Bungled Litigation and Costs

Hugh Evans |

  1. In principle, costs and funding should be taken into account when determining the value of litigation which has been lost by lawyers’ negligence. The Courts by and large purport to do this,[1] but the reported cases mostly do not do so adequately, and as a result considerably overvalue lost claims. I will attempt in this paper to show why, backed up by some simple calculations. In particular, the possibility of losing any trial makes a very great impact on the value of a claim.  I will assume the following facts:

Claim valued at £300,000 if successful, 50% prospect of success.

Costs to trial of each side £150,000.

Irrecoverable costs of £30,000.

£60,000 CFA uplift, £30,000 ATE insurance premium.[2]

Notional settlement one third of the way through the claim.

 

  1. The impact of costs pre CFA and ATE. If one just considers the first line of the example, a claim worth £300,000 with a 50% prospect of success, one would start by thinking that it has a value of £150,000, in other words the expected benefit to the claimant is £150,000. If one brings into account irrecoverable costs, then that reduces the value of the claim, the expected benefit, to £135,000 if fought to trial,[3] and £145,000 or £140,000 at a notional settlement a third the way through.[4] What makes a real difference, though, is the impact of costs if the claim were lost. The following calculation is the position at the start of the litigation, before costs are incurred, and ignoring the complications of the CFA and ATE insurance, which I will come to later. The claim is worth £135,000 if successful (see above).  But there is a 50% prospect of failure, which is valued at a negative £150,000 (the claimant’s costs) plus £120,000 (the defendant’s irrecoverable costs), a total of £270,000, divided by two (as there is 50% chance of losing), which is £135,000.  That is the same as the expected benefit.  The value of the claim at the start of the litigation, and assuming it fights, is therefore precisely zero.

 

  1. This is a startling conclusion, Most lawyers and litigants don’t undertake this sort of calculation, but that does not make it any the less true in terms of straightforward addition. It is, though, unrealistic. The overwhelming majority of cases settle, indeed on these assumed figures litigation is only rational if the prospect of settlement is taken into account.  Anecdotal evidence used to suggest to me that most lawyers would think that such a claim should settle for about £150,000 (half the value of the claim), plus recoverable costs (40,000 a third the way through), giving a net benefit to the claimant of £140,000 (taking into account £10,000 of irrecoverable costs). Anecdotal evidence also suggests that defendants have generally got tougher in settlement negotiations over the last few years, at least if they are funded by insurers or able to bear the costs of losing the claim without serious difficulty.

 

  1. One tactic seldom used by defendants is to point out to claimants the sort of calculation I have made above, which shows that the expected benefit of the claim to them is zero (or if the case is settled a third the way through it will be worth £50,000, the amount the claimant has spent so far, a total benefit of zero, as the next paragraph should demonstrate). However, the position of the defendant is the mirror of this, as a claimant should point out if this sort of argument is ever deployed.  The expected loss to the defendant if the claim fights to judgment is £300,000.[5] One would expect that perfectly rational and informed negotiating parties with equal bargaining power, who privately agree on the prospects of success,[6] would settle at a figure of £150,000, half way between zero (the value of the claim to the claimant), and £300,000 (the negative value of the claim to the defendant).  That figure is a gross payment, and there is no further payment for costs. The fact that most lawyers assume that the claim would be likely to settle for £150,000 plus assessed costs, or something approaching it, suggests that settlements tend to favour claimants.[7]

 

  1. At any stage of the litigation, the half way position between the claimant’s expected benefit and the defendant’s expected loss is, in this example, £150,000. This is most evident were the case to settle after all the costs had been expended when the parties are awaiting judgment, when the claimant’s expected benefit is £150,000,[8] and the Defendant’s expected loss is the same.[9] The claimant therefore recovers nothing were the case to be settled at this point, because he has expended £150,000 in costs. While the expected benefit and loss to each party alters over the course of the litigation, given that incurred costs go up, the mid-point between their two positions is always £150,000. The calculation at the notional settlement a third the way through the litigation is that the claimant’s future expected benefit is £50,000,[10] and the defendant’s future expected loss is £250,000,[11] with a mid-point again of £150,000.  This would be a net benefit to the claimant of £100,000, given that he has expended £50,000 in costs.  While a payment by the defendant at this stage of £150,000 plus recoverable costs of £40,000 favours the claimant, it is still significantly less that its expected future loss of £250,000.

