As part of the UK government’s latest plan to curb taxpayer-funded legal spending, companies and directors cleared of criminal charges in the UK could be barred from recovering their defence costs – potentially leaving businesses and individuals acquitted of fraud, price-fixing, corporate manslaughter and other serious offences with legal bills ranging up to several million pounds.

The Ministry of Justice is considering whether the public should be “subsidising” the legal fees of defendants that choose to hire teams of high-priced lawyers to defend them, as opposed to solicitors working on more reasonable legal aid rates. For example, the ministry points out that although criminal prosecutions against defendant companies are rare in the Crown Court, amounting to 0.12 percent of the total in 2005 (105 prosecutions from a total of 85,165 cases), if these firms are acquitted, the payments from central funds can run into millions of pounds. For example, in one recent high profile case, had payment been restricted to legal aid rates, the cost would have been approximately £10m rather than the actual cost of £21m.

But companies and lawyers have reacted angrily to the ministry’s proposals, saying  that the government “wants others to pay for its own mistakes” when its prosecuting agencies, such as the Serious Fraud Office (SFO), waste millions of pounds attempting to bring “poorly prepared” and “reckless” prosecutions that they often do not win.

Rod Fletcher, Head of Business and Regulatory Investigations at law firm Russell Jones & Walker, says that “the government is looking at the issue the wrong way round. It’s not the fault of the company that it is acquitted – it is the fault of the prosecution that it did not prepare its case properly, or that it made the wrong decision to prosecute in the first place.”

Forensic investigations
As an example, last December the SFO suffered a huge defeat with the collapse of its £25m, six-year investigation into alleged price fixing among drug manufacturers after the Court of Appeal in London rejected the SFO’s appeal against the striking out of its earlier indictment against five pharmaceutical companies.

The investigation dwarfed any other undertaken by the office. At one stage it involved every lawyer and every accountant at the SFO, its entire forensic computing unit and 100 police officers from the National Crime Squad, as well as the entire Metropolitan Police fraud squad.

The SFO’s new director, Richard Alderman, has since indicated that he would prefer to focus resources on pre-emptive and preventative measures.

Prosecutors had alleged that the defendants – Goldshield, Ranbaxy, Norton Healthcare, Kent Pharmaceuticals and Generics UK – conspired to defraud the NHS of £120m by fixing the price of drugs, including the blood thinner warfarin and antibiotics. Criminal charges were brought after raids on 30 homes and offices in 2002.

Price-fixing was not a specific offence in the UK until the Enterprise Act 2002 came into force. Because the allegations referred to the period 1996-2001, the charges were brought instead under the common law offence of conspiracy to defraud. However, the law lords ruled that price-fixing alone did not amount to conspiracy to defraud. The SFO returned to the Crown Court seeking to amend and represent its case in the light of the House of Lords ruling that cartels were not illegal at the time of the alleged offences. This was rejected in July. The total costs – both of the SFO and of the companies – are estimated to have run to more than £50m.

Under the present system, defendants found not guilty of criminal charges are compensated for “reasonable” legal defence costs. But the ministry’s plan says public legal spending is vulnerable to high cost, one-off cases where privately funded defendants, often in circumstances where a company has been accused of a criminal offence, are acquitted. Engineering firm Balfour Beatty and Network Rail, the organisation that is responsible for the UK’s rain infrastructure, for example, recovered £21m in legal costs from the government’s central funds pool after being cleared of manslaughter charges in connection with the 2000 Hatfield rail crash, despite being fined a combined £11m for related health and safety failings.

Cost structures
In a consultation document that closed on January 29, the Ministry of Justice proposed several reforms to the system of payment of acquitted defendants’ legal costs. One such option would mean that individuals who fail to apply for legal aid in Crown Court cases, and then instruct lawyers privately, would no longer be eligible for their legal costs from central funds if acquitted. Another option being considered is to cap central funds payments in all cases for acquitted defendants, including companies, to the relevant legal aid rates.

It has been the practice in the UK that those found innocent of charges brought by the state are compensated for the costs they have incurred in defending themselves. Under the Prosecution of Offences Act 1985, if an individual pays for their defence privately – either because they choose to do so or because they do not qualify for legal aid – they can usually reclaim their “reasonable” costs and expenses from central funds if they are acquitted. Companies, which do not currently qualify for representation under legal aid, can similarly claim from central funds.

But in an effort to cap spending, the ministry is currently considering three options for the reform of central funds payments. The first option is to keep the present system as it is. The second option is to restrict access to central funds, which would mean that individuals who fail to apply for legal aid in Crown Court cases would no longer be eligible for central funds payments if acquitted. The third option is to cap central funds payments in all cases for acquitted defendants, including companies, to the relevant legal aid rates.

In particular, the ministry is looking at whether it is counterintuitive to pay for higher privately funded rates in cases when the existing legal aid system pays both sustainable fee levels for practitioners and ensures a sufficient level of quality for clients. “While some individuals or companies may in the future be willing to pay a premium to a particular firm based on their local reputation, this is a financial choice that should not necessarily be subsidised by the taxpayer,” it says.

