenes the 1990 Regulations.

The FSA’s letter also confirmed that, contrary to the position taken by a number of legal expenses insurers, a policyholder’s right to choose their own lawyer arises before issue of Court proceedings.

The FSA has asked all providers of legal expenses insurance to inform the FSA by 30.09.2010 of the actions which they have taken to ensure that the terms of their legal expenses cover comply with the 1990 Regulations following the ruling in Eschig.

For a copy of the FSA’s letter, please click on the following link: http://www.fsa.gov.uk/pubs/other/lei_190710.pdf