 

  1. The impact of CFAs and ATE insurance. One might think that the claimant’s position is significantly improved if his lawyer’s act under a CFA, and he has the benefit of ATE insurance, but that such benefit was very much greater when the uplift and premium were recoverable from the defendant. Under the old and new regimes, the claimant had the very significant advantage of having no risk as to costs. In contrast, the defendant’s position was very much worse, as it would have to pay the CFA uplift and ATE premium on top of the recoverable costs and damages if it lost, whereas now it does not, and the claimant’s expected benefit is now reduced by the payment out of the uplift and premium from any damages if he wins. One might think that the old CFA/ATE regime meant that the overall value of the claimant’s claim was very much greater than it was without them, and that the new regime is worse but still better for the claimant than no CFA or ATE.

 

  1. The maths bears this out. Recall that the rational settlement figure at all times between parties of equal bargaining power, ignoring CFAs and ATEs, was a payment from the defendant to the claimant of £150,000.  With a recoverable CFA uplift and ATE premium, the figures look like this:
    1. At the start of the case, before costs are incurred, the expected gain for the claimant £127,500 (rather than the zero without the benefit of the CFA and ATE),[12] and the expected loss for the defendant £337,500 (rather than £300,000),[13] the half way figure is £232,500 (rather than £150,000), which is what the defendant would pay the claimant if rational and of equal bargaining power.
    2. At the notional settlement, one third the way through, for the claimant £127,500 (rather than £50,000 without the benefit of the CFA and ATE),[14] for the defendant -£287,500 (rather than -£250,000),[15] half way figure £207,500 (rather than £150,000), which is what the defendant would pay the claimant. The claimant will have to pay costs of £50,000, CFA uplift of £20,000, and ATE premium of £10,000, a total of £80,000, but he will still end up with £127,500 (rather than £100,000).
    3. At the end of trial for the claimant £127,500 (rather than £150,000 without the benefit of the CFA and ATE),[16] for the defendant -£237,500 (rather than -£150,000),[17] half way figure £182,500, which is what the defendant would pay the claimant (rather than £150,000). The claimant will have to pay costs of £150,000, a CFA uplift of £60,000, and ATE premium of £30,000, a total £245,000, so it is not rational for him to settle at this stage at any figure the defendant is likely to offer him, which will be up to £237,500. In practice, of course, his solicitors and insurers may be prepared to take a reduction on the uplift and premium, so settlement might still be possible.

 

  1. If one changes the figures so that the CFA uplift is 100% (ie £150,000) and the ATE premium is £120,000, which may be more realistic, the figures are even starker:
    1. At the start of the case, before costs are incurred, the expected benefit for the claimant is £110,000 (rather than the zero without the benefit of the CFA and ATE, and £127,500 with the lower CFA and ATE uplift),[18] for the defendant the expected loss is £410,000 (rather than £300,000, or £337,500 with the lower CFA and ATE uplift),[19] a half way figure £260,000, which is what the defendant would pay the claimant if rational and of equal bargaining power (rather than £150,000 with CFA and ATE, and £232,500 with the lower uplift and premium).
    2. At the notional settlement, one third the way through, the expected gain for the claimant is again £110,000, for the defendant a loss of £385,000 (rather than £250,000 or £287,500),[20] half way figure £247,500, which is what the defendant would pay the claimant (rather than £150,000 or £207,500). The claimant will have to pay costs of £50,000, CFA uplift of £50,000, and ATE premium of £40,000, a total of £140,000, but he will still end up with £107,500 (rather than nothing or £127,500).
    3. At the end of trial for the claimant £110,000 again, for the defendant -£310,000 (rather than £150,000 or £237,500),[21] half way figure £220,000, which is what the defendant would pay the claimant (rather than £150,000). The claimant will have to pay costs of £150,000, CFA uplift of £150,000, and ATE premium of £120,000, a total of £420,000.  Again, the claim is not settleable at that stage, as the defendant would not rationally pay more than £310,000. The reductions the claimant’s solicitors and insurers may be prepared to accept are less likely to enable a settlement, although of course rationally they should be.[22]

