Kenneth Clarke will today sound the death knell for 'no win, no fee' deals which encourage ambulance-chasing lawyers to pursue frivolous cases.
Victorious solicitors will now have to take a share of the damages awarded, rather than claiming huge success fees.
The Justice Secretary will also raise the maximum damages which can be awarded in small claims courts from £5,000 to £15,000.
Mr Clarke wants as many people as possible to settle civil disputes through this less bureaucratic system, where costs are kept to a minimum, or by mediation.
Lawyers are not always needed in small claims courts, and many 'no win no fee' solicitors do not operate in them because there is not enough money to be made.
Everybody lodging a civil claim for damages will be forced to consider mediation. A similar move is planned for divorce cases.
Mr Clarke will say the aim is to reverse a trend which has seen Britain become a 'very, very legalistic and litigious' society in which huge sums are paid to 'fat cat' lawyers.
Many of those in 'no win, no fee' deals claim success fees up to 100 per cent of legal costs at the expense of the person or organisation that loses. Some claims are more than 1,000 per cent of damages.
Campaigners say the payouts have had a 'chilling' effect on freedom of speech, forcing scientists, writers and newspapers to settle even flimsy libel accusations out of court rather than risk the huge costs of losing. NHS trusts have also been affected in this way.
In future, lawyers will take a share of the damages awarded to the winner the same as in the U.S.
For every sensible citizen of Middle England, resorting to the law has become something to dread.
Frivolous claims are brought against small firms; legal costs grow out of all proportion to the value of the damage done; fines are imposed but never collected.
Too often the system seems to create problems, rather than solving those which caused the dispute in the first place.
For most people, fighting a case, enforcing a contract or resolving a dispute with a neighbour means months of anxiety, hassle and delay.
More often than not, the only certainty is that the bill, when it arrives, will be larger than expected.
Today I am announcing reforms which I hope will begin to tackle the compensation culture and restore a sense of proportion to our legal system.
First, we will encourage people to solve their disputes through formal mediation rather than heading straight to court with all the cost and time that entails.
Second, we will fix the 'no win, no fee' agreements which have made it so costly for businesses to defend spurious claims that they often pay out, even when they know they are in the right.
And third, we will put more cases into the quicker, cheaper small claims and county courts, keeping costs down even further.
I hope that one day, normal citizens will regard going to a lawyer as a sensible way of sorting out a dispute not the expensive nightmare that people fear now.
These reforms are the first important steps towards that goal.
This will be capped at 25 per cent of the damages awarded by the court.
Judges will be told to increase damages by 10 per cent to ensure that those who win still receive the money they deserve.
Lawyers will also be forced to reach an agreement with their clients before a case begins over how much of the damages they will receive if successful.
It is hoped that, by making lawyers compete for business in this way, success fees will be driven down significantly.
The number of claims made by ambulance-chasing solicitors is likely to fall as defendants freed from the threat of massive costs become more likely to fight back.
Daytime television is packed with adverts for 'no win, no fee' lawyers. They encourage people who have had even minor accidents at work or in their car to pursue civil claims.
In a report last year, Lord Justice Jackson said there had been a huge rise in civil litigation costs.
The fees awarded to lawyers were sometimes more than 1,000 per cent of damages, he said.
People making claims in clinical negligence cases and other incidents where they have suffered harm will be able to do so without fear of huge costs.
A judge will be able to put a ceiling on the amount they will be made to pay even if they lose.
This is designed to prevent people who have been seriously wronged from being afraid to claim compensation.
The moves come after Mr Clarke this month announced a string of reforms to Britain's defamation laws.
In future, the rich and powerful will have to prove they have suffered or are likely to suffer 'substantial harm' from the words of their critics to sue successfully for libel.
A defence of 'honest opinion' would replace that of 'fair comment', meaning that it will be a defence against libel to establish that something was published responsibly, without malice and in the public interest.
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