In a similar vein, the government wants to put a halt to funding the defence costs of a company in cases that take a long time to resolve, such as fraud, price-fixing and corporate manslaughter cases. Because of the length of time involved in prosecuting such cases, claims from central funds under private rates can run into several million pounds for one case if the company is acquitted. As a result, the consultation says that “given the huge cost of many of these cases, coupled with the need to target resources effectively, we are considering whether these rates should also be capped to their legal aid equivalent.”

Such sweeping changes would affect both private paying individuals and companies. For cases in the Crown Court, for example, this approach would mean that all cases were paid at the levels outlined in the relevant remuneration scheme, such as the litigators’ and advocates’ graduated fee scheme. Using expenditure from 2007/08 as a baseline, and excluding any high cost cases, the ministry believes that this could generate savings of £20m to the central funds budget, with £12m coming from the magistrates’ court and £8m from the Crown Court.

Unlike individuals, companies prosecuted under criminal legislation do not face the risk of imprisonment and may also have access to insurance to protect them against actions relating to, for instance, corporate manslaughter. Just as companies do not have access to legal aid in civil cases, the government is exploring whether they should not have access to publicly funded defence costs in criminal cases above those offered at legal aid rates. “As with privately paying individuals, we are of the view at this stage that companies should be in a good position to negotiate favourable rates with their legal teams given the number of providers available and the evident sustainability of legal aid rates. Any additional ‘gold plating’ that a company may wish to fund would then be subject to a clearly defined business decision, taken in full knowledge of the rates available from central funds,” says the ministry in its consultation document.

Severe impact
Under the current system, companies can already have their private cost claims assessed downwards in high cost cases. For example, in one recent case, the defence costs paid from central funds were reduced to £2.64m from an original claim of £3.5m. However, lawyers say that this arguably builds uncertainty into the system for companies, their defence teams and potentially insurance companies about the level of remuneration to which they are entitled. It also runs the risk of inconsistency between cases due to the subjective nature of some elements of the assessment.

Jonathan Grimes, a solicitor at law firm Kingsley Napley and a member of the London Solicitors Litigation Association (LSLA), an organisation that represents the interests of a wide range of civil litigators in London, says that the proposals are likely to mean that companies will bear greater costs. “If the Ministry of Justice’s proposals are enacted it is likely that there will be an effect on the cover that insurers are willing to offer and the cost of that cover since insurers will no longer be able to recover if their insured is acquitted or the case discontinued,” he says.

“A similar situation may arise for company directors, many of whom have the benefit of Directors’ & Officers’ (D&O) policies that cover their legal costs in respect of criminal action brought against them relating to their employment,” adds Mr Grimes. “The range of potential criminal offences facing directors is already large and is increasing with penalties becoming more severe. The Health and Safety (Offences) Act 2008, for example, (which is shortly to come into force) will increase from a fine to a custodial penalty the maximum sentence available for certain health and safety breaches. These developments in the law – in combination with the potential for insurance cover to become unavailable or prohibitively expensive – may result in some directors choosing more carefully the areas of corporate responsibility in which they are prepared to be involved,” he says.

Furthermore, says Mr Grimes, “parties to criminal litigation never choose to be in that position and it is unfair, in circumstances where defendants (whether corporate or human) are acquitted or against whom proceedings are discontinued, that they should be unable to recover the cost of their legal representation.”

“The proposals, if adopted, will impact more severely on companies with more meagre resources. Large companies will have the funds to pay for their defence or to pay increased insurance premiums that may be associated with such changes,” he adds.

Other lawyers have pointed out that the proposals essentially mean that the overwhelming majority of UK companies will be denied appropriate access to justice because they will not be able to afford to pay lawyers to represent them, even if they feel that the charges made against them are without merit. Nichola Evans, partner in the financial and professional risks practice at solicitors Browne Jacobson, says that the government’s proposals are “not very well thought through”.

“If companies are no longer able to reclaim their defence costs from the central fund, then there is likely to be a rise in the number of small to medium enterprises that will either plead guilty to charges that they could otherwise have defended themselves against or cease trading because of the potentially ruinous cost of litigation fees. This is totally unfair and hardly something that the government should be pushing for,” she says.

Kevin Roberts, partner in the litigation department at international law firm Morrison & Foerster, says that “if the government wants to reduce its legal bill, agencies such as the SFO should have a good think about whether they can actually win the cases they try to prosecute. If they did that, the number of companies reclaiming costs through the central fund after being acquitted would be dramatically reduced because fewer cases would be brought to court.”

He adds: “It is absolutely wrong for the government to try to prevent companies from reclaiming legal costs from the central fund. Firstly, companies are usually unable to reclaim all legal costs anyway so expenses are already capped. Secondly, the government’s consultation does not take into account other expenses that the company has to bear as a result of a prosecution being launched against it, such as the amount of time and staff resources it takes to collect evidence and so on. As these cases can go on for years, these extra costs can run into millions of pounds and not a penny of it can be reclaimed from the central fund.”