 

  1. The new funding arrangements make a significant difference here. The claimant is not at risk as to costs, but will lose a substantial part of his damages in uplift and premium. For the defendant, it does not face the prospect at trial, if it loses, of paying the uplift and premium. Again, the maths bears this out:
    1. At the start of the case, before costs are incurred, the expected benefit for the claimant is £90,000,[23] the expected loss for the defendant £300,000,[24] half way figure £195,000, which is what the defendant would pay the claimant if rational and of equal bargaining power.
    2. At the notional settlement, one third the way through, for the claimant £90,000,[25] for the defendant £250,000,[26] half way figure £170,000, which is what the defendant would pay the claimant. The claimant will have to pay costs of £50,000, CFA uplift of £20,000, and ATE premium of £10,000, a total of £80,000, but he will still end up with £90,000.
    3. At the end of trial for the claimant £90,000 (again),[27] for the defendant £150,000,[28] half way figure £120,000, which is what the defendant would pay the claimant. The claimant will have to pay costs of £150,000, a CFA uplift of £60,000, and ATE premium of £30,000, a total £245,000, so it is not rational for him to settle at this stage at any figure the defendant is rationally able to offer him, and this cannot easily be smoothed away by solicitors and insurers taking a haircut.

 

  1. I have summarised the figures in a table at the end.

 

  1. Weak cases. I turn to cases where the prospects of success are less than 50%. The jurisprudence suggests that a claimant who has lost a claim with some prospects of success (the test is formulated in a variety of ways in different authorities) will obtain an award of substantial damages. [29]  But the impact of costs on weaker cases should in principle be more dramatic than is widely thought. Let us assume the same figures as in the example above, but reduce the prospects of success to 25%.  The claimant will have an initial burden, which he will have to overcome on the balance of probabilities[30] which he may well not be able to do, of showing that he would have been prepared to litigate (which he would not rationally do, nor would any lawyer rationally take the claim on a CFA), or that he would have been able to obtain a settlement with the defendant (which would probably have been for very modest amounts, given the difficulties in the claim).

 

  1. If this hurdle can be overcome, one might start by thinking that a claim worth £300,000 with a prospect of success of 25%, has a value of £75,000 (and a bit less with irrecoverable costs). In fact it is dramatically less. Consider the position before costs are incurred. At 50% prospect of success, the rational settlement for the parties is £150,000, midway between zero and £300,000.  If the prospects of success are 25%, then the figure is £15,000,[31] half way between the claimant’s expected loss of £135,000[32], and the defendant’s expected loss of £165,000.[33] That would be a nuisance payment.

 

  1. The figures for a third the way through litigation are as follows: claimant – £85,000, [34] Defendant, -£115,000 (the maximum a rational defendant should pay),[35] half way between the two is again £15,000.[36] Thus shortly after costs are started to be incurred, a rational half way settlement at £15,000 will leave the claimant out of pocket. At the end of litigation the figures are claimant £15,000, [37]  defendant – £15,000, [38] so the parties would rationally settle by a payment by the defendant to the claimant of £15,000, which is 10% of the costs the claimant has expended.

