Herbert M. Kritzer

Professor of Political Science and Law
University of Wisconsin-Madison

ABA Journal
Volume 78
November, 1992
pp. 54-58

*55 Vice President Dan Quayle is not the first critic of the American legal system to look to England in search of reforms.

A cornerstone of the package of proposals to change the U.S. legal system being espoused by the President's Council on Competitiveness, which Quayle chairs, is adoption of the principle that fees and costs of litigation should be shifted to the loser--known as the English rule.

With his proposal, Quayle joins the line of critics who periodically have advocated a more "English" approach as a means of reining in the litigation excesses they perceive under the American rule, which requires each side to cover its own legal fees and costs.

Some proponents of the English rule--technically termed "cost-(or fee-) shifting or "indemnity for costs"--justify their support on grounds of fairness, while others view it as a vehicle for discouraging frivolous or questionable litigation.

Opponents charge that the English rule would inhibit individuals with meritorious claims from seeking compensation.

Surprisingly, however, neither side in the American debate over the English rule has bothered to consider how cost-shifting functions in jurisdictions that embrace it.

Even a minimal investigation into the working of the rule in the English legal system (which serves England and Wales; Scotland and Northern Ireland have separate legal systems) would reveal that many litigants are shielded from either the costs or the benefits, or both, that the cost-shifting principle theoretically creates.

These realities of the English rule raise key issues that must be considered in debates over whether the rule should be imported to the American civil justice system.

The theory of the English rule is uncomplicated: Whichever side prevails in a legal action is entitled to recover its reasonable litigation expense--court costs, legal fees and other expenses, such as expert witness fees--from the losing side.

In England, the loser pays the winner's legal costs even in settlements, regardless of whether a formal action was filed; the typical settlement agreement includes a statement as to what costs will be paid.

The application of the cost-shifting principle is much more complicated than the simple phrase "loser pays" implies. While most defendants, who tend to be institutional (either as named defendants or as insurers of defendants), are genuinely at risk to pay costs if they lose, this is not true for plaintiffs, especially individuals.

The variation in applying the rule is closely linked to the mechanisms English plaintiffs use to finance litigation. One result is that, in many situations, a successful defendant will not be able to recover its litigation costs.

Only a fraction of plaintiffs in England actually confront a straight- forward cost-shifting situation. Those plaintiffs who are "privately funded" must pay their own solicitors (often on account, as actions progress) and are at risk for having to pay their opponents' solicitors if actions are unsuccessful. If the litigation is successful, privately funded plaintiffs are entitled to recover most of their costs from the losing sides.

When barristers are used in cases, the cost-shifting rule applies to their fees, as well. While contingent (or percentage) fees are not formalized in England, there is an informal quasi-contingent fee system under which an unsuccessful plaintiff's solicitor does not seek a fee from his or her own client, although the client still must expect to pay the winner's costs.

It is generally accepted that the English rule discourages privately funded parties from bringing meritorious claims. Patrick Devlin, a distinguished English judge, has observed, "Everyone knows, every lawyer particularly knows, that for the ordinary citizen unqualified for Legal Aid a lawsuit is quite out of the question."

(The leading civil procedure text for practice in Ontario, the Canadian province with a cost-shifting regime most similar to England's, asserts, "Our costs system means that in litigation the 'downside risk' [the costs of losing] is always substantial and its undoubted effect is to discourage much litigation including some that should go forward.")

In fact, at least in court actions involving personal injury, only about 40 percent of English plaintiffs are subject to the downside risk of the English rule, according to a 1986 study conducted for the Lord Chancellor's Department, the management arm of the English judiciary. The majority of plaintiffs avoid that risk through one of three means:

First, persons whose incomes and assets fall within the appropriate guidelines are eligible to have their legal costs paid by Legal Aid, a program funded by the government and administered by a board appointed by the Lord Chancellor's Department. Some Legal Aid participants are required to *56 pay part of their costs, but most pay little or nothing. An estimated 28 percent of personal injury plaintiffs receive legal aid.

Litigants who receive legal aid are not subject, except in rare cases, to the risks of the English rule. Outside of matrimonial cases, most litigants receiving civil legal aid are plaintiffs confronting institutional defendants, which cannot recover legal expenses even if they prevail (the justification is that these parties are better able to bear the costs than is the Legal Aid fund).

Second, other litigants avoid the downside of the English rule through their trade unions. Generally, unions provide both legal representation for their members and absorb litigation costs. Typically, unions limit funding to litigation related to accident claims by their members. Most often, those claims are work-related, although many unions provide funding for injuries occurring outside the work setting.

About 29 percent of accident cases in England are pursued by solicitors retained by unions. If a claim is unsuccessful, the union pays both sides' legal costs; if the claim is successful, the claimant's unionretained solicitor is paid by the defendant.

