Fixing Lawyers' Fees Ex Ante: A Case Study in Policy and Empirical Legal Studies

• Date: 01 September 2011
• DOI: http://doi.org/10.1111/j.1740-1461.2011.01219.x
• Author: Neil Rickman,Paul Fenn
• Published date: 01 September 2011

Fixing Lawyers’ Fees Ex Ante: A Case Study

in Policy and Empirical Legal Studiesjels_1219533..555

Paul Fenn and Neil Rickman*

The relationship between legal fees and damages is fundamental to the way litigation is

funded in most countries. In jurisdictions where fee shifting is the norm, the means by which

courts regulate recoverable costs (i.e., the plaintiff’s fees), and the extent to which they are

proportional to damages, is of central importance. This article explores a recent case study

from the United Kingdom involving the introduction of procedural rules designed to build

an explicit and transparent degree of proportionality into the determination of legal costs.

In October 2003, the Department of Constitutional Affairs in England and Wales announced

the introduction of the “Fixed Recoverable Costs Scheme for Low Value Road Traffic

Accident Claims.” This established a set of fixed costs that successful lawyers could recover

from losing defendants in such cases. The Fixed Recoverable Costs Scheme was based closely

on research undertaken by the authors for the Civil Justice Council and the current article

describes the process that brought this about. In so doing, it provides an explicit example of

empirical legal studies having a direct impact on policy. We were also asked to provide some

basic evaluation of the scheme two years later and the article also shows how the scheme was

operating, including some of the behavioral changes it apparently induced. We argue that

some of these were predictable at the time the scheme was being designed and that the total

experience allows us to consider ways the interaction between empirical legal studies and

policy can be improved in the future.

I. Introduction

The relationship between legal fees and damages is fundamental to the way tort litigation

is funded in most jurisdictions. In the United States, the dominant means of funding

litigation is through contingency fees, which clearly implies a direct and proportionate

relationship between fees and damages. However, in areas of the law where fee shifting is

adopted, U.S. courts typically assess the fees that are recovered according to a test of

*Address correspondence to Paul Fenn, Nottingham University Business School, Jubilee Campus, Wollaton Rd.,

Nottingham NG8 1BB, UK. Email: paul.fenn@nottingham.ac.uk. Fenn is Aviva Professor of Insurance Studies,

Nottingham University Business School; Rickman is Professor of Economics, University of Surrey, CEPR & RAND

Europe’s ICJE.

We are grateful to the Ministry of Justice and the Civil Justice Council (both of England and Wales) for providing

the opportunity to undertake this research, and to a number of (anonymized) sources for making data available. We

are also grateful for numerous comments during the policy process that we describe, and to an editor of this journal

for his comments and suggestions. Any remaining errors/mistakes are our responsibility.

Journal of Empirical Legal Studies

Volume 8, Issue 3, 533–555, September 2011

533

“reasonableness.”1The extent to which reasonable fees are proportional to damages in

these areas of law can be uncertain (Eisenberg & Miller 2004, 2010). In jurisdictions other

than the United States, where fee shifting (or cost shifting) is often the norm across most

cases, the means by which courts regulate recoverable costs (i.e., plaintiff’s legal fees2), and

the extent to which they are proportional to damages, is of central importance.3This article

explores a recent case study from the United Kingdom involving the introduction of

procedural rules designed to build an explicit and transparent degree of proportionality

into the determination of costs.

On October 6, 2003, the Department of Constitutional Affairs in England and Wales

published a press release announcing with immediate effect a “revolution in legal costs”:

the Fixed Recoverable Costs Scheme for Low Value Road Traffic Accident Claims. The

scheme specified the costs that successful lawyers could claim against defendants in road

traffic accident (RTA) claims with damages below £10,000. These costs were, themselves,

linked to the damages recovered, thereby injecting a degree of “proportionality” into the

cost-recovery process. The Fixed Recoverable Costs Scheme (FRCS) was itself a response to

a growing concern about rising legal costs in England and Wales, due (at least in part) to

the unintended consequences of policy initiatives that had taken place during the 1990s.

We argue that these had shifted costly legal work to the early stages of cases (thereby

pushing up costs in the majority of cases) and reduced client incentives to monitor legal

fees (thereby removing competitive pressures). Under English cost-allocation rules (where

the loser pays the winner’s costs), this imposed a negative externality on unsuccessful

defendants that ultimately led to a remarkable period of litigation over costs: Phase 1 of the

“Cost Wars”4. As several commentators have remarked, most notably Lord Justice Jackson,

these Cost Wars “have generated more litigation, arguably to less useful purpose” than any

other” (Jackson 2009a:para. 5.1): as such the FRCS helped limit a “shocking squandering of

scarce court resources on refereeing of disputes about costs” (Ian Scott, quoted in Jackson

2009a:para. 5.50).

This article is about the role of economists in the process and research that underlay

the introduction and evaluation of the FRCS. We were fortunate to be asked to undertake

this research in 2002 as part of a quasi-mediation process set up by the Civil Justice Council

of England and Wales in an attempt to bring claimant and defendant groups together in

order to resolve a large-scale dispute over costs that was taking place at that time. The results

of this initial research were explicitly (indeed almost verbatim) incorporated within the

1The “lodestar” method involves the assessment of fees by the courts as the product of a reasonable number of hours

and a reasonable hourly rate.

2The term “costs” is used throughout this article in the sense used in the United Kingdom and other fee-shifting

jurisdictions; that is, they are the fees paid by the plaintiff to his or her lawyer that are recoverable from the losing

defendants.

3See Faure and Philipsen (2010) for recent evidence from the Netherlands.

4Jackson (2009a:ch. 11) identifies two phases of these Cost Wars: the first running from 2000–2003 and the second

ongoing from then. As he points out, the foundations for these had been laid in the early/mid-1990s.

534 Fenn and Rickman