 

  1. It is, of course, rational for the defendant to pay up to £165,000 initially and £115,000 a third the way through the litigation. Thus if it believes that the claimant will fight the claim to trial, the claim is plainly settleable for up to those figures. But claims which are weak are much less likely to settle.  Suppose that there is a 50% prospect of settlement at an early stage at say £75,000 plus costs,[39] and a 50% prospect of fighting all the way to trial, the real value of the claim to the claimant is – £30,000.[40]  Even if the prospects of settlement are 75%, the claim is only worth £22,500.[41]  A weak case is not only likely to settle for less, the prospects of settlement are smaller, and if the case were to go to trial the claimant’s expected benefit is substantially negative.  The conclusion is that a case with a 25% prospect of success is worth very little if anything.

 

Table: Homo Economicus indulges in a spot of litigation

Start of claim 1/3 way through End of claim
No CFA/ATE
C’s expected gain 0 £50,000 £150,000
D’s expected loss £300,000 £250,000 £150,000
Median position £150,000 £150,000 £150,000
C’s net recovery £150,000 £100,000 0
Recoverable CFA/ATE

(see paras 7 & 8)

C’s expected gain £127,500/£110,000 £127,500/£110,000 £127,500/£110,000
D’s expected loss £337,500/£410,000 £287,600/£385,000 £237,500/£310,000
Median position £232,500/£262,000 £207,500/247,500 £182,500/£220,000
C’s net recovery £232,500/£262,000 £127,500/£107,500 0 (unsettleable)
Irrecoverable CFA/ATE
C’s expected gain £90,000 £90,000 £90,000
D’s expected loss £300,000 £250,000 £150,000
Median position £195,000 £170,000 £120,000
C’s net recovery £195,000 £90,000 0 (unsettleable)

 


[1] See my summary in Jackson and Powell on Professional Liability, 8th edn, para 11-305.

[2] These figures are very modest. They may not be unrepresentative for modern litigation with irrecoverable CFA uplifts and ATE insurance premiums, where in particular it is not uncommon for there to be a cap on the CFA uplift at any rate.  They are too low in the period where the uplifts and premia were recoverable, although in practice they were often negotiated downwards in any settlement, and may be reduced on assessment.

[3] ie 50% of £270,000, which is £300,000 – £30,000 irrecoverable costs.

[4] 50% of £300,000, minus £10,000 irrecoverable costs, which on different scenarios may be deducted before or after the 50% reduction, but most realistically after it.

[5] If the defendant wins, it will have irrecoverable costs of £30,000, x 50%, which is £15,000.  If the claimant wins the defendant will pay £300,000 damages, £150,000 of its own costs and £120,000 of the claimant’s costs, a total of £570,000. 50% of this is £285,000. £15,000 + £285,000 = £300,000.

[6] Which is a realistic assumption in most cases, whatever the parties argue when negotiating.

[7] See H. Evans: “Why settlements favour claimants” (2000) 150 New LJ 432. One obvious reason for this, at least after proceedings have been issued, is that claimants have shown by issuing that they mean business, which should give them a significant psychological advantage.

[8] If the claimant loses he pays £120,000 to the defendant, 50% of that is £60,000.  If the claimant wins he will get £300,000 plus £120,000 recoverable costs, £420,000, x 50% is £210,000. £210,000 – £60,000 = £150,000.  Of course the costs he has spent are the same.

[9] If the claimant loses he pays £120,000 to the defendant, 50% of that is £60,000.  If the claimant wins he will get £300,000 plus £120,000 recoverable costs, £420,000, x 50% is £210,000. £60,000 – £210,000  = – £150,000.

[10] If he wins he will get £300,000 plus £120,000 costs, for a future costs expenditure of £100,000, a total of £320,000, x 50% = £160,000.  If he loses he will pay £120,000 to the defendant, and he will incur a further £100,000 of costs, a total of £220,000, x 50% = £110,000.  £160,000 – £110,000 = £50,000.