Solicitors retained by the unions are generally regarded as extremely effective, in no small part because they do not have to worry about skittish clients who fear paying out substantial sums if their cases are unsuccessful.

The third method of avoiding the risks of the English rule is legal expense insurance. At present, only about 2 percent of all cases are pursued by persons with such insurance. Nonetheless, insurance makes a significant difference in how solicitors handle cases, primarily because clients need not be concerned about costs.

The division of the English legal profession into solicitors and barristers helps to explain how plaintiffs react to being at actual risk for litigation costs.

In England, solicitors are responsible for most of the pretrial preparation of cases, while barristers are responsible for trying cases. Barristers typically do not become involved in cases until trial dates are approaching.

Although some 40 percent of personal injury litigants are privately funded, it is the perception of barristers that they rarely deal with privately funded plaintiffs. This can only mean that either these types of litigants are more likely to reach settlements earlier or that they are more likely to abandon their cases if settlements are not reached.

While early settlements may be the result of generous offers, it is more likely that plaintiffs are inclined to accept whatever is offered to avoid the risk of cost-shifting.

To quote Judge Devlin again, the unassisted litigant "must take what is offered to him and be glad that he has got something."

Research on negotiation and settlement in England supports Devlin. Repeat player defendants take advantage of the risk aversion of privately funded, one shot plaintiffs by engaging in hard bargaining; defendants either refuse to make offers or make offers considerably under the likely value of the case.

Further support for this conclusion is provided by a mid-1980s study of settlement negotiations in 220 High Court cases by Timothy Swanson of the economics department at University College in London. In only 53 percent of the cases studied in which plaintiffs were privately funded did defendants make settlement offers, compared to 66 percent of the cases with Legal Aid plaintiffs and 90 percent of the cases financed by unions.

These findings suggest that defendants use plaintiff concerns about costs as a strategic bargaining tool.

(A second study, unpublished, by Paul Fenn of the Centre for Socio-Legal Studies at Wolfson College of Oxford University, suggests that the tendency may be strongest in cases that already have evolved into litigation. Fenn's study indicates that the likelihood of an offer being made to privately funded claimants not yet in litigation was only slightly lower than for financially assisted claimants.)

Transplanting the English rule to the United States raises a number of important issues closely related to underlying differences between the two legal systems:

- Would an Americanized English rule include provisions to mitigate the loser-pays principle for some segments of the population?

England's extensive Legal Aid system provides a shield for one segment of its population, trade union funding covers another segment, and private legal expense insurance offers at least the potential of a shield for other segments.

In the United States, however, legal assistance is not generally available from either government or private sources for contingent fee cases, to which a cost-shifting rule would apply.

Moreover, the hardship imposed on American plaintiffs by the English rule would be compounded by the fact that the United States lacks the comprehensive social insurance system that provides English victims of injuries with extensive compensation outside the tort system.

- Are the disincentives of the English rule really so great if a potential plaintiff has a strong case? Vice President Quayle has argued that a loser-pays rule actually would enable persons to pursue strong claims that are not financially viable under the usual American contingent fee arrangement.

To evaluate that contention, imagine *57 a person of moderate means who has suffered a loss of $1,000. You, as his attorney, advise him that his case is very strong, virtually a sure winner at trial.

Under the English rule, you would explain that if your client wins, the defendant would have to pay your client's legal costs. You also would inform your client that, in the unlikely (perhaps one chance in 10) event that the other side won the case, your client would have to pay the other side's legal costs amounting to, say, $5,000.

It is hard to imagine a typical risk-averse, one-shot plaintiff willing to risk $5,000 to recover a $1,000 loss, even at highly favorable odds. If the amount at stake were $10,000 or $25,000, most middle-income individuals still would be reluctant to put $5,000 to $10,000 on the line to pursue even a strong case.

- How would the English rule apply to cases decided prior to trial?

Under the rule, costs follow the event; that is, at any point at which some aspect of a case is decided, the costs associated with that particular decision are assessed to the loser. Quayle's proposal would apply this principle to discovery motions. Should the rule also apply to other pre-trial maneuvers typically made by defendants, such as demurrers, motions to dismiss or motions for summary judgment (which are largely unsuccessful)?

- Would the English rule extend to all reasonable costs incurred in prosecuting or defending a suit, including expenses for such items as expert witness fees, day-in-the-life videos and accident reconstruction models?

Under the American rule, only court fees are generally considered costs, while jurisdictions following the English rule typically include all three elements.

Astriking characteristic of the American bar is its entrepreneurial spirit. There is nothing comparable in the English legal profession, which historically has been reluctant to seek out or develop new areas of practice or causes of action.

Particularly for routine cases with smaller damage amounts at issue, in which liability could be assessed with a degree of certainty, one might expect the American plaintiff bar to develop some type of mutual insurance system that would protect litigants from the downside risk associated with a case.

