State of disrepair

A key Court of Appeal ruling could see housing disrepair claims increase as solicitors plug the after-the-event insurance gap, says Philip Hesketh.

Potential compensation claims for housing disrepair have not been pursued because claimants have been unable to find affordable after-the-event insurance to cover their risks of losing the claim. This article examines a ruling which provides a way around this. It also looks at the implications for the anticipated reduction of claims against local authorities arising out of the government’s recently proposed reforms of civil litigation costs. It will then consider the increasing role the government expects mediation to play in reducing local authorities’ costs of defending claims.

The Court of Appeal has given a landmark ruling in the case of Sibthorpe v London Borough of Southwark [2011] EWCA Civ 25. It ruled that a firm of solicitors could give their client an indemnity for adverse costs within a Conditional Fee Agreement. The CFA in question had been challenged as being champertous. The court rejected that argument on the basis that the solicitors did not gain anything in the event of their client losing the case. The Law Society had intervened in the action given the importance of this issue to the legal profession.

The case involved a housing disrepair claim brought by a tenant of a council house for breach of the repairing covenants. It appears her solicitors were unable to source an affordable after the event (ATE) policy to cover the claimant’s potential liability for the council’s costs in the event of her losing the case.

Legal aid was not obtained so to enable the claimant to proceed the solicitors included the following “indemnity” clause in the CFA: "If you lose, you pay your opponent's charges and disbursements. You may be able to take out an insurance policy against this risk. If you are unable to obtain an insurance policy against this risk, we indemnify you against payment of your opponent's charges at the end of the case if you lose. This means that we will pay those charges."

The council argued that according to well-established principles, the indemnity clause was champertous, and although the rest of the CFA was lawful, it was unenforceable as it contained an integral provision which was champertous. The public policy law against champerty is long established and essentially prevents lawyers being in a position where they can benefit from their client’s success in any given litigation. The rule prohibits ‘contingency fees’ in most contentious litigation (employment claims being a notable exception) but has been amended somewhat by the availability of success fees in CFAs.

Lord Neuberger, the Master of the Rolls, rejected the council’s arguments and declared the clause lawful and the CFA enforceable.

He said: “Access to justice is an essential ingredient of a modern civilised society, but it is difficult to achieve for the great majority of citizens, especially with the ever reducing availability of legal aid. This has been accompanied by a shift in legislative policy towards favouring the relaxation of previously tight professional ethical constraints, in order to enable a variety of more flexible funding arrangements (which some applaud and others believe give too much weight to consumerism and involve expensive regulation). In these circumstances, I find it hard to accept that, by shouldering the risk of an adverse order for costs against his client, a solicitor is acting contrary to public policy, which is, of course, the basis for the law of champerty. It is one thing to say, in relation to contracts with those who conduct litigation, that the reach of champerty should not be curtailed by the courts. It is quite another to say that, in relation to such contracts, the law of champerty should be expanded.”

The potential effect of the decision is to open the way for many more claims to be brought for housing disrepair. Unchallenged evidence, which was supported by the Law Society in the case at first instance, stated that the ATE market for housing claims was not well developed and premiums were expensive. This restricted “access to justice” and the solicitors’ indemnity clause was one way to redress the balance. Of course it requires the solicitors to take on the risk of liability for adverse costs orders so it is unlikely to result in a flood of spurious claims.

Post Jackson reforms

The government is (at the time of writing) still consulting on its proposals for reforming civil litigation costs. One of the key proposals is to make ATE premiums and CFA success fees unrecoverable against a paying party. This will significantly reduce the costs of defending claims for local authorities and other public bodies. It may not only reduce the costs per claim but also the number of claims. Claimants who proceed on a CFA with an unrecoverable ATE premium would have to pay for the policy (and any success fee) out of their damages. That may be a disincentive for many claimants, particularly in low value claims. This decision may therefore take on more importance and significance because if solicitors are prepared to provide the indemnity it removes the need for an ATE policy, once again making those claims affordable.

The case will not be limited to housing disrepair claims. Personal injury claims make up by far the largest proportion of compensation claims and the effects of the Jackson reforms will have most impact in this field. Once again this decision may diminish the expectation that the number of such claims will fall as solicitors, who are highly skilled at risk assessing personal injury claims, stand in the place of the ATE insurers at no cost (other than perhaps in an enhanced success fee) to their clients.

Disproportionality of disrepair claims costs

In Sibthorpe a negotiated settlement was reached. The claimant received £10,000 compensation and the council agreed to carry out repairs. The claimant’s costs were £11,979 exclusive of VAT. Assuming the council’s costs were half of that the total is £17,968 exclusive of VAT.

The Department for Business Innovation & Skills launched a consultation on 27 January 2011 on the resolution of workplace disputes. The consultation paper recommends the increased use of mediation to resolve these disputes. It says this about the cost of disputes: “Figures show that while the cost of resolving a dispute through a claim to an employment tribunal can cost an average of £3,800 for business, and £1,500 for a claimant, with many taking at least 26 weeks to reach determination, mediation is often completed in a day, usually at a cost of around £1,200 if parties act quickly, when a problem first arises.”

The litigation in the Sibthorpe case arose post-settlement so this was not a case where mediation was unsuitable because one party or the other was seeking a precedent ruling. On any view the costs of the litigation were disproportionate to the outcome achieved. It is not reported whether mediation was contemplated or attempted in the case. In November 2010 Jonathan Djanogly MP, Parliamentary Under-Secretary of State at the Ministry of Justice, made a speech at an ADR awards ceremony. He said that he will be re-launching a “new and improved” version of the ADR Pledge which since 2001 has required all Central Government departments and agencies to use ADR solutions in appropriate cases. In renewing the Pledge [in 2011] he “would also like to promote the wider benefits of ADR by seeking to encourage both local authorities and businesses to make a similar commitment to using ADR in appropriate cases.”

The Pledge is yet to be renewed and the Jackson reforms are still proposals. However it is clear that the coalition government is determined to bring mediation off the sidelines and into the mainstream of dispute resolution. The requirements to consider and advise about mediation under the Solicitors’ Conduct Rules, the Pre-Action Protocols and the Civil Procedure Rules have not brought about this change so further action is required. Local authorities can expect to be one of the main beneficiaries of this wider use of mediation, the main purpose of which is to reduce the costs of resolving claims.

Philip Hesketh is a Mediator at Hesketh Mediation Services www.heskethmediation.com. He can be contacted on 0845 056 3625.