[11] If the defendant wins, it will get £120,000 costs for a future outlay in costs of £100,000, a net £20,000, x 50% = £10,000.  If the claimant wins the defendant will pay £300,000 damages, £100,000 of its own future costs and £120,000 of the claimant’s costs, a total of £520,000. 50% of this is £260,000. £260,000 – £10,000 = £250,000.

[12] If the claimant wins he will get £300,000 minus irrecoverable costs of £30,000, minus the irrecoverable element of the CFA uplift at say £15,000, a total of £255,000, 50% = £127,500.  If he loses, there is no financial downside.

[13] If the defendant wins, it will have irrecoverable costs of £30,000, x 50% is £15,000.  If the claimant wins the defendant will pay £300,000 damages, £150,000 of its own costs, £120,000 of the claimant’s costs, a CFA uplift of £45,000, and an ATE premium of £30,000, a total of £645,000. 50% of this is £322,500. £15,000 + £322,500 = £337,500.

[14] If the claimant wins he will get £300,000 minus irrecoverable costs of £30,000, minus the irrecoverable element of the CFA uplift at say £15,000, a total of £255,000, 50% = £127,500.  If he loses, there is no financial downside.

[15] If the defendant wins, it will get £120,000 costs for a future outlay in costs of £100,000, a net £20,000, x 50% = £10,000.  If the claimant wins the defendant will pay £300,000 damages, £100,000 of its own future costs, £120,000 of the claimant’s costs, a CFA uplift of £45,000, and an ATE premium of £30,000, a total of £595,000. 50% of this is £297,500. £10,000 – £297,500 = – £287,500.

[16]The calculation is again the same. If the claimant wins he will get £300,000 minus irrecoverable costs of £30,000, minus the irrecoverable element of the CFA uplift at say £15,000, a total of £255,000, 50% = £127,500.  If he loses, there is no financial downside.

[17] If the defendant wins, it will get £120,000 costs for no future outlay in costs, x 50% = £60,000.  If the claimant wins the defendant will pay £300,000 damages, £100,000 of its own future costs, £120,000 of the claimant’s costs, a CFA uplift of £45,000, and an ATE premium of £30,000, a total of £595,000. 50% of this is £297,500. £60,000 – £297,500 = – £237,500.

[18] If the claimant wins he will get £300,000 minus irrecoverable costs of £30,000, minus the irrecoverable element of the CFA uplift/ATE premium at say £50,000, a total of £220,000, 50% = £110,000.  If he loses, there is no financial downside.

[19] If the defendant wins, it will have irrecoverable costs of £30,000, x 50% is £15,000.  If the claimant wins the defendant will pay £300,000 damages, £150,000 of its own costs, £120,000 of the claimant’s costs, a CFA uplift and ATE premium of £220,000 (£270,000 – £50,000), a total of £790,000. 50% of this is £395,000. £15,000 + £395,000 = £410,000.

[20] If the defendant wins, it will get £120,000 costs for a future outlay in costs of £100,000, a net £20,000, x 50% = £10,000.  If the claimant wins the defendant will pay £300,000 damages, £100,000 of its own future costs, £120,000 of the claimant’s costs, a CFA uplift and ATE premium of £220,000, a total of £790,000. 50% of this is £395,000. £10,000 – £395,000 = – £385,000.

[21] If the defendant wins, it will get £120,000 costs for no future outlay in costs, x 50% = £60,000.  If the claimant wins the defendant will pay £300,000 damages, £100,000 of its own future costs, £120,000 of the claimant’s costs, a CFA uplift and ATE premium of £220,000, a total of £740,000. 50% of this is £370,000. £60,000 – £370,000 = – £310,000.

[22] If the claim has a 50% prospect of success, it is always rational for solicitors to forego the uplift, even if it is 100%, and similarly it is rational for the insurers to forego the full premium (although they never would).

[23] If the claimant wins he will get £300,000 minus irrecoverable costs of £30,000, minus the CFA uplift of £60,000 and ATE premium of £30,000, a total of £180,000, 50% = £90,000.  If he loses, there is no financial downside.  This will be repeated at each future stage.