Under a reasonably pure feeshifting system such as England's, the costs of legal expense insurance for individuals are generally quite modest because insurance is provided only against the costs of losing. These insurance systems employ casescreening procedures that effectively remove the doubtful cases.

If the English rule were adopted in the United States, similar schemes might be developed, perhaps including post-incident plans based on some percentage of the recovery.

- But what if it were the contingent fee lawyer, not his or her plaintiff client, who was at risk for costs? This could occur either through statutory requirements or by simply incorporating the risk for the other side's costs into standard contingent fee retainer agreements.

While the President's Council on Competitiveness has not floated such a proposal, it has been suggested in other quarters.

This type of cost-shifting arrangement probably would discourage speculative litigation that advances unique legal theories or new causes of action, thus dampening the entrepreneurial tendencies of the plaintiff bar. At the other extreme, the impact on more routine cases would depend on whether lawyers screened out weak cases.

If a significant proportion of cases filed are "frivolous," then putting the lawyers bringing them at risk for the other side's legal costs should reduce the frequency of such cases, because defendants who strongly believe they would win at trial would be less inclined to settle, and plaintiff lawyers would be reluctant to risk pursuing cases to trial.

On the other hand, the ability to recover costs as well as damages from defendants should encourage plaintiff lawyers to take on the kinds of smaller cases that are not as attractive under the contingent fee system.

Since routine cases far outnumber the more speculative cases, this type of modified English rule would almost certainly increase the amount of litigation.

Actually, this type of modified English rule potentially could work to the financial benefit of plaintiff lawyers.

Under this system, lawyers could distinguish between the commission, (the percentage of the recovery they receive from their clients), which would cover the risks and costs of handling cases, and an hourly fee they would receive from losing parties in the cases.

There should not necessarily be a reduction in the commission paid out of a client's recovery simply because the defendant is required to pay the winning lawyer a reasonable hourly fee. The combination of the commission and the fee could cover an extended package of services provided by the lawyer to the plaintiff, including paying the defendant's costs on behalf of the plaintiff in a losing case and absorbing the plaintiff's expenses.

Critics might argue that this would constitute a windfall for plaintiff lawyers, but that would occur only rarely, particularly if cost-shifting were simply a part of the negotiated settlement in cases that do not go to trial.

*58 Since going to trial is a moneylosing proposition in most contingent- fee cases, combining some level of fee-shifting with a percentage commission probably would represent a fair fee in most tried cases. The potential for excessive fees would exist only for the small segment of very large cases, in which fee amounts are already considerable.

Assuming that contingent fee lawyers would act in a risk-neutral fashion, this Americanized English rule would favor smaller, routine causes of action that are not currently economically viable for most plaintiff lawyers at the expense of more speculative cases, in which the amounts at risk are large and the probability of success much harder to predict.

One of the most complex issues arising from the possible implementation of a form of the English rule in this country involves the process of setting amounts of legal costs to be paid by losing parties.

While legal fees and costs are now determined privately between lawyers and their clients, greater consideration would have to be given under a cost- shifting principle to the underlying reasonableness of those fee arrangements.

Should there be a single fee rate for particular types of legal services, or should rates vary depending on the experience and skills of lawyers, or the nature of the cases?

In its proposal, President Bush's Council on Competitiveness seeks to finesse one aspect of the costs equation by making one side's liability equal to its own expenditure of time. In other words, if party A lost the case, its liability to party B would be limited to the amount of time that party A spent on the case, multiplied at some hourly rate.

This seemingly simple solution is fraught with difficulties: What constitutes the time spent on the case? Should it include time spent in settlement negotiations? How should time spent by support staff be calculated (and what if a lawyer did work that could have been done by a paralegal)?

Significant litigation over fee-shifting standards would be inevitable to resolve these issues.

Another question: Who would hear disputes over fees to be shifted?

Judges in England do not handle routine disputes over fees; rather, they are handled by taxing masters or registrars (roughly equivalent to magistrates or court commissioners in the United States).

However, American courts are generally not structured to include that type of intermediary process. As a result, judges would likely experience a significant impact from tackling the extensive litigation that would arise over setting even routine legal fees and costs.

Establishing standards for legal work in litigation, and for the fees that can be charged, may have potential benefits, even in the absence of a fee- shifting system. However, such standards cannot exist without substantial costs, both to the system and to litigants themselves.

Viewed from afar, the English rule appeals to its supporters as a mechanism for dealing with what some have described as an overly litigious American society. To its opponents, the rule is a nightmare that threatens to deny many victims their rightful compensation and put many lawyers into financial crisis.

The truth is that these hopes and fears about the English rule have some validity.

Supporters and opponents of the rule must look beyond simple images and analyses as they grapple with the complexities that such a fundamental change would bring to the American justice system.