[24] If the defendant wins, it will have irrecoverable costs of £30,000, x 50% is £15,000.  If the claimant wins the defendant will pay £300,000 damages, £150,000 of its own costs and £120,000 of the claimant’s costs, a total of £570,000. 50% of this is £285,000. £15,000 + £285,000 = £300,000. For the Defendant, the figures are of course the same as the position pre CFA and ATE.

[25] If the claimant wins he will get £300,000 minus irrecoverable costs of £30,000, minus the CFA uplift of £60,000 and ATE premium of £30,000, a total of £180,000, 50% = £90,000.  If he loses, there is no financial downside.

[26] If the defendant wins, it will get £120,000 costs for a future outlay in costs of £100,000, a net £20,000, x 50% = £10,000.  If the claimant wins the defendant will pay £300,000 damages, £100,000 of its own future costs and £120,000 of the claimant’s costs, a total of £520,000. 50% of this is £260,000. £260,000 – £10,000 = £250,000.

[27]The calculation is again the same. If the claimant wins he will get £300,000 minus irrecoverable costs of £30,000, minus the irrecoverable element of the CFA uplift at say £15,000, a total of £255,000, 50% = £127,500.  If he loses, there is no financial downside.

[28] If the claimant loses he pays £120,000 to the defendant, 50% of that is £60,000.  If the claimant wins he will get £300,000 plus £120,000 recoverable costs, £420,000, x 50% is £210,000. £60,000 – £210,000  = – £150,000.

[29] See Jackson and Powell on Professional Liability, 8th edn, para 11-302.

[30] Harrison v Bloom Camillin [2000] Lloyds Rep PN 89 to 100.

[31] Ie equal misery for both parties.

[32] If the claimant wins he will get £270,000 (£300,000 minus irrecoverable costs) x 25% £67,500. If he loses £270,000 (his costs of £150,000, and defendant’s recoverable costs of £120,000) x 75% = £202,500. £67,500 – £202,500 = -£135,000.

[33] If the defendant wins: -£30k irrecoverable costs x 75% = -£22,500k.  If the claimant wins: £300,000 + £150,000 own costs + £120,000 Cs costs == £570,000, x 25% £142,500.  Total £165,000.

[34] If he wins he will get £300,000 plus £120,000 costs, for a future costs expenditure of £100,000, a total of £320,000, x 25% = £80,000.  If he loses he will pay £120,000 to the defendant, and he will incur a further £100,000 of costs, a total of £220,000, x 75% = £165,000.  £80,000 – £165,000 = -£85,000.

[35] If the defendant wins, it will get £120,000 costs for a future outlay in costs of £100,000, a net £20,000, x 75% = £15,000.  If the claimant wins the defendant will pay £300,000 damages, £100,000 of its own future costs and £120,000 of the claimant’s costs, a total of £520,000. 25% of this is £130,000. £130,000 – £15,000 = £115,000.

[36] The expected future losses of each party are reduced by the expenditure they have incurred already.

[37] If the claimant loses he pays £120,000 to the defendant, 75% of that is £90,000.  If the claimant wins he will get £300,000 plus £120,000 recoverable costs, £420,000, x 25% is £105,000. £105,000 – £90,000 = £15,000.

[38] If the claimant loses he pays £120,000 to the defendant, 70% of that is £90,000.  If the claimant wins he will get £300,000 plus £120,000 recoverable costs, £420,000, x 25% is £105,000. £90,000 – £105,000  = – £15,000.

[39] One may consider this a realistic figure for settlement, but see the next paragraph. If it is rational for the defendant to pay up to £115,000, as the sum at footnote 35 shows, then as costs at this stage for the claimant are £50,000, the maximum he could expect to obtain is in fact £60,000.

[40] £75,000 x 50% – £135,000 x 50% = – £30,000.

[41] £75,000 x 75% – £135,000 x 25% = £22,500.